The Next Major Crisis Brewing 86 comments
-
Font Size:
-
Print
- TweetThis
The Fed’s FOMC announcement came out…
We got exactly what I expected, a kind of wishy-washy, “hedging our bets” statement from the Fed. You have to remember that Bernanke was Greenspan’s right hand man for much of the bubble days of the ‘90s and early ‘00s, so the guy is an expert at walking both sides of the line when it comes to policy and public statements.
For instance, the Fed announced it would keep interest rates between 0% and 0.25% for an “extended period.” No surprise there. As I’ve noted previously, 80%+ of the $200+ trillion in derivatives sitting on US commercial banks’ balance sheets are related to interest rates.
For the Fed to hint at raising rates (let alone raise them) would kick off a systemic implosion that would wipe out the very guys the Fed has been bailing out. Suffice to say the Fed won’t be raising interest rates now or anytime too soon (within the next 3-5 years, unless inflation destroys the dollar).
The Fed also announced it would be slowing its purchase of Mortgage-Backed Securities (what I call the Fed’s “cash for trash” program). The Fed has stated previously that it will buy $1.45 trillion in mortgage-backed securities from US banks and that this program will end by the end of 2009. However, last week the Fed said it will be extending the program (but not the amount of money spent) until the first quarter of 2010.
Again, this is not much of a surprise. The Fed performed a similar act with its Quantitative Easing Program (extending but not increasing the amount). However, given the increasing public outcry about the Fed’s balance sheet, this issue of buying toxic debt (and the mortgage backed securities the Fed is buying are nothing if not that) may become a hot topic in the near future. If there is ever a successful audit of the Fed’s balance sheet, kiss the big banks’ equity (and share prices) good-bye.
The Fed did announce that it would let its Quantitative Easing program end in October. If you’re not familiar with this program, it’s basically a fancy way of saying that the Fed has been buying US debt in order to finance Obama et al’s massive deficit.
This particular development is key. A little known fact (and one totally ignored by the mainstream media) is that the Fed accounted for nearly half of all Treasury purchases in the second quarter ($164 billion out of $339 billion). In fact, the Fed bought more Treasuries than the next three largest purchasers combined!!
The Fed’s purchases outnumber foreign holders (foreign governments), US households, and Primary Dealers (mega banks) combined. One should also note that foreign holders reduced their purchases of US debt from $159 billion in 1Q09 to $101 billion in 2Q09 (a 40% decrease).
In simple terms, these numbers indicate that if it were not for the Fed, the US Treasury market would have almost assuredly had numerous failed auctions in the second quarter. It also shows us that foreign holders (China, Japan, etc.) are reducing their purchases of US debt at an incredible rate. This tells us two things:
1) China and pals are putting their money where their mouths are: refusing to service our debt as they did in the past
2) Treasuries will have to become a lot more attractive (higher yields) for foreign investors to start buying again
I’ve often stated that the Fed will have to sacrifice stocks or the US dollar. If the Fed does in fact end Quantitative Easing in October (as it has stated it will in last week’s FOMC), then we’ll see what the market really thinks of US debt as an investment class. It’s clear from the above data that foreign holders want higher rates (yields) in order for them to start buying more heavily. However, as I’ve stated before, the Fed cannot afford higher interest rates without blowing up US banks.
Keep your eyes on the Treasury market going forward. This could very well be the next major crisis brewing. It will certainly be our first taste of how a market operates without life support courtesy of the Fed.
I’m guessing the results won’t be pretty.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 86 comments:
It does buy some time but the consequences are horrendously bad.
There are so many ways that could bring another crash, so many players that could start the snowball rolling, so much ignorance from those that spend the money and set the budgets and so much apathy from those of us that will pay the ultimate price.
On Oct 01 08:53 AM MrMark wrote:
> So.... let me get this straight. You're saying that we may be needing
> to short the market at some point. Check!
It does seem that raes will rise. The Fed said they were targeting the March - June 2010 time frame to begin raising rates. I don't see how they will be able not to do so. I am hoping that the economy has recovered enough that the housing market does not completely implode when this happens. If we can get enough of a recovery, things might just work out. The possibility of a double dip recession definitely looms though. The possibility of a CIT failure is a huge threat just at the moment. I am hoping Bernanke et al have some plan for that. Allowing CIT to fail would likely be worse than allowing Lehman to fail. Most agree that the US would have been better off if that had been avoided.
Will you fire your rifle when the Feds come to take all my money? I'll stand by you.
The argument against this is increased savings within the US..........but at least half of this is going to debt reduction. And with China diversifying its holdings of dollars sooner or later we are going to feel the pinch (crisis) from irresponsible fiscal policies.
Hard to say. Everytime 1 drops the dipsticks in DC put another 2 over our heads. And then they go back to the day job - which is to remind us continually how lucky we are to have them around to save us from the crisises that they start.
On Oct 01 08:50 AM TeresaE wrote:
> So, exactly how many shoes are dangling over our collective heads
> at this point?
