Bernanke 'Puzzled' by Collapse of Bond Bubble

While the corporate propaganda-machine (i.e. the “free press”) provides little in the way of “news” any more, it has made up for this deficiency (somewhat) by becoming a regular source of comedy.

The script-writers at Reuters penned their own hilarious farce on May 31st, titled “Federal Reserve Puzzled by Yield Curve Steepening”. In this latest effort at corporate, “slap-stick” humor, we find the Federal Reserve and its witless chairman claiming to be mystified by the rapid deflation of the U.S. Treasuries “bubble”. As all the “experts” exclaimed, immediately after the bursting of the U.S. housing bubble, “who knew that a bubble could burst?” (see “Greenspan: spotting a bubble is easy”)

To be more specific, Reuters stated that Fed officials were pondering which possible cause of this deflating-bubble was most likely:

1. Was it due to increasing “certainty” of a U.S. “economic recovery”?

2. Does this indicate that foreign investors are “worried about the deterioration in the U.S. fiscal outlook”?, or;

3. Is this the result of China dumping long-term Treasuries for shorter-term instruments – in anticipation of a spike in U.S. inflation?

For regular readers, it would take less time than that required for Intel's (INTC) speediest micro-processor to reject #1. This leaves people who inhabit the real world left with the answers in #2 and #3 (or a combination of the two).

However, we are told by the Reuters propagandists that

Fed insiders said they have a problem blaming the steepening of the yield curve just on the [countless trillions of new, U.S. government debt, and gigantic, corresponding] extra supply of new Treasury debt.

(On a market which was already totally saturated with U.S. debt).

The reason for this skepticism? The catastrophic, U.S. fiscal picture “has been evident for months”, while “the dramatic steepening of the curve only occurred this week.”

You really have to wonder why these media corporations cannot find better script-writers than this for their propaganda. Let me respond to this “skepticism”.

First of all, the steepening of the yield curve has been increasing gradually for months – not simply one “week”. Second, I would like to introduce the members of the Federal Reserve and the Reuters propagandists to a concept known as “technical analysis”.

In the world of “technical analysis”, traders often do not immediately react to fundamental factors in the economy – no matter how powerful – unless/until there is statistical evidence of a new trend emerging in markets. At that point (in this age of computerized, trading algorithms), the moves are sudden and violent.

What we are left with, after stripping away the propaganda, is that the Federal Reserve is essentially expressing “surprise” that foreign investors didn't start dumping U.S. Treasuries sooner. And this is supposed to help “calm” U.S. bond markets?

Clearly, at this point, the U.S. propaganda-machine would be much better off finding the best Hollywood scriptwriter which money can buy and then having all of its propaganda outlets peddle an 100% identical message.

What becomes increasingly apparent each day is that none of the brain-dead government officials, the Wall Street Liars, or the media-parrots have the brain-power to ad lib with their lies. Instead, each time one of these stooges opens their mouths all they are doing is discrediting dozens (if not hundreds) of previous lies. What a waste of good propaganda.

The problem at this point is the problem which confronts all compulsive liars. As the mountain of lies grows and grows, the likelihood that each new lie will discredit old lies is now increasing exponentially. The best course of action for all these co-conspirators would be to jointly “plead the 5th Amendment” - their right to avoid self-incrimination.

Now that is something which people could believe.

Disclosure: I hold no position in Intel

Comments

[Jasper M:]

Bernanke might be genuinely puzzled, as he is clearly a self-deluded sophist of mythic proportions. (Any day now, I expect to hear he has put out his own eyes)

Jeff, I like your work, but try the decaf. The last 10 years of financial history, while replete with examples of premeditated fraud, testify to vastly more plain stupidity. Not everything is a conspiracy. Sometimes people are just simply Wrong. Sometimes in herds.

CERTAINLY some of the Fed's recent releases have been disingenuous. But the very lack of consistency you cite is a sign of a lack of a high level of organization.
I think a tiny handful at the Fed have some clue of the $__t they are in, and are making up tactics as they go along.

Jun 03 04:48 AM

[dcb:]

Bernake is an academic, He has no real understanding of the way that markets actually function. for that he is likely to be listening to wall street bankers. As such it is likely that he is told lies.

It would explain much his behavior during the crisis

Jun 03 06:56 AM

[CautiousInv...:]

He must be tone deaf as the Chinese, our largest foreign creditors, just spent the last two days laying out their concerns.

Much of what took place in recent meeting's between Geithner and hinese officials went largely unreported because of the cozy relationship between the press and the administration. Bloomberg, however, covered the meeting in its entirety. Snippets from Bloomberg:

Yu said U.S. tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of “fighting two wars.”

