JasonC

U.S. Treasuries in a Bubble, Not Commodities

Problem - the premise is false. The Fed isn't pumping out money. The Fed's balance sheet is the same size as it was last October. All that happened in the meantime is the emergency short term loans to the banking system etc were repaid, and the Fed parked the proceeds in treasuries and agency mortgage backeds.

Everyone in the world is predicting the same US inflation and dollar collapse that was the bubble in the first place. It didn't happen 2005 to 2008 because the Fed held M1 completely constant over that span. It isn't going to happen this time either because the Fed hasn't moved its sheet size in a year.

The treasury auctions are 4 times oversubscribed in bills at zero and 2.5 times oversubscribed for the 10 years with actual yield.

Foreign investors did stop buying agencies over the last year but continue to buy treasuries hand over fist. China, Hong Kong, Japan, the UK, everybody else in smaller amounts. They may talk about the dollar being old hat but it continues to be the place they are parking their net new reserves. Foreign investors have also been buying the US stock market since April, at a $15 billion a month clip.

And the reason is clear - they are not willing to see their current account surpluses disappear, by actually pushing the US to trade balance. So the net capital inflow ot the US has slowed but it remains an inflow.

As for the much vaunted "carry trade", US investors owned less in foreign assets at the end of last year than nearly ever, really. Their foreign stocks got slammed; Americans don't buy foreign government bonds. Meanwhile the supposedly stupid US treasury positions all the foreigners have piled up earned plus 13% in that smash year. Foreign ownership of US assets went down because of the stock market decline, but only by $1 trillion, while US holdings abroad dropped $2.5 trillion - because we own their stock and they own our bonds.

As of the end of 2008, US investors had only a 5% position in foreign stocks and only 3% in foreign bond assets, and 80% of the latter are dollar denominated. The total US investor position in the BRICs is less than 0.5% of US household assets. Some carry trade. Nor can this change much net in the short run, because the net flow of capital remains inward at a $400 billion a year rate.

People talk their ideology but their actual trading positions are saying something quite different. Risk aversion is off the charts after last year's smash, and secular deleveraging continues.

Today in Commodities: Dollar Up, Again

Hey, someone noticed that the dollar went up! No fair! No one on the planet is supposed to be able to notice when that happens! Everyone screaming in chorus that it is toilet paper is supposed to make it so, and make everyone's overcrowded commodity bets pay off at infinite, wipe away all debts, and make every doom monger whole.

Federal Reserve: Readying a Stealth Tightening of Monetary Policy?

$700 billion in short term credits the Fed supplied as of this April have already been repaid.

The Battle of the 'Flations

Never lose sight of the fact that the braintrust telling you the Fed is stupid just lost $20 trillion betting on a hyperinflation that isn't happening, while the Fed correctly saw coming the deflation that is happening.

The Fed isn't stupid. But a lot of traders fighting it are stone cold morons.

Great Depression Not Imminent, But Inevitable

Simply dumb. What covers real risks is spreads, spreads are at epic levels, ergo even epic levels of risk can be objectively handled now. The silly and dangerous bit was the low spread world we just exited --- exiting it has destroyed so much capital taking credit risk for a living (which used to be known as "banking", duh) that spreads have reacted to the opposite, silly extreme. Someone will realize these epic spreads are buys when the narrow ones were sells, and be profitable as a banker again. Those who believed that it was possible to be a banker at spreads of zero were wrong, those who now believe it is impossible to be a banker at spreads of 10% over risk free rates are just as wrong.

Both are trend following idiots and not bankers.

Deflation Is Just Around the Corner

"can someone tell me which prices are lower"

Housing, silly, a third of consumer costs. Plus energy, a tenth or so, direct and indirect. That is 40% of costs that have been cut in half. We've only seen the headline CPI number drop 3%.

To Understand Inflation, Follow the Money

I call financially illiterate BS.

Maiden Lane LLC assets are lower by $2 B (with a quarter billion interest received), not 9-10B. JPM takes the first B and change of hit on those. Maiden Lane III, lower by 0.5 billion, Fed share 3/4 of it.

The article writer apparently confused the amount outstanding for the AIG loan in the latter, with the older Bear Stearns figure for the former. For comparison, in a typical recent year the Fed had profits of $30 billion and paid $29 billion back to the Treasury.

There is no inflation. Prices are in fact dropping, and treasury auctions are four times oversubscribed at yields of zero.

As for what treasury rates can do, from 1934 to 1954 the average rate on 3 month T-bills was 61 basis points. For 20 years. There was some inflation in that period, coming out of WW II and during Korea - the price level doubled, and the average rate of inflation works out to 3.6% a year, taking years of flat or lower prices early, with years of increases later in the series.

The T-bill rate was under 1% continually for those 20 years. It didn't move above 2% and stay above it until the late 1950s.

Over their entire history since 1934, T-bills have averaged 4.4%, exactly equal to average CPI inflation over that period. But the relationship is *not* one to one each year, only overall and on average.

As for the illiterate comments at the end, hyperinflation without transactions is a round square and a misunderstanding.

For the millionth time, the *demand* for money is *not* a constant, it can and does fluctuate violently, the price of any commodity, including money, depends on the demand as well as the supply, and deflations can and do last decades.

