The Greatest Market Manipulation

January 24, 2010

If you had the ability to convince lenders to accept a lower interest rate at the precise moments you needed to borrow large amounts of money, would you?

Individuals do not have that unique ability and neither do corporations. Imagine you or I or even Microsoft had the ability to scare the whole world into buying your’s or their debt.  In fact most sovereign nations do not have that ability either.

However, when people are afraid they run for the hills to the “safest” investments. In a post 2008 world where asset backed securities (thing Freddie Mac and Fannie Mae bonds) used to play a large role in the low-risk asset pool, sovereign debt of just a handful of nations are about the only “no risk” investments left.  I quote “no risk” because that remains a topic of a different discussion.

Nonetheless, the United States and Japan end up two of the largest safe havens, not necessarily because they are in fact safe, but more importantly because they can provide ample liquidity on demand.  Imagine if China thought Norway to be safer than the United States as a place to park their reserves.  Well they might think Norway to be safer, but Norway and most other counties are not large enough as measured in domestic GDP to support the levels of debt demanded by countries like China who need to park hundreds of billions of dollars in “safe” places.  In fact, the US and Japan are the worls two largest economies followed closely by Germany which is why you see such demand for those currencies in general.  Soon China will usurp Japan as the world’s second largest economy, and evenentually and inevitably, whenever it occurs, China will beat out the US as measured by nominal GDP.  But who wants to hold Yuan now, also a topic for a different discussion.

At the end of the day the point here is that those countries whose currencies are sought as reserve currencies in fact do have the unique ability to potencially manipulate demand for their own debt if and only if they also have the ability to create fear and / or systemic risk.

Some media pundits have commented that Obama’s plans to stiffen regulation of the financial industry in the US is spurring demand for US debt.  While flattering to the adminstration (which I voted for), I think that is a far reach from reality.  Nobody is calmoring to own 2-year treasuries paying less than 80 basis points (0.8%).  The only reason people clamor for such paultry yields is becasue they fear deflation.

The timing of Obama’s recent announcements for regulating financial markets seemed to coincidentally overlap with the head fake media coverage of Bernanke’s reappointment (which is just for show in my opinion). Both of these events however also coincide with upcoming large treasury auctions and major announcements for a number of central bankers on monetary policy issues including interest rates.

US MONEY WEEK AHEAD: Treasury Auctions May Overshadow Fed

Has the current US regime found sanctity in Bush’s fear tactics? Bush used threats of physical destruction relating to terrorism  to his advantage to control the populace and to dictate foreign policy.

I am beginning to wonder if members inside the current administration are similarly using the fear bread by the 2008-2009 financial crisis to keep interest rates low and more important to keep our debt buyers content with ultra low interest payments.

While this type of manipulation is speculative at best, no one can argue that financing our deficit at lower rates is certainly better than financing it at higher rates.  I have said for a while that dollar weakness is a real and likely to be a long term issue, but there should be little concern that the dollar will lose its place in the global currency marketplace.  There simply are not enough of any other single currency to serve as the world’s leading reserve currency.  Global risk flares however are not just good for the US, they will also benefit Japan, who still seems to have a long way to go before domestic growth starts anew.  In the meantime I would remain suspect of the timing of risk flares around large Treasury auctions, or moreover, come to expect that their timing will coincide.  What is good for the goose is ultimately good for the gander as well.

Is there anyone out there disecting this issue?

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Guide to 2010 Investment Predictions and Outlooks

January 10, 2010

Wall Street Banks

Hedge Funds & Investment Gurus

Actionable Ideas, Alternative Assets & Potential Potholes

The Outlook Abroad