Is the Fed Cranking Up the Presses Again?

Dear Reader,
Vedran Vuk here, filling in for David Galland. Today we'll cover a number of topics, most importantly Bud Conrad's coverage of the Fed's announcement on Wednesday. For a while, investors were basically allowed to sleep through these Federal Open Market Committee statements – we get it; they're keeping rates low. However, this meeting had a few key points that should stir investors from their slumber. I'll start with a discussion about the weakening core of European nations. Then I'll return to touch on other topics of interest.

Cracks in the European Core

By Vedran Vuk, Senior Analyst
While the euro crisis has taken a momentary breather, let's not forget the even bigger dangers on the horizon. We've all seen the spreads between the PIIGS and German bonds. Needless to say, they aren't pretty. But another chart is scaring me even more at the moment: It's the 10-year bond spread between Germany and France:

(Click on image to enlarge)

The media always want to frame financial news in the classical sense: the good guys versus the bad guys. In this case, it's the responsible and prudent core of Europe versus the lazy and uncontrollable PIIGS. However, the chart above tells a different story. The crisis has reached the core itself. Rather than being an impenetrable fortress, countries such as France have their own problems.
That should come as no surprise. The rest of Europe has been following the exact same path as Greece, Portugal, Spain, and all the other "bad guys." It's the same story of excessive spending programs, disastrous labor laws, and widespread government interventions. In fact, the European core must necessarily experience the same problems. If you're following the same stupid policies, you should expect the same bad results. It's logically inconsistent to think that certain policies are absolute failures in Greece while they magically work in France.
The only difference is that the core countries have been able to afford their programs thus far. Countries such as Greece aren't following a unique Greek policy agenda. Instead, Greece essentially tried to mimic Western European policies on an Eastern European budget. Unfortunately, that just doesn't work… but those policies won't work for Western Europe in the long run either.
Now don't get me wrong: I'm not saying that France or some of the other core countries are going into a crisis. I'm just pointing out that the cracks are starting show. If Europe can't shake its obsession with the welfare state, I have little doubt that some of the biggest European countries will be the PIIGS of tomorrow. They're walking the same path as Greece, Ireland, Italy, and Portugal. But because of their stronger economies, they are taking this stroll at a much slower pace while the PIIGS are sprinting toward the end of the road… and the cliff waiting there. Though one country is running for the cliff and the other is walking, make no mistake – they're both on the exact same path.
But let's put this in perspective for now. The spread over German bonds is a little above one percent. This isn't the end of the world. In fact, it's very far from it, and considering all the problems in Europe, I'd still much rather hold French bonds than many other options. However, there are a few important things to take away from this situation. The spread between French and German bonds can teach us an important lesson about US interest rates.