Nobody is truly safe.
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Just ask Fed Chair Ben Bernanke.
If you’ve been following the news, you may know he and his wife were the victims of identity theft.
Last August, while his wife Anna was busy ordering a grande extra hot soy with extra foam split shot with a half squirt of sugar-free vanilla and a half squirt of sugar-free cinnamon in a venti cup at Starbucks, her purse was stolen.
Gauging the Slippage
Within hours, the thieves started writing checks. Courtesy of the Bernankes, they went on a spending spree. Apparently Anna either was too embarrassed to tell hubby Ben or too amped on caffeine to care. The crooks continued cashing checks on the couple’s joint account for several days after the theft.
No wonder the markets are not completely buying the Fed Chair’s unrestrained optimism about the economy.
Stocks slid worldwide, trimming a sixth straight monthly gain for the Standard & Poor’s 500 Index as lower metals and oil dragged down commodity shares while banks fell on concern their rally outpaced the prospects for earnings.
The selloff started in China where the Shanghai Composite Index tumbled 6.7 percent, the most since June 2008. At the opening, the S&P 500 along with the Dow Jones Industrial Average both were down more than 1 percent. After making a record surge since March 9 of this year, it looks like shareholders around the globe are taking a breather to reconnoiter the investment landscape before they settle in.
In particular, it doesn’t yet look like the bond market is buying all the optimism over the end of the global recession. Bond purchases and yields generally move inversely to the stock market. They are one of the more accurate means to measure overall investor confidence.
[img]666|left|||no_popup[/img] Despite Chairman Bernanke’s recent statements that the economy is recovering at a faster pace than originally projected, investors pushed yields on government debt to their lowest level since April.
Depressed yields are an accepted indicator of the growing appetite for bonds as a safe haven for investors. As the demand for bonds grows, issuers like the U.S. Treasury aren’t compelled to offer higher returns to attract buyers. As a result, the yields start to fall.
Was This a Poor Guess?
During an Aug. 21 speech at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyo., Bernanke said the “prospects for a return to growth in the near term appear good.” Since delivering this optimistic prognostication, bond yields have steadily fallen, and bond sales have been especially robust.
The market perception regarding the pace of the recovery can be seen in the paltry yields currently being offered for the two-year Treasury notes. Since reaching a high of 1.36 percent early in August, bonds yields fell to 1.02 percent at the end of last week.
Investors may believe that recovery is in sight; but with unemployment approaching 10 percent and consumer spending still anemic, traders are starting pare their bets.
With home sales starting to stabilize and durable goods orders beginning to firm, there is some evidence that the economy has found a bottom. Given, the persistent growth in bond sales, however, it looks as if investors are still skittish about taking on too much risk.
Up to this point, it has seemed that emerging economies, like China’s, were immunized against the types of pernicious stock market selloffs experienced in Europe and the U.S. Yet, the Shanghai Composite Index has slumped 23 percent since Aug. 7.
Most international stock analysts seem to agree that this precipitous drop in Chinese share prices is inextricably linked to the fall-off in U.S. consumer demand. A growing host of economists also have started to conclude that unless the Chinese government is willing to continue its massive support programs for the manufacturing and export sectors, the “bubble” is not sustainable.
As the major purchaser of U.S. debt, the Chinese also have got to be biting their fingernails over the continued drop in bond yields and the record pace at which the Treasury has been issuing notes. With the yields continuing to drop, investors will be less inclined to buy bonds. This means that on a percentage basis, the Chinese government may end up carrying an even greater proportion of U.S. debt; which may in turn, hamper its ability to continue investing at the same brisk tempo in its own economy.
In the final analysis, none of this would have happened if Ben’s wife had simply kept a closer eye on her handbag.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
