A quick update

Tuesday, May 5, 2009

Much to report lately but not enough time. 80 hour weeks aren't leaving much time for writing. A stream of consciousness method might be best here. There are some signs that the economy isn't deteriorating AS QUICKLY as it has been. This is for the most part being viewed in the market as a sign that we are close to a bottom. However...I don't know of anyone that thinks we're going to bounce off the bottom and just start growing again. Jobless Claims are still mounting at a pace north of 600,000 per week. An important consideration here is that a good number of the jobs we are losing are STRUCTURAL job losses as opposed to transitory job losses...these jobs won't be coming back when the economy rebounds. GM and Chrysler simply won't need as many employees...many of those jobs are gone permanently.

When does the economy start growing again? Even though the economic damage is accruing at a slower pace we've still taken some tremendous hits. I saw a quote today that had the amount of value lost in the housing sector as over $6 Trillion. That's not just going to re-inflate to pre-recession numbers....nor should it. I was at dinner last year with the President of the St. Louis Fed and he had a nice chart that showed where housing prices WOULD have been if they tracked GDP growth instead of following the rapid growth path that was fueled by speculation. I'll have to dig that chart up because it was quite insightful. Essentially it showed that after the collapse in home prices to that point (and I want to say this was back in Sept of 2008...but don't quote me on the timeline) we were really just in line with where prices SHOULD be if they grew at the same pace as GDP.

Moving on still in stream of consciousness mode...and I apologize I'm in between work and studying for CFA Level 2...I've got my hands full. The big news recently was that the 3.00% level was breached on the 10-year Treasury. There was much speculation that the Fed wanted to keep the 10-year yield below 3.00% to help ignite the refi wave. There was compelling evidence of this in the markets until last week. At the April FOMC meeting Bernanke and Co. announced a surprise. There was speculation that they would EITHER announce a plan to buy Treasury debt OR announce a plan to buy Agency debt...they did both. The plan calls for spending $300 billion to buy Treasuries and an additional $750 Billion to buy Agency debt (bullets and MBS). This is on top of the $600 Billion in MBS purchases they had announced in January.

So on this announcement the 10 year Treasury yield dropped like a rock. It appeared that through open market operations the Fed was going to keep the 10-year in the 2.80% range. As much money as the Fed has, they don't have pockets deep enough to keep the 10 year at a predetermined level. The market won that battle. After a disappointing volume of purchases in open market operations one day last week the 10-year popped above the 3.00% level...then it was off to the races.

For its part the Fed says they don't have a target level for the 10-year. They say they will consider all evidence as they deploy the money in these programs. If economic growth picks up they can pare back on purchases, the opposite also holds.

That is a rambling recap of some of the bigger items recently. Sorry about the format...it's a product of necessity. Support the economy...buy bonds.