28 March 2008

Economics Update

South Korea’s National Pension Service will no longer invest in US Treasuries. They are saying that the rates of return are too low.

Note that this is the 5th largest pension fund in the world, so this is a decision with consequences.

I have noted on a number of occasions that the Fed would find itself torn between keeping the economy afloat, and keeping the dollar strong, and this is the first leak in the dam.

This does not necessarily mean that they won't be investing in the US though. While the rates treasuries are low, other interest rates are rising, with the London interbank offered rate (LIBOR) up about 1%. Mortgage rates are also not responding to Fed Rate cuts.

Search for the term "pushing on a string" in my archives. It's a quote from Keynes.

The weekly jobless claims numbers are less than were expected, which is good news, but there is a lot of noise week to week, so I'm more concerned about Commerce Department's final GDP numbers, which show the inflation adjusted growth of the GDP being 0.6% annually.

Additionally, investors initial reaction was to flee long term treasuries following the unemployment numbers, which implies an expectation of increasing inflation.

In terms of the market recovering trust, not so much, with asset backed commercial paper, short term asset backed debt, falling. There are no buyers for it.

Finally, Merrill will write down $4.5 billion on CDOs (collateralized debt obligations), and post a loss in Q1.


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