There have been several articles this week on Quantitative Easing ending June 30, 2011. The Federal Reserve has announced that on that date they will end buying US Treasuries. Why would this be a concern for you?
Back in December Meredith Whitney made some comments about how she believed and would predict that there would be hundreds of billions of dollars of municipal bond defaults during 2011. The muni market immediately sold off 10% or more and people who hold munis began to worry about the safety of their bonds. Note that the majority of munis are held by individuals and not institutions. Since then cooler heads have prevailed and munis have bounced back some. Ms. Whitney was made famous by calling beforehand the big bank problems back in 2008. Big predictions made good make you a celebrity and sometimes leads one to get to thinking you know more than you do. So those people liking the limelight back on them tend to do some more big predicting. I have seen this time and time again since I started investing over three decades ago. Ms. Whitney is a smart person and knows banks likely better than anyone. If she sticks to her knitting she would likely continue to do well.
All that is to say the latest big prediction comes from Bill Gross. Mr. Gross opined this week that we need to be concerned about who will buy US Treasuries when the fed stops buying June 30, 2011. As I mentioned above I tend to ignore big predictions, but when Mr. Gross opined my ears perked up. That is because Mr. Gross is predicting in his field of expertise. He runs PIMCO funds the largest buyer of bonds on earth. He has been doing this for a long time as well.
His concerns revolve around the fact The Fed, which has been buying 70% of all borrowing buying the US Government will no longer be doing so. I know most of hear that China is buying up all these bonds and they are buying a lot, but The Fed is doing the heavy lifting. Basically what that means is that the nations banker is printing lots of money to balance the government's books. Now if we are running a 125 billion dollar deficit monthly and The Fed is buying 75 billion of that and they stop the hole is a big one to fill.
Frankly no one knows. More Chinese buying? More foreigners buying? Maybe just some Americans buying? Fact is the deficit is not going down soon and someone has the buy these bonds. Could be The Fed has to step back in. The real concern here is not necessarily buying up the bonds, but what will happen with interest rates. If the government, which auctions these bonds, has to raise rates to give incentive to get others to make bond purchases that would hurt the already weak economy. It could spill over into consumer loans rates and likely mortgage rates. The next question to ask is how high these rates could go if needed, and how much The Fed will tolerate before sensing the need to step up and begin buying again. The truth is The Fed can keep printing money forever, but sooner or later this devalues your currency and even the Chinese will step back then.
The greatest inheritance we got from the generation that fought, died in, and won World War Two, was that we got the world's reserve currency. That means we can print money and people willingly take in return for products. That is the reason oil is priced in dollars. However if we continue to print money we are going to spend all our inheritance and not only ruin our economy, but can not pass this gift on to our children. The Fed is up against a wall as they know this too. Of course all this comes about because the politicians we vote in and send to Washington DC just keep on spending more than they take in, so ultimately we/they are to blame for this situation.
So as we approach June 30, 2011 I will be keeping an eye on what will happen. If I was you and needed a loan I would go ahead and cash in on the current low rates, because one thing is for sure rates after June 30 are not going down.
No comments:
Post a Comment