China wants to know how the U.S. will withdraw excess liquidity from its financial system “in a timely fashion so as to avoid inflation” when its economy recovers, said Yu, now a senior researcher at the government-backed Chinese Academy of Social Sciences.

Yu questioned whether there would be enough demand to meet U.S. debt issuance this year.

Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.”

“The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said

Compounding this is a falling dollar, increased appetite for risk and improved economic activity. With stabilization of the financial system, the dollar has lost its luster as a safe haven currency and there is legitimate concern about the solvency of the US government.

Jun 03 07:17 AM

[MinAkkar20:]

Jasper / Jeff, whether our policy makers are afflicted with mere stupidity or actual malice would make for a great debate.

Regardless, I do feel that the majority of people in the arena suffer from an inability to think from themselves. This is most evident by the fact that when the Fed announced they were monetizing treasuries, they immediately rose in price. What possible logic could people have to justify price increases for a product that the market didn't want?

Think about the products the Fed has had to purchase in their "QE": equity in companies like GM, Citi, BoA, AIG; non-performing mortgage & debt securities; and US government debt. What do all have in common? They are all garbage. Thanks to Cautious investor for supplying this quote which sums it all up:

“The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said

Jun 03 08:23 AM

[doubleguns:]

Washington simply believes they are infallible.

A great awakening is coming when demand at auctions fails and the fed has to bail out the auctions on a regular basis.

Bankruptcy is no longer an outlier probability. It is moving closer.

Jun 03 08:33 AM

[Moon Kil Woong:]

We need someway to take the $2 trillion in primary money the Fed created overnight and blow it up in a big volcano. Then the yield of long term treasuries would reverse. Instead they are talking about letting the Fed and/or the Treasury make $500 billion more funny money to prop up FDIC.

We aren't even talking about the giand deficit or the Treasury being the biggest shopaholic in history which likes buying assets at a 30% premium to market. Even a volcano can't eradicate all the infationary factors at once. It just wouldn't be believable, even in a Hollywood film.

Jun 03 08:45 AM

[fireball:]

few that hold federal office understand they merely follow instructions. the few are malicious. the fed is a tool for destruction of u.s. wealth. it is obviously unconstitutional.

jeff
i would appreciate your opinion on tbt as a likely candidate to gain more fiat currency to puirchase gold and silver.

Jun 03 09:00 AM

[nova:]

Unfortunately, the majority of economic actions by the US government and FED were made based of political expediency instead of using sound economics.

It appears that Obama and the Congress have no clue of what they are doing but their intentions are to postpone/delay natural processes in a hope for "something good happen later".

Jun 03 09:22 AM

[Jasper M:]

dcb,
Even an academic could be expected to at least get his Theory straight! Bernanke is flat out ignoring history (default exercise of now-reviled 'liquidationist' inaction in 1920 yielded short, sharp recession, vs. government action in '29+ yielding depression), so precisely as to ensure repeating it.
That that man arrived in that chair demonstrates an (and I know this is a much overused term these days) EPIC Failure on the part of all involved.

I am well off, and about as well prepared for this as a fellow can be, and I reckon I'll be okay. But the general misery and ruin this man has helped bring about (with oh, So much help) is Inexcusible. Understand that depressions are usually followed by Wars. And I'm not talking about counter-insurgencies, I am talking about the mightiest militaries on Earth, diligently trying to erase one another.

This is what comes of dumbing down academia.

Jun 03 09:32 AM

[Jonathan Ch...:]

Maybe someone is missing a very big point about US Treasury Bonds. I believe that the Chinese are trading longer term bonds for shorter term bonds, and then going to the governments of countries with weaker currencies and low foreign reserves, offering such a deal:

"We give you good US Treasuries for your local currency, and you allow us to buy, with your local currency, companies, commodities, and land. Not only that, but we will agree with you to sign long -term fixed (DOLLAR PRICED) commodity purchase contracts."

If the Chinese get to do this, they get rid of a lot of Treasuries, obtain land and commodities at a good price, and with those long-term contracts, assure themselves supplies at a low future price, as the dollar drops.

Works for the US too. Keeps the Dollar as a reserve currency for the next few years.

Jun 03 09:37 AM

[Jeff Nielson:]

Thanks for the comments, everyone!

Fireball, sorry, but I'm unclear about your reference to "tbt".


On Jun 03 09:00 AM fireball wrote:

> few that hold federal office understand they merely follow instructions.
> the few are malicious. the fed is a tool for destruction of u.s.
> wealth. it is obviously unconstitutional.
>
> jeff
> i would appreciate your opinion on tbt as a likely candidate to gain
> more fiat currency to puirchase gold and silver.

