High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.

And it’s only getting worse: The national vacancy rate crept up to just over 13% according to last week’s decennial census report. That’s up from 12.1% in 2007. So which is it guys?

“More vacant homes equal more downward pressure on home prices,” said Brad Hunter, chief economist for Metrostudy, a real estate information provider.

Maine had the highest proportion of empty housing stock, at 22.8%. Other states with gluts of empty houses included Vermont (20.5%), Florida (17.5%), Arizona (16.3%) and Alaska (15.9%).

The way the census calculates the vacancy rates, however, is problematic. It includes properties such as ski lodges, beach houses and pied-à-terres that many real estate statisticians would not.

These are often summer homes or second homes, but census lumps them together with homes that have been sold but not occupied, empty homes for sale or rent, and homes used by migrant workers. Basically, anything other than a primary residence is considered vacant.

“You can only live in one home,” said William Chapin of the Census Bureau’s Housing Statistics Branch. “If you own five homes that you occasionally live in, four of them will be counted as vacant.”

But Paul Bishop, the vice president for research for the National Association of Realtors, countered that these properties aren’t vacant in the usual sense of the term. “A vacation home is hardly the same situation as a foreclosed home that has been taken back by the bank,” he said.

In Maine, more than two-thirds of the 160,000 vacancies were vacation homes in 2009; Vermont had a similarly high concentration.

Compare them with Connecticut, which has a vacancy rate of just 7.9%, the lowest of all the states. If you back out the vacation properties from the statistics, the states have very similar vacancy rates: 6.1% for Connecticut and 7% for Maine.

Some states have high vacancy rates even after backing out the second homes: Florida’s is about 10%; Arizona’s is 10.7%; and Nevada’s 11.4%.

Besides Connecticut, the other states with lowest vacancy rates are California, Iowa, Illinois, Virginia and Washington, all at 9.2% or lower.

Our interest rate forecast model has been turning heads since last November when it issued a long-term buy signal for 10-Year rates (meaning bond prices would go lower). Since that signal, 10-year yields have risen around 100 basis points. In the meantime, the model has also issued accurate signals on shorter-term moves as well. We’re including a partially labelled chart for anyone who cares to take a look.

If you’ll take a few minutes to look over the above graphic, you will see that this model has been predicting short-term moves in rates for many, many months now. How valuable is this information to the self-directed investor? Only you can answer that. How much does it cost? Not as much as you’d think. We’re currently running a special – $99/year. For that, you get 12 issues of the Centsible Investor, access to our interest rate model, and periodic audio/video updates to keep you up to speed on the markets and economy. Don’t miss another update – Subscribe Today!!

President Obama projects that the gross federal debt will top $15 trillion this year, officially equalling the size of the entire U.S. economy, and will jump to nearly $21 trillion in five years’ time.

Amid the other staggering numbers in the budget Mr. Obama sent to Congress on Monday, the debt stands out — both because Congress will need to vote to raise the debt limit later this year, and because the numbers are so large.

Mr. Obama‘s budget said 2011 will see the biggest one-year jump in debt in history, or nearly $2 trillion in a single year. And the administration says it will reach $15.476 trillion by Sept. 30, the end of the fiscal year, to reach 102.6 percent of gross domestic product (GDP) — the first time since World War II that dubious figure has been reached.

In one often-cited study, two economists have argued that when gross debt passes 90 percent it hinders overall economic growth.

The president’s budget said debt as a percentage of GDP will top out at 106 percent in 2013, but only if the economy booms.

“I still don’t see a sense of urgency from the president about the massive federal debt,” said Sen. Lamar Alexander, Tennessee Republican. “His budget calls for too much government borrowing – even though the debt is already at a level that makes it harder to create private-sector jobs.”

Speaking on MSNBC on Monday, Jacob “Jack” Lew, the White House budget director, said their long-term plan to lower deficits will stabilize the debt.

“When we came into office, when President Obama took office, the deficit was climbing to over 10 percent of the economy. We have a plan that would bring it down to 3 percent,” he said. “That is the most rapid reduction in the deficit in history. It is what we have to do to be able to say we’re paying our bills and we’re not adding to the debt.”

The administration said debt as a percentage of GDP will stabilize at about 105 percent in the middle of this decade, though those calculations assume economic growth levels significantly above projections of the non-partisan Congressional Budget Office.

