The $700 Billion U.S. Funding Hole; Desperately Seeking A Very Indiscriminate Treasury Buyer

A month ago we observed that in 2010, the supply/demand picture for US fixed income would be very problematic, as there was no immediate apparent substitute to fill the void resulting from the departure of the constant bid provided by the Federal Reserve's Quantitative Easing in both the UST and the MBS markets. The conclusion was that there would need to be a dramatic increase in demand for debt securities across the board, with an emphasis of Treasuries and MBS.

Today, we focus on the most critical segment of debt issuance for 2010 - those ever critical US Treasuries, without whose weekly uptake by various investors, the multitrillion budget deficit will become unfundable. Using estimates from Morgan Stanley for 2010 Treasury supply and demand, the conclusion is that there will be a demand shortfall of at least half a trillion, and realistically $700 billion, to satisfy the roughly $1.7 trillion in net ($2.4 trillion gross) coupon issuance in the upcoming year.

The implication is that back end prices will decline sharply due to an ever increasing supply overhang, even as nearly $800 billion in Bills are paid down, thereby further accentuating the steepness of the bond curve. And with ever more emphasis put on the coupon supply, the marginal yield on long-dated Treasuries will likely find it needs to be increasingly more attractive to find bidders, which in turn will jar mortgage rates out of hibernation. We are now certain that Q.E. will continue: the weakness in the mortgage backed-market is already becoming a topic of contention, and when it becomes apparent that there is an additional $700 billion demand void in Treasuries, then it is merely a matter of time before Ben (or his successor) realizes the dollar destruction comeback tour has to resume asap. Those cynically inclined may wonder why Bernanke's reconfirmation should take place prior to any potential Q.E. 2 announcement. Perhaps this country's Senators would further evaluate their support of the Chairman once they experience the popular anger which will accompany the next leg down in the US currency the minute Mr. Bernanke announces that the Fed will need to continue being the market in treasuries and mortgage backed securities, further eroding the collateral behind the greenback.

First, based on Morgan Stanley's expectations, and further corroborated by yesterday's disclosure that the next increase in the debt ceiling by $1.9 trillion net, to $14.3 trillion, would last the country only through early 2011, we present the estimated supply of gross coupon issuance in the upcoming fiscal year (keep in mind one quarter of issuance has already been absorbed and the run-rate validates the projections).

After issuing a $1.9 trillion gross amount of coupons in F2009, in 2010 this amount is expected to increase by 30% to $2.4 trillion, with an emphasis on long-dated maturities: per the chart above, the average age of new gross coupon issuance (excluding Bill impact) will increase from 5.9 years to 6.4 years in 2010.

In 2010, net issuance will be substantially lower than gross according to MS, due to an increase in maturities, and "only" $1.7 trillion in net new coupon bonds, $425 billion more than 2009, are expected to be issued by the US Treasury: this number may well be an underestimation as the Senate, which likely has far more granular issuance projections, is calling for $1.9 trillion in net issues (in addition to the $300 billion temporary increase which passed late last year) which would fund the US budget for about a year. One offsetting feature of net issuance in 2010 will be a surge in paydowns in Bills, which are expected to be a net negative contributor to issuance to the tune of $775 billion (of which $275 billion has already taken place in Q1 of fiscal 2010, primarily as a function of the $195 billion in SFP bills rolling off).

So far so good- the supply picture is clear, and in reality the final amount will probably end up being substantially higher than $1.7 trillion net, as the runaway deficit-creating machine in D.C. will stop at nothing to prove that any one failed auction will destroy this country.

Where things get tricky is on the demand side.

As we pointed out previously, the number one defining feature of 2009 was the Fed's blatant support of the bond and MBS markets. Bernanke monetized $300 billion in Treasuries, and indirectly will have purchased another $1.4 trillion in bond/MBS hybrids (we say indirectly, because Fed MBS purchases effectively allowed MBS holders to switch their holdings to Treasuries at preferential terms, better known as the "reallocation trade" in essence achieving the same effect as if the Fed has purchased these - see Bill Gross). With the Fed out of the demand picture (at least temporarily), the questionmarks emerge.

Combining the supply and demand for Treasuries yields the following chart. Fact: in 2010, a best case of demand projections, indicates there will be a $400 billion shortfall for total Treasury supply... and a worst case of a stunning $700 billion funding shortfall. This is "just" a little worse than Greece, yet the latter's CDS trades trades nearly ten times wider than the U.S. Logical? You decide.

The key variable in this exercise is quantized and overall demand, which is why a detailed analysis of each end segment must be performed to understand the demand mechanics.

Foreign Accounts

On December 31, 2009, a majority of U.S. debt (marketable Bill, Coupons, TIPS) was held by foreigners, making America a net foreign creditor nation. Compare this with Japan, where 93% of sovereign bonds are held by domestic accounts. Yet over the past several years, the US has become increasingly reliant on foreign generosity: foreign demand has grown from $143 billion in 2007 to $794 billion in 2009. And even as foreigners have purchased an increasingly greater amount in absolute terms, the relative composition has in fact declined in the past year: foreign demand dropped from 76% in 2008 to 46% in 2009.

An even more granular analysis of foreign purchases, indicates that as foreigners rushed into the safety of Bills, demand for coupons actually declined. Also notable is that foreign demand for coupons has never moved too far, and has stayed in the range of $192-$370 billion each year.

The biggest problem this data indicates is that foreign demand will not go willingly with the Treasury's demand to extend the average Treasury maturity from 4 to 7 years: foreigners purchased 145% of the Fiscal 2008 net issuance of $255 and a meager 26% of the Fiscal 2009 of $1,271 billion.

And herein lies the rub, as MS points out, the foreign bid is usually a direct function of the amount of global trade and the associated trade gap experienced by the U.S. Historically, the excess trade gap was not an issue, as China, Japan and net exporter partners had to recycle their otherwise useless dollars back in the U.S., and they did so by purchasing U.S. bonds, thereby allowing U.S. consumers to borrow ever cheaper and to purchase yet more Chinese and Japanese trinkets, rinse, repeat.

As Zero Hedge pointed out some time ago, the deputy governor of the PBoC, Zhu Min, said the most logical, yet scariest, thing for the US Treasury.

"The United States cannot force foreign governments to increase their
holdings of Treasuries," Zhu said, according to an audio recording of
his remarks. "Double the holdings? It is definitely impossible."

"The
US current account deficit is falling as residents' savings increase,
so its trade turnover is falling, which means the US is supplying fewer
dollars to the rest of the world," he added. "The world does not have
so much money to buy more US Treasuries."

Zero Hedge has previously demonstrated the problem associated with China's trade surplus, which while still positive, saw a significant drop from the prior year. And compounding this is the concern that while China is still accumulating FX reserves, it may now be diversifying its US-denominated holdings. Yet setting diversification concerns aside, the bigger picture indicates that China UST purchases usually are a function of FX reserves: should the US continue on the recent protectionist path, this will implicitly make Chinese demand for Treasuries even scarcer.

Based purely on global trade surplus/deficits, it is likely that the foreign bid would purchase $300-$400 in coupon Treasuries in 2010. However, in evaluating foreign demand in 2010 one has to consider the Bill/MBS reallocation trade. A big question mark for 2010 will be whether foreigners will reinvest Bill holdings purchased at an above average rate in 2008 and 2009 (see Foreign Bill Vs Coupon Purchases). The demand for Bills occurred due to reallocation away from Agencies/MBS and corporates, which can be seen from the below chart. Here it becomes visible why the Fed's MBS program was the practical equivalent of a Treasury QE extension. The Fed was acquiring foreigners' MBS and Agencies at prices that would allow them to buy Bills (and sometimes Coupons) in kind.

With non-Fed demand for MBS still non-existent (and, in fact, everyone selling into the Fed's bid), and a reduced issuance of Bills in 2010, it remains to be seen what assets foreigners will reallocate to. This "reallocation" trade will likely add another $200 billion to the $300-400 billion estimated above, thus bringing total demand for Coupons to $500-600 billion, offset by a Bill outflow of $300-400 billion.

Household Sector

Recently the "Household" sector as defined in the Federal Reserve's Flow of Funds, attained some notoriety after, as Zero Hedge disclosed first, Eric Sprott brought up allegations of covert monetization and general ponziness by the Fed via the "Household" sector. We will stay away from semantics, and present what is known: at the end of 2009, "households" held 12% of Treasury debt, or $800 billion: less than a quarter of Foreign holdings of $3.6 trillion. The inappropriately-named household sector consists of individual households, nonprofits, hedge funds, private equty, private foundations, labor unions and others, and Treasury holdings allocated to it, are calculated as a differential between total USTs outstanding and known amounts held by other investors. Basically, it serves as a plug to "everything else."

Regardless of semantics, a critical point must be added to the Sprott analysis, and also to Goldman's optimistic outlook on bonds, which is predicated on increased household purchases. As a reminder, Goldman speculates:

Increased saving by households and businesses creates a
potential demand for Treasury securities as well as less competition
for lenders' funds; flow of funds data and bank balance sheet reports
confirm that the domestic private sector is increasing its allocation
to Treasury securities.

