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Inside the Market

2/7/2011

This week’s review will focus on the oddities that exist in the realm of the financial markets or better put, “the things that just don’t make sense” according to what you hear from media outlets.

You probably thought that the topic of focus for this week would be to highlight the ridiculous scenario that transpired in the market last Friday, which involved data that depicted a lack of job creation but yet a significant drop in the unemployment rate.  Without going into detail on this….last week’s data was not good for the economy but illustrated the ongoing job destruction that continues in the US.  We’ll let Rick Santelli describe the situation with color…

The ridiculous scenario we will focus on entails the continued spin that asserts that the US economy is doing well and that growth is increasing and existing stimulative actions are effective and appropriate.  All these positives yet short term interest rates are held at 0%.

When financial officials are asked why US Treasury Bonds have experienced significant price declines and corresponding increases in Yields (e.g. 120 basis points for 10 year maturities in the past three months), they respond by saying that investors are pricing in a more robust economic scenario and some inflation expectations as well.  Other positive spin mentions good economic data releases (e.g recent ISM and Retail activity) that illustrate a growing economy. 

Here’s the ridiculous scenario to this positive spin.  If growth is picking up, the economy is gaining strength and inflation is set to move higher, why has the Federal Reserve continued to maintain a zero interest rate policy for the Funds rate?  This inappropriate policy stance has begun to create imbalances in the economy from investors being forced to allocate money to risky assets with the hope of attaining positive returns.

If everything is so positive then let’s get back to a positive real interest rate environment which would set short term rates in the area of at least 4%....until then, stop the nonsense.  It was prolonged zero interest rate policies over the past years that got the US economy into the mess it’s in right now.