All your inflationary brainstorms, are belong to us.

Panic in CDS Market to Cause Next Collapse in Equities

Corporate bonds are table pounding buys, and the CDS market is a disfunctional Enron exercise in manipulative trend following that lost all fundamental connection to credit reality the moment AIG went belly up.

Right now, every CDS out there is a credit risk squared, because the counterparty is less likely to actually pay on the CDS contract than the underlying is to default.

But the braintrust automatons who built the system cannot grok that the CDS contract itself is no longer trading as a nearly risk free AAA collateralized credit.

Half the governments on the planet are within an inch of just declaring CDS contracts unenforceable if not making their trade criminal, and these nutjobs are still pretending that everything else must be driven by their manipulated make believe.

I call "no clothes" on the CDS emperors. They are buffons, actual default rates on corporates will not hit half the current spreads, let alone loss rates. Buy the bonds and tell the CDS marketeers to stuff themselves.

Can Central Bankers Prevent a Great Depression?

A long winded contentless article that ends only with a concern whether his gold will go up in nominal terms in a deflation. Answer, no, nothing will go up in a deflation.

Next idiot, please be less long-winded.

Trading Strategy: VIX Spread and the Stock Market

Excellent post, real substance by the standards of Seeking Alpha. Thanks for sharing it.

Treasury Continues to Harpoon the Real Economy

Utterly pointless and ignorant rant.

On GM, cut wages, simple. They are perfectly competitive at national average wages, they aren't worth their existing debt at 2-3 times national average wages.

On the bailouts supposedly achieving nothing, the banks are open, TED spreads as falling. It would be much worse had nothing been done.

On it supposedly being nailbiting to watch the 10 year, um, compared to watching paint dry? It is locked in a trading range between 3.5 and 4%, meandering there aimlessly, and doesn't care a lick how much new issuance there is. Even with real rates rising (see TIPS, see corporates, see everything else) USTs are well bid worldwide.

On bailout "costs", ignorant refusal to distinguish payments and loans. If I lend you a dollar for a day and get it back, did I "spend" a dollar supporting you?

What We Don't Know about the Markets

Mostly sane advice, but you also ask "who wants to put in new money now, only to perhaps be underwater almost immediately, and then hope to get back to even?"

I do. I have no problem with it whatever. Someone coming along and offering a lower and lower bid for something I am not going to sell does not distress me. No one can own only monotonically increasing assets --- any such asset either returns only the risk free rate or can be instantly arbed up to a level where it goes unstable again. The whole notion that you can avoid ever holding anything declining in price is a complete delusion.

Who cares how insane the next few offers are? If they get whacky, take your next bond coupons and buy some more.

No one can call directions, anyone can call levels. Lend at the high rates on offer, and average into stocks with the coupons as you receive them.

Simple.

The Reykjavik Scenario (or How Interest Rates Can't Control Monetary Inflation)

Did anyone hold a gun to currency speculator's heads and force them to buy Krona, even as the money supply expanded?

Nope, just a bubble like any other, caused by trend followers all making the same bet and thinking they can all be right, as long as it keeps going.

No government policy can outlaw the stupidity of free men. If enough people act stupidly enough on a big enough scale, they can wreck things. Duh.

The assets that secure the debts issued by Iceland banks are the assets they purchased abroad with the funds lent to them. If those assets are worth less than the nominal value of the debts, whoppie doo, they are all the creditors own because they are all the creditors can own. If that makes Krona worth a bit less, tough toenails.

But if the Iceland authorities now put rates high enough, they will kill the inflation stone cold dead, just as happened in the US in 1982. All it requires is the political will to be fair to capital, foreign or domestic.

To avoid distressed sales of the foreign assets owned by the banks at the worst time for it, the IMF can loan to the government, which can use the proceeds to pay off foreign creditors. As markets recover and foreign assets continue to earn out, they are realized and used to retire the debt to the IMF.

None of the past actions or losses are going to matter much at all, in any of it. Only their forward policies will.

Money isn't magical or exotic or dangerous, and it isn't the only real asset with others being fake. It is merely one narrow asset among many others. And right now there is a manic demand for it. Selling long dates claims at fire sale prices to get money when the money is yielding nothing and useless, is insane. But leveraged debtors have been forced to it, and others are mimicking them in monkey-see, monkey-do trend following fashion, instead of sensibly taking the other side and collecting all the long dated claims.

The fever will break, and everyone who used the occasion to sell everything to get into money, will have given away their future wealth to those who made the opposite call.

Things Aren't as Bad as They Seem - Barron's

The great depression is no more going to show up than the great pumpkin.

All the doommongering fools screeching that the sky is falling can't add and have no idea what the US economy is to begin with, they are just repeating what their communist masters in the press tell them to say. Those have been predicting the immediate self destruction of capitalism for 160 years straight. And they are hopelessly wrong, and always will be.

Will We Know When We've Made a Low?

Why should I care what happens to stocks a month or three after I buy them? I'm not going to sell. In ten years there is a slight chance. The only point of timing is to get more shares for the buck. Let clueless leverage speculators worry about every buck and squiggle; if you are investing your own money, just buy after all large pullbacks and never sell until you've at least doubled your money. The whole point of using your own money is you can hold as long as that takes, and longer if you want.