Is Goldman overly optimistic on their expectation that U.S. households will finally do what their Japanese equivalents have been doing for decades? The answer is yes. But before we get into this, we need to point out that the recent surge in "Household" buying has not been effected in one bit by actual households and individual investors. Why is this? After all, the household savings rate has increased from 0.8% in April 2008 to 4.8% in December 2009. Yet as a reminder, the two key components of Household Treasury holdings include Savings Bonds, which are what households actually buy when they wish to purchase government debt, and Other Treasuries, which are marketable Treasuries, and which average households have no access to. It is a notable observation, that while the savings rate has indeed increased, holdings of savings bonds have not only stayed flat, but have declined over the past year: this is perfectly explainable by the combination of an increasing savings mentality coupled with a desire to deleverage: i.e., Rosenberg's new frugal normal. Goldman, which has bet the house on household Treasury purchasing to keep rates low, will be disappointed.

The chart below demonstrates the historical holdings progression between Savings Bonds and Other Treasuries. As can be seen, actual households have not been active purchasers at all in the recent bond buying spree.

Yet while it will take much more to convince Goldman in its faulty assumptions, what is without doubt, is that the same "reallocation" trade that has taken place in Foreign purchasing, has been paralleled in the Household sector. As the chart below shows, while Treasury holdings have surged over the past year, this has been purely a function of a collapse in Agency/MBS holdings. In fact, in the past year, MBS holdings in the Household category have fallen by a stunning $772 billion, from $840 billion a year ago to just $68 billion most recently. This has been accompanied by a less than half increase in Treasuries in the last 12 months: from $493 billion to $860 billion, a $367 billion increase, and less than half the decline in MBS.

Just like the reallocation trade has been critical to spur demand in foreign purchasers for USTs as they have rotated out MBS with the Fed lifting any and all foreign offers, so has the Fed been busy domestically. Comparing the action over the past 3 years, from the peak of the housing bubble (2006-2009 period), indicates that the reallocation trade accounts for nearly a dollar-for-dollar move out of MBS, which declined by $352 billion from $420 billion to $68 billion, into Treasuries, which in turn increased by $344 billion, from $516 billion to $860 billion.

With just $68 billion left in Households' MBS holdings, the reallocation is over, which means that the household sector will no longer be a major purchaser of Treasuries, and all of this on the backdrop of actual consumers, whose Saving Bonds holdings have dropped from $197 billion to $192 billion over the past two years. On the other hand, should "Households" end up purchasing substantially more than expected, then the Sprott thesis will have to be seriously revisited.

Commercial Banks

A major wildcard for 2010 Treasury demand will come from commercial banks, whose $1+ trillion in excess reserves, courtesy of flawed monetary policy, may be used if not to spur consumer lending, then at least to acquire treasuries. As was shown previously, banks held only $200 billion in Treasuries at the end of 2009, making them the second to last holder, yet the massive dry powder on their books, as well as possible political prerogatives, will likely make this sector a major purchaser of Treasuries.

Empirically, banks add to their Treasury holdings at the end of recessions, when banks have capital to allocate, yet consumer and small-business loan opportunities remain weak. This can be seen on the chart below:

This is also evident when one considers that change in bank UST holdings, compared against the steepness of the yield curve: it makes all the sense in the world that banks would increase Treasury holdings in a steep yield curve environment.

Yet even if banks unleash the full power of their excess reserve holdings it will likely not do much for back end supply. The reason is that banks traditionally purchase USTs in the 2-4 year sector, as they get most of their duration via their mortgage holdings, and with rising rates, existing duration has grown. As banks receive much better returns by lending direct, moves along the curve are i) rare and ii) merely placeholder measures until the economy improves, which explains their unwillingness to stray far on the back end of the curve.

The reason why this may be problematic is that there is an incremental $350 billion in new gross issuance in the 5Y - 30Y part of the curve alone, which is precisely the part that is least attractive to the banking sector.

Another major concern to banks is the prevalent uncertainty about possible future inflation: the Fed's liquidity spigot is as worrying to banks as it is to all but the staunchest deflationists. Today, inflation uncertainty is near decade highs. Furthermore, even as 10 Year yields remain near all-time lows, 10 Y inflation expectations are rising fast.

In order to determine the pace of Treasury purchases, a comparison with prior recessions (including those of the 1970s, 1980s, and 1990s) indicates that following major recessions, banks increase their UST holdings by 1.6% to 2.7% of total assets (with an average increase of 2.2%), and this increase takes two years on average.

Of the $16.9 trillion in total banking assets as of June 2009, USTs accounted for $141 billion or 0.8%. Growing this number in value to 2.2% of projected total bank assets of $18.6 trillion in June 2011 in the low case, and 2.7% in the bear case, implies that between $421 and $513 billion in Treasuries would have to be purchased over the next two years. As $82 billion was purchased in H2 2009,  this implies banks need to ramp up purchases to $225 billion per year in the low case, or about $4 billion per week. This represents about one-third the pace with which the Fed was monetizing/buying back bonds in 2009. The high case corresponds to an annual pace of $287 billion per year, or $6 billion per week: about half of the Fed's rate of purchases. Both cases, as noted above, would focus on Treasuries in the front-end of the curve.

As a result, it is expected that banks will purchase between $190 and $240 billion in Treasuries in 2010, which number also includes the $24 billion already purchased by domestic banks in Q1.

Broker-Dealers

Broker dealers, unlike the other mentioned purchasers, do not have an outright preference for Treasuries as a yielding instrument, but merely as a hedge for spread-product books (including corporates, CDS, MBS and agencies). As banks deleveraged in 2008 and 2009, they covered massive amounts of UST shorts as they sold off the underlying hedged securities. Indeed, in Fiscal 2009, B/Ds purchased a record $119 billion of Treasuries, following $86 billion in 2008. Not surprisingly, these coupon purchases occurred in the front end of the curve (1Y-5Y), again indicating B/D's aversion toward dated paper.

As of June 2009, the B/D deleveraging process appears to have ended, and in fact has reversed as leveraging has once again commenced: B/Ds sold $21 billion of Treasuries in Q4 2009. Therefore, Broker Dealers are expected to sell $25-50 billion in coupons in 2010.

Insurance/Pension Funds

Insurance funds are essentially banks-lite: they prefer to purchase treasuries in a steep yield curve environment. In 2009, insurance/pension funds were the fifth largest buyer of Treasuries ($56 billion from insurance firms and $37 billion from pension funds). With expectations of a steep yield curve (for now) likely staying in the 270-280 bps range, Insurance funds are expected to purchase about $100-$150 billion.

An upper ceiling to purchases is likely to come from the discount rate on defined benefit pension plans (around 6.5%), implying the yield on purchased Treasuries has to be at least 5.25%. Currently the highest yielding P-STRIPS in the 30 year sector offer just 5%. Insurance companies could very well become a purchasing force... however at materially lower levels.

Mutual Funds

In 2009 the fixed income mutual fund/ETF space saw unprecedented activity: doubling the $104 billion in 2008 inflows (2009 closed at $204 billion). Yet the vast majority of this amount went to chase higher-yielding, riskier assets: only $33 billion (16%) was allocated for UST purchases.

As allocation to these buyers seeks to outperform benchmarks, the allocation to USTs has traditionally stayed limited, and as a result 2010 demand from mutual funds/ETFs is expected to stay in line at around $50-75 billion. Furthermore, as has been repeatedly pointed out, equity inflows have been negative in 2009. If there is a reallocation trade whereby investors seek even riskier assets, 2009 could see a rotation out of broad fixed income into equities and even riskier assets (CDOs are already stirring).

Money Market Mutual Funds

As money-markets only invest in ultra-short dated Treasury products, this demand category would not have an impact on the back-end. Furthermore, money-markets will probably continue to unwind the $332 billion in front-end paper purchased in Fiscal 2008: already last year $34 billion in Bills and short-end coupons was sold. If ZIRP persists, and if the Volcker doctrine manages to make money markets sufficiently unattractive, this category will at best have a neutral impact on USTs and more realistically will continue to be a net seller. As such, in 2010 this segment is expected to sell $100-200 billion in Bills and front-end paper.

Municipalities

Municipalities are expected to provide a token amount of demand, to the tune of $25-50 billion: this source of demand is low in a rising rate environment. In 2009 only $3 billion in demand came from money market funds.

Federal Reserve

Up to this point, we have demonstrated that under realistic assumptions, the traditional buyers of Treasuries will be insufficient to plug the demand hole. As the Fed will not sell any of the roughly $770 billion in Treasuries on its balance sheet with a ZIRP policy still in place, the only question is whether Ben Bernanke will step in and roll out QE 2. Of course, the implications to the stock and currency markets will be drastic should the Fed relapse to its old financial heroin-dispersing ways.

Conclusion

While near end supply will likely not be as difficult to satisfy, the back-end will face increasing yield pressure in order to stimulate demand. This means that long yields will begin a slow trickle higher to attract the missing demand that currently is unaccounted for. Should this happen, and should the likes of Morgan Stanley be correct in expecting even further steepening, the implications on mortgages will likely be severe. Which is why we are confident that the Fed, which is all too aware that the economic situation is far worse than what is presented in the mainstream media, will expand quantitative easing not only to more MBS purchases (mostly to facilitate yet more reallocation trades), but to direct Treasury purchases once again. In doing so, the Fed will surely short-circuit the market beyond all repair.