The government measures debt several ways. Debt held by the public includes the money borrowed from Social Security’s trust fund.

The ‘Pre-Crash’ World

It was not uncommon as recently as 2006 or so to be able to put together a portfolio of equities, a few bonds, and some open or closed end funds and easily target a double-digit yield. Keep in mind that was just the yield and did not count for capital appreciation. When I penned the pilot issue of our Centsible Investor in November of 2007 (coincident with the market top), the yield on the first firm analyzed was 14.87%. I remember it like it was yesterday. The standard deviation (a measure of volatility) on the same firm was 18%, which was fairly representative of the volatility of the S&P500. The yield on the 10-Year Treasury Note was around 4.36%, and a 1-Year CD was bringing around 4.5%. Designing a portfolio with a target yield of 8-10% was easy and could be done without taking on a lot of risk.

One question I want everyone to consider before reading any further is: has it gotten any cheaper to live your life since then? I ask this because common Mediaspeak will have you believe that the cost of living has dropped significantly since then and as such it is ok that a good yield is about as hard to find as an honest politician. Clearly, if your cost of living has stayed the same, the precipitous drop in yields has caused you hardship at a bare minimum.

Before & After

Let’s take a 10-asset model portfolio and analyze it over several periods and demonstrate what has transpired. For our factor of comparison we’ll use the DJ Total Market Index (Aka Wilshire 5000). The composition of the ‘model’ is three Canadian Energy Trusts, three non-US fixed income closed-end funds, a US Bond ETF, and three global high-dividend paying closed-end funds.

From January 1, 2000 through November 30, 2007, the vitals on this model were as follows:

Risk-Free Rate: 4.5%

Average Yield: 8.9%

Standard Deviation: 11.17%

Expected Return beyond the Risk-Free Rate: 3.5%

Portfolio Beta: .28

It is obvious from the above that this ten asset model was well-diversified, and performed quite well despite the bear market of the early part of the decade even though there were 3 losers out of 10 during the 7 year period. From a capital appreciation standpoint, the model didn’t grow all that much, but it certainly produced good income along the way.

Now let’s take a look at the same 10-asset model from December 1, 2007 through the present. We’ll use the same factor (Wilshire 5000), and will change only the risk free rate, which we’ll set at 1% to reflect the current rate picture. Here are the particulars:

Risk-Free Rate: 1.0%

Average Yield: 4.78%

Standard Deviation: 29.21%

Expected Return beyond the Risk-Free Rate: .79%

Portfolio Beta: .77

Obviously aside from the decrease in yield is the increase in portfolio volatility. Not only that, but the principal took quite a beating as well and finally recovered in January of 2010. This assumes that the investor chose to ride out the storm and didn’t take any evasive moves, choosing to continue collecting dividends.

I understand that this period obviously includes the 2008-2009 panic, but the point is a simple one. The individual who was quietly invested for the first part of the decade had the rug yanked out from under them. The investor who could have lived very nicely from the dividends alone resulting from a $500,000 portfolio has suddenly had to dip into an already shrunken principal to continue the same standard of living.

And perhaps the most important thing, our hypothetical investor is taking on MUCH more risk and experiencing more volatility for a significantly lower return.

An Unlikely Parallel

Let’s now present a second ‘model’, this one consisting of 10 preferred stocks. I’ve mentioned preferreds before and many people eschewed them since they don’t generally provide the same opportunities for capital appreciation as common stock. Yet, in a discussion about income, preferreds definitely have their place. Generally, preferred shares are thought to be lower yielding (more conservative in nature), which has generally been true. Let’s see what’s happened in the past few years though. Our preferred model consists of all preferreds, the DJ Total Market Index (Wilshire 5000) as the factor for comparison, and a risk-free rate of 1.0%. 6 of the preferreds are utility firms, 2 are multinational manufacturing, one is a pharma company, and there is one food company.

Risk-Free Rate: 1.0%

Average Yield: 6.44%

Standard Deviation: 11.53%

Expected Return beyond the Risk-Free Rate: 9.01%

Portfolio Beta: .21

What is amazing is that the preferreds, with their vanilla, conservative reputation, are outperforming the dividend ‘achievers’ over the past three years, and doing it with roughly 30% of the volatility. Incredible isn’t it?

