Obama and Bernanke Stick It to the States

U.S. Federal Reserve Chairman Ben Bernanke and Obama’s White House are sticking it to the states with their misguided policies.

Bernanke is doing the twist, Operation Twist, by selling short-term and buying long-term bonds. His hope is to push mortgage rates lower to help the sluggish real-estate market recovery. But the problem isn’t that interest rates are too high; they’re already near historic lows. The problem, for most, is getting the truckload of cash to the closing for a new house or a refinancing.

Long-term Treasury yields have fallen off of a cliff, thanks to the Fed intervention. This is going to stick it to the states with unfunded pension liabilities—like Rhode Island, for example. The proper way to account for the funding of a pension liability for a state in such dire financial straits as Rhode Island’s is to match up the pension liability with a discount rate like a zero-coupon bond. This is similar to what the lottery does to guarantee that winners receive their payments over a set time period. Now that the Fed has intervened, the 30-year zero-coupon is yielding only 3.31%. The lower the yield, the higher the unfunded liability, and as rates drop, the unfunded liability based on realistic returns will continue to blow up exponentially.

Then you have Obama’s jobs scam plan, where he taxes the successful among us who make $250,000 or more—“the millionaires and billionaires.” For this group, he wants to remove the tax-free benefit of municipal bonds. He and his Harvard boys don’t get that muni holders will simply sell their bonds or hold them until maturity. The last thing they’ll do is buy more—unless, of course, the yield is high enough. So states will be forced to offer higher yields, in effect increasing their borrowing costs. This is not the time to be increasing costs for states, especially those hanging on by a string, such as Rhode Island. A first grader could figure this stuff out, never mind Harvard grads.

The Fed and White House are a clear example of the left hand not knowing what the right hand is doing. The Fed intervenes to keep rates lower for housing, while the White House scares off mortgage bond investors. The market sells off 300 points on the Fed’s plan and is trading off 400 points as I write. The yields on the bonds that the states should be investing in, like zeros, continue to plummet from the Fed intervention. And then the White House goes after the “rich” and increases the financing costs for states issuing muni bonds. I’d say all in all it’s a complete nightmare.

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E.J. Smith - Your Survival Guy

Preparing your investments and family for when disaster strikes.

E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.