As stated today by the FOMC, Ben Bernanke has once again pledged to keep rates at these artificially low levels. At 11:15am this morning, when the announcement took place, the market began to rally, bonds began sliding, gold moved significantly higher. These markets didn't move based on what he said, but what he didn't say. He didn't say the treasury was going to continue the purchase of treasuries. Great news! That means that the economy is getting better, and that more purchases, which will yield lower yields, wouldn't be necessary. He didn't say that he was holding rates steady and watching for signs of improvements - which would then dictate that there is significant growth... BUT - Most importantly, He didn't say there was a chance of rates moving higher due to significant economic improvements. What is he saying then? He essentially came out and said that he wants to see what is going to happen based on his past actions. Could this be? Could someone in the government/treasury actually be taking a step back to watch their actions unfold?
Here is the reality: The FOMC has realized that by pushing rates as low as they are now, it isn't sparking the demand that they had anticipated - exact opposite of Bernanke's thesis (http://www.marketoracle.co.uk/Article5638.html). - I will try and do the research as much as possible to quotes and things I point out, but it is as simple as doing an internet search. Ideally, they had hoped that by rates being as low as they are now, that the demand for borrowing would increase, thus sparking the demand in real estate, and ripple across the economy. It hasn't happened. What has happened was a considerable amount of refinancing in the real estate market, and a considerable amount of mergers and acquisitions activity, which will only continue to increase as the stock market increases and the yields on borrowing decline. Another rate to begin watching is the LIBOR rate, which hasn't gotten much attention from mainstream media, as well.
Actions to be taken: As the fed continues to honor it's commitment to low interest rates, the average business person and consumer can lay confident in the fact that the cost of borrowing will not increase, and more than likely will not for a period of time (barring default on our debt/rising credit concerns for the debt - which will be a major issue in the next year or two, more than likely election year 2012). There are a number of businesses out there still struggling to survive, and the fact that they remain alive is that banks are negotiating alot of the debt to more manageable rates, as even at a 3% rate, the bank is making a great premium based on their cost of funds. You will see lower interest rates to come for the rest of the year, due to a strong cyclical effect that yields on treasuries drop for the second half of the year, and rise the first half. Gold has risen significantly in the past few weeks, but it is going to take a pause in it's rally, and fall back to the 1250-1200 mark, and any pull back is a great time to load back up on the metal, as governments and banks from around the world are grabbing what they can when they can. If you are a business that is flush with cash, this is the perfect storm to do M&A activity, especially to purchase businesses at a steal of a deal. If you have $20 MM and would like help on spotting these deals, drop me an e-mail and I will be happy to consult for you! Over the next 5 years, there will be alot of consolidation in the various industries that allow it to happen. Finally, real estate - as a whole it is being propped up by financial regulation, banks unwillingness to foreclose in a timely manner, and an overall glut of supply that hasn't even touched the market. For those of you thinking about buying - do so with caution, and only purchase those properties that you believe you can stay put for another 5 years for a rebound to today's levels (Talking more specifically los angeles area, as every market is different). But, the commercial loans haven't even hit headlines, despite them being in the background. Along with M&A activity, commercial real estate will be a great purchase for those conglomerates with large cash positions. The only down side will be the tenancy issues, as the competition for tenants will be high and the demand low = lower prices for lease space = more defaults to come.
Overall situation: Interest rates will go lower, stocks will continue it's trading band between 11,000 (with breakouts to 11,200) and 9800 (with breakouts to 9500). Barring any unforeseen catastrophic financial news, we are just waiting on reports that the economy is getting better, despite that it isn't - it's flat. Once we get that, we will see higher rates. If it gets worse, we will see bold action on the fed's part. Gold will continue it's growth. The government will keep spending and adding more legislation. Finally - If you take any of this as advice, do so at your own risk. Consult a qualified investment consultant, as investments are not guaranteed, not FDIC insured, and may lose value.
Theory of the month: There comes a time when expansionary monetary policy will no longer work to stimulate the economy and fiscal policy comes into play. However, fiscal policy only focuses primarily on taxation and government expenditures. There is a factor that lies that I will call the legislative policy. As government has gotten too big over the years (including Bush, think PATRIOT Act), there have been a huge amount of legislation that has been passed to increase the difficulty of doing business. Legislative policy needs to come into play when the roles of fiscal and monetary policy become ineffective, thereby reducing the amount of barriers to enter there are in order to do more business, thus creating more jobs and enticing more entrepreneur's to do business. I believe we are currently in that state - and the traditional means of economic revitalization will not work during this period. The appearance as such is because of the artificial support of the government, and the moment the bailouts stop, the tax incentives expire, and the monetary policy of buying treasuries ends - The true economic downturn will begin.
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