The Big Speech by Fed Chairman Ben Bernanke from Jackson Hole, Wyoming, seems to be well-received by the markets.
Stocks are up nicely (S&P+1.3%) despite the fact that the economic data released today was uninspiring (second quarter GDP revised lower to +1.7% from +2.4%, and the U. of Michigan Consumer sentiment numbers show more pessimism than last month).
Meanwhile, the bond market is getting rocked: the 10-year Treasury yield has "soared" by 15 basis points to 2.64%.
Guess the bond folks were hoping for a combination of weaker GDP data and/or more Bernanke mention of Fed direct intervention in the credit markets.
The best line in the talk, I thought, was the following (tip of the hat to Louise Story from the NY Times, who mentioned this on Twitter):
“Central bankers alone cannot solve the world’s economic problems,” he {Bernanke} said.
To which I say: Amen. The Fed has thrown money in the system, driven interest rates down to their lowest level in decades, and yet interest-sensitive sectors like housing have not responded.
One scary statistic: the housing data released a couple of days ago indicated that there was not a single home worth more than $750,000 sold in the month of July in the United States. Not good news for either coasts of the United States, where most of the high-priced housing in the U.S. is located.
My sense is that the other parts of the federal government would love the Fed to come to rescue so that they do not have to address any of the incredibly difficult fiscal challenges that we face.
On the other hand, low interest rates are driving investors crazy, and pushing them in the direction of high yield and emerging market debt in a desperate attempt for more income. I think the swap from stocks to emerging markets bonds makes no sense, but neither does buying higher grade debt issues at yields less than 1%:
Aug. 27 (Bloomberg) -- Investors withdrew a net $7.1 billion from equity funds tracked worldwide in the week to Aug. 25 and put some $5.2 billion into bonds amid concern economies in the U.S. and Europe are losing momentum, EPFR Global said.
A net $5.4 billion was redeemed from U.S. stock funds, while inflows into emerging markets were the lowest in 13 weeks, EPFR said in an e-mailed statement. Developing-nation bond funds took in $1 billion, on course for a record-setting year, while U.S. bond funds drew $2.5 billion, according to the Cambridge, Massachusetts-based research firm.
Fed Ready to Increase Its Buying of Long-Term Debt - NYTimes.comhttp://noir.bloomberg.com/apps/news?pid=20603037&sid=aPRxN9th86fU
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