The Fed Pulls The Rug Out

by Doug Marshall, CCIM
Market Assessment
Published September 30, 2009


And the hits just keep onnnnn comin’!

After having committed earlier this year to a policy of artificial stimulus of the mortgage market, the Fed made the announcement on September 23rd that they were withdrawing – or at least not expanding – direct purchases of mortgages and government debt.

Most “experts” believe this decision to stop buying mortgages and government debt will have a dramatic long-term impact on interest rates.

Shown below are the opinions by knowledgeable sources about this monumental decision that we find most provocative:

· With the amount of money the Federal government has pumped into the economy, almost every economist is predicting the return of hyper-inflation. The Federal Reserve’s only remedy for that will be to raise interest rates which, as we all know, is counter to business development and growth. 1

Surprisingly, I have also seen this premise directly contradicted, including this one by the Fed: “the Committee expects that inflation will remain subdued for some time.”

Another humdinger of a quote regarding the recent Fed decision:

· These purchases helped the Federal government continue its stimulative deficit spending over the cries of budget hawks in Congress, it helped keep a lid on borrowing rates throughout the economy.

Thus, we had a unique situation where stocks were rising without a concurrent and ultimately self-defeating rise in Treasury yields – enjoying a daily slice of chocolate cheesecake without an expansion in the waistline.

Now the equity market must operate in a more normal environment where rising stock prices result in higher interest rates. 2

The Federal Open Market Committee, which made this decision and other decisions affecting monetary policy, seems itself to be at odds as to what inflation is going to do, how much slack is in the economy, and how much intervention is necessary or healthy.

While it’s disappointing to see the Fed’s purchases of mortgages and government debt being discontinued, surely commercial real estate is going to require a return to more realistic – if painful – conditions in order to right itself well.

Perhaps not quickly, but well. PriceWaterhouseCooper, for one, is forecasting that the commercial real estate market will remain in recession until at least 2012. 3

It’s the byword of capitalism: survival of the fittest. And, while the fittest are surviving, look for more vacant storefronts and a shorter lender list, as the lions have their way with the lambs.


Sources:
1 Commercial Real Estate Will Not Benefit From The End Of The Current Recession, by Robert Canter of Gerson Lehman Group, Sept 8 2009
2 Did The Fed Just Kill The Bull Market? by Anthony Mirhaydan of Top Stocks Blog – MSN Money, Sep 23 2009
3 Commercial Real Estate Recession to Keep Going, by SquareFeetBlog.com, Sep 15 2009

The China Effect On The Dollar

by Doug Marshall, CCIM
Market Assessment
Published September 15, 2009


During America’s recent economic swan dive, we must admit that we have issued some dire warnings and predicted some difficult times.

But we’ve also come to the conclusion that we need to focus our attention these days on some key financial indicators instead of rambling all over the place about the bad news.

Right now, we believe, the key financial indicator to watch is the health of the dollar.

The almighty dollar has been for many investors the most important, reliable, and used currency in the world. The question is – what is the dollar’s long-term outlook?

To prognosticate accurately, one must think globally because the dollar really isn’t ours anymore. It belongs, in the purest sense, to whoever has the most of them. Um, that would be China (see chart below).

As we wend our way through the economic morass, America has counted on the ability for China and Japan, among others, to continue buying Treasuries at their typical rate.

Right now, though, that demand has slowed, especially for long-term Treasuries.

This is bad news for Washington. When investors got nervous about the crazed spending, borrowing, and printing of money from the Bush & Obama administrations, they backed off on the purchase of Treasuries, which is how Washington raises cash to fund their agenda.

Now, to make matters worse, China has actually begun selling, in net terms, their massive holdings of Treasuries.

And, according to Mike Larson of MoneyandMarkets.com, “One thing seems clear: that one of Washington’s most dependable sources of loans to finance our out-of-control deficits is drying up.”

Mr. Larson quotes the following figures in coming to this conclusion:
· In 2006, China and Hong Kong accounted for more than 50% of the increase in the amount of Treasury debt sold to the public.
· In 2008, their share had fallen to 22% of newly issued treasuries at the same time that the U.S. government increased its public debt by a record $1.2 trillion.
· In the first half of 2009, China and Hong Kong acquired only 9% of the more than $800 billion worth of Treasury bonds that were sold.
· In June of 2009, China actually reduced its note and bond holdings by $25 billion.

The sour appetite for Treasuries across the board is a concern to the Federal Reserve. Without a robust demand for U.S. Treasuries, treasury rates will have to increase to spark additional interest.

Higher treasury rates mean higher across the board rates for everything from auto loans, home loans, business loans, you name it.

So what would be the upshot of all this? At the least, higher interest rates would be inevitable as a result of China more and more leaving Treasuries where they sit on the table.

And in that process, the hope of vigorous economic recovery gets squashed.

Doggone ripple effect…!


Sources:
China Is Now A Net SELLER Of U.S. Treasury Notes And Bonds!, Mike Larson, moneyandmarkets.com (9/6/09)
U.S. Concerned on Debt Demand, Treasury’s Dollar SaysBloomberg News (9/11/09)