E The False Economy; R-Star Estimates Bleak

When the Fed speaks, it is like that insurance company telling you that your car will not be replaced if totaled in the fine print. The fine print reads, blah blah blah blah blah blah blah. Well, the Fed, the BOJ and central banks everywhere are getting us to ignore the fine print, expecting us to really believe they will fix things. Unless radical solutions are found, they won't fix things.

Donald Trump, who is not my favorite politician (come to think of it, I don't have any favorite politicians anymore), has kindled a potentially useful discussion that could one day be helpful to the real economy. The odds are that it probably won't be helpful, so I am not trying to get anyone's hopes up. As I show later R* (R-Star) predictions are very bleak.

But more people need to understand the argument for getting money from the financial economy into the real economy, and more people need to demand something be done. I will tell you upfront that if Harvard professor Jeremy Stein can't solve the problem of building up the real economy through changes to the financial economy, I am not sure who could.

Trump is correct that the economy is a false economy, in that it is powerful within the financial system but not so potent on MainStreet, and that interest rates must rise. However, he is short on details about how to make that happen. And it is unlikely that any president could establish a fix for our massive decline in bond yields, as the chart below shows, that reflects their massive demand as collateral. This demand drives yields down, and it doesn't look like that will change.

Hillary Clinton toes the traditional line saying that presidents or presidential candidates speaking out about Fed policy move markets. Well, it didn't happen. The 10 year UST is yielding under 1.60 after Trump's comments.

The discussion about the Fed policy is significant if only to illustrate that raising rates at the low end has had little effect on the long bond due to Greenspan's "conundrum" which he knows is really not a conundrum. It is expected behavior for the 10-year bond, due to the structured finance bond hoarding that Alan Greenspan himself help put in place to push risk off banks and onto counterparties.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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