A practical idea on how to approach this binary outcome, would be the implementation of the kind of barbell trade that has made John Paulson a billionaire: should the Fed announce QE 2, the dollar will plunge, and gold will surge. Due to negative convexity between these two asset classes, we anticipate a non-linear acceleration in the price of gold compared to the DXY. Alternatively, should the Fed stay pat and do nothing to prevent the verticalization in the yield curve, the other side of the barbell would be to reward those who would benefit the most from the resultant even greater curve steepness, expressing this with long financial exposure (the more levered, the better). Another levered way to play the increasing curve steepness would be putting on the Julian Robertson-proposed Constant Maturity Swap trade (discussed previously in depth here).

Lastly, should the Fed attempt to stimulate an endogenous flight to safety and boost demand for Coupons artificially, we believe, as we have said before, that the FRBNY will certainly implement a stock market crash. The alternatives, an interest rate hike and QE. We believe that while the probability of QE 2 is increasing with every day, the likelihood of a rate raise is negligible, leaving the market crash theory as the wildcard. We will not handicap this outcome and instead let every reader decide for themselves. Nonetheless, as this week demonstrated all too well, once the market gains downward momentum, even the much expected daily offer-lifters may be mysteriously elusive. Hedge appropriately.

Comments

[Number 156]

You need someone indiscriminate? No problem. The Fed will buy what they can't sell.

Ben Shalom Bernanke, Suuuuuuuuuuper genius.

[huntergvl]

Great Article Tyler.

I do believe Bernanke will continue to buy Treasuries, but through backdoor, very quiet to the public, venues. Announcing QE2 will not be prudent (understatement of the year).

So, they are floating the 'idea' of annuitizing 401ks and IRAs which might get some money. I have already wrote my congressman screaming and hollering that if they force me to annuitize my funds, I will pull them all before the plan is implemented even if it means quitting my job to get access to my funds. I think (hope) the backlash against forcing our retirement accounts into inflating treasuries will not meet with success.

Second......they need to crash the stock market. If the DOW and the S&P break through to new lows, say 500 on the S&P, the reverberations and domino effect on global markets will force a run to safety - Treasuries. Whether that will force a flight to safety into the long treasuries will be the question, but it will provide a backstop for treasuries that doesn't require the FED to raise interest rates. At least for 2010.

Of course, sooner or later the game will be up, and treasuries will need a rate boost, gold will explode, and stocks will wallow along in the 500-650 range will occasional dips, with less frequent surges.

Your article points out a multitude of factors to consider, and I am particularly interested in China's bonds and Germany's bonds (post the Euro collapse?). Lot's of variables to consider but:

Oil, Gold, and commodities will be the way I am going soon.

There will be some long term stock picks available in the s&p 500 range.

And there is always the small risk of an eventual dollar collapse which simply can't be ignored.

[MrPalladium]

"So, they are floating the 'idea' of annuitizing 401ks and IRAs which might get some money. I have already wrote my congressman screaming and hollering that if they force me to annuitize my funds, I will pull them all before the plan is implemented even if it means quitting my job to get access to my funds. I think (hope) the backlash against forcing our retirement accounts into inflating treasuries will not meet with success."

Don't forget that withdrawls from 401(k) and IRAs are taxable, with a 10% early withdrawl penalty tax (last time I checked). These withdrawls push the taxpayer up into higher marginal rate brackets. Force a trillion out of IRAs and the gummint collects an unanticipated $450 billions in tax revenues, enough to kick the can of long dated treasury yields down the road for another year.

An inspired plan!!

[Dirtt]

He's not alone in thinking that.  Particularly in the medical biz I know more than one highly qualified person that is ready to retire so they can begin to pull down the 401 reserve.

The clowns who are pushing this healthcare "reform" are insanely out of touch. Highly qualified people in medicine have been clamoring on for years about the woefully underprepared underlings entering healthcare.  And when you force the cream of the crop into retirement WHO exactly is going to staff the institutions that expand coverage to the tens of millions converging into the system.

It's kinda like starting a football league to rival the NFL.  How well did the USFL work?  There aren't enough people in the world who can play at the NFL level ( w/o steriods).

Any wonder why we need to pound the Progressive Movement into the fetal position?  Breathlessly void of logic.

[Anonymous]

Doctors aren't that special. Cuba gave 400 to Haiti before the disaster.

[strike for retu...]

The withdrawal of productive labor and capital from the system is to be expected.

The speculative activities of Goldman Sachs and the like have been made risk-free via their ownership of Treserve.  Consequently all capital is driven to them.  (Those in the know because they know.  Those not in the know because heads squid wins, tails you lose, means that squid gets everything.)

Our society will stop functioning in this environment.  The question is when that will happen.

http://www.goldmansachs666.com/

[Anonymous]

"It is widely acknowledged that the USFL had a dramatic impact on the National Football League both on the field and off. Almost all of the USFL's on-field innovations were eventually adopted by the older league, and a multitude of star players in the USFL would go on to very successful careers in the NFL".

With the expiration of the collective bargaining agreement in 2011 what's going to happen to the "progressive movement" of the NFL? Basically only the most wealthy market teams are going to be able to afford star players, effectively killing the competitiveness of small market teams.

The majority of modern medical treatment is standardized and routine, much like the requirements of a offensive lineman.I don't need the talents of a Brett Favre to put a cast on a my kids broken leg or to administer a flu shot.

[GoldSilverDoc]

BOY it's fun to read these comments - especially THIS ONE!!  I, as a specialty surgeon, am absolutely THRILLED that most of the patients are going to see "physician assistants" and "nurse practitioners".  I have noticed that the practices which employ these folks send me three to five times as many consults as the ones who use actual physicians, because about 80% of the time they have no idea what they are doing. 

Good luck with the cast, btw - a little too tight and your leg turns blue, then black, then falls off.    But don't worry, some nice NP or PA will hold your kid's hand while it does, and everyone will at least "feel good about it".  And as for the flu shot, well, heck, anybody can handle an anaphylactic reaction, right?  You just.... well, what is it that you do, anyway? 

Ha ha ha ha ha ha..........btw - I now work on retainer.  $5000 up front, plus 2% of your net assets (yearly), and 20% of your income if I manage to save your life.  If I don't well,  you take the loss......

[Anonymous]

um....epinephrine...adminstered by another injection? Aren't many common folk (who are allergic to bee stings)provided doses themselves to self adminster?

ha. Thanks for the info. ummm....what happens if I am unemployed? Can we still make a deal? Will you at least take my underwater home as collateral? If not, I have a bunch of plastic stuff from China I can give you.

[Whats that smell]

Medical people are at least 10x smarter than anyone else, just ask one. Also they never make any mistakes after working those 15 hour days? (not for money but to help people)

[Basia]

@GoldSilverDoc

Very arrogant and inappropriate comment. Most health care does not need a high salaried physician's services . I rarely have to refer to an M.D., save my HMO lots of money, and get excellent patient reviews.

You are obviously more interested in the money than in helping people. I feel sorry for your patients.

BH Nurse Practitioner

[Chumly]

Dear Nurse Practitioner:

>Very arrogant and inappropriate comment. Most health care does not need a high salaried physician's services.<

Tell that to the parents, whom I know of, with of a toddler who was probably within 24 of dying had not a highly skilled physician properly diagnosed a serious condition requiring emergency surgery and whose prognosis had been missed by a practitioner who would have never got it right (because only the highly skilled physician had the experience and knowledge to identify it).  Now, I'm sure that practitioner does not pay the malpractice insurance that the highly skilled physician pays, yet in this case mentioned it would have been the practitioner who cost the child his life, probably not because that practitioner didn't "care" but because the the practitioner didn't have the skills of a highly paid arrogant physician.  Do you think the parents would have cared if the doctor was arrogant (which in this case she wasn't)?

If it was my child's life, I would prefer the highly paid arrogant skilled physician (probably paying at least $1 million in annual malpractice insurance premiums, hence he/she is highly paid; which came first: the chicken or the egg?) over the less paid practitioner.

[Grace]

Chumly,

You don't get it - precisely *because* you are an arrogant **** who overvalues your contribution to society.

The practitioner you mention in the referenced case did his/her job by refering the child to a highly skilled physician who understood the condition. It's not like he/she had a fist fight in the ER over who owned the patient. No. Things worked out just as they should have.

You get paid to be on call for these rare cases where life hangs in the balance. But I've set a leg and stitched myself up - with no medical training - just a book with pretty pictures and informative descriptions. The fact is that the basics are not rocket science and I would prefer to have a conversation with a nurse or PA about what's going on with me, than spend two minutes with a "highly skilled" MD who is more concerned about his investments than he is about my health.

And yes - you have massive malpractice insurance. That's not the fault of the PA or Nurse. That's the fault of a lot of doctors who get it VERY wrong, too damn often, and the fault of an overly influential insurance and legal lobby who pay congress to make them rich.

Get over yourself. You went to med school for the wrong reasons. Why don't you find a network to work for, like your moral twin Sanjay Gupta? I'm sure it pays even better than your current scam/scheme.

[GoldSilverDoc]

Ah, Basia.

"I rarely have to refer to an M.D." - that is because 95% of what you see is self-limiting, and needs no treatment.

"I save my HMO lots of money" - so you withhold care from patients in order to save money.  Who is most interested in money?  You.

""get excellent patient reviews" - patients don't know that you are doing nothing for them.  How could they?  

I feel sorry for anyone who gets stuck with a poorly-trained doctor wanna-be, like you.  They will pay for it, in the end.

