Skip to comments.For Whom the Bell Tolls (Peter Schiff)
Posted on 12/17/2010 6:25:29 PM PST by sickoflibs
There is an old adage on Wall Street: no one rings a bell to signal a market top or bottom. Yet, I have found that bells do ring; it's just that few people know exactly what sound to listen for.
Perhaps the biggest and most liquid of all markets is for US government bonds. That market has been rallying for almost thirty years. The bull can be traced back to 1981, when Treasury bond yields peaked at about 15%. At that time, high inflation and a weakening dollar had justifiably squelched demand for Treasuries. Even the ultra-high interest rates were not enough to attract buyers.
But this was also when the proverbial bell was rung. Fed Chairman Paul Volcker had signaled, by jacking up interest rates so high, that he would stop at nothing to break the back of inflation. Volcker's iron will, and Reagan's unflinching support, restored demand for Treasuries for the next three decades.
We have arrived today at a similar inflection point. After falling steadily for 30 years, bond yields are now heading north with a full head of steam.
Many are taking the recent moves in stride. The consensus is that despite the recent spike, yields are still historically low, and that they are unlikely to go much higher from here. Once again, most on Wall Street are either tone deaf or plugging their ears.
For years, the Fed has been able to prevent market forces from correcting our growing economic imbalances by inexorably pushing rates lower. This happened in 1991, 2001, and most notably in 2008. These easing campaigns succeeded in boosting the economy in the short term by greatly increasing the amount of debt held by both the private and public sectors. As such, these episodes have allowed our economy to delay and magnify the ultimate reckoning.
Just like a junkie who requires ever-increasing doses of heroine to achieve the same high, the Fed has needed to take rates ever lower to boost the economy after its previous stimulants had faded.
To stimulate after the bursting of the housing bubble (which itself resulted from the low interest rates used to juice the economy following the bursting of the dot-com bubble), the Fed lowered interest rates to practically zero. At that point, rates could go no lower. However, when that stimulus failed, the Fed decided to bring on the heavy artillery in the form of "quantitative easing," or as it is known in the vernacular, "printing money to buy government debt."
Lowering the federal funds rate, its traditional weapon, tends to make the most impact on short-duration debt. By its own words, the goal of quantitative easing (QE) was to lower long-term interest rates. It was hoped that this would achieve what low short-term rates had not: an increase in stock and real estate prices, a rise in household wealth, and consequently greater consumer spending, economic growth, and job creation.
However, the Fed's plan backfired. The selling pressure on long-term bonds is overwhelming the Fed's buying pressure. Spiking rates (which move inversely to price) are powerful evidence that the bond bubble has finally burst. The Fed threw everything but the kitchen sink at the bond market to force yields lower, yet they rose anyway. If bond prices failed to rise given such a Herculean effort to lift them up, there can be only one direction for them to go: down.
In true form, few on Wall Street hear the ringing. In a shocking display of rationalizing cognitive dissonance, some (such as Wharton Professor Jeremy Siegel in a WSJ op-ed) have even suggested that the spike in yields is proof that quantitative easing is working. Siegel heralded higher rates as indicative of economic resurgence, which supposedly was the Fed's goal all along. In other words, QE2 worked so well, we skipped the lower rates and went directly to the higher rates that go with growth!
There is also a widespread belief that long-term rates will remain contained at historically low levels. Four percent is seen as the ceiling above which ten-year yields will not rise. I believe this ceiling will prove to be of the thinnest glass. Once yields easily break that level, they may quickly rise above five percent, where they will likely encounter some resistance, before heading significantly higher.
In fact, if rates approach six percent next year, we will be seeing a ten-year high in ten-year yields. If our economy is this fragile with record low rates, image how much weaker it will be with rates at ten-year highs? If the Fed believes that lower rates revive an economy through the 'wealth effect,' what does the Fed feel will happen when higher rates produce a reverse 'wealth effect'?
Not only does this bell herald the end of the bond bull, but it also marks the end of the Fed's ability to artificially engender economic "growth" through monetary policy. More significantly, the new tax compromise President Obama is about to sign will add more than $900 billion in new debt onto the government's balance sheet over the next 10 years. This will put additional upward pressure on interest rates, and more political pressure on the Fed to monetize the debt. It is no coincidence that the real upward movement in yields began immediately after the tax/stimulus deal was brokered in Washington.
What lies ahead is a new era of rising interest rates, soaring consumer prices, increasing unemployment, economic stagnation, and lower living standards. Instead of stimulating the economy, quantitative easing and deficit spending will prove to be a lethal combination. Bondholders beware, the bell tolls for thee.
If you realize both parties in Washington think that our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus who is going to get elected in Washington and cut your taxes, spend a few trillion and that will jump-start the economy, this list is not for you.