>
> There are so many ways that could bring another crash, so many players
> that could start the snowball rolling, so much ignorance from those
> that spend the money and set the budgets and so much apathy from
> those of us that will pay the ultimate price.
The long bond yield is under 4% today, who is the greater fool?? wow. A lot of people are betting that inflation will remain under 3% for 30 years. That's stupid, considering the unfunded liabilities of entitlements -- about 40-50 trillion.
I can't explain it, except to think that the US govt. has allowed looting, laws, and the general environment for entrepreneurs to dissolve to the point where credit doesn't expand when the government is giving away money to the bankers at 0%. A MAJORITY OF THE PEOPLE IN THE WORLD DON'T WANT TO DO BUSINESS HERE.
Our governments (local, state & Federal) have let our country down. I see two ways to get our government to responsibly run our country - A. Revolution or B. Until our elected politicians perform responsibly, keep changing them - ALL of them.
We have a 90% re-election rate in our country. Why do we allow the same people who cause us problems to stay in office and continue causing us problems?
It's always somebody rambling about the US banks, the fed, Obama, inflation, deflation, and how everything is obviously pointing towards a "crash" or "crisis" yet the author will never even attempt to quantify our impending doom in any way. No numbers, no percentages, no timeline, no actual prediction whatsoever.
"It's going to rain. I'm not saying when, or how much, but get your umbrellas ready. It might be sunny for a while, and in fact it might not even rain, it might just be a little overcast or slightly cloudy, so you might not need your umbrella at all, but you might want to put your sunglasses away"
And then for some reason the comment section is filled with happy clapping seals convinced that this is a brilliant and insightful prophecy.
I wonder what this place is like during the good times.
On Oct 01 10:59 AM Michael Clark wrote:
> Details are nice. But what about the larger conceptions of the article:
> do you have an opinion on the large issues being discussed? I could
> get Hitler's real name wrong, and the color of his eyes wrong (were
> they blue?) but does that disqualify what I say about Auschwitz or
> Treblinka? Not necessarily.
We all need to be "realistic" and accept that we must have tighter credit, significantly higher taxes, and that the Fed must withdraw money from the financial system ... "as the economy pulls out of recession."
To announce this plan is to guarantee there can be no economic recovery.
What sort of idiot borrows money on the eve of a deflationary depression? Why on earth would anyone invest new money into an economy facing a future of tighter credit and higher taxes?
As I see it, the yield is largely irrelevant, as what you gain on the coupon you will lose on the depreciation of the principal. Currently, my net long USD position is less than $1,000 and it is going to stay that way, regardless of what pundits tell me about it being oversold...
On Oct 01 11:39 AM MarkitWacha wrote:
> The treasury market is headed up in the short term because Bill Gross
> is putting 45% of his 177 bln bond fund in it.
>
> The long bond yield is under 4% today, who is the greater fool??
> wow. A lot of people are betting that inflation will remain under
> 3% for 30 years. That's stupid, considering the unfunded liabilities
> of entitlements -- about 40-50 trillion.
>
> I can't explain it, except to think that the US govt. has allowed
> looting, laws, and the general environment for entrepreneurs to dissolve
> to the point where credit doesn't expand when the government is giving
> away money to the bankers at 0%. A MAJORITY OF THE PEOPLE IN THE
> WORLD DON'T WANT TO DO BUSINESS HERE.
Please explain how the Fed collapsing would help taxpayers.
Who would own all the bad debt?
While they are changing the mix of what they are buying (agencies etc.), the theory that CBs are buying LESS (in absolute terms) US securities is not borne out by the TIC data. Could Mr. Graham perhaps show us where he got the data showing that the foreign banks are reducing in absolute terms their T-bill purchases? I also dont understand how higher yields induce any CB to buy a T-bill. Did we get deficit nations in Africa scrambling to buy T-bills in the 80s? You only buy a foreign bond if you have a surplus. If you dont, your currency will rise and ceteris paribus, over time, you will run less of a surplus. That is how international economics works.
I wont decipher the chicken-and-egg connections here, but the foreign buyers undoubtedly will buy less treasuries in the future as US saves more, China consumes more, international trade contracts and the US runs a smaller trade deficit, while these surplus nations run a smaller surplus.
There is a choice however of WHAT foreign asset to buy. China has been buying more commodities, some gold....even foreign companies. But I have yet to see convincing evidence (and random comments from various pols in China in news publications is not that evidence) that China believes it should make MORE of these purchases in lieu of US Treasuries. What I have seen is that China is buying more of everything, incl. Treasuries.
On Oct 01 12:18 PM Madcow2 wrote:
> According to Alan Greenspan -
>
> We all need to be "realistic" and accept that we must have tighter
> credit, significantly higher taxes, and that the Fed must withdraw
> money from the financial system ... "as the economy pulls out of
> recession."
>
> To announce this plan is to guarantee there can be no economic recovery.
>
>
> What sort of idiot borrows money on the eve of a deflationary depression?
