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The Stakes Are Raised

Posted by Larry Doyle on May 28, 2009 7:46 AM |

The move higher in rates and lower in the U.S. dollar is nothing more than the market response to Ben Bernanke, Tim Geithner, and ultimately Barack Obama for the cards that they have already shown.

Managing one’s personal business and finances is anything but a game, but the manner in which Wall Street and Washington address economic and financial issues incorporates many aspects of “game theory.” As such, we need to adapt our own thought process and financial management accordingly.

Our leaders in Washington have shown many cards, including:

1. $780 billion Stimulus

2. proposed $3.5 trillion budget

3. multiple trillions in backstops to the financial industry (Sense on Cents’ link to Subsidyscope provides a wealth of info)

4. a trillion dollar plus commitment to quantitative easing targeted over a 6 month time horizon.

Be mindful that the “Washington wizards” are at the “table” and “playing the game” with borrowed funds. Each of us is also in the “game” whether we know it or not. We, along with foreign participants, are funding the window from which the wizards have to get the cash to stay in the game. The move higher in interest rates on the long end of our yield curve is nothing more than market participants (investors) “raising” the stakes on the “wizards.”

How quickly, strongly, and emphatically will Geithner and Bernanke respond? Will “Big Ben” announce that he will aggressively purchase more Treasury and mortgage assets at this juncture to keep interest rates from ratcheting even higher?

Bloomberg addresses this quandary and aspect of “game theory” in Fed May Buy More Assets to Bolster Balance Sheet:

The Federal Reserve may step up asset purchases to prevent its balance sheet from contracting until policy makers are convinced an economic recovery has taken hold, Fed officials and analysts said.

Fed officials have said their Treasuries buying isn’t designed to target any specific yield levels. Last week’s release of minutes of the April 28-29 Open Market Committee meeting showed some members were open to bigger purchases to spur a more rapid recovery.

Bonds slumped yesterday on concern surging debt sales will overwhelm the Fed’s strategy. The yield on the benchmark 10-year bond increased 19 basis points to 3.74 percent, the biggest increase since Jan. 19. It slipped 6 basis points today. A basis point is 0.01 percentage point.

I am convinced we will see government officials “talk” about how strong their hand is and how well their “game” is going. Be mindful, they are at the table and attempting to display a strong position.  Meanwhile, investors and market participants have just “raised” them.

I personally believe government officials should very calmly and methodically display a “business as usual” response to being “raised.” That said, this administration has shown a predilection for talking too much to the audience in grand and eloquent fashion.

The stakes have been raised. Let’s see how Ben and Tim play their hand from here. Sense on Cents will be monitoring their every move.


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