06/13/08

Why are rates going up up and away? 

OK, so its Friday the 13^th and we all know about the tales that go with that. Well in this case it may not all be fantasy. In the economic sectors this week, including Friday the 13^th, we have seen the largest single deterioration in the MBS market in over 20 years, actually since 1983. The 2 year Treasury note impacted 50% by increasing from the 2% range to over 3% as foreign investors made statements if interest returns did not increase, their buying would be placed elsewhere. This sent the, already strained markets into additional pressure.  The 10yr T-Bill went from its 2008 average range of between 3.311 - 3.913% to 4.26%, the highest mark it has hit in almost a year.

Consumer Price Index showed stronger than expected numbers, due mostly from the impact of the recent arrival of Economic Stimulus Checks, part of President Bush’s plan to help jump start the economy,  and while retailers across the board are claiming weakness the reports for May sales actually showed the biggest gain since November of 07, the start of the holiday shopping season. This surprise in numbers set the Dow into a short rally.

For investors in stocks and bonds alike, the near future holds a host of uncertainty. While the initial glance at reporting indices would make the statement of signs of recovery have arrived, the deeper issues our country are facing are… unemployment at 30 year highs, foreclosures at record highs and growing, housing starts near record lows. To look at resale’s of existing homes on the increase is simply not enough as the majority of those are new buyers and investors taking advantage of the thousands of bank owned foreclosure sales and those come at a cost to the banks, and all the other homeowners in the community, as it hurts their homes values.

As a forecaster, I would predict we will see the short lived gain of the Dow and the great losses in the bond market rebound some. While inflation is a concern that cannot be overlooked the balance between this and strengthening the dollar will be a difficult task for 2008. We recently heard comments from Fed Chairman Bernanke stating that inflation was not as pressing as bringing back value to the dollar and that short term rates were going to start increasing. How can an already weakened economy face increasing rates on top of the $4.50 price per gallon for gas and additional costs in commodities?

Our dollars strength, as our ability to recover from the housing nightmare and recession our country has been in, will rely on our countries focus and proper decisions and policies to whether the storm we are in. We need to mend broken policies, including bailing out hedge funds and the poor decisions made by investment firms on Wall Street, who knowingly made access to liquidity in the MBS market coupled with greatly reduced guidelines for those portfolio’s, for the single purpose of today’s profits at the country’s expense tomorrow. The liquidity in MBS arena not only increase volumes through reduced credit guidelines and easy access to capital but induced the blatant mortgage fraud that has been the cause of so many of the failures of companies and the loss of billions to the banking industry.

Wake up America we are facing the financial industries version of Enron!