The Mike Bertelsen Project

Investors are starving for yield. With the Fed's QE3 program going and shifting the curve to riskier fixed income assets, yields are being driven down. Investors are soaking up bonds. With this money printing mentality we see there is no more risk-free assets. Investors are dumping their money into bonds and getting a better yield than what money market and savings accounts are paying.

There, however, is a pitch for buying good quality stocks. Macro-economic factors need to be weighed more carefully. Equities are always competing for market share with fixed-income assets. These are unprecedented times. The Fed's artificially low interest rates make fixed-income investment a guaranteed loser. When QE3 was announced, I had the feeling that investors were being fed some good tidings for investing in Treasuries. But now what I heard was too good to be true.

Nervousness. That's the best way to describe the mood of the markets. That mood has not entirely filtered across the national spectrum regarding the economy. Close though. Retail spending is low. Which in a way is good. That tells me that households are indeed watching their spending. But, with an economy geared towards spending, that doesn't sit well with the big banks and hedge funds. Wall Street, as a whole, has been watching for the bright and shining light to bring the American economy out of darkness. Alas, that light has not been shown.

Housing is still down. There has been a rise in home construction to be sure. But realize just how much new building needs to happen to create more jobs. We need about 400,000 to 600,000 jobs a month, for I don't know how many months, to get unemployment down to 10 year ago levels.

The DJIA is hovering at the 13,000 level. To be sure there are those who say a new bull market is within reach. But realize that more and more money is being taken out of the stock market practically daily. Is there the push to bring in a new bull?

Everything going wrong with the U.S. economy has to do with our massive debt levels. The current national debt grossly exceeds 15 trillion dollars. But don't miss seeing the bigger picture. Along with that the U.S. government is also sitting on 84 trillion dollars in unfunded liabilities in Social Security, Medicaid, and other entitlement programs. Nearly 100 trillion dollars total!

To put it in perspective, if you spent 1 dollar every second, every single day, every single year..... it would take 31,000 years to spend just 1 trillion dollars. Now multiply that by 100.

Divided by every citizen of the United States, this equates to to more than 318,000 owed by every citizen in the U.S. During the Obama administration more debt has been racked up than the administrations of George Washington through George H.W. Bush (Bush 41) combined. This is the component that could unhinge our global economy. One analyst on CNBC talked about Europe, but asked what about the United States. Seems we are not looking in our own backyard.

Fox News reported in August 2011, American debt had already surpassed its entire 2010 GDP of 14.53 trillion dollars.

The U.S. government borrows four out of every ten dollars it spends. Our Social Security taxes (what you and I pay through income taxes) have 40 percent going to pay the INTEREST on the debt.

Without borrowing money to fill its quarter of the GDP and cover the national debt, 10 percent of our economy could vanish. It's looking more and more likely to prevent this is to raise the debt ceiling. That obviously will bring a fight in Congress.

The Treasury Borrowing Advisory Committee is in fear of a massive sell-off of Treasury bonds by foreign investors. This could place another 75 billion dollars on taxpayers. This also would increase mortgage lending rates. Treasury Secretary Geithner reported that the debt ceiling debate will come AFTER November's election day. His timing is off!

The mudslinging has already begun. Speaker John Boehner has said no to a rise in the debt ceiling. We very well can't operate without a rise. Not raising the debt ceiling could put the entire market in peril. Prices for core goods will rise, another collapse of the housing market could happen, and a destruction of wealth is sure to overtake us.

As much as I wish to keep more debt from happening, a rise in the debt ceiling has to happen. After that, than what?

QE3, that's what.

I wrote earlier that Geithner's timing was off. When will it be? I say at the end of September. There most likely will be monumental events that will happen to the U.S. economy to put the debt ceiling debate into gear. Look at the Treasury auction results. If you see those auctions starting to falter, that's the trigger. Bernanke will make the case for more easing by the Fed. These events will just "kick the can" down the road some more and we'll deal with it in the new year, no matter who the president is.

Atlanta Fed President Dennis Lockhart appeared to be headed for a QE3 vote. A "yes" vote at first, but now he may have released the "no" vote initiative.

He feels the output gap ..... the amount of slack in the economy - is not as sizable as high-end estimates and is not zero either. Slowing growth has still been here and there has been no real progress toward unemployment.

Balance sheet expansion should be done with much caution, according to Lockhart. Such a step takes us into uncharted territory. Lockhart does not see QE as a miracle cure.

Is unemployment an economic disease or a symptom?

With crop prices going up and the price of gold pegged to perhaps hit $2000.00 an ounce, will QE3 happen or not? Most stock guys don't want it. The consensus is that the stock market is doing just fine without QE3.

But if commodities still remain high, what will that do to the consumer? Food prices are high enough now. Can the household incomes stay up with this kind of price inflation? Do you want to answer that with your wallet?

The rest of July will and should tell us more on the state of prices for corn and wheat. With rainfall totals down almost 3 inches in some parts of the Midwest, the crop yield reduction estimates have increased.

What a summer it been, huh?

Well, is QE3 imminent or not? Support for Bernanke's plan is growing all so slowly. Central bankers are still searching for solutions to the European contraction. They'll figure a way to loosen the money supply. When that happens, commodities will rise in price. There was recently a 20% sell-off in commodities. Commodity traders are watching inflation. If higher inflation causes a U.S. dollar weakening, this will be a good bounce for commodity prices.

Wall Street benefited from the Eurozone headline fatigue Tuesday the 5th of June. The European Central Bank rate decision is tomorrow the 6th. What do the eurocrats have in the central system pipeline? We'll soon find out.

The waiting game is on for U.S. stocks. After an impressive first quarter in 2012,the engines haven't really hit higher rpm's in the second quarter. The bias is negative and there is no news. No news is good news.... right?

Federal Reserve Chairman Ben Bernanke is heading to Capital Hill on Thursday. QE3 rumbling seems to be getting louder, but nothing definitive. Pullbacks could bring more money into the market, and we'll see.

The Fed meets on June 19 and 20.

In my previous blog post I mentioned about a possible QE3. Highly doubtful. Rates are too low. QE1, QE2 and Operation Twist were meant to bring down long-term interest rates. With the 10 year Treasuries at record lows of 1.439% on Friday, the Fed has the U.S. economy and markets turning Japanese. The 10 year Japanese bond was .82% on Friday (06/01/2012).

The 10 year Treasury began its decline from 5.25% in mid-2007 after the Fed's final rate hike, which pushed the federal funds rate up to 5.25%. Since then, the decline in yield has been dramatic. Once the Fed began to cut rates in September 2007 the yield decline accelerated. On December 16, 2008 the Fed cut the federal funds rate to zero to .25%, and that's where it has been ever since without a major positive effect on the Main Street economy.

Talk about dead money. Instead of a QE3, the Federal Reserve should create a lending facility to funnel mortgage money to community and local banks through the Federal Deposit Insurance Corporation. The FDIC could use this fund to refinance any mortgage where the borrower has been current on all mortgage payments. The new 30 year fixed-rate mortgage offered at a rate equivalent to the 10 year yield plus 100 basis points. This would be 2.50% for a 30 year fixed rate mortgage.

What would this do? Help families facing foreclosure stay in their homes. That's all.