One Man’s Opinion: Has The US Fed Lost Control Over The Bond Market?

Marc Faber, author of the Gloom, Boom & Doom report expected the Federal Reserve to reduce its monthly bond purchase program by $10-$15 billion, but says he’s not surprised Ben Bernanke didn’t bite the bullet.

The people at the Fed are academics with little understanding what’s happening on the ground. What they fail to understand is that printing money benefits only a miniscule proportion of the population. Equities and commodities reacted positively to the Fed’s announcement with prices of crude, silver and gold surging. However, the downside far outweighs the benefits as only 11 percent of Americans directly own equities and don’t benefit from an increase in asset prices, Mark argued.

When told low interest rates benefit mortgage and car buyers, Marc said the bond markets had peaked out and interest rates hit the bottom on July 25, 2012, well ahead of the QE3 announcement made by the Fed on Sep 14, 2012. Ten-year Treasury note yields had tumbled to 1.43 percent and Bernanke had said in a press conference the objective of the Fed is to keep interest rates low; yields have doubled since then, meaning markets were ready for taper, but Bernanke failed to pull the trigger, he quipped.

Asked to explain the endgame and whether rising yields were the unintended consequence of money printing, Marc said it will result in total collapse of the economy, but from a higher level. The Fed will continue to print money and if the stock market crashes by ten percent, they will print even more because Bernanke doesn’t have a clue. Frankly speaking, the Fed has boxed itself in a corner and they are kind of desperate to get out of it, he noted.

Asked if the situation will improve if Janet Yellen takes over, Marc joked Yellen will make Bernanke look like a hawk. Back in 2010, Yellen had said if she could vote for a negative interest rate, she would have done so. Her intention would be to keep real interest rates (after adjusting for inflation) low.

The consequence of such a monetary policy and artificially-low interest rate regime is that the government debt grows bigger and bigger and they have less freedom to spend. Then politicians propose higher taxes for the rich to service higher debts, which are applauded because in a democracy there are more poor people than the rich, Marc said.

Asked to comment investing in gold, Marc said he would like to wait before making his next move because the jump in gold prices may be a one-day event and the euphoria may die down soon. The markets are overbought and the Fed has already lost control over the bond market. It’s only a matter of time before it loses control over the stock market, he noted.

Asked if 10-year treasury yields will rise again to levels seen before Bernanke’s announcement at 2 pm on Wednesday, Marc said he’s negative on government bonds in the long-run because he thought there will be a sovereign default in future.

But in the last few days when 10-year yields had touched the 3 percent mark, he bought some Treasuries for the first time in years because prices had overshot and yields could ease to around 2.2 and 2.5 percent in the next two to three months. The economy is much weaker than most people think, he said.

You can watch the video here.