A Manufactured Crisis

Wow, what a week for an investor. Three weeks ago, the US Stock Markets were about at the high for the year and the economy was good. Now, the sky is falling and the future is terrible. So what happened in 3 weeks? I think that President Obama stated it best last week that this debt ceiling crisis was A Manufactured Crisis.

My view is that for 3 weeks the news media has stated over and over again that the US, Europe, Middle East, China, Japan is in a crisis of one form or another. After stating that we are in crisis enough times sooner or later people will believe it even if it is not true. During these 3 weeks some things have been constant. Our economy is still in a recovery phase, our government is still printing money to feed the economy, interest rates are low due to the actions of the Federal Reserve, corporate profits are still growing, and jobs are still being created.

So this week when the stock market was supposed to have a relief rally and interest rates would be steady it kept thinking about the word crisis and had an emotional decline. This decline reduced the 10 year treasury bond interest rate below 2.5% for the 3rd time in my life-time. More on this in the middle section. First is the recap from Vanguard. The end is a quote from a former US President that seems very appropriate.

Vanguard

A week that began with the federal government striking a deal to avert defaulting on the nation's debts ended with the release of better-than-expected unemployment numbers. The week also saw the largest one-day drop for the Dow Jones Industrial Average since autumn 2008. Consumer spending fell for the first time in nearly two years, while service industry expansion slowed to its lowest rate of growth in 17 months. For the week ended August 5, the S&P 500 Index fell 7.2% to 1199 (for a year-to-date total return—including price change plus dividends—of about -3.6%). The yield on the 10-year U.S. Treasury note fell 24 basis points to 2.58% (for a year-to-date decrease of 72 basis points).

A Manufactured Crisis

This week the US Treasury 10 Year Treasury Bond dropped to 2.47%. The next day the rate rose to 2.58% making it only the 3rd time it went below 2.5% in my life-time. The previous time was when it reached 2.38% during a 2 week period between September 27 to October 12, 2010. The only other time was when it reached 2.13% during a 6 week period between December 8, 2008 and January 26, 2009.

So the question to ask is the economy better today than last year and 3 years ago? The answer is clearly yes by looking at a number of economic indicators.

We know that a correlation exists between the US Stock Market and the US Treasury 10 Year Treasury Bond. As this bond interest rate goes up this means that these bonds are being sold and the money has to go somewhere and a good portion of it goes into purchasing US Stocks.

My bottom line is that this crisis creates a good opportunity to purchase stocks for the long term investor. Since this crisis is being fed by the news media it is hard to predict what happens in the short term.

REPUBLICANS VS. DEMOCRATS – US President Dwight D. Eisenhower

“It is quite clear that the Federal government cannot avoid or escape responsibilities which the mass of the people firmly believe should be undertaken by it. The political processes of our country are such that if a rule of reason is not applied in this effort, we will lose everything – even to a possible and drastic change in the Constitution.

“This is what I mean by my constant insistence upon moderation in government. Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. “There is a tiny splinter group, of course, that believes you can do these things. Among them are H. L. Hunt…a few other Texas oil millionaires, and an occasional politician or businessman...Their number is negligible and they are stupid.”

– From a letter from former US President Dwight D. Eisenhower (Republican) to his brother, Edgar - November 8, 1954