Money Talks

We continued to be bombarded with more statistics that are showing the economy is improving. You can see that we have put the deepest depths of the recession behind us and a good portion of this is because of government spending and a shift in monetary policy. The Fed is going out of their way to stress that nothing is going to change and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

First, we need to understand little about Chairman Bernanke’s background. At the heart of his entire philosophy, he is a strong proponent for massive money printing and he literally wrote a book on this subject – the book that is now essentially the Fed’s operating manual on precisely how to print enough money to overwhelm almost any economic collapse.

Bernanke believes that the Fed prematurely hiked rates in 1937, prolonging the Great Depression into 1938 and beyond. He is convinced that single, momentous blunder of history is what doomed the world to a nasty ‘double-dip’. One thing for sure, he will consistently bend over backwards to avoid raising rates and he will continue to do everything in his power to pump more and more liquidity into the economy.

Neither the Obama administration nor Congress is showing any fiscal discipline. And definitely they are not acting with some counter-balancing actions. It all goes back to the 1937-38 analog and I have no doubt that Treasury Secretary Tim Geithner is singing from the same hymnal. The philosophical approach that is dominating Washington policy holds the belief that as soon as the government curtails its support for housing and mortgages, the market will tank again.

The spread between short-term and long term interest rates will widen and I could safely assume that long-term bond prices to go much lower. Last year was the single worst year for long-term Treasury bonds in decades and if you got hammered in 2009, don’t let 2010 result in more of the same. Consider dumping the long-term government debt and rest assured that the belief that non-Treasury bonds are impervious to price declines resulting from higher rates are not true after all.

In 2009, downgrades and debt auction failures in countries like the UK, Greece, Ireland and Spain were a stark reminder that unless advanced economies begin to put their fiscal houses in order, investors and rating agencies will likely turn from friends to foes.