[DonnieD]

Are you saying a PA can't do as good of a job putting on a cast as a physician? I think you're just worried about losing your "god status" as an M.D.

[GoldSilverDoc]

O Envious One:

Perhaps you, too, should have studied, instead of screwing around in college? Then you wouldn't have to be so envious?

[Anonymous]

No worries AuAgDoc, you've got to do that sh*t for 20 years to get the irony.
Don't phuck with civilians.

[MarketTruth]

Some may be missing the point. The 10% 'penalty' is easily offset by the 15%+ devaluation of the USD that will probably rear its ugly head. In other words you will be +5% when all is said and done. Have you seen the loss of value in the USD in the past few years alone(!) and yet the US Gov says inflation is low. The point is that dollar devaluation (and gold price increasing) tells the tale of the typical and ongoing USA government lies and deception. The sheeple will not know what hit them when their 401k is converted because "We are from the government and are here to help you."

[Anonymous]

huntergvl.

One smart cookie.

-MobBarley

[Anonymous]

Long yields could drift higher. How something trickles
uphill is beyond me. Take me to a stream you've seen traveling uphill defying the laws of gravity.
It has to be an exotic locale and I could use the
vacation. Interstellar travel does't count. Breakeven
on mortgages is 5% on tens I seem to have read some-
where else last week so we have a ways to go yet
before treasury yields threaten the doorstep of
mortgage rates your assertation in that regard is
somewhat overstated as it pertains to the near term.
I doubt Bernanke has time to meddle in the minutiae of fed
operations he is up to his eyeballs in alligators at
the moment. I never understood for the life of me
why normal fed behavior signaled in some people's
mind a ponzi scheme of some sort. Buying in the
open market as a tool for portfolio mgmt has
been done for decades you probably just weren't
aware of it for whatever the reason. I swear ZH sometimes can't see the forest for the trees. Probably in your quest for accuracy and truth you let yourself be bogged down by minutiae that makes your crystal ball a little not so crystal clear.

[Voluntary Exchange]

For those of you who begin to understand that we are living under despotisim, may I sugget you read the excellet article at

http://www.lewrockwell.com/rockwell/misesian-vision139.html

to get some good ideas about what can be done about it to undue the problem and get America and the world back on the track to a decent life for the most people.

[Daedal]

TBT, son.

[Number 156]

Agree.

[D.M. Ryan]

Just factor in the option-ARM resets expected next year and the case for QE2 gets even stronger.

[aurum]

thats exactly right...we are finally moving out of the eye of the hurricane

[waterdog]

Cynically inclined- I did not use to be this way until I began reading the posts on this site.

Quantitative squeezing- the act of putting the USA's lemons in a vice.

[GeoffreyT]

The Chinee made some ornery noises when Billary tried to tell them not to behave like the NSA. Hop Sing got downright un-neighbourly towards the entire Cartwright clan.

Maybe Billary thinks that getting Hop Sing and his cronies to stop buying USTs would help her Preznitential pretensions in 2012 (or earlier if the CIA decides to off the Great Beige Hope). Not sure why Billary would want to be Preznit of a failed state, but you never know with them lezbeens.

US has mortgaged the Ponderosa to Hop Sing, and they still need Hop Sing to buy USTs ... cash.

You raff, you ruse.

Obvious troll is troll...

Cheerio

GT

[Anonymous]

your cynical attitude is being noticed comrade....:)

[Shiznit Diggity]

Huh? May I suggest making any future comments intelligible to persons other than yourself.

[Anonymous]

Amen!

[Anonymous]

it's quite intelligible but perhaps crossed that very clear but narrow line in ZH land where Marla will gladly provide IP info should Jim and Artemus come a callin'

[Grace]

Baw-haw-Haw!!

I haven't thought of the Wild Wild West since I was ten years old. But I got the ref as easily as I got the Hop-Sing/Ben ref. It's a generational thing ya'll... 60's TV.

[Master Bates]

I agree with you shiznit diggity. 

You know you must be spewing some words nobody can understand when shiznit diggity is like "wtf did that guy just say?"

[Anonymous]

Come on MasterB - if you aren't clever enough to decipher GeoffreyT, then you do not belong on ZH, and you best go play with yourself ...

[Anonymous]

I guess this all depends on whether Bernanke gets renominated right?

Regardless the wall of worry remains high for Treasuries and the dollar. Given how big a hole our economy is in, and how much trouble our banks and our retirees are in, I think that there will be plenty of demand going forward. As far as China? Don't you worry, even though they say they won't buy, they surely will. .. Didn't a news story break recently that they are now the 2nd largest exporter in the world? That's exactly the point, they are exporters and have been for decades. Their domestic economy take over in less than 2 yrs? Wishful thinking you all.

The dollar will continue to rise, regardless of whether QE2 is initiated or not. Why? Ask the millions of small business and unemployed in the real world: "There is no money out there". While all printing might be creating insane amounts of cash, all the debt that exists out there that is BS is going to get eliminated sooner or later....THAT is where ALL the dollars that are being printed are going. To replace those dollars that will completely vanish sooner or later. And even then that won't be enough. Deflation will be the order of the day. There is NO money in the economy, only debt...debt that will fail.

I'd give it around 2013 when we start seeing some of the symptoms of what this article portrays.

[Anonymous]

China was expected by WTO to overtake Germany as
world's largest exporter and did so by early estimates in
December of 2009.

[Mongo]

Wow, do you ever get to sleep?

[Anonymous]

Can someone please tell me when the fed cant print anymore and admit defeat? This story is becoming boring. ZH, The marketticker all say that the fed cant do this and the Fed cant do that, or the end of the world will happen, Yet they are doing it. Please explain what hasto happen for the Fed to stop their policy or i am just going to think that The Fed is doing the right thing and ZH and all the Fed bashers are wrong..

[Doug]

When you see tanks rolling down your street, you'll know the game is pretty much over.

[Number 156]

...and the price of 1 pound of bread cost 3 billion marks... er uh, I mean, dollars.

[WaterWings]

Chinese tanks...

[Anonymous]

Never ever fill a tank barrel with water before firing it.

Never ever ever do that.

Just don't do it.

-MobBarley

[Seer]

You're asking for the impossible.  If everyone knew what the Fed was going to do it would be impossible to maintain any sense of stability.  It would be like a listing ship in which everyone runs to the high side only to cause it to become the low side (and, perhaps, capsize).

That's what's so tricky about all of this, the Fed has to play the biggest bluffs in all of history.  It's even more tricky with fewer, more powerful players.  And then on the other side of the coin is the poor, general (unemployed and un-insured) populace which could explode and nullify everything.

Regardless, it's all pretty much headed for the toilet anyway, as growth as we've known it is dead.  We are, in effect, just shuffling the deck chairs.

[Mark Beck]

I think most financial analysts, with portfolio segments invested in Treasuries and cash (USDs), are watching the Treasury auctions to be at a rate which would finance Government spending. The FED will not bluff, it will just announce another Long Term Treasury buy program, to simulate XXXXX, you fill in the blank, growth, interest rates, employment, what ever the best buzz word at the time fits. The question is, once this starts what is the strategy for investment portfolios. Well, goodby USD, and a move out of US Treasuries. So this will not be 2008 where money moved from equities to Treasuries. Here we will see divestiture out of the US assets and debt.

One item not mentioned is that any increase in entitlements will place even more pressure on issuing debt. The one that I am watching is for SS to not be self funded in 2010. That is, more money going out than withheld from payroll taxes. If this indeed happens it will mean that the CBO estimate is off by 8 years. Although, it has to be revised by now, but perhaps not published.

Also, adding to the increase in debt, is the possibility of a new healthcare bill, although it is all but dead. We may incur in 2010 costs for another stimulus bill.

Perhaps by the end of 2010, it will become clear the actual date of default, or currency collapse. It really depends on the sequence of world events.

Mark Beck

[Jean Valjean]

One:

When money velocity picks up due to failing confidence in the currency...hyperinflation.

Or two:

When the manipulation of the gold market no longer works, signifying a weak currency to the sheeple and triggering number one.

If neither of those things happen, they can continue forever.

[hooligan2009]

congrats on a good analysis of the upcoming demand and supply for US treasuries. I suggest that you need to include three other areas.

1) The demand from a global perspective, that is, G7 + PIGS deficit funding and

2) the global consumers "draw-down rate", that is, the need by holders for their money back to fund retirement, health and house payments

3) the flow of global trade, that is, the net trade surplus and deficit supply of all currencies that is available for G7 + PIGS to steal, I mean borrow.

From 1) the Fed and other central banks have funded the "mark to market" effects of excess leveraged capacity by buying around 30% of capacity that is not required and continue to sponsor the misallocation of "scarce" tax payer resources away from benefits to tax payers (government for the people, by the people, etc, so atrocious and smug delegation of proper government to ivory towered civil servants).

From 2) consumers (or investors, as ou describe) actually need their money back at an increasing rate. Parallels exist for health and housing, but as baby boomers increasingly retire (and continue a ten year old trend of increasing in Japan) and live for twenty years, they want their 5% per annum in "drawdown" for the twenty years they have before they die. This 5% will increase in 5% increments. This is a "drawdown rate" and is the new cost of debt, that doesn't feature in any economic analysis that I have seen.

