I knew there was hope for you krypt. ;) Now if only we can get you to be a bit more consistent and in opposing these massive interventions, corporate bailouts, and creeping fascism. BTW, I love how CNBC cuts this guy off when he brings up the topic of fascism..
Shakka
MacroMavens...
quote:
Monetization Math
Score one for the bond bears. The day they've been waiting for finally arrived. After 17 years, 7 months and 20-some odd days, the great bond bull appears to have drawn its last breath. It's demise insinuated by the action in Treasuries since 3/25/09. It was then that the Fed put Operation: Helicopter Money into action. Yet, despite some $100B in outright Treasury purchases over the past 6 weeks, Ben and the Gang have failed to prevent 10-year yields from climbing 35bps (from 2.8% to 3.17%). It would seem that even the Fed's manufactured demand is no match for the deluge of supply.
With over $2t in gross (and $1.6 in net) Treasury issuance forecast this year, serious people are getting seriously concerned about how we are going to finance these gargantuan deficits. Whiel Obama stands resolute in his determination to halve the deficit by 2011, the counter-cyclical (spending and tax) measures required to achieve that goal are sure to destroy whatever green-shoots are presently budding. Of course, if the budget deficit maintains its torpid state and rates keep rising at their current pace (Fed monetization be damned) we'll be looking at 5.8% on the 10-year this time next year. That level, lest memory has dimmed, was sufficient to bring Enron and the Subprime mortgage sector to their knees. Presumably, it would prove equally destructive to the storied green-shoots today.
CHART: 10 year treasury yield from 1973 through today, essentially showing that lower and lower rates over time with cycle peaks occurring in tandem with significant events like Continental Illinois (1985), Black Monday(1987), S&L Crisis(1991), Russia LTCM(1998), Dot.com bust (2001), Subprime(1007)...
As loyal readers know, the U.S. economy's eroding threshold of interest rate pain (on pathetic display in the above chart) has imbued our confidence that the bond bears were wrong. Well, not wrong, but unlikely to reap the bounty that was their due. For, scarcely would rates begin to rise toward levels that might provide adequate compensation for financing our voluminous deficits than the entire economy would disintegrate. And the dollar would be left to do the heavy lifting. By placing our assets on red-light special, a massive dollar decline would lure buyers to our markets without all the unpleasantness of higher borrowing costs. The prospect that the dollar (not rates) would be the outlet for our policy sins seemed foreshadowed by gold, which parted company from bonds when Ben proposed his Helicopter Solution. And, more recently, by the Fed itself, which all but rubber-stamped a collapse in the dollar in a working paper entitled: "Currency Crashes in Industrial Countries: Much Ado About Nothing?".
We've spent considerable time and spilled considerable ink making our case. But these will soon be abstract considerations no more. With both interest rates and the dollar on the move, the day of reckoning is drawing near. Soon we will have an answer to the question of how we will pay for our policy sins. How much pain will be meted out on the dollar and/or interest rates? Whichever it ends up being--the dollar or rates or some combo of the two--the degree of pain will be determined by the size of the gap between Treasury supply and demand...akathe amount the Fed is forced to monetize. So, this week, we thought to roll up our sleeves and try to...arrive at a number.
5 pages of reading and great charts later...
quote:
So let's see...we've got $220b poosible from pension funds, $735B from households (excluding T-bills) and another $79b from banks. That sums to roughly $1.7t...almost exactly the amount of net Treasury issuance this fiscal year!Ha! And here you thought this pre/post Greenspan analysis was too cheeky by half!
The symmetry is truly delicious...until you realize that the deficit is recurring and the Treasury purchases are not.Doh! Worse yet, the recurring deficits seem likely to expand (not contract) in size. This prospect underscored by the rapidly browning green shoots, to say nothing of the teetering fortunes of the PBGC and the State of California. If they (and others) are added to the bailout list, $1.7t might well look like a gift.
Besides, even if the deficit disappeared tomorrow (was that a pig that just flew past my window?) it would take some time for pension funds and banks to accomplish their rebalancing risk...and longer still for deleveraging households. In the meantime, Ben and his printing press won't be getting any rest. They will be busy picking up the financing slack.