While the above reality has certainly been present for quite some time, it is amazing how many folks who are active in investing and the financial world still haven’t caught on to the change in paradigm. It has been over three years since the Dow peaked in late 2007. This is certainly not meant to serve as a knock against anyone, but rather to point out that as people, we are creatures of habit and that old habits die hard. An old cliché is that fortune favors the bold, but I would submit that in this case, maybe fortune just happens to favor those who know where to look.

The Financial Report of the United States, which applies corporate-style accrual accounting methods to Washington, showed the government’s liabilities exceeded assets by $13.473 trillion. That compared with a $11.456 trillion gap a year earlier.

Unlike the normal measurement of government intake of receipts against cash outlays, accrual accounting measures costs such as interest on the debt and federal benefits payable when they are incurred, not when funds are actually disbursed.

The report was instituted under former Treasury Secretary Paul O’Neill, the first Treasury secretary in the George W. Bush administration, to illustrate the mounting liabilities of government entitlement programs like Medicare, Medicaid and Social Security.

The government’s net operating cost, or deficit, in the report grew to $2.080 trillion for the year ended September 30 from $1.253 trillion the prior year as spending and liabilities increased for social programs. Actual and anticipated revenues were roughly unchanged.

The cash budget deficit narrowed in fiscal 2010 to $1.294 trillion from $1.417 trillion in 2009. But the $858 billion tax cut extension package enacted last week is expected to keep the deficit well above the $1 trillion mark for another year.

BUDGET CUT DEBATE

The latest Treasury report should fuel debate in Congress over spending cuts next year as a new Republican majority in the House of Representatives takes office.

The U.S. Senate on Tuesday approved a compromise bill to fund the government until March 4, 2011. After that, Republicans will have the chance to push through dramatic budget cuts.

“Today, we must balance our efforts to accelerate economic recovery and job growth in the near term with continued efforts to address the challenges posed by the long-term deficit outlook,” Treasury Secretary Timothy Geithner said in a letter accompanying the report. “The administration’s top priority remains restoring good jobs to American workers and accelerating the pace of economic recovery.”

Among key differences between the operating deficit and the cash deficit were sharp increases in costs accrued for veterans’ compensation, government and military employee benefits and anticipated losses at mortgage finance giants Fannie Mae and Freddie Mac.

The biggest increase in net liabilities in fiscal 2010 stemmed from a $1.477 trillion increase in federal debt repayment and interest obligations, largely to finance programs to stabilize the economy and pull it out of recession.

The federal balance sheet liabilities do not include long-term projections for social programs such as Medicare, Medicaid and Social Security, but these showed a positive improvement.

The report said the present value of future net expenditures for those now eligible to participate in these programs over the next 75 years declined to $43.058 trillion from $52.145 trillion a year ago — a change attributed to the enactment of health-care reform legislation aimed at boosting coverage and limiting long-term cost growth.

The overall projection, including for those under 15 years of age and not yet born, is much rosier, with the 75-year projected cost falling to $30.857 trillion from last year’s projection of $43.878 trillion.

The report noted, however, that there was “uncertainty about whether the projected reductions in health care cost growth will be fully achieved.”

The extra yield Treasury investors demand to hold 10-year notes over 2-year securities touched the widest since February on speculation an extension of tax cuts will spur growth and increase deficits.

The benchmark 10-year yield rose this week to the highest level in seven months as retail sales advanced in November more than economists forecast and the Federal Reserve said the recovery is continuing. The U.S. economy grew at a faster pace in the third quarter, a report is forecast to show next week.

“The market will be subject to selling,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of the 18 primary dealers that trade directly with the Fed. “It’s hard to think of anything good for bonds coming out of the tax-cut extension. Something has got to give.”

The difference in yield between 10- and 2-year notes increased for a third week, rising to 272 basis points yesterday, or 2.72 percentage points, from 268 basis points on Dec. 10, according to Bloomberg data. The spread touched 289 basis points on Dec. 15, the widest since Feb. 23.

Fed officials maintained following their Dec. 14 meeting a $600 billion program of U.S. debt buying under a second round of quantitative easing, saying the economic expansion hasn’t been strong enough to reduce joblessness. The recovery “is continuing, though at a rate that has been insufficient to bring down unemployment,” the Fed said in its statement.

The central bank bought Treasuries maturing from 2028 to 2040 yesterday, bringing the total in its latest purchase program to $129.7 billion, according to Bloomberg data. The Fed will hold two buybacks on Dec. 20.