> Why on earth would anyone invest new money into an economy facing
> a future of tighter credit and higher taxes?
They can only imagine a future in which private industry labors to sustain the debt covenants created by government and issue by central banks.
Problem is, like any perpetual motion machine or antigravity device, they're standing on the wrong side of the laws of physics - in front of a train.
On Oct 01 01:30 PM Michael Clark wrote:
> What kind of idiot? Ben Bernanke?
On Oct 01 12:07 PM Depressionitis wrote:
> BTW, Next election I'm voting for whomever is NOT currently in office.
> If I lived in his Congressional District - they only incumbent I
> would vote for is Ron Paul (I live in NY).
>
> Our governments (local, state & Federal) have let our country
> down. I see two ways to get our government to responsibly run our
> country - A. Revolution or B. Until our elected politicians perform
> responsibly, keep changing them - ALL of them.
>
> We have a 90% re-election rate in our country. Why do we allow the
> same people who cause us problems to stay in office and continue
> causing us problems?
Do tell! And may I suppose that you're one of them?
Oh! Your not? You mean you just have a picture of an American who has worked in Europe and Scandinavia that was given to you by a person traveling on public transportation.
Smarten up, chump! Europe's not as great as the magazines that you read imply.
On Oct 01 12:50 PM squeaky wheel wrote:
>Millions of Americans have traveled and worked
> in Europe and the rest of the world. Life in Scandinavia and at >least
> half of Europe for the middle class is as good or better than in
> the States.
Granted that this cannot go on forever, the Fed would still be able to delay any big "day of reckoning" for Treasuries by forming the support under the treasury market. Till when they can keep doing that is anyone's guess.
For more analysis, check out my blog: youngandinvested.com
But laws apply to you and me not to GS, JPM or the unions. They get a full tax payer bail out funneled thru AIG or sticking it to the bond holders in case of unions. Law enforcement is there to keep the riff-raff in their place.
If we have deflation (falling prices) cash is king. For those who have money things actually get cheaper. If the dollar tanks, assets get more expensive (stocks, commodities, imports).
Right now we have a weird combination of deflation and inflation. They're practically giving houses away, and we have too much manufacturing capacity worldwide suppressing prices. Yet, with a falling dollar and zero interest rates, commodities are much higher than they would be otherwise, as are stocks.
Do you know that the Australian Dollar has risen almost as much against the US Dollar since the lows as the stock market has rallied? Which is to say that the US stock market has not increased in value in Australian dollars. Or you could have bought the Aussie around 63 in the spring and enjoyed the same percentage gain as stocks, with less risk.
But I digress. We've just experienced our Japan-like destruction of the financial system, a stock and real estate market collapse, and now a mini-reflation of the system with stocks up 50% from their lows.
Anyone familiar with the chart patterns of the Nikkei 225 over the past 20 years can guess why I went short today. Also, in contrast to the light volume steep uptrend of the past 6 months, real volume has started coming in the past week, on the downside. FWIW.
that's an interesting point. maybe at the end of the day the fed will turn out to be the "bad bank" that the financialistas have been scheming to concoct.
ah, but won't the govt bail them out too? talking about too fat to fail...
On Oct 01 02:24 PM Leftfield wrote:
> Depressionitis, since we're in trouble anyway and the Fed, privately
> owned, will expect taxpayers to swallow Wall St. toxic debt they
> are taking in now, a thorough housecleaning is overdue. There are
> better ways to reform than a Fed collapse, perhaps, but by sticking
> it to ordinary Americans so much, Washington and Wall St. are already
> pushing our society to the brink.
And, lastly remove property taxes, since we are no longer an agrarian society that generates income from our land.
And, finally tax income at 20% and wealth (assets) at 1% at a flat rate rate with no exemptions! This should produce more than enough treasury revenue to run the government. Especially, the wealth tax, since it would counteract the macro-economic tendency to concentrate 90% of the wealth in the hands of 1% of the population.
I recently read somewhere that the Fed and it's accomplices may tank the markets to scare up enough fear to ensure that their large bond auctions are successful. Seems logical enough, and in fact didn't the July dip coincide with the massive 200+B auction?
Food for thought...
Personally, it seems doubtful that the Fed can end Treasury purchases in October or anytime son. I suspect they will unwind other parts of their balance sheet to support their auctions and call it unwinding their exposure to real estate risk etc. After all, they must inevitably face the simple fact that a Fed that can't hold successful US Treasury auctions has no real value at all. That is unless they stop being a bank and become a regulatory agency. If they become that they get to become accountable: oh dreaded accountability.
But assuming the author is correct, this is a HUGE warning as the Fed can't keep this game going forever. What is the end-game? A massive spike in interest rates? Hope that the economy picks up so they can raise interest rates 900 basis points?
> Behind the Fed and China, Japan is our largest creditor holding $700 some billion in Treasuries. The problem is their population is aging and their savings rate is falling, reducing the amount of capital which could potentially flow to the US.
