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The Economist calmly explains why there might be panic.
FOLLOWING the earthquake and tsunami that struck Japan on March 11th, survivors scrambled for shelter and sustenance. Investors, meanwhile, scrambled for knowledge. Speaking at a London seminar hosted by GaveKal Research, a consultancy, Jonathan Allum of Mizuho International noted how many of his fellow analysts suddenly purported to be experts on seismology, oceanography and nuclear physics. He was more honest about the limits of his own wisdom. “I know quite a lot about economics and finance and I’m pretty good on German progressive rock,” he said, but that was about it.
The list of esoteric worries troubling the world’s investors is growing. As Western aircraft enforce a no-fly zone over Libya, some of Mr Allum’s peers are no doubt waxing lyrical about the payload of the Eurofighter Typhoon. Across the Mediterranean, Europe’s debt crisis is still in full swing. Markets fretted about the prospect of a long-expected bail-out for Portugal, after the parliament in Lisbon rejected the minority government’s latest austerity measures on March 23rd and the prime minister promptly submitted his resignation. Possible write-downs on Irish bank debt by the new government in Dublin are another concern; so too is the threat that losses will be imposed on private creditors when a permanent European rescue fund starts operating in 2013.
Everyone knows that the disaster in Japan, the violence in the Middle East and the euro zone’s fiscal strains are bad for the global economy. But no one knows quite how bad. This lack of clarity can be as harmful as the disruption itself. …
Peter Schiff lets us in one of the Fed’s dirty secrets.
… Most people are aware that foreign central banks figure very prominently into the mix. They buy for political reasons and to suppress the value of their currencies relative to the dollar. And while we think their rationale is silly, we do not dispute that they will continue to buy as long as they believe the policy serves their own national interests. When that will change is harder to determine. But another very large chunk of Treasuries go to “primary dealers,” the very large financial institutions that are designated middle men for Treasury bonds. In a late February auction, these dealers took down 46% of the entire $29 billion issue of seven year bonds. While this is hardly remarkable, it is shocking what happened next.
According to analysis that appeared in Zero Hedge, nearly 53% of those bonds were then sold to the Federal Reserve on March 8, under the rubric of the Fed’s quantitative easing plan. While it’s certainly hard to determine the profits that were made on this two week trade, it’s virtually impossible to imagine that the private banks lost money. What’s more, knowing that the Fed was sure to make a bid, the profits were made essentially risk free. It’s good to be on the government’s short list.
Given that the Treasury is essentially selling its debt to the Fed, in a process that we would call debt monetization, some may wonder why it doesn’t just cut out the middle man and sell directly. But the Treasury is prevented by law from doing this, so the private banks provide a vital fig leaf that disguises the underlying activity and makes it appear as if there is legitimate private demand for Treasury debt. But this is just an illusion, and a clumsy one to boot. …
More on the subject from Jim Lacey in the National Review.
… The wisest and most successful bond investor of all time, Bill Gross, has dumped his bond fund’s $150 billion investment in U.S. bonds. One should not ignore the importance of this event. The largest bond fund in America no longer believes that Treasury bonds are a good investment. Moreover, Gross is not alone. Blackrock, the world’s largest money manager, is now underweighting Treasuries overall and reducing the duration of the bonds it still holds. That means they are dumping their long-term bonds, which are the most sensitive to interest-rate changes, in favor of Treasury instruments that mature in a year or less. Other bond funds, such as the $20 billion Loomis Sayles funds, are also forgoing Treasuries in favor of high-yield corporate bonds. Virtually everywhere you look, from great investors such as Warren Buffett to insurance companies such as Allstate, everyone is dumping their long-term U.S. debt and either buying debt that matures in less than a year or moving their money elsewhere.
So who is still buying U.S. debt? According to Bill Gross, the “old reliables” — China, Japan, and OPEC — are still in the market for 30 percent of all new debt. The rest, however, is being purchased by the Federal Reserve. There is no one in else in the market. For the first time ever, Americans are refusing to purchase their own country’s debt.
Gross estimates that the “old reliables” are still good for $500 billion a year in purchases, and will be for some time in the future. This is pretty much the amount they’ve had to buy in the past to rebalance capital flows distorted by the U.S. trade deficit. Gross, however, may be wrong this time. Japan, needing to finance its reconstruction, is much likelier to be a net seller of U.S. debt, while China’s economy is slowing and actually ran a trade deficit in the last quarter. That leaves only one buyer of consequence — the Federal Reserve. …
David Goldman says it is not time to panic.
Fox News among other outlets is warning that mass liquidation of US Treasuries by the rebuilding Japanese will lead to a collapse of the US Treasury market and a spike in US bond yields–and that’s why Congress has to cut the deficit right away. That was Stuart Varney’s message this afternoon (Sunday). There is no possible way for Congress to cut enough fat out of the budget to make much of a dent in a trillion-and-a-half dollar deficit, but I suppose this sort of scare talk gets angry phone calls into the House of Representatives.
I’m a good Republican and I think less of President Obama than most of the party faithful, but my job is not to spin stories but to tell it as I see it. As I see it, the story is nonsense.
Treasury yields bounced up a bit from the extreme lows of last summer, to be sure, but we are still in the lower part of a very long-term range. There simply aren’t any safe assets. The Euro is in much worse shape than the dollar; Europe can’t throw the PIIGS overboard without having to re-capitalize its own banking system (full disclosure: I own no European bank common, and only a bit of Deutsche Bank preferred). Japan’s debt to GDP ratio is the worst in the world. Where, then, are the central banks of the world to put their money — not to mention the rest of the world’s savers?
Long term, the US is a better bet than Europe. Forget the present deficit and look at fundamentals: how many working-age people will there be in Europe, Japan, and North America over the life of a 30-year bond?
Between now and 2050, according to the UN, Japan’s population aged 15-59 will fall from 71 million to 45 million; Europe’s from 460 million to 350 million. Those are declines in the number of potential taxpayers by 37% and 24% respectively. America’s working-age population, though, will rise by 15% as of 2050. …
For a change of pace, Jennifer Rubin interviews John Kasich, governor of Ohio.
… I wanted to talk to him about SB 5, the measure to severely curtail public employee bargaining rights and require employees to increase their contributions. (An analysis provided by his spokesman shows that had the measure been in place last year, it would have saved local governments in the state $1.1 billion.) Kasich tells me, “We’ve unveiled the most comprehensive reform budget people have seen in a generation.” The union reform is key, but “it’s only one element” to allow local governments to control their costs. He notes that under the bill public-employee unions can still negotiate for wages and working conditions, but not health care and pension benefits. It would also end public-employee union strikes and automatic pay increases.
Kasich explains that the equation between public employees and taxpayers needs to be “rebalanced,” with the idea that the taxpayers through their elected officials should control the state budget. He points to troubling examples of how the balance has gotten out of whack: “We’re in the bottom 10 [among states] in dollars in the classroom, and the top 10 in dollars for administration.” He continues to rattle off examples in which Ohio and its taxpayers have lost control of government finances. “The city of Mansfield,” he explains, “is on the way to bankruptcy.” He denies accusations that he is out to get the unions. “Nothing could be farther from the truth,” he says. He points to some compelling math: The average Ohioan must pay 23 percent.of his own health care; government workers pay only 9 percent. …