While it may not be quite certain yet, I sense a shift in the sentiment of the stock markets in the United States. The markets fell by 273 points Tuesday. This follows several down days. It just feels like the market is out of steam.
The interesting battle to been seen these days is the direction of interest rates. The 10-year Treasury note fell to 2.35 percent Tuesday from about 2.6 percent just a few weeks ago. Usually this would signal great concern about the future health of the U.S. economy if all we can muster is 2.35 percent for lending money for 10 years. But with all the manipulations of the interest rates by the Federal Reserve, it is only a guess now as to what the rates are indicating.
Looking at this from the street level, I see a major tug of war between the Fed and the markets. Despite every hollow assurance that we get from our politicians touting job growth and how the U.S. economy is back on track, the people on the street are far from comfortable and far from being reassured about their prospects of a good life. So they are nervous and want to bring the interest rates down, which shows an uncertain and weak future.
On the other hand, one of the Fed heads just announced that the expectation of a rise in interest rates in second quarter of 2015 was considered "fair." So the Fed is desperate to get the rates to go back up since they know they have kept the rates too low for too long and this cannot last for much longer.
The vanity of the Fed's interest policy is that it presumes a group of economists can do a better job of finding a suitable price for credit than the market itself can.
First, the Fed believes that only the market knows what things should cost. Second, they also believe they can get along without input from the market. The central tenet of the Efficient Market Hypothesis is that the market knows more than we do. And yet the Fed would rather set a price for credit than let the market discover a price.
What perplexes me is how the Fed cannot see that their desire to raise interest rates would absolutely crush them, the markets and the economy, if we have one left.
The U.S. government faces unfunded liabilities of approximately $222 trillion in the coming years. Social Security and Medicare will account for most of these liabilities. Obviously this is not how the government accounts for its books. It excludes any unfunded liabilities, lies about future projected growth rates and make up numbers when we see the mere $17 trillion of deficits it has announced.
Yet, if we just believe their own stories, a 1 percent interest rate increase would add nearly $200 billion to their deficits each year. Add this deficit to the funding that it has to renew each year of approximately $4 trillion the Fed has conjured up as it inflated its balance sheet. Due to Operation Twist, the Fed holds most of its debt in short-duration not long-term bonds. So it has to renew it almost every year.
With the Chinese yuan making massive advances each year, the U.S. will be facing an uphill task each year trying to renew its funding. When I was traveling in Europe last week, I saw banners advertising for investing in the yuan.
I urge you to slowly, steadily, definitely diversify out of the U.S. dollar.
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