Posts Tagged ‘Government Bonds’

Bloomberg had an article posted today entitled – Bond Traders Declare Inflation Dead after Yields Fall!  The article surmises that interest rates are low and well contained.  One trader states that he is not concerned at all about rising interest rates.  He doesn’t think that rising interest rates will be a threat.

I believe that interest rates will rise for one simple reason.  Let me show you an illustration of something that ran in the Chicago Tribune.

(related image) 

Debt will probably be the reason that interest rates go up.  If you have been staying up on the news, you know that Greece and many of the other European Union countries are in financial trouble.  Greece, in particular, needs to borrow money or are seeking a bail-out just so they can make their debt payments to their creditors.   So if you are going to lend money to someone in trouble, shouldn’t you get rewarded with higher interest rates for taking the risk?  When Greece issues bonds (read: borrows money), they are forced to pay higher interest rates because they represent a risk.  I think that we will start to see the same thing in this country.  In fact, I think that we already are seeing this occur.  At some point, investors are going to demand much higher interest rates on US government bonds which forces interest rates to rise.  One other point to make about the article is that rising interest rates does not automatically equate to inflation.  We need prices to go up all across the board for inflation which brings me to the title of this piece.

Inflation would be a welcome sign.  The opposite of inflation is deflation.  That is what Japan has been mired in for decades and what the US went through in the 30’s.  I believe that is what we face today. Unusually high levels of debt create deflation.  So, once again, we come full circle to this enormous debt problem in America.  Our politicians can pretend it is not there.  We can also think of it as our children’s problems.  In reality, it is driving force behind all financial problems in this country.

Low Volume

Will Deener wrote an article in the Dallas Morning News this morning debunking the views of those of us who are bearish.  He quotes a trader that states the low volume in the stock market is actually a bullish indicator.  He says that you want to buy stocks when no one wants them.  I don’t think that I would go this far.  There is something else that usually occurs when the volume is this low.  You typically see low volume when you are getting to the end of a bull market run.  Further, investors are unusually spooked right now about the stock market.  I don’t think that this kind of fear is a good thing.

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In 2006, I was writing to my clients in my private client letter about what I felt was occurring in the financial markets.  I described what I felt was coming as a Category 5 hurricane.  I think that I even named it Hurricane Greenspan at the time.  Although he is a distant memory, he had a lot to do with the problems that we are facing today.

It feels like we were hit with a category 5 hurricane last year.  Unfortunately, I think that another one is brewing and might even be getting very close to shore.

Every Friday it seems another bank fails.  Last Friday we saw a sizable bank fail.  The Failure of Colonial Bank marks the 6th largest bank failure in U.S History.  It is a bank of $25 billion and 346 branches in 5 states.  Besides the troubling nature of this story and the fact that the Government cannot bail all of them out, the FDIC insurance pot takes another big hit.  It looks like the 13 billion dollar fund will lose another $2.8 billion because of this bank failure. That insurance fund designed to protect you and me is quickly dwindling.

Another hurricane indication would be the Government’s sale of Government Bonds. The Treasury Department sells bonds to raise money for Government spending.  It is the way the Government borrows money.  Last week the Treasury Department sold 75 billion dollars in bonds.  Do you really think that China and other countries are lining up to lend us money?  No, you would be correct.

So, who is buying these treasury securities and lending money to the United States?  Ok, if you have high blood pressure or a weak heart, please stop reading.

Our own Federal Reserve Board is buying many of those securities and lending money to the US. For a great expose on this, read this article.  I don’t need to tell you how desperate that is and how much trouble we are in considering that is occurring.

I hate to say it but this is going to end badly.  All of this is going on at the same time we are facing an unemployment crisis and a whole list of problems in this country.  Once again, I advise you to watch your risk and don’t fall for the notion that this is just a normal cycle.  In other words, don’t drink the kool-aid.

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