The argument against this is increased savings within the US..........but at least half of this is going to debt reduction. And with China diversifying its holdings of dollars sooner or later we are going to feel the pinch (crisis) from irresponsible fiscal policies. >
Not to mention the baby boomers here who should start retiring en masse shortly. The boomer generation started in 1946, the first wave will hit 65 in 2011. But already this year the Social Security "Trust Fund" went from being net purchasers of Treasuries, to having a negative cash flow for at least a couple of months. Even though that was likely due to the severity of the recession it is a harbinger of things to come.
As more and more boomers transition from paying money in to taking it out in retirement that will be another source of funds that dries up. In fact it will be an additional expense. That SS Trust Fund is filled with veritable IOUs that will now come due.
Due to creative accounting, they were also counting the revenues under general income, theoretically reducing the deficit.
On Oct 01 12:18 PM Shaftsinker wrote:
> There is no larger conception in this article. This is just seekingalpha's
> daily dose of why the world is ending. Every day it's a new theory
> and yet all these damn articles are the same.
>
> It's always somebody rambling about the US banks, the fed, Obama,
> inflation, deflation, and how everything is obviously pointing towards
> a "crash" or "crisis" yet the author will never even attempt to quantify
> our impending doom in any way. No numbers, no percentages, no timeline,
> no actual prediction whatsoever.
>
> "It's going to rain. I'm not saying when, or how much, but get your
> umbrellas ready. It might be sunny for a while, and in fact it might
> not even rain, it might just be a little overcast or slightly cloudy,
> so you might not need your umbrella at all, but you might want to
> put your sunglasses away"
>
> And then for some reason the comment section is filled with happy
> clapping seals convinced that this is a brilliant and insightful
> prophecy.
>
> I wonder what this place is like during the good times.
The Whole Sheebang IS going to collapse by year end , If it lasts that long . Bill Gross is broadcasting " he's buying treasuries " as the gubmint Need folks to invest in this TP . Stock your pantry , Get a 2ndary source of power . Going to need it . Don't for get to stock up for your pets . Remember , they Love you + are totally dependent on you .
If Summer's thesis is true why aren't interest rates of long bond rising?
Competitive buyers (Japan and China etc.) are few - so the fed has a chance to buy treasuries on the cheap. Bill Gross is not stupid.
"A little known fact (and one totally ignored by the mainstream media) is that the Fed accounted for nearly half of all Treasury purchases in the second quarter ($164 billion out of $339 billion). In fact, the Fed bought more Treasuries than the next three largest purchasers combined!!"
On Oct 01 08:03 PM Missiondweller wrote:
> I'd like to see the sources for the % the Fed bought of recent auctions. Not that I question it. Auctions in the last 6 months have gone suspiciously too well.
>
> But assuming the author is correct, this is a HUGE warning as the Fed can't keep this game going forever. What is the end-game? A massive spike in interest rates? Hope that the economy picks up so they can raise interest rates 900 basis points? >
I'm not sure if they give those figures exactly, and some of it is apparently done by sleight of hand. I don't believe they are supposed to buy them directly from the Treasury on the auction days, but instead have dealers buy them for them and then they buy them from the dealers. They also may be doing some quid pro quo things such as buying Agency debt from other countries in exchange for them buying Treasuries.
Chris Martenson discusses those topics in a couple articles here:
How the Federal Reserve Is Monetizing Debt
seekingalpha.com/artic...
The Fed Already Buys Back Last Week's Treasury Notes
seekingalpha.com/artic...
---
The Fed does publish quite a few reports and they would seem to back up the author's contention about them buying $164 billion of the Treasuries in the 2nd quarter of this year.
jiriad posted a link to the Sept. report which gave some of the numbers through Aug 26, 2009: www.federalreserve.gov... (See page 7 of 32). They list "Securities Held Outright" at 1,485 (billions) and US Treasury Securities as a subset of that category at 745 (billions) which was an increase of +49 from the prior month. Multiplied by 3 months that would be $147 billion for a quarter which is in the ballpark albeit a little lower than the $164 billion figure for the 2nd quarter. The Treasuries were roughly 1/2 of the total "Securities Held Outright".
I'm not sure how to find the earlier documents via their search engine, but was able to just change the month at the end of the URL to find a few of the earlier months:
The August report, through July 29, 2009: www.federalreserve.gov... (page 7)
The July report, through June 24, 2009: www.federalreserve.gov... (page 6)
Treasuries held outright were +53 billion from the prior month.
The June report, through May 27, 2009: www.federalreserve.gov... (page 5)
Treasuries held outright were +51 billion from the prior month
That tactic did not work for the earlier reports, however. To get an increase of $164 billion for the quarter they would have had to have around a +60 billion for April, 2009 which doesn't seem out of the question.
The Fed also had a table & chart on "recent trends in monetary policy" www.federalreserve.gov...
They didn't break out the Treasuries, but did have an option to included the "Securities Held Outright". The chart shows that part of the balance sheet taking off in 2009 and rising on through today.