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The Austrian Schools Commandments plus :From : link
1) You cannot spend your way out of a recession
2) You cannot regulate the economy into oblivion and expect it to function
3) You cannot tax people and businesses to the point of near slavery and expect them to keep producing
4) You cannot create an abundance of money out of thin air without making all that paper worthless
5) The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever
6) You cannot live beyond your means indefinitely
7) The economy must actually produce something others are willing to buy
8) Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: First, do no harm!
9) Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10) Gold is Gods money.
1) Businesses don't hire workers just because of demand for products or services, they hire because it makes them money. Sorry to have to state the obvious.
2) Government spending without taxing is still redistribution
3) Taking one man's money and giving it to another is not a job.
4) Paul Krugman and Bernake have been wrong about everything, as well as the other best and brightest Keynesian's who have been fixing our economy for over a decade.
5) Republicans in the minority (esp out of the White House) act like Republicans, in the majority they act like Democrats .
Video - Peter Schiff on the Economy Dec 2010
Video - Gold-dispensing ATM Debuts in South Fla.
So, should we sell every Treasury Bond we own?
There is no way I would give investment advice here but when I posted this Jim Rogers video almost two years ago I thought it was brilliant and still is.
The fundamentals of General Motors are impaired. The fundamentals of City Bank are impaired by what is happening. The fundamentals of most industries of the world are very impaired. The only thing I know where the fundamentals are not impaired, but are enhanced, are commodities, coming out of this. Things are so bad that some farmers cant get loans for fertilizer. No one can a loan to get a new mine. Mines are closing, farmers are suffering. So the fundamentals of commodities are actually getting better because the supply is under terrible pressure when the world is going to continue to eat and everything else. The best place to be invested now is commodities, China, the Yen and commodities. Commodities have been in a bull market since 1998, 1999. The bull market was caused by supply and demand being terribly out of balance In the 80s and 90s there was very little money invested in productive capacity for any commodities;
Jim Rogers/Asian Financial Forum (World Commodities fundamenals enhanced)1/21/09 |Jim Rogers
To the The Austrian Schools Commandments, I would add: Don’t confuse money with wealth.
I know a lot of politicos that deserve to be shaken like a rag doll by a pit bull.
I would add:
- Private investment not consumer and government spending drives long term economic growth.
- No economy is too big to fail.
- Accounting for government pensions violates basic tenets of finance.
- Deferred compensation for government employees is vicious principal agent problem in which the principal (taxpayer) bears tremendous risk without any benefit while the interest of the agent (politicians, pension agencies, and government administrators) are in direct opposition to the principal.
- Unfunded liabilities matter.
Years ago, before the web existed and there was just Usenet, I read a posting of a short story that had won an "Imitation Hemingway" competition held at some college or other. Throughout the story, the first-person voice tells of how he keeps eyeing some hottie in a convertible who daily drives the same Texas tollroad that he does, and she returns his looks. At the end of the story, his girlfriend figures out about this flirtation and she ends their relationship with: " 'Stop the car,' the girl said. There was a look of terrible sadness in her eyes. She knew about the woman of the tollway. I knew not how. I started to speak, but she raised an arm and spoke with a quiet and peace I will never forget. 'I do not ask for whom's the tollway belle,' she said, 'the tollway belle's for thee.' "
Can't find the entire parody any more. All that's left on the web is a collection of excerpts from it. Here's a typical example
Beautiful! A classic shaggy dog story.
“For whom the bell tolls?”...YUP its time for a mandatory
metallica moment (ENJOY)
That would give the economy a 10 megaton kick in the ass and get it a'movin agin'
Sounds fine by me.
It’s all funny money anyway at this point.
I respect Schiff, but on this he is simply wrong. The goal of QE was to raise inflation expectations and lower REAL long-term rates. Higher NOMINAL rates are perectly consistent with that goal.
The place to look to see whether QE is working is in the TIPS markets. And indeed, the spread between nominal bond yields and TIPS yields is higher, indicating inflation expectations have increased, and TIPS yields are lower overall, indicating that real rates have come down. So yes, QE is working and acheiving its stated goal.
Also, there is nothing "unAustrian" about printing money during a recession. Hayek himself aknowledged that it would be necessary to avoid what he called the "secondary deflation" that comes after the bust. In other words, Hayek himself would probably endorse QE and QE2.
Thanks, from this literary-allusion-loving Freeper!
Not unless you think the market is wrong in its assessment of US government default risk. That's not something I worry about much because if the government defaults, we'll end up in a world where guns and seeds will be the only thing of any value.
I'm also not worried about hyperinflation because the Fed has the power to stop it pretty easily, and hyperinflation would hurt virtually every politically powerful interest group in the US. The Fed's going to keep inflation running between 2-3% per year. Worst case they'll screw up some one year and it might get up to 4%, tops.