The Marshall Plan In Reverse: Europe To Buy Massive Amounts of U.S. Treasuries?

As the Fed tapers its QE bond buying program, a new massive buyer of U.S. Treasuries has emerged – Belgium. Where is Belgium getting the money to buy them?

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Podcast Summary:

0:00 – 6:19 Introduction

New Looser Freddie Mac and Fannie Mae Lending Guidelines On the Way

6:19-6:56 Discussion of the new rules for Freddie Mac and Fannie Mae to loosen lending standards to increase home sales as the housing “recovery’ falters despite trillions of dollars of QE and record low interest rates. The new lending guidelines will be directed towards allowing more people to obtain credit to buy over priced homes. Fed policies of manipulating interest rates artificially lower have pushed home prices higher on low sales volume to levels that make them unaffordable in many metropolitan areas. Having pushed home prices higher to the point of unaffordabiity, the government wants to lower lending standards to allow more people to qualify to overpay for homes.

The Fed Continues Bailonomics

6:56-12:00 discussion of the ineffectiveness of quantitative easing (QE) in helping the economy. Rather than providing a boost to the economy, QE has provided an ongoing bailout to the too big to fail banks. Given the failure of QE, the government turns to lowering lending standards when a better approach would be to allow home prices to fall to levels of affordability that would increase sales. It seems that the recent history of the housing bubble and bust of 2003-2008 and the dot com bubble of the late 1990’s are being ignored.

Mel Watt, the regulator who oversees Freddie and Fannie, said “Housing finance is such a critical part of the economy to stop, or stand in place, is just not an option.”

Policy makers are determined to orchestrate a housing “recovery” which means higher home prices, not a better economy with a robust job market and more people with the ability to buy homes.

The Underlying Economy is Still Weak, Inflation Rising, Retail Sales and Wages Down

12:00 -13:40 review of the recent economic data releases. The consumer price index and the producer price index rose .3 and .6%, respectively. Housing prices, food and energy prices are all much higher and together make up the largest portion of a household budget, yet supposedly there is no inflation. Retail sales and wages were also down. Yet the media continues to promote the economic “recovery” narrative: “Retail Sales Slow, But Growth Outlook Still Upbeat!” blurted a Reuters headline. “U.S. retail sales braked sharply in April after strong gains in the prior two months, but that did little to change views the economy was poised for faster growth this quarter.”

Reuters also scoffs at the notion of inflationary pressures in the economy:

The Fed also shares the manufactured optimism of the economy’s prospects later this year. St. Louis Federal Reserve President James Bullard predicted the Fed will hit its inflation and employment goals as the economy is expected to grow at a “robust pace’ this year.

Why are Interest Rates Dropping As the Fed Tapers?
Belgium doubles its U.S. Treasury Reserves

13:40 -15:48 Discussion of the perverse market dynamic whereby the Fed has been tapering its bond purchases yet interest rates are falling. If the Fed can keep interest rates low without QE, why did the Fed need to do QE in the first place? Is the Fed funneling dollars to Belgium to buy U.S. Treasuries? Recent data from the U.S. Treasury Department shows a massive increase of Treasury bonds held by Belgium coinciding with the beginning of the Fed’s tapering of QE.

Chart from the U.S. Treasury Showing the Massive Increase in U.S. Treasury Holdings by Belgium (click to enlarge)

Belgium buys massive amounts of US Treasuries while demand for treasuries falls in countries like china and Russia

Belgium has increased its U.S. Treasury holdings 102% in a year

15:48-18:00 discussion of how the markets try to interpret Fed actions

The Marshall Plan In Reverse?

18:00-22:00 Discussion of how the purchases of U.S. Treasuries by other U.S. allied countries allied will probably increase as the Fed and the U.S. lean on them to buy Treasuries in exchange for continued military defense support. Discussion of potential Russia/China oil deals that won’t use the U.S. dollar. Discussion of what impact declining dollar demand might have on the U.S. prices. Discussion of some traditional reasons why there might be continued demand for the dollar and U.S. Treasuries.

22:00-23:50 How artificially low rates and lower lending standards can continue to boost the housing market, even though consumers are feeling the pinch of inflation, lower wages or unemployment.

23:50-26: review of how the Fed might message how the economy is doing and what their plans are for QE. Six years ago Ben Bernanke then Federal Reserve Chairman stated on “60 Minutes” that while the Fed was “printing money” they would stop when the economy started to recovery. You can watch him talk about Fed money printing here The Fed has been promising recovery for years. Discussion of how wars and terrorist attacks allow the Fed to take “extraordinary” measures.

26:40- 29:30 Discussion of the impact of inflation on household budgets- food, energy and housing. Discussion of how the CPI excludes food and energy because they are volatile (they go up in different amounts each month!) Discussion of the initial jobless claim number noting that there are fewer people left in the job market to fire after years of layoffs, so a lower initial jobless claim number doesn’t mean the labor market is improving.

29:30-30:45 Discussion of the lack of participation of millenials in the labor and housing markets and what the government might do to get them involved.

How Government Involvement in Markets Obliterates Price Discovery

30:45-37:40 Discussion of the government involvement in housing, higher education and heath care insurance markets and its impact on pricing.

37:40-41:00 discussion of the lack of reaction to the plan of Freddie Mac and Fannie Mae to relax lending standards. There is a vested interest in preserving the housing “recovery”. Discussion of Fed policy in the late 70’s/early 80’s and Reaganonmics.

41:00-44:25 what impact will the new Freddie Mac and Fannie Mae lending standards have on potential home buyers.

Valuing Social Media Stocks

44:25- Discussion of how speculative investments, like technology and social media stocks get valued. Results are less important than what story an analyst can concoct to justify a large market cap. Discussion of current interest rates and the advantages of long term mortgages. Discussion of loans available for self employed borrowers.

Europe To Buy Massive Amounts of U.S. Treasuries?

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Further Reading:

Reuters Reports on Belgium Buying of U.S. Treasuries

Millennials Not Part of the Club Yet

Obama, Fannie Mae and Freddie Mac Hit the Panic Button on Housing

The Dark Side of Artificially Low Interest Rates

Is a Euro Dollar on The Way?

Royal Canadian Mint

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