Benchmark Note

The yield on the benchmark 10-year note was little changed at 3.326 percent yesterday, from 3.325 percent on Dec. 10, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 94 1/8.

The 10-year note yield touched 3.56 percent on Dec. 16, the highest level since May 13. A gain in two-year notes this week pushed the yield down three basis points to 0.61 percent. It touched 0.69 percent Dec. 13, the highest level since June 23.

President Barack Obama signed into law yesterday an $858 billion bill extending for two years all tax cuts enacted during the administration of George W. Bush. Congress passed the measure this week.

Retail sales gained 0.8 percent last month as Americans began holiday shopping, the Commerce Department reported Dec. 14. The median forecast of 77 economists in a Bloomberg News survey was for an increase of 0.6 percent.

U.S. Economic Growth

The U.S. economy grew 2.8 percent in the third quarter from a year earlier, faster than the 2.5 percent estimate issued last month, according to the median forecast of 61 economists before the Commerce Department’s report Dec. 22. Gross domestic product advanced 1.7 percent in the second quarter.

“The data has improved, and the tax package has contributed to the rise in yields,” said David Ader, head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “One needs to adjust what they were thinking next year to accommodate it.”

Bank of America Merrill Lynch’s MOVE index, which measures volatility in Treasuries based on prices of over-the-counter options maturing in 2 to 30 years, rose on Dec. 15 to 125.20, the highest level since September 2009.

Treasuries rallied over the past two days as yields near a seven-month high attracted investors.

The 10-year yield fell 20 basis points on Dec. 16-17, the most since a decrease of 22 basis points during the two days ended June 7, after the U.S. payrolls report showed employers added fewer jobs than forecast.

Relative Strength

The 14-day relative strength index on the 10-year yield was at 62 yesterday after increasing to 74.384 on Dec. 15, the highest since May 2009, according to Bloomberg data. Readings at or above 70 typically indicate yields are poised to fall.

Bonds rose yesterday as Moody’s Investors Service lowered Ireland’s credit rating five levels to Baa1 from Aa2. Moody’s also this week placed Greece’s Ba1 local and foreign currency government bond ratings on review for possible downgrade.

European Union leaders agreed to amend the bloc’s treaties to create a permanent crisis-management mechanism in 2013, with Germany refusing to boost the current 750 billion-euro ($1 trillion) emergency fund for the most indebted countries.

“There are still worries coming out of Europe that are lingering that are still supportive of the Treasury market,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “The market will trade volatile and illiquid into the end of the year as people wind down their positions. The action should be very choppy.”

The Federal Open Market Committee kept its policy steady at Tuesday’s meeting, as expected. The target interest rate is still 0% to 0.25%, and the FOMC affirmed its intentions to buy $600 billion in Treasurys over the next few months as part of its extraordinary quantitative easing to boost economic growth. Read our full story on the FOMC.

The statement contained no surprises and very few changes. Read the full text.

One notable change in emphasis came in the very first sentence, where no one could miss it: “The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment,” the FOMC said. Last time, the Fed had said that “the pace of recovery in output and employment continues to be slow.”

Same meaning, but with a heightened focus on jobs.

The new wording is the clearest statement yet that the Fed’s top concern is high unemployment.

There was no hint that members of the FOMC were regretting their decision to push more liquidity into the economy through bond purchases. Since that decision in early November, bond yields have soared, exactly the opposite reaction the Fed was hoping for from its second quantitative easing program.

We won’t know for three weeks (with the release of the truncated minutes) whether members debated scaling back the QE2 program. We do know that Fed governors and presidents have been fairly reluctant to air their differences in public over the past month.

For now, it seems that Fed Chairman Ben Bernanke and his colleagues remain focused on the deplorable state of the job market, and not on gyrations in financial markets.

Moody’s warned Monday that it could move a step closer to cutting the U.S. Aaa rating if President Obama’s tax and unemployment benefit package becomes law.

The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments.

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” Moody’s analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

If the bill becomes law, it will “adversely affect the federal government budget deficit and debt level,” Moody’s said.

On Monday, the Democratic-led U.S. Congress moved toward grudging approval of President Obama’s deal with Republicans to extend expiring tax cuts, even for the wealthiest Americans, Last week, Moody’s and Fitch Ratings both expressed concerns about the U.S.’s rating longer term, with Moody’s fearing the impact if the tax cuts become permanent. For more, see

In a market obsessed with the euro sovereign debt crisis, the Moody’s note reminded foreign exchange investors about their worries of growing U.S. debt and was a factor pressuring the dollar on Monday.

