We don't know what happened, but it didn't seem to matter anyway. Everyone said it was a fluke. The rest of the economy was okay.
Nobody seems to care about the increase in US debt yields either. Since Ben Bernanke announced his QE Forever program, bond prices have gone down. This is the opposite of what was supposed to happen.
Everyone seems convinced that the economy is moving forward, even though it is not. They're also persuaded that we have the Fed's QE Forever program to thank, even though the drive shaft - bond yields - is going in the wrong direction.
Bernanke is buying $85 billion worth of bonds every month, trying to lower bond yields. This will bring down long-term lending rates - especially important to the housing industry - which will help people borrow with the wild abandon they showed in the '05-'07 spree. Then, according to the theory, the economy will grow. At least, that's the stated goal.
What we're trying to figure is where this clunky old machine ends up.
We've just seen how slippage at the Pentagon can put it into reverse. Reports suggested that the brass wasted $40 billion less than planned in the quarter. But $40 billion is only a tiny bit of the feds' $1 trillion deficit. What would happen if they cut out the entire $1 trillion in deficit spending to bring the budget in balance?
Theoretically, GDP would race backwards 25 times faster...surely crashing into something...
No one seems worried about it. Which is probably because they see ol' Casey Jones Bernanke at the controls. Never mind that there doesn't seem to be a direct link between Bernanke's gearbox and what actually happens to the wheels below. He puts bonds into high gear - buying $85 billion per month...approximately the same amount as the US government offers for sale. With that kind of buying power, you'd think the bond market would get so hot you'd need to put your bid in an asbestos envelope. But no. Instead, it cooled down. The 10-year note fell to yield almost 2% yesterday.
What do we make of it? Don't know yet. But at some point, observers are going to notice that the train is going in the wrong direction and that the conductor should have his license revoked.
Michael Hasenstab is arguably the most successful bond investor of the last 10 years. He runs the portfolio of Templeton's $67 billion Global Bond Fund.
Of US debt he asks "is that really a safe asset?"
And the risk is huge. Bonds are near the top of a mammoth 33 -year bull market. Investors buy them for safety. But what safety is there? The Fed is buying, trying to boost them up. And still they go down.
And so we have to wonder? Has QE reached its limit? If the Fed announces another QE Forever +, will bond prices go up in anticipation of more Fed buying? Or will they go down in anticipation of more risk?
We don't know. We'd like to see the Fed to it just to find out what would happen.
But this is a train we don't want to be aboard when the word gets out.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.