You can play with the monetization math, plugging in your own assumptions as to whether and how quickly domestic purchasers restore their Treasury allocations of yore. If it took a decade, then the $170b in annual purchases would scarcely make a dent. If it took half that time, Ben would still be mopping up $1t/plus a year for the next few years. The point is, if you think the Fed's balance sheet is bloated now...
But in addition to highlighting the grim monetization math, the other point of this rant is to suggest that investors might apportion a share of their US debt financing consternation for private sector "risk" claims. (You know, the ones they are presently clamoring into). For, should our thesis prove correct and we find ourselves standing at the doorstep of a generational shift in the appetite for risk,the slack in credit demand will be equally, if not more, manifest in risk assets as in Treasuries. Remember, these deficits didn't emerge in a vacuum. They are the response to an economic and financial crisis like none we've witnessed in our lifetimes. One that, we suspect, will leave a lasting impression--manifest as a generational reduction in the appetite for 'risk'.
If so, not only will the Fed's balance sheet swell, it will stink as it endeavors to arrest the rise in private sector borrowing costs as well. The improvement in household balance sheets associated with a rebalancing of risk will be mirrored in the degradation of the Fed's.
That's all I care to type. I can't show the good chart work she does. I will just add that her assumptions for who can finance all of this via Treasury purchase is based on using 40-year average historical rates for the various cohorts she's referring to. Anyway, that was your sample of Pomboy. I hope you enjoyed it.
Capitalizt
I enjoyed it..thanks. But it still would have been easier to take a few screen caps. ;)
Shakka
quote:
Originally posted by Capitalizt
I enjoyed it..thanks. But it still would have been easier to take a few screen caps. ;)
I don't do screen caps;) Plus, I think that would ultimately have the potential to get me into more trouble than just transcribing it (however nominal the risk of that happening might be).
Krypton
quote:
Originally posted by Capitalizt
I knew there was hope for you krypt. ;) Now if only we can get you to be a bit more consistent and in opposing these massive interventions, corporate bailouts, and creeping m. BTW, I love how CNBC cuts this guy off when he brings up the topic of m..
My views are not so black and white.
By the way, government intervention is a socialist policy. I really do hate it when conservatives pull the "liberal m" card, which really is an oxymoron.
Shakka
Another person I give heavy weight to is Ned Davis, who publishes daily. He's a great contrarian who consistently has valuable insights. Here's a good sample of his work from today (again, no charts for you!).
quote:
Recently there has been a big debate over the possibility of credit agencies downgrading the U.S. credit rating from "AAA." One side argues the debate is silly. What is the default risk for the U.S. dollar when one can create new dollars just by printing up new paper currency? They say the U.S. dollar is vulnerable; relative to what? - the paper Japanese yen, the paper euro? Those currencies might have problems worse than ours.
On the other hand, my "two-cents worth" is that those defending the U.S. paper currency really don't "get it." These are the same arrogant U.S. leaders who actually believe they can fight "Mother Nature" and win. They believe we have conquered the business cycle, and think all recessions in the past only happened due to dump policy mistakes. They don't believe in strict standards on anything, arguing they are smarter than the rules and need flexibility.
You don't need a PhD in psychology to understand the swings in human nature from fear to greed and back. Behavior is controlled or changed by: (1) reward; (2) punishment; and (3) standards. The free market, left alone, will provide its own rewards (sunshine) and punishments (rain), but our leadership only believes in rewards and talk. No wonder we had a huge party from 1996 to 2007! As that great philosopher George W. Bush put it in 2008, "Wall Street Got Drunk." Why should investors not "rock on" if there were no consequences or standards?
Thus, unless we want to allow the harsh discipline of the free market or can find rare Fed statesmen like Paul Volcker or William McChesney Martin, we need standards.
Two indicators I have long suggested watching are featured on [2 charts you can't see]--these are called "monetary targets" imposed by Volcker but abandoned by the Fed in 2000! Another is what I call a dollar plus price (or inflation) standard on [chart you can't see]. The Fed, Treasury, and Congress need standards, rules and some regulations.