If the Treasuries remained at roughly half of the total "Securities Held Outright" they would have purchased even more than the $164 billion in that 2nd quarter. Per the table on that last page, the total "Securities Held Outright" for that quarter were:
(millions)
1,215,516.66 June 30, 2009
-782,582.97 April 1, 2009
=
432,933.69 "Securities Held Outright"
/2 = 216,466.845 Rough estimate of Treasuries purchased the 2nd quarter if the ratios were fairly constant.
So, the bottom line for me is that $164 billion in purchases of Treasuries in the 2nd quarter by the Fed is not out of line with the statistics they publish (at least the ones I could find).
I'm not sure if the amounts the Treasury sold off during that quarter are listed somewhere other than the tables at the Treasury site which would have to be added up and they list the T-Bills separately from the Notes, Bonds & TIPS.
www.treasurydirect.gov...
www.treasurydirect.gov...
On Oct 01 01:17 PM odin wrote:
> China has been buying more commodities, some gold....even foreign companies. But I have yet to see convincing evidence (and random comments from various pols in China in news publications is not that evidence) that China believes it should make MORE of these purchases in lieu of US Treasuries. What I have seen is that China is buying more of everything, incl. Treasuries. >
I don't know if you would consider this "convincing evidence", but Chris Martenson has a chart on an article he posted here showing that the Chinese aren't growing their purchases of Treasuries like they used to:
A U.S. Dollar Crisis in the Making
seekingalpha.com/artic...
China has also been very vocal, along with several other countries in calling for a new international reserve currency, and convinced the UN to call for the same. They also purchased some token amount of UN SDRs as an investment, perhaps something like $45 billion or so.
www.reuters.com/articl...
www.telegraph.co.uk/fi...
Your conclusion is that the Fed will stop easing in October?
That is an important little piece of info, and if it is so, your last statement that it will not be pretty is an understatement.
On Oct 01 12:07 PM Depressionitis wrote:
> BTW, Next election I'm voting for whomever is NOT currently in office.
> If I lived in his Congressional District - they only incumbent I
> would vote for is Ron Paul (I live in NY).
>
> Our governments (local, state & Federal) have let our country
> down. I see two ways to get our government to responsibly run our
> country - A. Revolution or B. Until our elected politicians perform
> responsibly, keep changing them - ALL of them.
>
> We have a 90% re-election rate in our country. Why do we allow the
> same people who cause us problems to stay in office and continue
> causing us problems?
On Oct 01 12:18 PM Shaftsinker wrote:
> There is no larger conception in this article. This is just seekingalpha's
> daily dose of why the world is ending. Every day it's a new theory
> and yet all these damn articles are the same.
>
> It's always somebody rambling about the US banks, the fed, Obama,
> inflation, deflation, and how everything is obviously pointing towards
> a "crash" or "crisis" yet the author will never even attempt to quantify
> our impending doom in any way. No numbers, no percentages, no timeline,
> no actual prediction whatsoever.
>
> "It's going to rain. I'm not saying when, or how much, but get your
> umbrellas ready. It might be sunny for a while, and in fact it might
> not even rain, it might just be a little overcast or slightly cloudy,
> so you might not need your umbrella at all, but you might want to
> put your sunglasses away"
>
> And then for some reason the comment section is filled with happy
> clapping seals convinced that this is a brilliant and insightful
> prophecy.
>
> I wonder what this place is like during the good times.
On Oct 01 12:20 PM Leftfield wrote:
> The Fed is privately owned, so, let them buy up all the toxic assets
> and Treasuries the banks and agencies feed them. Then, let it collapse.
> Won't that take taxpayers off the hook?
The Fed has been the major buyer of Treasury issues in recent auctions. What happens when The Fed says "no more"?
Hint: The answer is not good for US citizens....
On Oct 01 03:29 PM Shishir Nigam wrote:
> The same fact that such a huge prorportion of Treasury issuances
> are purchased by the Fed ensures that if any of the other major buyers
> start pulling out of future auctions, the Fed could very easily step
> in to fill their places.
>
> Granted that this cannot go on forever, the Fed would still be able
> to delay any big "day of reckoning" for Treasuries by forming the
> support under the treasury market. Till when they can keep doing
> that is anyone's guess.
>
> For more analysis, check out my blog: youngandinvested.com
On Oct 01 12:20 PM Leftfield wrote:
> The Fed is privately owned, so, let them buy up all the toxic assets
> and Treasuries the banks and agencies feed them. Then, let it collapse.
> Won't that take taxpayers off the hook?
First, no need to insult me.
Second, What do you suggest we do?
D
On Oct 02 08:11 AM grey road wrote:
> youve let yourselves down by being so stupid to believe any of these
> clowns can or will ever help you in any way. what a sad sad situation.
