Yesterday the Federal Open Market Committee (FOMC) announced a Treasury purchase program of up to $300 billion to help improve conditions in private credit markets.
Minutes later, the markets reacted aggressively:
Interest rates on T-bonds took a dive and drove a sudden increase in the value of these securities. David Hightower, editor of our options and futures alert, the Casey Trend Trader, and owner of the respected Hightower Report, called me as this was unfolding. He asked me:
Have you seen what just happened in the last fifteen minutes? The T-bond rose eight points on the Fed's announcement. In my thirty-plus-year career of tracking the commodities markets, I have never witnessed such a dramatic move.
Clearly the Fed has shown again its willingness to do whatever it can to drive long-term interest rates down... and it worked, at least for now.
The stock market reacted favorably to lower interest rates, seeing them as a further stimulus to the economy.
Simultaneously, though, gold jumped by 5%. Within fifteen minutes, it climbed from $892 to $930, and within less than two hours, it almost reached $950. That the markets reacted so strongly shows fears over inflation and devaluation of the dollar. Many investors are clearly starting to question the ability of the Treasury to raise the $2.5 to $3 trillion it needs to finance this year's deficit and the various bailouts. In fact, even the euro managed to show some strong - albeit probably temporary - gains against the dollar on this news.
We believe that the objective of the Fed was two-fold; firstly, to put downward pressure on the long-term interest rates and stimulate the economy by squashing their recent gains, and secondly, to fill in the gap between a very sizeable increase in government spending and the demand for Treasuries at a time when traditional foreign investors are reducing their exposure to the dollar. They no longer have the same export surpluses, they need to invest domestically and support their own economies, and are truly starting to question whether the U.S. government will ever be able to pay them back without significantly devaluating the dollar.
Interestingly enough, today's announcement follows closely last Monday's (3/16) TIC release for January. The U.S. Treasury then disclosed a very disturbing figure. In January, international sales and purchases of U.S. assets showed a net outflow of $148.9 billion for the month. This is in contrast to net inflows of $196 billion at the height of the credit crisis last October.
While China has not stopped (yet) buying $12 billion in Treasuries, 95% of its recent purchases have been in short-term T-bills. Lower interest rates on the T-Bonds will not encourage China or any other foreign investors to increase their long-term commitments to Treasuries and agency debt.
In fact, at Casey Research we expect that very soon, foreigners will demand much higher returns for their dollar investment. At that point, the Fed has to either let rates rise (difficult politically) or expand its purchase of Treasuries to whatever level will be needed to support the budget deficit and bailouts. Already, foreign investors have cautioned the Obama administration about their concerns with the extensive use of the printing presses and the impact this will have on the value of their assets.
However, foreigners do not vote. Thus we can be assured that the administration is going to favor printing over raising interest rates... that is, until foreigners start withdrawing some of the trillions of dollars they have invested in government and Treasury debts ($2 to $3 trillion of which is coming to maturity in the next year).
We could soon see the next phase to this crisis, a stampede away from the dollar. Like any bubble, the government debt bubble may take a long time before it finally bursts - and you need to be ready for the pop because its consequences will be far reaching for America and the world.
As my esteemed partner Doug Casey likes to say, in every crisis lie opportunities. The contrarian investors that prepare will benefit greatly, while the others may have to line up in front of the soup kitchens.
In our leading publication, The Casey Report, our team of economists constantly monitor the actions of the most powerful and disrupting force in our economy, government. Our motives are not political, although we would prefer government to step aside and let the markets correct excesses, as they do so effectively.
The fact is, one cannot expect to make money without understanding what is next on the agenda in Washington DC: the next bailout, pork barrel spending, and social or infrastructure programs. The fate of many industries, businesses, and investors is at the whim of the political establishment and their cronies. Our job is to protect your assets and help you profit from the unfolding crisis.
Today we look at opportunities that will benefit from rising inflation and interest rates the same way we recommended shorting financial stocks 18 months ago or buying agricultural commodities two years ago. It's now time to rig for the second phase of the storm;
The Casey Report is the most comprehensive tool you will find to get you ready for the ride.