But the fact of the matter is "the best and the brightest" in Washington continue to scoff at either free markets or standards. They abandoned "money supply targeting" suggested by Milton Friedman and imposed by Paul Volcker. They don't like targeting the dollar or prices either. And heaven forbid a "gold standard" in place of human smarts or judgment.
In my opinion, leaders are not going back to the "gold standard" unless the markets force them to do so. They will continue to provide reckless fiscal and monetary policy and debauch the currency. I could care less what the credit agencies do--they have almost no credibility to begin with due to their AAA ratings on financially engineered, toxic subprime junk loans. Nevertheless, I do greatly fear "Mr. Market." That vigilante (Mr. Market) can bring arrogance to its knees!
So here is what I am watching: (1) T-Bond futures to break 123. This has already happened (or the equivalent yields on T-Bonds[on a chart you can't see]. (2) Then, I'd be further concerned if the U.S. dollar index fell below support at 78 combined with (3) gold going to new record highs. All of these are shown on this chart. Of course, the S&P falling below 814 would also make me move my strategy.
In conclusion, I obviously don't trust the powers that be in Washington or the credit agencies, but I do trust the cold bloodless verdict of the marketplace. I have long advised gold as an insurance hedge, and would watch the three levels mentioned above.
I do hate retyping these darned things!
Nrg2Nfinit
The canadian markets can hedge on the US markets. If we see you guys starting to dip bad we can pull out. This is my assumption anyways. Essentially what happens in the states will filter through to canada. We are in a much better position then you guys. Needless to say though we have upped our deficit budget to 50 billion from 34.
Shakka
quote:
Originally posted by Nrg2Nfinit
The canadian markets can hedge on the US markets. If we see you guys starting to dip bad we can pull out. This is my assumption anyways. Essentially what happens in the states will filter through to canada. We are in a much better position then you guys. Needless to say though we have upped our deficit budget to 50 billion from 34.
huh?
Capitalizt
Looks like the coming inflationary boom is starting to seep into the minds of investors..
ba ba ba booyaaaah!
Krypton
I wrote two blog posting titled, "Why Inflation is Good". Well, it's changed. The premise for inflating the money supply is no longer valid. 10Y T-bills yields are skyrocketing. The stock market has also appreciated greatly. It's time for the Federal Reserve to increase interest rates, and they better get on it fast. Also, they need to start the de-leveraging of their balance sheet...
Capitalizt
quote:
Originally posted by Krypton
It's time for the Federal Reserve to increase interest rates, and they better get on it fast. Also, they need to start the de-leveraging of their balance sheet...
Don't hold your breath. The economy is still in a precarious situation. There have been TONS of refinancing and other stuff at variable rate loans since they dropped rates to 0%. We didn't allow the recession to take it's course and things didn't bottom properly. The "recovery" we are currently experiencing is built on a foundation of cheap credit..not real savings and investment. If they hike rates too soon to curb inflation, this whole house of cards will come tumbling down. I'm willing to bet they keep the fed funds rate under 2% for the next 3-4 years. They would rather face the evils of inflation (and blame rising prices on "corporate greed" or some other nonsense), instead of accepting a prolonged (but necessary) recession.
Krypton
quote:
Originally posted by Capitalizt
Don't hold your breath. The economy is still in a precarious situation. There have been TONS of refinancing and other stuff at variable rate loans since they dropped rates to 0%. We didn't allow the recession to take it's course and things didn't bottom properly. The "recovery" we are currently experiencing is built on a foundation of cheap credit..not real savings and investment. If they hike rates too soon to curb inflation, this whole house of cards will come tumbling down. I'm willing to bet they keep the fed funds rate under 2% for the next 3-4 years. They would rather face the evils of inflation (and blame rising prices on "corporate greed" or some other nonsense), instead of accepting a prolonged (but necessary) recession.
The economy needed liquidity and that's what the Fed gave it. Now, there are signs that there may be too much liquidity. So now the Fed should begin thinking about reducing the money supply. The recession has very much taken its course. Remember the over $10 trillion in capital lost over the course of the recession? The Fed only put in $2 trillion. As big as the Fed is, they are not all the powerful entity you make them out to be.
