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Interest Rate Puzzle

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The real reason for the large, unexpected decline in interest rates since tapering began in January is that the economy never recovered from the recession that started in 2006. Consequently, current stock prices reflect a recovery that doesn't exist.

Large investors have gained awareness that the U.S. economy is at risk for a negative second quarter, which would officially move the economy into recession. While the Fed is busy propping up the stock market, large institutional investors are moving out of stocks and into the relative "safety" of Treasury bonds. While not apparent from looking only at the Dow or S&P 500, small stock indices like the Russell 2000 and the Nasdaq Composite and homebuilder stocks have been declining since early March. The average Russell 2000 stock is more than 22% below its 52-week highs, and the S&P 500 all time high has been reached despite fewer and fewer individual stocks setting new highs. The cash from selling the riskier small cap stocks is flooding into Treasury bonds, which is forcing yields lower.

The question that needs to be asked is, what will the Fed do if 2nd quarter GDP is also negative? As QE did not revive the economy, if the economy heads into an official recession, what policies will the Fed implement in an attempt to revive the economy?

*Dave Kranzler spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, he traded junk bonds for Bankers Trust. He earned a master's degree in business administration from the University of Chicago, with a concentration in accounting and finance. Currently he co-manages Golden Returns Capital, a precious metals and mining stock investment fund based in Denver. He writes a blog to help people understand and analyze what is really going on in our financial system and economy.

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Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

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This is a fine economics piece IMO, as the tone is... by Robert S. Becker on Thursday, Jun 5, 2014 at 1:14:32 PM
Bob, I'm not sure of what the fuse may be that wil... by Alan MacDonald on Friday, Jun 6, 2014 at 9:36:45 AM
deleted, comment below ... by Robert S. Becker on Friday, Jun 6, 2014 at 10:23:59 AM
Isn't that always the case? Black Swans are always... by Robert S. Becker on Friday, Jun 6, 2014 at 10:29:27 AM
Bob, if I had to pick / guess at what the fuse to ... by Alan MacDonald on Friday, Jun 6, 2014 at 3:16:52 PM
I note in passing that when PCR and his apparently... by Robert S. Becker on Saturday, Jun 7, 2014 at 1:24:03 PM
Hmm...spoiling for it, are we?! I am pleased one o... by K V Ramani on Tuesday, Jun 10, 2014 at 9:21:10 AM
(...continued)Foreign purchases of US bonds by tra... by K V Ramani on Tuesday, Jun 10, 2014 at 9:34:31 AM
Yikes, no wonder you buy gold and expect the stock... by Robert S. Becker on Tuesday, Jun 10, 2014 at 10:53:22 AM
My confidence in the original US economic model ha... by K V Ramani on Tuesday, Jun 10, 2014 at 10:58:45 PM