Posts Tagged ‘U.S. Treasuries’
The Four Big Risks Massive Money Has Brought to the U.S. Economy
By Michael Lombardi, MBA for Profit Confidential
The bond market, dear reader, is becoming vulnerable. By keeping interest rates so low and by the Federal Reserve actually buying U.S. Treasuries, bond prices have climbed and climbed…and the low yields on U.S. Treasuries have sent investors to the stock market and junk bonds. Any tightening in monetary policy will send the bond market into a tailspin.
But there’s more…
Next, the stock market rose to atmospheric levels as easy monetary policy remained in effect. Even I’m surprised at just how high this market has gone. But at the very moment the Federal Reserve shifts its monetary policy towards normalization, the market will be in jeopardy. We saw a slight episode of this in a sell-off in the key stock indices last week, when the Federal Open Market Committee’s (FOMC) meeting minutes suggested some members of the committee think the Federal Reserve should start to slow the rate of its quantitative easing. (Source: Federal Reserve, May 22, 2013.)
Moving on, public companies are borrowing money cheaply as a result of the favorable monetary policy environment, but these companies are not putting the borrowed money to good use. Instead of making investments in plant, equipment, and people, companies are buying back their shares to eventually make their corporate earnings look better.
In 2012, American companies spent $400 billion to buy back their shares; a startling 2.6% of the gross domestic product (GDP) of the U.S. economy is going to buy stock? Something’s not right with this. Since the beginning of the year to March 7, American companies have announced share buybacks worth a total of $111.6 billion—an increase of 96% … Read More
Disconnect Between Stock Market and Economy Biggest I’ve Ever Seen
By Michael Lombardi, MBA for Profit Confidential
By looking at the stock market’s recent performance, one might think the U.S. economy has turned the corner and the worst is behind us. This is far from reality! The U.S. economy is fundamentally damaged, and since the financial crisis of 2008–2009, there really hasn’t been any real economic growth.
Even a novice economist will tell you: economic growth happens when general living conditions of citizens in a country improve; they are able to find jobs, they are able to maintain their standard of living, and they are able to spend and save.
Unfortunately, I see the opposite of this when I look at the state of the U.S. economy. Instead of economic growth, I actually see misery!
While politicians may rejoice over the recovery in the jobs market in the U.S. economy, it is still tormented. The job creation is unequal. During the financial crisis, 60% of the jobs lost were among the mid-wage earners. In the so-called “recovery,” 58% of all jobs created were in lower-wage sectors—retail and restaurant workers, mostly.
The year 2012 was the third year in a row that 40% of unemployed Americans were out of work for more than six months. (Source: National Employment Law Project, February 1, 2013.) In economic growth, there is equal job creation.
The middle class in the U.S. economy is suffering severely—its cost of living is going up, while income levels stay the same. Just look at the price of gasoline. The U.S. Energy Information Administration (EIA) reported that Americans paid $3.71 per gallon of gasoline during the second week of March 2013. (Source: U.S. Energy Information Administration, March … Read More
Concern: Who Will Buy U.S. Treasuries if the Fed Exits Quantitative Easing?
By Michael Lombardi, MBA for Profit Confidential
One of the biggest debates amongst American economists these days is whether the Federal Reserve’s continued $85.0-billion-a-month expansion of the money supply is making the U.S. economy more vulnerable, as opposed to helping strengthen the economy. One of the main reasons the central bank took on quantitative easing in the first place was to revive the financial system following the housing slump. After a $3.0 trillion increase in the Fed’s balance sheet, should the central bank put the brakes on money printing?
Federal Reserve Governor Daniel K. Trullo said late last week, “Significant increase in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.” (Source: Federal Reserve, March 7, 2013.)
While this may be good news, I am more concerned about what may be next—the “exit” of a monetary policy, which in the eyes of many has now gone on for too long. As noted above, through quantitative easing, the Federal Reserve has added a significant amount of assets to its balance sheet.
How will it decrease its balance sheet and bring it back to historical levels? On one hand, the idea is that the Federal Reserve can continue to hold the bonds it has bought until maturity. On the other hand, the option is to go out into the open market and sell the bonds it has accumulated.
While these options sound feasible, I see them as troubling. If the Fed sells the bonds it has in the open market, then the prices of bonds will … Read More
Could This Be a Trick to Drive Even
More Investors to U.S. Treasuries?
By Michael Lombardi, MBA for Profit Confidential
The financial crisis of 2008-2009 crumbled the U.S. economy to a degree not seen since the great depression. Now another economic problem is emerging—a problem 46 times bigger than the gross domestic product (GDP) of the U.S. economy.
It’s the financial crisis involving derivatives markets.
Starting next year, to “prevent” another financial crisis, traders need to back up their derivatives by top-rated collateral such as U.S. Treasuries. (Source: Bloomberg, September 11, 2012.) The current value of the derivatives markets stands at about $648 trillion!
This collateral rule was the result of the Dodd-Frank Act, which was passed in the midst of the financial crisis of 2008. Companies like American International Group Inc (NYSE/AIG) did not have their derivatives backed up by enough capital; American International ended up needing a $182.3-billion bailout to protect itself from collapse.
It has been said that the worst financial crisis since the Great Depression was caused by derivatives backed by insufficient collateral. Hence, one would think raising the collateral requirement by which derivatives are backed should avert another financial crisis. It sounds like a great idea, in a perfect world. But it’s not the case in this current U.S. economy.
Two important points here:
The U.S. Treasury market is worth about $11.0 trillion. But the derivatives market is worth $648 trillion. The demand for U.S. Treasuries will surge next year, as derivative players rush to back their derivatives with U.S. Treasuries. Doesn’t this almost guarantee the yields on U.S. Treasuries will fall even lower?
Bank of America Corporation (NYSE/BAC) and JP Morgan & Chase Co (NYSE/JPM) have the biggest derivative components on their … Read More
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