If you can’t beat the professionally managed superannuation market (based on yesterday’s research report from APRA) should you join it? That’s one of the questions we take up in today’s Markets and Money. We’ll also discuss the short, happy life of industrial civilization. But before we get to those subjects, a quick review of the night’s financial proceedings is in order.
Stock action on Wall Street was mostly directionless. Stocks have opened lower here in Australia. But all the juicy action is in the bond market, where the Fed is getting its hands dirty again. You wouldn’t think the Fed would have to come in and support bond prices with investors wringing their hands about global growth. But the numbers tell another story.
The Federal Reserve Bank of New York bought US$7 billion worth of Treasury bonds maturing between 2013 and 2016, according to Marketwatch.com. Remember, Fed announced last year it would buy up to $300 billion in Treasury bonds to keep interest rates down and borrowing costs low. But there’s a slight problem.
According to Credit Suisse, the Fed would have to buy about $37 billion worth of Treasuries a month from now until September to reach its target. But in actual fact, the Fed’s been averaging $59 billion in purchases per month since March. Hmm.
There are three points to come to mind here. First, the Fed is going to have trouble keeping long-term interest rates down through its repurchase program. Second, if talking up the bond-market and intervening doesn’t work, it wouldn’t surprise us to see the Fed talk down the stock market in order to drive investors back into Treasuries.
And the third point deserves its own paragraph. Debasement has consequences. It is perverse enough that the Fed must purchase U.S. government debt to keep rates down (and the bond market auctions chugging along). No one in the media calls this for what it is: market manipulation. But do you reckon there will come a day-perhaps this year-when a U.S. Treasury auction fails and the Fed is forced to buy up the whole lot with new money?
What do you think will happen to the U.S. dollar then? And here’s a kicker…what happens when the U.S. Federal government begins throwing loan life-lines to debt-distressed states like California?
for Markets and Money