3) as global capacity was overleveraged, global trade nominal levels will settle at lower levels to reflect "correct" capacity and demand. The net trade numbers you allude to, should better reflect "petro-dollars" and other resources dollars as well "trade dollars" and a world map of money flow drawn up. As G7 + PIGS progress towards the failure of the macro economic model they use, other countries who have not failed (yet) like BRIC will spend their cash at home, not in G7 + PIGS economies. Trade and petro dollar flows are the source of funds, I think that you have addressed China, so well done, but not put it in the context of (somewhat ignorant and traditionally dollar friendly) petro dollars or the other BRIC countries local situtations.

Japan has shown that a ponzi scheme of failed Government can persist for decades. Whether this can happen in isolation or whether G7 + PIGS can do it is the question. There is a tipping point, but so far, the lunatics running our fiat (ponzi) asylums have convinced consumers that consumers are the lunatics.

[MrPalladium]

"but as baby boomers increasingly retire (and continue a ten year old trend of increasing in Japan) and live for twenty years, they want their 5% per annum in "drawdown" for the twenty years they have before they die. This 5% will increase in 5% increments. This is a "drawdown rate" and is the new cost of debt, that doesn't feature in any economic analysis that I have seen."

Outflows to U.S., Japanese and European retirees for the next 20 years. This guarantees under-performance of stocks and rising interest rates for the next 20 years, and it seems that even bearish analysts are in complete denial about this stark reality.

And all these retirees will be cutting back on consumption and downsizing their homes to cut back on taxes and utilities.

We will have to live with the massive forces of deflation for a long time, as the CBs of the developed world create a roller coaster for stock and bond prices with episodes of unrestrained money printing alternating with periods of restraint.

Fortunes will be made by those who can see reality and catch the tops and bottoms of the red flag waves on the investment beach.

[Seer]

And all these retirees will be cutting back on consumption and downsizing their homes to cut back on taxes and utilities.

Not necessarily.  After all, who is going to be able to purchase these homes formerly known as homes-as-nest-eggs?  Wages continue to be pummeled.

I would suggest that you're going to see a lot of boarding going on.  These "retirees" will be renting out rooms.  I suspect that more of this is occurring, given that rent is being driven down: with people losing homes you'd think that rent would be coming up a bit, but that's not the case; this means that the supply of rentals is greater than the demand;  prices are too high- resolution? people doubling up in residences (cheaper).

[TheGoodDoctor]

Yeah and they didn't just overbuild houses. But you are right, kids are moving back home, families are moving in with their parents, and don't forget the rent free tent cities.

[Mark Beck]

I would like to give you a heads up on what may happen if Government cannot pay its bills, and the FED debased the dollar as much as they dare, the program most likely to be cut first is Social Security. It is by far the easiest to whittle down politically, much easier than Medicare or Medicaid.

The point is, the Government will have to cut benefits. It is just a matter of which one will be cut first.

Mark Beck

[DoChenRollingBearing]

Naah, they'll just inflate it away.  SS not paying me is OK, I never worked long enough -- for others!

[kurt_cagle]

> Japan has shown that a ponzi scheme of failed Government can persist for decades. Whether this can happen in isolation or whether G7 + PIGS can do it is the question. There is a tipping point, but so far, the lunatics running our fiat (ponzi) asylums have convinced consumers that consumers are the lunatics.

However, Japan's ponzi scheme began in 1990 just when the West was beginning to go through a long term bull market, the Japanese economy was and is an export economy, and saving in Japan has long been considerably higher than in the US. This all served to soften the shock - turning what could have been a nasty collapse into a long slow decline.

None of those conditions hold true for the US. It's only strength at this point is the fact that the dollar is the reserve currency, and that is unravelling. It's also worth noting that the political will for any back-door funding (QE2, 401K taps, whatever) is also becoming increasingly untenable. I'd be far more likely to price in a stock market crash at this point at this point, and possibly a spike as the dollar shoots up and then just as quickly collapses.

Additionally, the PIGS aren't Japan. Japan's always had a fairly isolationist economy and political orientation. The PIGS are second tier financial players in a far more interconnected economy - and a lot of the strain on their economy is due to poor meshing with Germany. Thus, any collapse that happens there will be rapid, cause widespread discontent and even rioting, and will almost certain end up in the change of the governments, adding even more chaos.

[bc0203]

Agree with everything in your post.  One thing to add...

Whoever fails first gets the benefit of surprising everyone else.

As these major, debt loaded economies "fail," the process will become more predictable, and investors of all sizes will re-allocate their funds defensively, in advance, in a desire not to get burned.

This will cause governments to become more and more fast/sneaky in how they hide their actual insolvency.

[Anonymous]

Don't you mean "petro-EUROS" ... it's a brave new world!

[Anonymous]

While I find Zero Hedge to be the best source of commentary around. I still find even here a dearth of analysis of with respect to that status of US debt and the geo-political forces making sure that U.S. does not run out of buyers for its debt.

This is not just a financial equation. How will the western world secure it's energy needs without a massive U.S. presence in the middle east? How many western nations are going to be comfortable with a failed state in Pakistan?

Maybe the world would be kinder to Greece and its rating if Greece's military ensured the energy supplies to the rest of the western world. Logical?

[Dirtt]

In the 80's the average weight of a vehicle was 2000 lbs. In the 00's the average weight of a vehicle was 4000 lbs.

Near the end of the 80's I remember paying US$0.87 for a gallon of gas.  Any wonder where we are headed.  Demand destruction.  Yeah yeah yeah.  I know China and Brazil and India are growing like Barry Bond's head.  So is Petrobras.

[Anonymous]

Geopolitical Card Is On Deck. Forces set in place, to secure inversion, are deployed and in position based on corrupt criminal political control through global financial influence. There is absolutely no active defensive action in play globally, within any nation, to secure or protect the required return for labor. There is no active defense for individuals, public trust lacks cause for credit and the foundation for the required return for the general public is out weighed by debt/tax/leverage. Active duty defines ''New World Orders''. Separation is required, this means war around 2013 plus or minus. The geopolitical card on deck is the ''crisis'' card with the 9 1 1, call on hold and at hand, the Joker MIHOP LIHOP. The final solution, once this geopolitical crisis card play calls for the sealing of the New World Order fiscal tattoo, which is now upon this generation, the mark can not be removed, it is lethal. Ill liquidity; the strong delusion, the corruption of the leaders of the nations, defines the offer of temptation, the deadly track mark that well defines the revelation of the prisoners on death row arrested by their own conviction. The corrupt are waiting for their own judgment to come upon them, they have order it. That is contempt, the ''New World Order'' claim of dominion. It is a deadly bluff designed to keep you in play. It is the suicide solution manifestation defining the offer of temptation. If you accepted the mark of the self devouring beast, you are perfectly visible to all but those that have rejected temptation and are resigned to stand fast without having accepted the mark of contempt because, the Truth has chosen them and they have left the game and are not marks at the table. Leave with saving grace and get out now my friends. Take to the street, The Great Wal Mart of China is as dried up as the strong delusion behind the the Great Wall Street of Babylon, where Euphrates River of wormwood ran under until Cyrus diverted the flow. The Cup of Fornication is filled with the claim of dominion, the market at hand has stolen the the temple vessels and captured the want of the whore. A measure of wheat is now risen and the weight of the Mene Mene calls out the names written in the books, the Upharsin at hand. Woe unto the name found wanting and in possession of the number representing the inversion, for it is a name and number of a man.

People, if you are not out or are not now getting out, you shall perish. What is sustaining is the Truth, not contempt. Take the provision you have and do not look back. Look and the fiscal year of 2012. Now clean your shorts and launder into physical holdings without expectation to receive gain from contempt, divest completely, for the sake of truth, freedom, liberty and justice for all. Let the City of Babylon fall as a result of your exit. The Truth is not a choice, do not abort the host of the law because the law tells you to abort the host. You represent the host of the law, therefor, the New World Order offer at hand is obviously the offer of temptation. The revelation of temptation defines corruption and the deception in the offer is the claim of dominion. The global financial black hole is the revelation of the knowledge of absence because, the offer of this market holds all that accept it in contempt. Let no man go, that covets the knowledge of absence, without challenge. Let no claims of dominion be offered without Cause. Contempt declares the deceived and persons without care.

The fool rejects foundation, the host of the law, for the sake of the will of the fool, at the expense of the law. Lack of foundation is the knowledge of short term and the revelation of absence defined by the presence of the Truth, the Light and the Host of the law.

Let the City of Babylon, which is now all nations, fall. You must be risen in agreement, the Truth is not a choice. Be sealed by the will of God in Christ my friends, do not count down to extinction, be ready to receive the salvation of the labor of the harvest. The proper rate of return for labor is not a choice, it is the law, the meaning of life, the love of God in Christ, the body of the Lord of the harvest risen in agreement and the Cause sustaining life. The offer of liberation trumps the New World Order Card now at hand, don't buy sell or trade in this game of contempt. It's time to fold and leave the table with what you have received. Leave the three sixes on the table and get ''winning this game'' out of your mind.

[waterdog]

You keep sucking on that sausage pal and you are going to get worms. I am not talking about the kind you use to catch Bluegills.

[Seer]

Blaming others and or expecting salvation from other(s) is just plain dumb.

Look in the mirror.  We've all bought into this Ponzi scheme and now we're all going to pay.

