Market Commentary for 12/15/10

Interest Rates improved slightly this morning as mortgage bonds recover some losses from yesterday’s extensive battle damage.  Treasuries found a bid overnight as talk of a Spanish credit rating downgrade gains steam and as the economic data released today was close to expectations.  However, the consensus on the street is that any moves in the bond market will be technical in nature and the likely trend is a continuation of the selloff … unfortunately.  So be prepared for more re-prices for the worse!  Mortgages are lagging Treasuries so far this morning although still improved in outright price.  However, stocks are continuing to make gains as the bulls are in control and the bond market appears to have a millstone tied around its collective neck, going ever deeper into negative territory.  The Fed appears to be in the twilight zone and in a willful form of denial in its statement yesterday, omitting any acknowledgement of recent positive economic data to the consternation of some economists.  Acknowledgement of any economic recovery would put the Feds entire QE2 scheme at risk and that cannot happen because the monetization game the Fed is playing has nothing to do with lowering interest rates and creating “good” inflation, contrary to the line of bull the Fed is selling, and everything to do with financing the government and its out of control spending by purchasing treasuries with hot money printed out of thin air and backed by nothing.  What is even more concerning was the total absence in the Feds statement yesterday of any comments regarding the sharp rise in interest rates we have all been dealing with in the last few weeks.  Don’t think for a moment the Fed just missed the apparent improving economic indicators and the sharp rise in interest rates … that just doesn’t happen.  

In an interview yesterday, Market commentator and CNBC analyst Rick Santelli remarked …

“The Fed’s direct action in the Treasury market has been nothing short of historic. The logic of the Fed’s various purchase programs was “sold” to the marketplace as a means to keep mortgage and treasury rates low…or at least well-behaved and to create some “controlled” inflation.” 

“Yet, since the last meeting 10-year rates are up close to 100 basis points! I am not sure what amazes me more — the fact that the Fed didn’t even MENTION the rate rise in today’s statement, or that many believe the various purchase plans have been “successful.”

“How can a program that was designed to drive rates lower be deemed a success if rates are now sharply higher? Why is there so little clarity from an entity (The Fed) that is now the largest holder of US Treasury securities?”

“My conclusion is that the goal of Chairman Bernanke and the Federal Open Market Committee was to monetize the growing U.S. debt and generate future inflation. On the last score…. generating inflation…. I think time will prove the Fed highly successful.”

From the Feds point of view it still sees the obvious:  jobs and housing are nowhere near recovery and, until they do, true economic recovery is not possible.  The problem is that the actions of the Fed, with its cloaked debt monetization scheme (QE2), run in direct opposition to its stated goals of price stability and job growth.  Its actions are damaging the debt markets by inflating the currency and pushing bond prices down and the yields (interest rates) up.  The Feds action also create price instability by massively increasing the supply of money and credit, which devalues the dollar and drives prices up through monetary inflation.  The rising prices as seen in record oil, cotton, copper, silver, gold, cold rolled steel prices etc. etc. etc. are a monetary phenomenon and not caused by demand as we see very tepid global demand for these commodities.  As these rising commodity inputs work their way into the economy and into consumer finished goods and services (air fares), the effect on job creation will be damaging as business will be forced to survive on compressing margins and weak consumer demand.  So what in the heck is the Fed doing? 

I think the comments by Rick Santelli and others are spot on.  The real goal of the Fed isn’t creating jobs and keeping rates and prices stable …. It is to keep the doors of a desperate and out of options government open by providing financing for the 47 cents of every dollar the government spends by the Fed slipping its some cash through purchases of Treasuries with newly minted fiat dollars.  It appears that the typical buyers of treasuries, China, India, Saudi Arabia, Japan, Brazil and others are really net sellers of dollars and Treasuries and appear to be no longer willing to play the ponzi scheme anymore and may have finally come to the realization that the US government has no intention of actually pay them back but with ever less valuable dollars.  The fix to get the dollar up and demand back for Treasury debt could be extreme …  so watch out for low flying “black swans”.  Data dumps on deck for tomorrow:  housing starts / building permits, jobless claims, and the Philly Fed.  Stay tuned to the bond market as bonds are continuing to groan under pressure at the moment, losing much of earlier gains.  It appears volatile and re-prices are going to be the norm for a while….

In the news today…       

- Fed Signals Stronger Economy Won’t Slow $600 Billion QE2 “Stimulus” Debt Monetization Scheme

- U.S. MBA Mortgage Applications Index Dropped 2.3% Last Week (even on purchase transactions)

- U.S. Consumer Prices Rose 0.1% in November, Core Rate Up 0.1% (But don’t worry there is no inflation)

- New York Region Manufacturing Growth Beats Forecasts

- Global Demand for U.S. Assets Slowed in October, Treasury Says (hmmm…who’s gonna buy all our Treasury debt?)

- U.S. Industrial Production Rises More Than Forecast

- U.S. Homebuilder Confidence Index Held at 16 in December

Suggested Reading for Today…   The Fountain Head, Ayn Rand
Considered by many to be Ayn Rand's best book. It presents the struggles of architect Howard Roark to design buildings true to his architectural principles. Along the way Rand illustrates the moral virtue of capitalism and the questionable ethics of those in the government who claim to act in the public interest.

Your Take Away… Get out there and tell the world that the historically low mortgage rates that we enjoyed are an endangered species … now is the time to get off the fence and refinance …  now is the time to purchase a home before rates rise further.  Use the market headlines and the fear it imparts to your advantage and communicate with confidence and clarity that NOW is the time to transact!