Saturday, December 22, 2012

The Treasury Bill Vigilantes Are Alive and Well

They just aren't doing what most people expect them to be doing.


Click to enlarge.

The Fed raised rates to 6.5% in 2000. What did the treasury bill vigilantes say?

"Oh no you didn't!"


Click to enlarge.

The Fed attempted to maintain 5.25% in 2007. What did the treasury bill vigilantes say?

"Oh no you didn't!"


Click to enlarge.

The Fed attempted to once again reach the "lofty" goal of just 0.2% in 2012. What did the treasury bill vigilantes say?

"Oh no you didn't!"

The following chart shows ZIRP in all its grandeur. The Fed is frozen near 0%. The treasury bill vigilantes are too. So is the spread between them. That's deer in headlights kind of frozen and there's long-term death of real yields written all over it.


Click to enlarge.

Things are going to get really interesting and/or terrifying if we enter the next recession with this as our starting point. Why can't more people seem to understand this? I am more bearish right now than I have ever been (and I've been a permabear since 2004). In my opinion, this is an awful time to be swinging for the fences.

And lastly, the Fed really dropped the ball on the housing bubble. Just look at that 1% spike in the last chart. Apparently Ben "There Is No Housing Bubble to Go Bust" Bernanke was dwelling on the wrong things as the treasury bill vigilantes ran for the relative safety of the bunkers. Go frickin' figure.

This is not investment advice.

Source Data:
St. Louis Fed: Effective Federal Funds Rate
St. Louis Fed: 3-Month Treasury Bill: Secondary Market Rate

12 comments:

Mr Slippery said...

And lastly, the Fed really dropped the ball on the housing bubble. Just look at that 1% spike in the last chart.

I think in 2008 Bernanke finally realized there was a massive housing bubble and tried to gently pop it. It was far too late by then for any kind of soft landing. If rates rise again, I think it won't be because of the Fed.

Stagflationary Mark said...

Mr Slippery,

In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover. Yet Hayami was trying to force Japan Inc. to implement structural reforms. It didn't work and rates returned to zero in March 2001. - William Pesek, September 6, 2007

ZIRP is like the perfect mouse trap. There's ample cheese and no easy exit. Sigh.

Craig M. Brandenburg said...

Things are going to get really interesting and/or terrifying if we enter the next recession with this as our starting point. Why can't more people seem to understand this? I am more bearish right now than I have ever been (and I've been a permabear since 2004). In my opinion, this is an awful time to be swinging for the fences.

Cognitive dissonance? The death of value investing? The abundance of commission-based investments? Feelings of modesty when trying to predict the future? Or maybe it's not worthwhile to be so worried about possible problems in the future. These are a few possible answers to your question.

TJandTheBear said...

I agree with Mr. Slippery (and have said as much for years) that future interest rate moves will not be dictated by the Fed.

Given the political climate, 2013 could be the watershed year.

Keep that basement stocked!

Stagflationary Mark said...

Craig M. Brandenburg,

Or maybe it's not worthwhile to be so worried about possible problems in the future.

If it was a part-time job then I'd have to admit that the pay is pretty low and it doesn't come with medical benefits. Sigh.

Stagflationary Mark said...

TJandTheBear,

Given the political climate, 2013 could be the watershed year.

Watershed (television)

In television, watershed is the point in time after which programmes with adult content may be broadcast.

...

Examples of adult content include, but are not limited to, graphic violence, horror, strong language, nudity, sexual intercourse, gambling, and drug use, or references to these themes without necessarily portraying them.

So as far as politics goes, 2013 will be more of the same? ;)

Fritz_O said...

"...the Fed really dropped the ball on the housing bubble. Just look at that 1% spike in the last chart. Apparently Ben "There Is No Housing Bubble to Go Bust" Bernanke was dwelling on the wrong things..."

Dropped the ball is one way of putting it. Let's invite Greenspan into this discussion.

February, 2004:
"To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive way of financing a home."

Greenspan was praising the virtues of floating-rate mortgages when interest rates were at 50 year lows. Almost anyone who took that advice from the man in charge of setting rates for our country is sorry they did.

In the two years following that statement Greenspan more than quadrupled rates in 17 hikes.

On the other hand, anyone who did the opposite of what he suggested and took out a fixed-rate mortgage saw no impact on the cost of financing as a result of those rate hikes.


"So as far as politics goes, 2013 will be more of the same?"

So as far as video games goes, 2013 will be more of the same?

FARCRY3 - available now at ubisoft - mature 17+:
Blood and gore
Intense violence
Nudity
Strong language
Strong sexual content
Use of drugs

Luke Smith said...

Fiscal cliff vigilantes?

The media has a new take on the fiscal cliff, and you should take a look at it.

The latest fiscal cliff prediction

mab said...

Mark,

Merry Christmas!

Stagflationary Mark said...

Fritz_O,

For what it is worth, I think adjustable rate mortgages hold a risk that the typical homeowner cannot afford.

It assumes that the typical homeowner can predict future interest rates and that prediction is always in the downward direction. That's pretty much been the case since about 1980 but who is to say what the future will bring?

Of course, if that is indeed the case then one could still refinance a fixed rate into a lower fixed rate (assuming house prices haven't fallen substantially and there's ample home equity to qualify for a new loan). I had a fixed rate mortgage when I bought my house in 1997. That was the case for me when I refinanced about a year later.

If it is not the case, then good luck refinancing should interest rates actually rise again someday! That's just got pain written all over it.

Stagflationary Mark said...

Luke Smith,

Can I assume that there is some sort of golden parachute? ;)

Stagflationary Mark said...

mab & all,

Merry Christmas!