Read “The Hubris of Central Bankers” again, then the following to understand that industrial policy, that socialized practice that informs the Five Year Plans central planners love to write, can come not only from ego-inflated presidents but from ego-inflated central bankers as well.
The industrial policy in evidence in the data below is the manipulation of market signals in the US Treasury Bond markets. Ben Bernanke and the Fed believe they know what is good for all of us, what the proper and correct allocation of capital should be over the next 6-7 years, and have used the unlimited savings account that is at the heart of any federal reserve system to buy controlling positions in T-Bonds at certain maturities. If hubris reveals itself in actions, this is technocratic hubris on full display.
The purpose of interest rates is, in the garbled lingo of the moment, “crowd-sourcing” in its most useful way. Progressives love the idea of “crowd-sourcing” on the internet. It’s “cooperative decision making” as one such lefty told me recently, based on the theory that wisdom more likely comes from group mind interplay than from individual genius. But if you point out as I always do that the ultimate “crowd-sourced” infomation is prices in an unmanipulated auction, progressives suddenly get the yips. Evil markets are not, apparently, asking the correct questions, ”crowd-sourcing” the correct people, which is why open markets don’t deliver the correct answers. Got that, evil capitalist greed-mongers?
“Helocopter” Ben Bernanke is not ”crowd-sourcing” at all. He’s just decided what’s best for the country and is installing it while waving the appropriate finger to “crowd-sourcers” left and right. To hell with progressive “crowd-sourcing” and to hell with market-driven interest rate signals, too.
This blog below is focused on the 7 year T-Bond, but notice in the data that the 6 year T-Bond is a larger issue and equally controlled by Bernanke’s Fed. The Fed owns over 40% of several T-Bond issues in the 6 to 12 year range, and over 50% (see second chart) of some specific maturities.
A fair question would be why he’s decided to take over the market at these two maturities and install artifically low interest rates in the process. The answer is mortgages: the average mortgage written in the US is priced against the 7-10 year T-Bond market, has an average term of 7 years (is refinanced or paid off in 7 years), and is the core of the mess from 2008 through today. Ben is “managing” the mortgage markets, and by dictating prices and yields in that maturity range has created the lowest mortgage interest rates since the 1950′s.
Hubris goeth before the fall. Central bankers are not immune to this wisdom. Markets distorted by industrial policy dictat always, sooner or later, snap back hard. The law of unintended consequences has not been repealed. This is not going to end well, IMHO.
The Great Repression: Freedom of Speech in the Bond Market
We’re baffled anybody still looks to the U.S. bond market for signals of future economic activity, inflation, or even risk aversion. Case in point is the Feb 25th 7-year bond auction which NBC’s Rick Santelli rated an eleven on a scale of ten, i.e., “a slam dunk”.
Go no further, however, than the chart below to see which maturities on the yield curve are the most repressed. Prior to today’s auction, for example, the Fed owned 43 percent of all Treasury coupon securities maturing in 2019 and more than 50 percent in three of the seven issues maturing in that year.
Yesterday we caught PIMCO’s very bright and articulate Mohammad El –Erian promoting the “seven-year bucket” in an interview with CNBC.
“…make sure you have some gold, some oil, and concentrate your bond exposure in the five to seven-year bucket.”
Known for “Fed Surfing” or getting in front of, or riding along with, the U.S. central bank’s market interventions, don’t you think PIMCO likes the seven-year, in part, because that is where Mr. Bernanke is camped out? Front running the Fed has paid handsomely for many and we doubt it is fully dominated by macro views of inflation, economic growth, Chinese hard landings, or risk aversion.
The information we divined from today’s successful bond auction? Especially, in a maturity that has been gagged and bound by Fed intervention? Absolutely nuttin’!
Finally, we view long-term Treasury interest rates as one of, if not, the most important price in the world. Because of direct financial repression the information it now provides and the signal it sends, which is so important to capital allocation decisions, has, at best, been severely distorted. No wonder corporations are hoarding cash and reluctant to invest.