No complicated story (biblical or otherwise) is necessary in order to understand why we've gotten to this point and where we're headed.  All that is necessary to know is that that which cannot continue forever won't, that infinite growth on a finite planet isn't possible, and that Mother Nature bats last (without "Her" resources we're gonners [read "destroy your environment and you destroy yourself"]).

[TheGoodDoctor]

Like in The Day The Earth Stood Still and Jericho (TV show)

That is my new tag line now.

Jericho bitches!

[Anonymous]

the usa is babylon and babylon shall fall.....

[Instant Karma]

Awesome article. Nothing that surprised me though. Basically, there's not enough money in the world to keep us afloat. Period. So, money needs to be created (QE public or surreptitious). And, we need a lot more Japanese guys in Switzerland willing to snag billions in Treasuries.

I had thought of selling some of my gold. Now, not so much.

[DoChenRollingBearing]

Don't sell your gold.

[Miyagi_san]

Its time for financial war bonds...Its your DUTY to country and future generations to unload whatever savings you have.

[docj]

ALL UR 401K R BELONG TO US, in other words.

[sangell]

Hey when I was in elementary school we had Savings Bond Stamp booklets. Kids brought in their quarters and were given stamps to put in a booklet towards a $25 dollar savings bond.

No reason the Department of Education couldn't again put the grip on little kids piggy banks and the NEA could keep the pressure on the young scholars. Those that didn't buy enough stamps could be denounced as unAmerican or made to stand in the corner.

[Anonymous]

looking back now, it would safe to say that the tax laws etc were changed to make the sheep , save money, in various retirement schemes, so that in the day after all the years of work and saving, all of this money sits, waiting for them to steal it. don't they just love it when a plan comes together. and all of those baby boomers thinking about retirement? what of them? good question. old men and women working at the store, sacking groceries and stocking shelves and getting in the way of high school kids......welcome to the new reality. my friend tells me. ha ha, look at my retirement account. it is growing at such in such a rate. i tell her. fine, you think that money is there. they go get it. show it to me. of course she can't. well if i get it out, i would be penalized. so they "allow" the sheep to "reap" tax benefits by saving, but in reality, it is programmed theft, and the sheep are now finding this out and are being dragged kicking and screaming into reality. what did george carlin say? its the american dream, but you have to be asleep to enjoy it?????
so it goes.....

[docj]

Yep, sure looks that way.

This doesn't end well.

[DoChenRollingBearing]

I cashed in my IRA in 2008, paid a horrible tax and penalty, but the rest is now mine.

It can be done.

[Seer]

Clearly, money is being pushed hard.  I've wondered whether it's not really some big recall of the USD?  Trying to create any global currency while many continue to hold USD (except the Chinese- the US doesn't care about them, as they've been looking to kill the "communists" for a long time now) would be problematic.  But... if concentrated in less "corporate" hands (after all, contrary to what many think, this is all a big fascist operation) would be the way to accomplish it: govt and business joined at the hip.

TPTB have to protect stability else they lose their positions of power (oh, and how sad That would be!).  The move, therefore, HAS to be toward some new economic restructuring: even the Chinese will have to give in, though, they, as happens to everyone who deals with the US, will ultimately get screwed.

[hooligan2009]

tipping point will come when there is a realisation that you will not be able to live off drawing down 5% of your savings for the rest of your life, and will instead have to give half of your savings to the banks and other profligate spending government departments, for zero benefit to you. then we may get a new economic system that works, and not one that is "gamed" by an unelected elite.

[blueskyscottsdale]

and for the simple folk such as myself, the difference between USA today and Argentina in the 1990s would be what exactly?

[Anonymous]

Latitude?

[Anonymous]

Evita was pretty. Hillary not so much so.

Otherwise, no different from Argentina.

[Mad Max]

1) Argentina has better women.

2) We have more guns and bombs.  Lots and lots and lots and lots more.

3) A decade.

[Dirtt]

We don't throw political rivals out of airplanes at 30,000 ft yet.

[Anonymous]

Why do I not believe you.

In fact, I strongly feel we invented the practice.

Oh those latin Americans are such badies.

They didn't learn anything from Anglo Saxons about conquest, did they.

-MobBarley

[Mad Max]

Perhaps not, but we do give some political challengers free international vacations (of indeterminate length) in unmarked small jets.

[docj]

1) Reserve currency status (for now)

2) Lots and lots more weapons

3) And uh, erm... Yeah, I guess that's about it.

[john_connor]

Great article TD. 

The idea that the Fed can increase short term rates is laughable.  If they did, it would be a political stunt, and it would have to be accompanied by an increase in interest paid on excess reserves.

Other than that, I see equities going down, way down, whether it happens sooner or later.  the smart money left the building long ago, and even Joe six pack has bailed in a lot of cases.  What you will see is a darwinian battle amongst the presidents working group of hedge funds, until there is one or two left standing.

I will say this, after witnessing the velocity of Friday's drop, I can't imagine what it will be like when the downside momentum really picks up.  I envision something like October 2008 to the 5th power.  It will be downright scary, and  there will be no opportunity to get in on the short side.

[lawton]

I think we may see DJ 5500 by the end of this year.

[Anonymous]

For those of us who lived through the 22%-in-a-day DJ crahsin October 1987, "October 2008 to the 5th power" will be a cake walk.

The hard part will be coming back from a big drop, something accomplished in the six months after the 1987 bust.

[Assetman]

Agreed, in many fronts here.

Zero interest rates at the short end are here to stay, despite more and more Americans realizing this is a quiet form of bank bailout.

QE 2.0 is also highly likely, but this will be a challenge to implement because it's a political timebomb.  If BB gets nominated and QE restarts with more MBS buying after March, the Senators who said "yes" will be history.  Of course, other incumbents are likely to be in trouble.

As it stands, those who want to see the reflation trade to continue are meeting with lots of resistance.  Investors so distrust the stock market, they are willing to stick money into assets with almost no return.  Given recent trading patters (on both up and down days) the incrmental buyers of equities are quant driven, not J6P driven.  While propping up the stock market gains an illusion of confidence, it appears that most people just don't buy it.

The window needs to be open for the Treasury market, especially at the longer end.  The Fed could purchase Treasuries again, distrorting the Fed balance sheet even more, putting more pressure on the USD.

TPTB probably should allow the stock market to pop, and engineer a flight to quality...it's preferable to have investors fund this deficit at long durations than have the Fed print their way to oblivion.  Perhaps those in the US are wating for something bigger to happen in Europe or Japan, maybe to hope a global move to Treasuries will happen.

The bottom line will be more looting by the financial elite-- the question will be what form will it take.  While those in power will try their best to fool the masses, the looting willb traced.  Obama has a heck of a lot more bark than bite, and will continue to get steamrolled by his economic advisers.  By 2012, I think Obama will be glad his one and only term is almost over. 

So will a majority of eligible voters.

[Anonymous]

Is the Obama 'Campaign' hijacking the Tea Party as it escalates the attack on Wall Street?

http://my.barackobama.com/page/content/ofasplashbsignon/

[Assetman]

If they can pull off the "We Want Our Money Back" BS, it will be the biggest end-around in the history of politics.

By allowing zero interest rates and further buying of MBS and Treasuries by the Fed, an Uncle Ben renomination would guarantee that the looting will continue.

Want our money back?  We will never get our money back, if the Fed executes their plan.  What Obama is doing is a very dangerous diversion...

[jomama]

no.

http://en.wikipedia.org/wiki/Kabuki

[Anonymous]

Tyler Darling. My warmest thanks to you for presenting this no-nonsense, beautifully structured, full of quality, and understandable piece. I am encouraged to read something that actually makes sense, backed up by official numbers. Also thank you for not littering it with too many abbreviations and traders lingo, that sometimes makes other posts and commentaries very difficult to follow. Very helpfull indeed!.

[Anonymous]

However should world equity markets crap out and performance in the EU zone zone drops, along with the ever growing financial disasters in the former east block countries which threatens the solvency of many EU banks.......and there could be a big demand for US paper.

I don't know what the shit is going to happen financially to this world, but I do know that it's never quite what we expect.

[Anonymous]

Bond funds had great returns in 2009 leading many individuals to invest in them.

If rates go up in 2010 and bond fund returns go down then investors could start pulling money out of bond funds leading to liquidation by the funds and increasing the supply/demand gap.

[TheGoodDoctor]

It's like the policies are created as to how the American investor is reacting to said policies. Seems like a vicious circle.

The thing I am scared about, is now that money was lost in equities by most everyone, they are moving to bond funds in their retirement.

I thought bonds were going to be the next bubble to pop. It's sad that people will lose more money if that is the case.

[asdf]

Debtwatch No. 42: The economic case against Bernanke

[lawton]

How can anyone even consider reappointing Bernanke when he cant even see the most basic things coming ? Unbelievable....

http://www.youtube.com/watch?v=HQ79Pt2GNJo

[sangell]

Yeah, I just finished Keen's article. Whereas before I had thought Bernanke akin to an old General fighting the last war, Keen makes it clear Bernanke doesn't even understand the last war he is attempting to reprise!

[TheGoodDoctor]

Very interesting article thanks for posting. What I glean from this is that as aggregate demand drops so will GDP thusly continuing to worsen our situation.

[SWRichmond]

Yes.  Higher rates = higher payments and less economic activity to produce tax revenue.

[NRGTDR]

OT here but good info to get out:

http://harveyorgan.blogspot.com/

1/23 Commentary:

......