Jun 03 10:20 AM

[fireball:]

jeff
ultra short 20+year treasury pro-share.

Jun 03 10:39 AM

[MinAkkar20:]

Probably referring to the double short long-term treasury ETF

Fireball - you are probably aware with holding leveraged ETFs long term because of the effect that leveraged compounding has on returns.

If you hold TBT and it has high volatility but generally moves sideways, you will lose big time. That said, I purchased TBT the day after the Fed announced they were monetizing debt (3/19) and held until last week for a nice gain (sadly I missed the 8% run after I sold). As long as you are confident it will move aggressively north, its ok to hold for an extended period, but keep an eye on it.


On Jun 03 10:20 AM Jeff Nielson wrote:

> Thanks for the comments, everyone!
>
> Fireball, sorry, but I'm unclear about your reference to "tbt".<br/>

Jun 03 10:42 AM

[henarl:]

TBT is not just for day trading. If you bought TBT in December in the 30s and still hold it, you're looking pretty good.
As to Bernanke and the Fed ---- Arrrggghhh!

Jun 03 11:09 AM

[Jeff Nielson:]

Thanks for the clarification.

For U.S. investors, those short-bond funds should be big winners. The problem for foreign investors is that they have to subtract the inevitable currency-loss from their gains.

Even for U.S. investors, you should be factoring-in currency into all your current investment decisions. An American friend of mine (who has been raking-in gains all year) is buying nothing but Canadian-listed mining companies.

Even if you have to hold the shares in USD's, as the USD falls, your nominal gains on these holdings SOAR.

Many here likely don't know that Canada has one of the world's top-5 stock exchanges in terms of size. Canada is also the global capital for mining companies, in general - and precious metals miners, in particular.

Keep in mind that there has been no "Plunge Protection Team" pumping-up Canadian markets. In fact, it's the reverse. U.S. propaganda has been deceiving most U.S. investors into pulling their money OUT of Canadian markets - and back to the (supposed) 'safety' of U.S. markets.

Thus, the valuation of most Canadian equities, and ESPECIALLY the precious metals miners are laughable versus the inflated valuations of U.S. markets.

Jun 03 12:23 PM

[fireball:]

MinAkkar20 and henarl
thank you gentlemen. it was something i came across. 2 months is my rough limit on things right now. it is probably best to watch for awhile. i try to keep things simple. that seems to work best for me. guess i'm gettin' cynical about long term ideas except for metals in the hand.

Jun 03 12:23 PM

[fireball:]

thank you jeff
i think i better study it some more. junior miners have been very good to me the last few months. i will keep tinkering there while i decide about tbt.

Jun 03 12:28 PM

[Alan Young:]

Why don't the Chinese offer to solve the problem by taking one of these wars off of our hands? They actually have a BORDER with Pakistan--why is it OUR problem instead of theirs?

On Jun 03 07:17 AM CautiousInvestor wrote:

> Yu said U.S. tax revenue is not likely to increase in the short term
> because of low economic growth, inflexible expenditures and the cost
> of “fighting two wars.”

Jun 03 12:32 PM

[Leftfield:]

It's getting harder all the time for me to tell how all this is supposed to succeed even according to the policymakers. World events seem likely to overtake Obama's effete world sooner or later even if they paint stalks green here for awhile. Reminds me of Carter. Worse: The power accrued by the state in the bailouts, succeed or fail, could leave us with Chavez. Not Lincoln.

Jun 03 12:36 PM

[TradingHelp...:]

A great article and some value-adding comments thereafter. I agree with that China is weaning itself off long-term bonds but it is going to be a long-term process. No one wants a Dollar collapse, but most want a gradual depreciation don't they... via inflation.

Jun 03 12:44 PM

[dcb:]

much of the problems could be fixed if the plunge protection team wasn't out in force. let world markets drop to reflect actual conditions, raising dollar, lowering t bond yield. unfortunately our government won't let us fix the economy slowly. I believe this is happening for two reasons
1)bail out banks by avoidiing oversight
2)high dow equals higher approval ratings
these will go to the gutter when the misery index climbs once again. jobs still being lost, and prices of goods increasing again with stagnant wages or no wages
3)If you allow the fed to do everything you can always blame someone else. I believe congress likes this idea.
4) Obama may be ruining his chance of a second term. while the oil embargo did it to carter, we are doing it to our self.

Jun 03 02:34 PM

[Shaggieman:]

Alan, I agree and they should at very least shut North Korea down. I mean do they ever want their money back or not? China should send the little pip-squeak and offer he can't refuse.