The cost of insuring U.S. government debt in the credit default swap market was little changed on Monday at around 41 basis points, or $41,000 per year to insure $10 million in debt for five years, according to Markit Intraday.

Negative Impact

A negative outlook would indicate that the rating may be more likely to be cut from the top Aaa rating over the following 12 to 18 months. The United States currently has a stable outlook, indicating a rating change is not anticipated over this time frame.

Moody’s estimates the cost of the funding the proposed tax bill, along with unemployment benefits and other policy measures, may be between $700 and $900 billion, which will raise the ratio of government debt to GDP to 72 to 73 percent, depending on the effects on nominal economic growth.

This means that the government’s debt relative to revenues will decline much more slowly over the coming two years, to just under 400 percent from 420 percent at the end of fiscal year 2010.

“This is a very high ratio compared with both history and other highly rated sovereigns,” Moody’s said.

Gold rose to a record, Treasuries rallied and stocks halted a four-day advance amid a slump in German confidence and concern China will cool its real-estate market. The yen rose to a 15-year high versus the dollar on speculation Japan is less likely to weaken its currency.

Gold futures rallied as much as 1.8 percent to $1,269.20 an ounce and the 10-year Treasury note yield lost 6 basis points to 2.69 percent at 10:06 a.m. in New York as investors pursued assets believed to be the safest. The Standard & Poor’s 500 Index and the Stoxx Europe 600 Index decreased 0.2 percent. The yen appreciated against all 16 most-traded peers and the Swiss franc touched $1 for the first time this year.

The MSCI World Index of stocks in 24 developed nations dropped for the first time in five days as investor confidence in Germany fell to a 19-month low in September, according to the ZEW Center for European Economic Research, and China’s Premier Wen Jiabao cautioned that rising property prices may stoke unrest. Better-than-estimated growth in U.S. retail sales and business inventories failed to extend the equity market’s rally after the S&P 500 climbed to a one-month high yesterday.

“It’s a sloppy, mixed-data environment,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $140 billion. “We had good retail sales data. However, German confidence and indications that China may continue to cool down its economy show that the economic environment continues to be very choppy.”

We have chronicled the damage that Bernanke’s pursuit of QE and near-zero rates have done to savers. Mainly, we’ve focused on short-term implications for those investors who rely on their savings to create income for immediate consumption. But what about the folks who are looking at the pie charts and the promises of over a millions dollars in retirement income? Ah, the powers of compounding. Yes, I have in front of me the literature from 2 national financial service firms that strongly suggest that you too can retire a millionaire for as little as $60/week. Of course there are no guarantees, but the details and assumptions to this rosy scenario on steroids are buried in fine print that you’d need an electron microscope to read.

The obvious conclusion most people draw is that interest rates fluctuate and the phenomenon we’ve witnessed over the past year or so will be transient and eventually higher rates will cycle in and restore the cash flows of fixed income investors. After all, that is what has always happened before, right? Not so fast. There are a couple of reasons to believe this won’t happen anytime soon.

As the graphic below outlines, the Treasury Dept (including debt service) is the third largest line item in the actual FY 2009 budget, at over $700 billion. According to Treasury Direct, the interest paid on the national debt in FY2009 was around $383 Billion. This constitutes an average interest rate of just over 3.1%. Doing a little projecting, if the deficit runs at the estimated $1.5 trillion for FY 2010, the Treasury will need to pay out an additional $431 Billion to service the debt assuming the same 3.1% average interest rate. If early results mean anything though, the amount might be much higher. In the first four months of FY2010, the Treasury has already paid out $164 Billion in debt service, which is setting a pace for nearly $500 Billion. For FY2009, tax revenues were $2.211 Trillion and interest payments on the debt ate up 17% of tax receipts. If the current trend in FY2010 continues, debt service will gobble up around 22% of tax receipts by the time the fiscal year ends next September 30.

While 17% doesn’t sound too bad, think about paying nearly 1/5 of your net income every year to credit card companies. Not a real appetizing thought, but certainly this application of sanity couldn’t apply to the federal government.