On Friday, the Dow retreated by 212 points and the Nasdaq by 61 points.   As for gold, the precious metal declined by $13.50 to 1089.20. During the physical time zones, gold saw brisk action rising to 1096.00 but as soon as the afternoon fix was completed,the not for profit gold cartel sold massive contracts on the comex and drove the price to close at 1089.20   Yesterdays, volume was immense at 260,000.  They do not tell us switches anymore, but from the data it looks like around 20,000 left the Feb. contract to the April contract.   At the conclusion of my commentary, I will forward to you results of the comex gold and silver trading for yesterday.   The volume of gold trading at the comex on Thursday turned out to be 328000.  In a rather strange development, the open interest declined by only  2400 contracts on that huge volume. This no doubt infuriated our banking cartel as they could not shake the leaves off the tree.  The bankers had their own problems to contend with, with the announcement of Obama that the USA was going to restrict trading by bankers.  I will delve deeply into this in my commentary today.    As for silver, the volume on the comex was an astounding 51000 contracts  (250 million oz).  To give you an idea of the amount of silver offered:   the world produces 500 million oz of silver in a given year and have no above ground strategic supplies like their richer cousin, gold. Thus in one day, the comex traded 1/2 its yearly production.  What is also strange, the comex is not the world's largest trader in silver and gold.  That belongs to the LBMA which trades on a daily basis of around 100,000 contracts or 500 million oz of silver and for gold around 2100 metric tonnes. (75000 contracts)  In gold that equates to a full years production of gold sold at the LBMA in one day.    In another strange development, the OI in silver (basis Thursday) rose by 721 contracts to 126941.  Please recall that silver has lost almost 2.00$ per oz and yet the OI has gone up????   As for gold, we are nearing the completion of the Feb contract.  It goes off the board on Jan 26.10 as does the options. The OI for February stands tonight at 197000 which is extremely high for 4 days to go. In another development we are seeing strange announcements at the comex at the various warehouses.   For gold:  16 tonnes of gold (physical) was adjusted out of the dealer inventory into the investor's inventory.  This caused the dealer inventory to fall to a dangerously low  1.8 million oz or 18,000 contracts. This is the amount of gold that is available to be delivered upon!   For silver:  2.4 million oz were removed from the dealer inventory to investor inventory.  This caused the level of dealer inventory to fall to a dangerously low 47 million oz of silver or 9400 contracts of silver.   To boot, for January options (January is a non delivery month for both silver and gold)  in gold, a huge 2808 contracts are already standing for delivery  (280 thousand oz of gold or 10 tonnes of gold) This is extremely high for just options in a non delivery month.  Not only that, but a further 45 contracts are standing which have not been hit. I would like to point out, that this does not include February options which expire Jan 26.10.  There is no doubt that our wicked bankers will be trying to keep the option holders from exercising contracts.   In silver: the January options hit for metal total 286 contracts or 1.43 million oz of silver.  Only 1 contract remains to be hit.   There is no doubt that this coming week will be extremely volatile as the bankers wish to get those long holders from taking delivery.  

[Carl Marks]

Look out for counterparty default in GLD.

[SWRichmond]

Look instead for a steadily rising "premium" for physical gold as the paper and physical markets diverge.

[Anonymous]

This is interesting stuff, but I'm starting to think they can keep this paper game going for as long as they like. They don't have to settle with physical, so where do we see the end of it?

A couple more years of this and gold's back may be permanently broken. Back to "commodity" status as people look elsewhere for a place to be.

[Anonymous]

High quality research.

How does this pay for TD to do this?

[Anonymous]

Bernanke should be trial and executed because of all the misery he brought upon humanity.

Following generations will find him guilty of destroying; capital, business, and lifes all over the world.

FEDs financial terrorists are far more destructive than Al Quaeda.

[Anonymous]

"A major wildcard for 2010 Treasury demand will come from commercial banks, whose $1+ trillion in excess reserves, courtesy of flawed monetary policy, may be used if not to spur consumer lending, then at least to acquire treasuries. As was shown previously, banks held only $200 billion in Treasuries at the end of 2009, making them the second to last holder, yet the massive dry powder on their books, as well as possible political prerogatives, will likely make this sector a major purchaser of Treasuries.

Empirically, banks add to their Treasury holdings at the end of recessions, when banks have capital to allocate, yet consumer and small-business loan opportunities remain weak."

With loan opportunities remaining weak for the coming decade, the Treasury will have no problem funding issuance through the massive excess reserves of the commercial banks. Couple that with the increase risk reduction in the US investor, and the government will have very little problem funding increased debt issuance.

[SWRichmond]

the government will have very little problem funding increased debt issuance.

Yes, but remember, government spending is unproductive.  So they issue the debt, then what?  Deficits continue to rise, and they need to issue more debt to pay the interest on the earlier debt.  The debt trap still is sprung.

Isn't it?

[Madcow]

Funding for debt is drying up not because of voluntary preferences for asset classes or yields or sovereign exposure ...  Funding is drying up because NEW CASH can't be created by the busted fractional reserve fiat debt is money fantasy machine.  That's all that matters.  Without new cash, all the rents, bonds, debts, etc can't be "serviced" and its game over. 

There's no escaping the deflationary vortex. the DJ:Gold ratio will go back to 1:1. probably within the next 12-18 months.

Many people think Gold is over-valued at $1100. I completely agree. 

A DJ forced to reckon with true economic value of assets, liabilities, consolidated balance sheets, etc etc - would trade below $900.  

Once we're back to pre-1980 levels, the asset market can begin to heal. But first, Obama is going to be forced to go on national television to say something like "sorry folks, but all that money you've been investing in stocks, mutual funds, insurance policies, annuities, REITs, etc - is GONE. you got tricked fair and square, and now its time to move on."

[assumptionblindness]

You forgot to mention sovereign bankruptcy, martial law, and global geopolitical chaos.  Deflation run wild! 

Where's the optimism, Madcow?

[Anonymous]

I am in banking, specifiacally risk management for community banks. I am hearing rumblings that because of this "liquidity scare" and over 1000 banks eventually going away, the Feds are going to use this opportunity to demand banks hold at least 10% of earning assets in Treasury's. There are over 7000 community banks in the US...do the math and you will see that this will more than accomadate the future supply.

[Hero Protagonist]

Any idea what the break down is currently of those 7,000 banks with regard to their "earning assets"?

[the grateful un...]

i know nothing about banking, but i envisioned your rumor some time ago, the Fed has a whole new range of powers, specifically the power to open the books on any of its charters, and demand greater reserves. Post crisis I recall a story about community banks drawing hot money, sort of like baby vampire squids, these banks were bringing in out of state cash, raising capital, while their retail business was next to nothing. To me backing the collateral of these banks with zero interest rate collateral (at the point of a gun, or pen, would facilitate more of the same, free hot money for everybody, that money in turn is malinvested in the stock market, or the carry trade, through derivative paper, I don't know. The force feeding of  Treasury paper to regional and community banks makes every retail banker an investment banker. Is that the solution??

[Anonymous]

i am not sure i buy that....if there are ~16t usd
assets in banking per the article and ~1% are in
treasuries today that means 9% conversion of assets
to treasuries remains....the banks are woefully undercapitalized
if figured on a pre-fasb mark to market basis....
so the only other location of assets / capital is the 1t
usd sitting in the fed...(unless the banks sell
good performing assets for treasury junk)....

9% of 16t is 1.44t so the banks can't meet the
10% requirement although some will get close....

my concern is that the 1t usd sitting in the fed
may already be in treasuries and that it is not
truly cash - frn....

regardless of the form of the excess reserves
it means that ben cannot possibly implement
reverse repos or any other trick to sop up
liquidity and impose a treasury holdings requirement

keep a watch on excess reserves as qe continues
until march...i bet those reserves rise to the 1.3t
level as ben buys more mbs and takes them off the
books in an elaborate shell game....

clearly these are acts of desperation....the
titanic did not sink immediately and there
was the orchestra playing tunes until the bitter
end...

this shell game is more proof that ben will be
reconfirmed...who else could manage this joke?

[Assetman]

Heh... I'm familiar with a $2 billion community bank that is already well beyond the 10% Treasury theshhold.

Many have simply exchanged agency debt or MBS for Tresuries on their balance sheets.

[Anonymous]

The Treasury Department's estimates that 2010 tax revenues will be $2.2 trillion which would be an increase from 2009 fiscal year revenues of $2.1 trillion.

Realistically, the trend in the first quarter (Oct, Nov, Dec) indicates tax revenues will fall this year. In the best case, to $2 trillion and, in the worst case,to $1.8 trillion.

This easily increases TD's funding gap to $800 billion - $1 trillion.

Also, as for a stock market crash being a solution, I disagree.

A stock market crash will certainly damage the economy again, and tax revenues would likely fall to the worst case $1.7 to $1.8 trillion. As well, I think it's almost a certainty Obama would again "stimulate" the economy with even more government spending.

Expenditures would likely rise to around $4 trillion. Basic arithmetic shows the amount of debt needed to be issued would increase from $1.7 trillion to around $2.3-2.5 trillion which would mean that the supply of treasuries needed would increase to match and possibly exceed any new demand due to flight to safety from the market.

I believe the Fed will be forced to continue to monetize debt at an increasingly greater pace. If you look back at previous episodes of hyperinflation, they are almost always due to the central bank monetizing government debt. They are not due to banks making loans to consumers.

