Don't Ask Me No Questions, And I Won't Tell You No Lies

So, don't ask me no questions
And I won't tell you no lies
So, don't ask me about my business
And I won't tell you goodbye

Listen to the song here: Lynyrd Skynyrd - Don't Ask Me No Questions (studio version)

The Federal Reserve is meeting today, and in all likelihood will not make any substantive changes in their recently enacted quantitative easing policy. It has been too short a period for the Fed to reverse course, even though interest rates have gone in the exact opposite direction than they'd wished...up. That's right, the Fed's hope was that by printing money to buy nearly all of the Treasury bonds being issued they would drive interest rates lower thereby stimulating the economy. Unfortunately the exact opposite has happened. Interest rates on 5 and 10 year treasuries are up about 60 basis points, while 30 year treasury yields are up about 30 basis points.

What gives? One explanation is that the markets anticipated the Feds QE2 and yields declined prior to the official roll-out of the program. Another explanation is that the economy is improving and rates are rising to reflect that. A third explanation is that the bond vigilantes see the Fed's policy as dollar de-basing and long-term inflationary, and are therefore requiring higher yields to lend to the US. The truth is probably a combination of all of the above. Whatever the reason, the fact is that rates are higher, mortgage rates are rising, municipal borrowing costs are higher, and inflation is higher.

We have been lightening up on our fixed income holdings as our indicators have moved to neutral territory, but we are not at minimum weight yet.  

Even with rates headed up there is still a strong case to be made for lower rates in the near future. The reason for this is the continued de-leveraging happening on both the consumer and government levels (especially state and local governments). As consumers and governments retrench, and attempt to live within their means, economic growth slows and deflationary forces take hold. This is exactly what Chairman Bernanke fears...a deflationary spiral. 

  

Last week Fed Chairman, Ben Bernanke, needed to go on 60 Minutes to explain to the American public why quantitative easing was necessary (unemployment is not going down anytime soon), and why all the naysayers were wrong about the Fed printing money. He was also bold enough to say, with a straight face, that he was 100% confident that the Fed will be able to raise interest rates at the appropriate time to prevent inflation. Wow, 100% confidence from the same man who in March of 2009 said, "It's hard to forecast where we're going." This 100% certainty from the same man who told Congress in 2007 that the impact of the subprime crisis is "contained". The most glaring statement came when Bernanke said, "We're not printing money. What we're doing is lowering interest rates by buying Treasury securities." This statement was in sharp contrast to what he said on 60 Minutes to the same reporter 21 months ago. Asked if its tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing." "You've been printing money?" Pelley asked. "Well, effectively." Bernanke replied.

OK, maybe Bernanke believes that the American public doesn't understand the creation of money out of thin air, or maybe as Jon Stewart of The Daily Show says, "I guess Bernanke was looking at the average age of a 60 Minutes viewer and betting anyone who saw him last year is dead now."

Please watch this excellent video clip that catches Bernanke in his bold faced lie; The Big Bank Theory 

And, if you want to watch the 60 Minutes videos the links are here; for 2010 60 Minutes Video - Fed Chairman Bernanke On The Economy - CBS.com  and here for 2009 Ben Bernanke's Greatest Challenge - 60 Minutes - CBS News

Be careful out there, and keep the lights on,

Chris Wiles, CFA

412-260-7917

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.