>
The Fed is in a tough spot and will have limited policy flexibility moving forward. Withdrawing credit from the system will be extremely difficult in the best of circumstances and the prevailing conditions will likely force them to keep rates lower for longer, which could be trouble if their massive stimulatory efforts are even modestly successful. Another minor asset or credit bubble isn't unfathomable given the shaky fundamental picture and the massive federal injection of liquidity, and it seems given the current rhetoric that the fed will be more active in managing emerging asset/credit bubbles. The Eurodollar future curve has flattened lately, interestingly.
In the context of this, external forces could further constrict the Fed's policy options. The bearish dollar view is essentially a bet on the inability of the current administration to successfully back itself out of the massive fiscal hole it has dug itself in and the real catalyst would be on the demand side. While the Chinese dumping their treasuries or ceasing to buy is extraordinarily unlikely, even a marginal slowing of Asian treasury buying would prove extremely troublesome. The above data could suggest we've already reached that stage. Wholesale dumping would push rates into the 19-20% range, so it wouldn't take much adjustment to cause some serious dislocations.
Most sovereign investors no longer need the dollar to park their reserves especially as many are wiped out or blew their loads on stimulus. I think even a modest recovery could drive global inflation high enough to cause problems- with rates the way they are currently, it wouldn't take much of a pick up inflation to make treasuries even less attractive and the Fed would suddenly find themselves in an arguably worse position than they were a year ago.
I'm of the opinion that enough forces are coming together to make a convincing argument for an inflection point coming sooner rather than later. I've been looking for a good spot to put this short on and I think the time is at hand.
I've posted on some of the signs of a strike coming soon at my blog. We've heard this wolf-crying drumbeat about Iran's nukes for many years now. And it's hard to believe two modern day countries could actually come to blows with nuclear fists. But consider these facts.
Nuclear weapons have actually been used in a war, not once but twice. There were no negotiations or even a warning. Just a quick destruction of two major cities. And the offender in this case is considered the most level-headed, responsible owner of nukes in history - the U.S.A.
Now fast forward to the mullahs of Iran. About half the people surveyed feel they wouldn't actually use their atom bombs - it would be suicide for them. But for Pete's sake, suicide bombing is their religion. So just how level-headed and responsible would these suicide bombers be with nuclear bombs? I doubt if Israel is going to wait around to find out.
You will be able to repeat that phrase with increasing regularity over the next 5 years.
Two ways have been mentioned: A revolution; B throw the bums out. A is much easier to achieve than B. FDR did both. Where he couldn't throw out (supreme court) he packed. Social security is enough revolution, but he did more.
Some of us remember. A childhood female playmate forced me to sing, "Hail hail Smith's in jail; Hoover was elected just as I expected." She became an aviator. I remember people working for nothing just to keep their hands in. Unemployed coal miners went to college. Other unemployed sat in the park and played penny ante. Still others talked communism; some joined. Theater groups performed for food. As you can see those were heady days. They could not have been predicted.
* Shaftsinker: "There is no larger conception in this article. This is just seekingalpha's daily dose of why the world is ending. Every day it's a new theory and yet all these damn articles are the same.
It's always somebody rambling about the US banks, the fed, Obama, inflation, deflation, and how everything is obviously pointing towards a "crash" or "crisis" yet the author will never even attempt to quantify our impending doom in any way. No numbers, no percentages, no timeline, no actual prediction whatsoever.
'It's going to rain. I'm not saying when, or how much, but get your umbrellas ready. It might be sunny for a while, and in fact it might not even rain, it might just be a little overcast or slightly cloudy, so you might not need your umbrella at all, but you might want to put your sunglasses away' "
--------
The weather man isn't always right and he'll never tell me *exactly* when it's going to rain or snow down to the minute, nor even to the hour, and yet I always check the weather forecast when the weather will be important to me.
But perhaps another analogy would be more appropriate. I see it more as a doctor warning about a patient's dangerous lifestyle. He may not be able to predict exactly when that patient is going to die, but he can warn after shocking him back to life after a heart attack that he needs to quit smoking and at least cut back a little on the hard liquor and the crack pipe.
I know it would probably be more fun to listen to cheerleaders and those wanting to "talk up" the economy, like Bernanke, et. al., rather than guys like Peter Shiff, but the fact of the matter is that Shiff, Faber and the others who have been warning about the systemic imbalances have been correct and those that were laughing at them, including those who have precipitated this crisis have egg all over their faces.
The scientific method entails testing of hypotheses and discarding those that are proven wrong. Unfortunately, Bernanke and the economists who dug this big hole for us want to continue digging. I think we should consider giving a little more credence to those whose hypothesis warned us that this would happen.
Check out the contrast in these two videos.
The first is Bernanke's predictions and soothing words leading up to the crisis:
Why Do We Listen To Ben Bernanke:
thupidity.com/2009/07/.../
Peter Schiff was right (new) - 2002 to 2009 with exact dates:
www.youtube.com/watch?...
so clearly explained!
E. Tippett
Chicago, Illinois
The Americans will be the ultimate winners in a long run.
The plan was to slow down the double digit growth of the BRIC countries, by bundling the mortgage loans and selling them to countries like China and the Entire Europe. They are the inventor of the Credit Swaps and AIG....
