Slip Slidin' Away

Founder Bill Bonner

"US Economy Slips into Reverse," was the headline in yesterday's Financial Times.

The economy didn't move ahead in the last quarter of 2012. Instead, it contracted by an annual rate of -0.1%.

That didn't seem to bother anyone. Investors hardly noticed. The Dow slid a little, but not much.

In the bar car, journalists generally dismissed the whole thing. It was a kind of optical illusion, they said, caused by the fact that the gunslingers had been a little slow on the draw in the waning months of 2012.

Perhaps on the South Bank of the Potomac they had heard that the world was going to end on Dec. 12 and decided that further security spending might not pay off. They had no defense against the end of the world, after all.

Or maybe, as the press reported, they were just preparing for the curtain to come down on their freewheeling, free-spending ways. That too was on the calendar during the darkening days of last year.

Maybe morale among the terror fighters fell into a terror of their own... and their generals, with downcast eyes, went around the Pentagon switching off the lights and turning down the heat.

We don't know what happened. But it didn't seem to matter anyway. Everyone said it was a fluke. The rest of the economy was OK.

Spinning in the Wrong Direction

Nobody seems to care about the increase in U.S. Treasury bond yields either. Since Ben Bernanke announced his "QE to Eternity" program, bond prices have gone down (and yields have risen). This is the opposite of what was supposed to happen.

Everyone seems convinced that the economy is moving forward, even though it is not. They're also persuaded that we have the Fed's "QE to Eternity" program to thank, even though the drive shaft -- bond yields -- is spinning in the wrong direction.

Bernanke is buying $85 billion worth of agency-backed mortgage bonds and Treasury bonds every month -- trying to increase demand and push down yields.

If successful this will bring down long-term lending rates -- especially important to the housing industry -- which will help people borrow with the wild abandon they showed in the 2005-07 spree. Then -- according to the theory, at least -- the economy will grow.

Go figure.

Collision Course

What we're trying to figure is where this clunky old machine ends up.

We've just seen how spending slippage at the Pentagon can put U.S. GDP into reverse. Reports suggested that top brass wasted $40 billion less than planned in the quarter.

But $40 billion is only a tiny fraction of the feds' $1 trillion deficit. What would happen if they cut out the entire $1 trillion in deficit spending to bring the budget in balance?

Theoretically, GDP would race backward 25 times faster... surely crashing into something.

No one seems worried about it. Which is probably because they see ol' Casey Jones Bernanke at the controls.

Never mind that there doesn't seem to be a direct link between Bernanke's gearbox and what actually happens to the wheels below. He puts bonds into high gear -- buying $85 billion a month... roughly the same amount as the U.S. government offers for sale.

With that kind of buying power, you'd think the bond market would get so hot you'd need to put your bid in an asbestos envelope. But no. Instead, it cooled down. The yield on the 10-year T-note broke above 2% yesterday.

What do we make of it? Don't know yet. But at some point, observers are going to notice that the train is going in the wrong direction and that the conductor should have his license revoked.

All Pain, No Gain?

Michael Hasenstab is arguably the most successful bond investor of the last 10 years. He runs the portfolio of Templeton's $67 billion Global Bond Fund.

Of U.S. debt, he asks, is that really a "safe asset"?

It's not paying you anything and you have the risk of principal losses when rates rise.

There's the potential for pain. Bu where's the gain?

And the risk is huge. Bonds are near the top of a mammoth 33-year bull market. Investors buy them for safety. But what safety is there? The Fed is buying, trying to boost them up. And still they go down.

And so we have to wonder: Has QE reached its limit? If the Fed announces another "QE to Eternity Plus," will bond prices go up in anticipation of more Fed buying? Or will they go down in anticipation of more risk?

We don't know. We'd like to see the Fed do it just to find out what would happen.

But this is a train we don't want to be aboard when the word gets out.

Regards,
Bill


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Here's the scoop on this breaking scandal. More importantly, here's an action plan you can take for protection -- and revenge -- against these public scumbags...

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