Jun 03 02:58 PM

[5142152-337:]

Kondratiev's (Kondratieff) 4th wave is going to SWAMP not-so-gentle Ben and his band of marauders. What say you, Jeff?

Jun 03 04:37 PM

[Old Trader:]

Jonathan,

I suspect that you're 100% correct in suggesting the Chinese are shifting to the shorter end of the yield curve, in regards to US debt. That's a classic "textbook" response for an investor in fixed income who expects rates to climb in the future. Who the heck wants to take the hit to their portfolio, when new debt is issued at ever increasingly high levels, savaging the value of the existing debt.


On Jun 03 09:37 AM Jonathan Christopher wrote:

> Maybe someone is missing a very big point about US Treasury Bonds.
> I believe that the Chinese are trading longer term bonds for shorter
> term bonds, and then going to the governments of countries with weaker
> currencies and low foreign reserves, offering such a deal:
>
> "We give you good US Treasuries for your local currency, and you
> allow us to buy, with your local currency, companies, commodities,
> and land. Not only that, but we will agree with you to sign long
> -term fixed (DOLLAR PRICED) commodity purchase contracts."
>
> If the Chinese get to do this, they get rid of a lot of Treasuries,
> obtain land and commodities at a good price, and with those long-term
> contracts, assure themselves supplies at a low future price, as the
> dollar drops.
>
> Works for the US too. Keeps the Dollar as a reserve currency for
> the next few years.

Jun 03 05:40 PM

[margel:]

I would not discount explanation #1. Look what happened in the fall when the banking system went through a crisis -- long term Treasuries took a huge dive as investors eschewed risk assets and shifted money into US government securities. Long term US Treasuries were up over 10% for the year, and most of increase occurred in the fall. It was clearly a "flight to quality." Some of the recent increase may be due to Chinese portfolio adjustments, but I suspect a large proportion of the change is due to a more optimistic outlook now that the financial community does not anticipate a major meltdown on the scale of the Great Depression of the 1930's.

Jun 03 07:06 PM

[billp37:]

We attribute many of the current US problems to education.

----- Forwarded Message -----
From: [e-mail] To: "Nancy Mitchell" [e-mail]
Sent: Wednesday, June 3, 2009 4:32:38 PM GMT -08:00 Tijuana / Baja California
Subject: Re: Class of 1959 reunion photos and more

Nancy

We appreciate all of the work you, Jason and others did.

Let's hope that our 50th visibility helps get some very unfortunate matters peacefully settled.

home.comcast.net/~bpayne37/whitman59/w...

Perhaps Whitman might consider philosophy department course LOGIC as a requirement for all students?

best
bill and patty

Jun 03 09:03 PM

[Fighting Yoda:]

Bernanke 'Puzzled' by Collapse of Bond Bubble - he is puzzled by everything.
He never saw nothing coming - no problem, small problem, subprime only, max $200-300B, no recession, shallow recession, quick recovery -> GREATEST CRSIS since DEPRESSION no end in sight.

Jun 03 09:51 PM

[Aki Izayoi:]

I am still a deflationist, and it seems that the bond bubble already bursted. If the deflationists are correct, then Treasuries are a buy NOW (possibly the 5 year might be a good buy and hold instrument). 383 basis points (for the 10 year note) would be a high real interest rate in a deflationary environment, and going long means you can benefit from the pain of the unwinding Treasury shorts (since that is already a crowded trade.)

Jun 06 09:24 PM

[wheelbarrel...:]

TBT is an ETF that is short treasuries


On Jun 03 10:20 AM Jeff Nielson wrote:

> Thanks for the comments, everyone!
>
> Fireball, sorry, but I'm unclear about your reference to "tbt".<br/>

Jun 07 01:18 PM

[wheelbarrel...:]

Stagflation seems like a more likely outcome

Stagflation is caused by cost-push inflation. Cost-push inflation occurs when some force or condition increases the costs of production. This could be caused by government policies (such as taxes), or from purely external factors such as a shortage of natural resources or an act of war


On Jun 06 09:24 PM Aki Izayoi wrote:

> I am still a deflationist, and it seems that the bond bubble already
> bursted. If the deflationists are correct, then Treasuries are a
> buy NOW (possibly the 5 year might be a good buy and hold instrument).
> 383 basis points (for the 10 year note) would be a high real interest
> rate in a deflationary environment, and going long means you can
> benefit from the pain of the unwinding Treasury shorts (since that
> is already a crowded trade.)

Jun 07 01:25 PM

[wheelbarrel...:]

Sounds familiar

Keynes wrote:

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some." [...]
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Jun 07 01:28 PM