Thursday, May 28, 2009

Short and Simple!

Two days ago may we have experienced the quietest major financial earthquake since, oh, last fall. I'll keep it short and simple. Where before they were just creeping up, rates at the long end of "the curve" are heading back up with a vengeance. Why? Too damn much supply being offered by Uncle Sam. As you know, when supply and demand don't meet, price moves, and in this case, prices on bonds came down and yields went through the roof. Tuesday played absolute havoc with the mortgage and refi markets in a way that bodes serious ill for the housing market specifically and the banking industry and economy in general.

Ben Bernanke's quantitative easing is clearly backfiring. How could it not? After all, with all those government IOUs being issued and and tax receipts simultaneously plummeting, what bond investor wouldn't ask for, nay, demand higher rates of return. Remember those green shoots the economy was said to be sprouting? Yes, the ones that are really weeds. Tuesday's action was the equivalent of learning that those weeds are, in fact, kudzu, and someone just sprinkled some world class fertilizer on it.

Friday morning addendum. The economic news this morning was bleak with the Chicago Purchasing Managers Index falling to 34.9 from 40.1 over the most recent period of review.


DED said...

Hi Edwardo,

I know you're not a fan of Bill Gross, but I was wondering what your thoughts were on this.

Edwardo said...

Hi Ded, Regarding Mr. Gross, whatever the truth may be prospectively, (and as you likely have surmised I do not concur with Mr. Gross' outlook regarding the attractiveness of government bonds) the man is talking his book.