August 15th 2010 – “Democracy is the art and science of running the circus from the monkey cage.”

In an Op-ed piece for the New York Times entitled “Welcome to the Recovery”, the Secretary to the US Treasury brings a whole fresh meaning to informed opinion… Within days the Fed and Goldman Sachs, who these days are nearly always batting for the same side, cast doubts on the strength of the recovery and David Rosenberg in an interview with the Wall Street Journal last week suggested there hadn’t been a recovery at all and talk of a “double-dip” was a non sequitur!

On the back of that, apparently, the market has thrown a wobbler and the bears are dusting off their downside targets. The Treasury bond market is going the other way thanks to yet more sleight-of-hand by the Fed. Some of its massive holdings of asset backed junk securities, bought from the banks to save them (not us…) from oblivion, actually pay dividends. So, in Fed speak, to keep the size of its intervention pot the same (we won’t ask embarrassing questions about how they value this shimmering pile) they will be re-investing these payments into Treasury bonds.

This annual injection is likely to be circa $200 billion so hardly the QE 2 we have been expecting to steam up the Hudson, but certainly a hurrah for the bond market and the banks that have been channelling cash there. Treasuries do look screamingly expensive at 2.67% for the 10-year, but lest we forget, yields were lower at the end of 2008 at 2.10%. A test of that number and the fact that Japanese government bonds (JGBs) closed the week at sub 1% may get the saliva flowing. Treasuries just might be the “safest” game in town, but do remember that 50% of them are due up for redemption within the next three years and when gravity eventually exerts its pull the trap door will be accommodatingly large and the close to fully open time will be faster than you can say “algorithm”.

The quotation at the beginning of this edition is from H.L. Menken and The Telegraph this week reports that the European Parliament has agreed to spend £5m on mouse mats, mugs, t-shirts and umbrellas with the Europe logo, rather proving his point. Sadly Democracy is running out of devotees notably in Greece where it was “invented” and regrettably there is still far too much “monkey business” going on almost everywhere you care to look…