In case you have not noticed the Nuclear war days are over......the cold war with Russia is over.......we have entered a new century of financial war with smart and calculated advanced plans to destroy and dominate other countries financially......It may seem hard for people to accept 10% unemployment......but the entire Europe and most of the world have been enjoying double digit unemployment for many years.....Americans have no patient, spoiled, and take everything for granted, because they have no clue what is going on in other countries........and how other people around the world live.......why don't you invest in yourself and travel outside the country to know first hand what is it like to live in Europe, Asia or a Middle Eastern countries......You will be kissing the ground when you come back to USA.....Even today!!!!.......The smartest people in the world live in this country or like a magnet they are only dreaming to come to USA.......When they do arrive, they will be working for the corrupted Financial Corporations to continue dominating the world financially or technologically, It is as simple as that......Right now we are in a transition period and it may be painful for some for a while...... Invest in America or you would loose!
The greatest untold or underreported story around
is that the great recession has massively reduced
US dependence on foreign capital. The combination
of massive increases in corporate cash flow and
improved consumer savings has massively increased the supply
of savings and cut private borrowing ,
As always happens in a recession the increase in
federal borrowing is more than offset by the drop in
private borrowing.
That is why, as the WSJ editorial page loved to point
out for years the correlation between govt debt and
interest rates is negative.
Moreover, this has to show up in a sharp contraction of
the US trade and current account deficit and a comparable
plunge in US borrowing abroad.
The question is how much of this is cyclical and how
much is secular. But even if it is just cyclical, it
will be some time before US dependence on foreign
capital rebounds significantly.
90% of what you hear about the weak dollar is pure
bullshit by people who have no idea what they are
talking about as this article demonstrates.
Note that the chinese yuan abainst the dollar
has been rock solid and the trade weighted yuan had
fallen, increasing chinese competitivness against
Japan and Europe.
The actions of our government and corporate executives is reminiscent of what happens in the average third-world country, where the masses are sacrificed in order to advance the interests of the wealthy and powerful.
The following Web site discusses all that's wrong with our nation, besides the Federal Reserve's failure to deflate bubbles:
www.progressiveliving....
> Boy does this guy not understand what is happening.>
Nothing like starting your third post here with a bang, I suppose.
> The greatest untold or underreported story around
> is that the great recession has massively reduced
> US dependence on foreign capital.
Interesting take, given that Chris Martenson's latest instablog has a chart indicating that Foreign Purchase of Treasuries reached an all time high over the last 12 months:
seekingalpha.com/autho...
www.chrismartenson.com...
> The combination
> of massive increases in corporate cash flow and
> improved consumer savings has massively increased the supply
> of savings and cut private borrowing ,
Somehow I doubt that any "massive increases in corporate cash flow" or improved consumer savings is going to crowd out foreign investors wanting to fund the $1.4 Trillion dollar(?) deficit this year.
The last I heard the U.S. consumers are still up to their eyeballs in debt and are in the process of deleveraging. I believe I heard recently that our total debt is something like 3 1/2 GDP.
> As always happens in a recession the increase in
> federal borrowing is more than offset by the drop in
> private borrowing.
The way I look at that is that the government is rushing in to pick up the slack in private borrowing in a deliberate effort to try and offset it as it would result in a contraction of the money supply and they do not want that in a recession. I'm not sure if you intended to imply that the federal government can borrow whatever they want and the private borrowing somehow syncs with that by automatically reducing by a similar amount, but that is the impression I got upon first reading it.
> That is why, as the WSJ editorial page loved to point
> out for years the correlation between govt debt and
> interest rates is negative.
But I think that may be somewhat misleading. Someone might be correct in stating that the temperature setting on the heater in one's car has a negative correlation with the temperature in the car. The colder it is the higher that dial seems to be set, and the hotter it is, the more likely it is to be set lower or even turned off. But I don't think that proves there is no causal relationship between having the heater on and increasing the temperature in the car regardless of what that temperature might already be.
In fact, I think that turning on the heater will raise the temperature at least somewhat, even though it might still be quite chilly at times. Similarly, I think running the deficit higher is going to have a tendency to push up the interest rates, all other things being equal. Of course things are almost never always equal at various times in our history. There are a lot of variables in play and circumstances can be quite different. A deficit in a country with a growing and healthy economy with little to no inflation, and that has the rock solid faith of investors and nations worldwide is going to probably have lower interest rates than a smaller country with a much lower GDP, a history of economic mismanagement and raging inflation is likely going to have a significantly higher interest rate.
> Moreover, this has to show up in a sharp contraction of
> the US trade and current account deficit and a comparable
> plunge in US borrowing abroad.
To the extent that it caused the significant drop in the value of the dollar in the foreign exchange markets, I think it would tend to help bring about a sharp contraction in our US trade and current account deficits, though I'm not so sure about the "comparable plunge in US borrowing abroad".
> 90% of what you hear about the weak dollar is pure
> bullshit by people who have no idea what they are
> talking about as this article demonstrates.
