The Daily Trading Report

If you Judge the FED by their actions rather than their words it seems obvious……..they actually want high Inflation and a weak USD for whatever reason.

We have been predicting significantly higher US Treasury yields since the start of this year. We also said that rising Treasury yields would be a positive sign because it would be evidence that that the market had come to accept the fact that the economy was in recovery mode. This is essentially where we are today.

We have also maintained that rising Treasury bond yields were a good thing, and not a threat to the economy as popular opinion would have it today. This is because yields have been rising as a result of a recovery in the economy. Remember it was the fear of depression and deflation that drove 30-year yields to just below 2.6% at the end of last year. A move from 2.6% to 4.7% in 6 months suggests we’re not sliding into a depression; rather the US economy is beginning to grow again.

We have also been saying that an inflationary storm could well be developing that will send T-bond yields sharply higher. This storm being a result of a recovering economy, rising inflation, and massive sales of Treasuries to finance Obama’s trillion-dollar deficits. In light of the recovering economy, it seems that the $800 billion in stimulus money, will not be required. However, it seems that the Obama administration is hell bent on going forward with the “stimulus” package and in so doing we are staring down the barrel of hyperinflation.

Has the increase in yields resulted in a significant increase in borrowing costs of corporates? Not really, this is thanks to a significant narrowing of credit spreads. Junk bond yields have fallen by roughly 6 percentage points since the end of last year, and investment grade bond yields are roughly unchanged. Mortgage rates are up from their all-time lows, but they are still well below the levels that prevailed during the housing boom. We don’t see why 6% fixed mortgage rates have to be a threat today, considering that they averaged 6.65% over the past 15 years, according to BanxQuote. Consider also that yields are up in nominal terms, but real borrowing costs (after adjusting for inflation) are still relatively low, and could go lower if inflation rises.

The Fed needs to start withdrawing the $1 trillion it has added to the money supply, as Art Laffer explains in his WSJ op-ed. If they took steps to avoid the huge rise in inflation that threatens, that would boost confidence and boost the dollar, and that would result in more investment and a stronger economy. Somehow we get the feeling that the FED wants inflation and a weak USD and are doing their utmost to ensure that it happens. We will just ride on the back of it!