The Problem

The problem here lies in the fact that the national debt is forecast to increase dramatically in the next 10 years. Estimates range anywhere from $18 to $23 Trillion depending on whose forecast you’d like to use. Let’s use $18 Trillion as our test case. At this level, assuming an average interest rate of 3.1%, debt service by 2019 will cost around $558 Billion per year. If tax revenues don’t change, debt service will eat up 25% of tax receipts. The conclusions that can be drawn from this simple analysis are pretty clear. If the government intends to provide the same levels of service on entitlement programs and maintain other government spending, the deficit will need to increase each year just to accommodate the additional debt service. This is called a spiral. It is akin to the family taking cash advances on a VISA to pay off Mastercard. I am sure there are many who will disagree with this rationale and call me all sorts of vile names for suggesting that we’re spending beyond our means and that somehow this really isn’t a good thing. Unfortunately, in reality, this situation is actually worse than the above paragraph indicates for a second, less publicized reason.

Artificial Interest Rates

Let’s start at the beginning here. Interest rates are payments given to lenders of capital for the privilege of using their money for a period of time. At a very minimum, the interest rate should ensure that the lender’s purchasing power doesn’t diminish due to making the loan. In other words, at the very least, interest rates must equal inflation. Such a situation is generally referred to as ‘free money’ since the lender isn’t actually being compensated for the loan in real terms.

When discussing the federal government and its inclination to spend beyond its means, interest rates are a very important topic at the US Treasury, as they should be. This is one of the reasons why government officials, Fed chairmen, and the absentee press generally try to temper inflationary expectations. If lenders expect inflation, then they’re going to want to see higher interest rates.

I have argued for several years now in this column that inflation in the US is grossly understated, and that it is done for both political expediency and out of absolute necessity, especially in an era of ballooning government debt. John Williams at shadowstats.com estimates (using previous BLS methodologies) that price inflation in the US is currently around 6% per annum. If we had free market interest rates, we would expect the yield curve to start somewhere around 7%, assuming John’s numbers are accurate, and there is no reason to believe that is not the case. It is very easy to see the implications this would have for debt service.

Let’s assume for a moment that under a free market interest rate environment, the US Government could achieve an average borrowing cost of 6.7%, allowing for a similar spread between price inflation and the mean interest rate as what we observe now. Debt service in FY2009 would have been $831 billion and devoured 38% of tax receipts. In 2019, using the same assumptions as previously mentioned, debt service would be $1.2 Trillion and eat up a whopping 55% of tax receipts. I understand there are many assumptions made here, many of which might fluctuate over the period, but the goal of the exercise is to make the simple point that the US cannot afford market interest rates.

It should now be easy to see why inflation is consistently understated, and why the FOMC and its minions are quick to temper inflationary expectations. While that might work to a limited extent when dealing with the general public, does anyone think for a minute that investors around the world don’t know what is going on here? Most of them are doing the exact same thing, albeit to a lesser extent, so you can bet they do.

In Conclusion

Many might look at the above analysis and wonder why it is any big deal. Keep the rates buried at near zero and we can keep getting ‘free money’, right? The problem is that mispriced capital leads to misallocation of the same. The gross misallocation of capital is one of the main ingredients of the ongoing financial crisis. It was willfully done by the Fed previously and it is being done again. These actions will virtually guarantee more misallocation of capital, more bubbles, and more unpleasant results. For savers, the news continues to be bad. We have demonstrated why it is in the government’s interest (a necessity really) to keep rates as low as possible. That means a continuation of the ridiculously low money market, CD and savings account rates. No doubt the pie charts referenced at the top of the essay will need some changing; it seems someone’s taken a few slices away.

This Week in the Markets

US equity markets are getting hammered early this Thursday morning on news that first time jobless claims jumped to 496,000 last week. First time claims have been trending upward over the past few weeks. Yesterday, new home sales put in the worst performance in the history of the data series. This despite the extension of the tax credit program for first-time (and now other) homebuyers. Bad weather was blamed for much of the sour performance. It seems recently the weather is getting blamed for any data point that isn’t in line with the ‘slow but steady recovery’ mantra being put out by the establishment. Oil is back at the $80 mark after being beaten down over the past couple of weeks. On the demand side, petroleum product demand appears to be bottom bouncing; any serious increase in demand will be bad news for consumers at the pump this summer. Forecasts are already in for an average pump price of $3.25-$3.50 this summer.