What are some of the other weak dollar misconceptions of which you speak?
> Note that the chinese yuan abainst the dollar
> has been rock solid and the trade weighted yuan had
> fallen, increasing chinese competitivness against
> Japan and Europe.
Umm, the chinese yuan has been rock solid against the dollar because the Chinese government "pegs it to the dollar", rather than letting its value float in relation to the dollar as other currencies do.
www.investopedia.com/a...
On Oct 01 08:50 AM TeresaE wrote:
> So, exactly how many shoes are dangling over our collective heads
> at this point?
>
> There are so many ways that could bring another crash, so many players
> that could start the snowball rolling, so much ignorance from those
> that spend the money and set the budgets and so much apathy from
> those of us that will pay the ultimate price.
We buy Britains debt, they buy ours. Everyone's rates are held low.
This will work for a while.
But, who will buy Caterpillar's debt, at 5%, or 10%, or 20%, when it's obvious that inflaton is roaring and treasuries are still at 3%?
Everytime the U.S. has been cornered, they've gone to war or instigated war!! We should see some war brewing somewhere so the US can keep its inflated dollar alive and kicking... oh yes.. also the fact that during war treasuries count as the best investment ever should swing sentiments in favor of war...
All Americans rise and shine.
On Oct 02 02:16 PM Bruce Pile wrote:
> The next major crisis brewing tends to be whatever the markets are
> not preoccupied with at the time. Right now that isn't auctions,
> interest rates, or commercial real estate. It could be Israel vs
> Iran. There are some serious early warnings about the military option
> being resorted to over the next 3 months or so. Yet, when I survey
> newsstands, and count the number of cover stories about Iran, I repeatedly
> come up with a total of zero! Only since the Geneva talks started
> yesterday have I noticed mention of it on CNBC.
>
> I've posted on some of the signs of a strike coming soon at my blog.
> We've heard this wolf-crying drumbeat about Iran's nukes for many
> years now. And it's hard to believe two modern day countries could
> actually come to blows with nuclear fists. But consider these facts.
>
>
> Nuclear weapons have actually been used in a war, not once but twice.
> There were no negotiations or even a warning. Just a quick destruction
> of two major cities. And the offender in this case is considered
> the most level-headed, responsible owner of nukes in history - the
> U.S.A.
>
> Now fast forward to the mullahs of Iran. About half the people surveyed
> feel they wouldn't actually use their atom bombs - it would be suicide
> for them. But for Pete's sake, suicide bombing is their religion.
> So just how level-headed and responsible would these suicide bombers
> be with nuclear bombs? I doubt if Israel is going to wait around
> to find out.
On Oct 01 10:38 AM David White wrote:
> I didn't realize that the Fed had bought that much of the Treasuries.
> Thank you for the info.
>
> It does seem that raes will rise. The Fed said they were targeting
> the March - June 2010 time frame to begin raising rates. I don't
> see how they will be able not to do so. I am hoping that the economy
> has recovered enough that the housing market does not completely
> implode when this happens. If we can get enough of a recovery, things
> might just work out. The possibility of a double dip recession definitely
> looms though. The possibility of a CIT failure is a huge threat just
> at the moment. I am hoping Bernanke et al have some plan for that.
> Allowing CIT to fail would likely be worse than allowing Lehman to
> fail. Most agree that the US would have been better off if that had
> been avoided.
Regarding ur 10 concerns, well, FED is there to take care of it. This time it's extra cautious and will not repeat the mistake of the past.
Depressionitis
BTW, Next election I'm voting for whomever is NOT currently in office. If I lived in his Congressional District - they only incumbent I would vote for is Ron Paul (I live in NY).
Our governments (local, state & Federal) have let our country down. I see two ways to get our government to responsibly run our country - A. Revolution or B. Until our elected politicians perform responsibly, keep changing them - ALL of them.
We have a 90% re-election rate in our country. Why do we allow the same people who cause us problems to stay in office and continue causing us problems?
On Oct 01 10:28 AM aaavoid wrote:
> Still too much money on the sidelines, the only way is up.
remember that we had a manhattan project in 1942 because we feared hitler would build some & use them against us.
as it turned out hitler's bomb program was stillborn because he had forced the jewish atomic scientists to leave europe.
in summer 1945 harry truman had a decision to make. the u.s military was scheduled to land on the japanese home islands on november first & we were told to expect a million casualties on the beach plus millions more of japanese civilian deaths. the japanese militarists were firmly in control & the emperor was a powerless puppet. the shock effect of the use of the bombs made it possible to break this impasse.
the u.s soldiers i have talked to over the years are all very happy they did not have to storm ashore on the 1st nov.
now as to iran. public information is lacking as to how many nuclear weapons israel has. as soon as it is known for sure that the suicidal armageddonists in charge of the iranian govt have their bomb, you can bet the saudi monarchy will want their bomb too, & the only place they can get one us through us. not a pretty prospect.
> jack