[kurt_cagle]

I don't think that most people feel that the stock market crashing is a necessary part of the process, save that in the process of crashing it has a possibility (albeit slim) of inflicting enough damage upon the parasites on the system to shake them off. On the other hand, I think a lot of people (especially on ZH) expect the market to crash at some point as the patently impossible valuations come back to some semblance of reality.

The reality is that at this stage, there's been a significant malinvest into the banks to make investors whole. This has benefited a few very wealthy, powerful people, largely at the cost of (much higher) future taxes on everyone else. There are relatively few people who would argue that government investments into energy R&D, communications technology, education, infrastructure, green-tech and bio are not worthwhile, there are far more who feel that paying back gamblers who made bad bets is a waste of money. The stock market's valuation at this stage has been due almost entirely to fairly transparent manipulation on low volume by a few specialized traders, made largely with "borrowed" US funds.

Finally, I think Obama's options for stimulating the economy are becoming increasingly limited. Politically QE2 is a non-starter, as Bernanke is losing support even among those who previously championed him. Thus the tough rhetoric out of Washington these days - it's becoming more likely that Obama is beginning to realize that the banks have no interest in playing ball, and are becoming more liability than asset.

If BAC, C, WFC, GS, etc. are forced into failing, then a great deal of debt gets wiped out - essentially the equivalent of a default. Investors, those who took the risks, get their haircuts, and quite possibly for a little while all investment in the US would stop ... but it would eventually resume, because investors are looking for yield. The alternative would be to let the dollar go into freefall, which causes all kinds of problems on the international stage, and will only weaken the props under the USD as reserve currency.

[ex ante]

the problem with your conclusion is that EVERYONE already has the trade on.  they are all parked in the front end waiting for yields to rise with the curve is at the steepest level in history.  with all the supply coming in the front, they would likely lead the sell off and flatten the curve.  at 4.5% the long bond yield is not that far from where it should trade with a very slow growth economy.  sure it is very likely there will be a supply induced sell-off but you will likely see a 4% 5YR and a 5% 30YR.  if the curve flattens and the massive inflation premium is removed the dollar will rally and gold will get obliterated.  the move we had in Dec was just a taste....

[Gordon_Gekko]

...the massive inflation premium is removed...

ROTFL! Just try telling that to Ben Bernanke who prints a trillion everyday just to wipe his ass with it. Keep dreaming dude. 

[SWRichmond]

at 4.5% the long bond yield is not that far from where it should trade with a very slow growth economy.

What growth?  You mean like "The Recession is Over!" growth?

[buzzsaw99]

W was prez and ran huge deficits and LT rates fell.

Webama took over with insnae deficits and rates fell.

The money always mysteriously appears, fundamentals have nothing to do with it. "They" decide everything, the info we get is all for public consumption. Were any of us privy to the phone calls between Buffett, Lord Blankfein, Paulson, and Geithner? If not it means we don't know jack shit. They own it all, we are peons.

[SWRichmond]

The regime of falling interest rates is over.  Rates are as low as they can go.  The purpose of QE is to simultate negative interest rates.  Our lenders recognize QE for what it is.

The U.S. government has probably already been forced to promise to demonstrate U.S. commitment by "making the U.S. citizens pay"; our private retirement assets have already been promised to the pot.  It's every man for himself, and the government controls the courts, the media, the exchanges, the banks, the value of the currency, and the rules.

[Anonymous]

A very solid analysis marginally undermined by some lack of context (what else is going on that may affect--even positively!--the demand shortfall seen here) and your preference for hyperbole ("plunge", etc.)

Some of the commenters here have provided some context, such as how the problem in the US may be better/worse than the problem elsewhere in the world. I also agree with one comment here that the Fed won't declare QEII, it will just work behind the scenes to this effect.

[Anonymous]

Hello, can't you see the obvious solution? I admire your hard work, mr. Durden, but the heart of the matter is that the US federal government does not need to issue debt in order to spend. Zhu Min's words point at the same. "there simply isn't that much money!" Don't issue it, then! All you need to know is that a) the US is sovereign in it's currency and b) it's got plenty of people & organizations it can tax.

If you're worried about the size of US public debt vs. GDP, check the good ole CIA factbook: https://www.cia.gov/library/publications/the-world-factbook/rankorder/21...
FYI, the US ranks 61st. Canada, btw, 21nd. If you consider Canada a wealthy country, it follows that the US, with it's bigger economy, can easily support public debt twice as large. Suppose that the president announced a jobguarantee. If he doesn't, suppose he succeeds in creating jobs by some other means. More people working means more tax revenue. Wouldn't you value that over any discussion on issuance of public debt or it's size?

[Seer]

GDP is pure crap!  In it you'll find such things as cleaning up toxic dumps; yeah, right, a "product!"  I won't even talk about the "contributions" by the financial sector!

[Anonymous]

take a prozac and have the rest of your frontal
lobotomy completed...

marginal productivity of debt is negative....

what i don't get is how people who were whining
about bush crime syndicate's baby bush's deficits
can now clamor for more....

thanks for sharing the cia's point of view...

man are you a fucktard...

[Anonymous]

Excellent reading, but...

ZH opposes QE, yet at the same time complains about falling price levels, unemployment, etc. I'm confused, unless one really wants financial armageddon.

The problem is not the introduction of more base currency into the system per se - this is needed. The problem is the failure to accompany QE with heightened capital asset ratios and stricter regulation (including on foreign banks operating in the US) in order to wean the entire US economy off of credit expansion, and limit the hyperinflationary blowback. QE + bank regulation = good. QE + no bank regulation = hyperdependence on short term credit and more moral hazard.

Given the massive debt overhang and high unemployment, a strong dollar now seems like it will steepen the already steep yield curve due to expectation of longer term monetization/default in order to subsidize the shorter term low rates.

I entirely fail to understand how one can defend a strong dollar, btw, and at the same time complain about the US trade deficit. Perpetuation of a strong dollar can only increase the trade deficit, which will be accompanied by huge fiscal deficits... But even worse is perpetuation of a strong dollar that is unsustainable, implying a future devaluation - in that case, we have all the problems of a strong dollar, but the carry trades still yield high commodity prices. Again, worst of all worlds. The better approach is a rapid, single, sharp devaluation combined with fiscal constraint (not going to get either). The only pro-strong-dollar argument out there is that we've spent 30 years ignoring foreign energy dependence.

[kurt_cagle]

We're in a race to the bottom - everyone wants to make their currency weaker than other currencies in order to stimulate exports, but that strategy clearly won't work, especially when you're an import-oriented country (such as the US clearly is). More to the point, it can be argued that one of the responsibilities that the US has as the holder of the reserve currency is to maintain it's stability, and it's been the abrogation of this responsibility (through poor monetary mismanagement on the part of the government and the corresponding lack of oversight on the financial industry) that has led us to where we are today.

Raise interest rates, and it will cause the TBTF banks to fail, and healthier ones can then come and pick up the slack more efficiently. Raise interest rates, and you attract foreign investment in a world where yield is currently low. Raise interest rates and you purge the system of excess capacity. Yes, unemployment then shoots up to 25% for a year or so (and you spend accordingly to minimize the pain on those who can't afford it), but after a year to eighteen months of that, you've cleared out a lot of deadwood, you see a lot of new investment into more contemporary systems and solutions and you change behavior of people accordingly to become more responsible with their own economic health. 

The other thing that would need to happen would be in re-establishing localized energy production, preferrably in the greenest way possible. Most people forget that a significant amount of that trade deficit is due to the purchase of foreign oil. Re-orient for a sustainable economy where the US moves towards a net neutral stance - it's trade balance becomes zero with a small amount of variability. This would mean shifting away from a pure consumer economy (something that's patently unsustainable) and more towards more localized internal markets.

Once the US economic system became more healthy, then it could shift it's stance again, but this is one of those cases where the US has to get better before it can help anyone else.

A strong dollar is only bad when your economy is predicated exclusively on being a net exporter, and the US hasn't been a net exporter for years. However, policy is still being developed as if it were. The disconnect between policy and reality is now making the system unsustainable, which means that unless it is managed, the snap-back will be chaotic and catastrophic.

[What_Me_Worry]

Absolutely amazing write-up.

Imagine if someone from the MSM tried to articulate this to their viewers.  They might as well just be talking to a tree.  Good thing the good men and women running those network are caring enough to shelter everyone from the bomb about to be dropped on them.  They, also, are doing "god's work".

Ignorance is surely bliss.

My only counter-point.  If the fed monetizes yet again, couldn't that spark another temporary rally in the market due to the same tired argument of "all the liquidity sloshing around"?  I'm not saying it wouldn't end in tears.  However, the market seems to be a function of liquidity instead of valuation.  Everyone is willing to pretend now, why would it be any different for the rest of 2010?

I'm in the wild-card camp.  I think they make up some bogus excuse that they must raise rates to tackle impending inflation risks (if the market manages to hold up into the current drop).  All along, their reasoning is just to scare people back into treasuries.  Even a simple quarter point could do that.

[deadhead]

I still say the tipoff on the move to push 401k, ira, pension funds into treasury confetti was a couple of months ago when both Obama and Geithner were talking about the "time for Americans to save" again theme.

Start watching for the bigger push to come to move money into Treasuries.

[WaterWings]

Indeed. Coercive patriotism.

[Gordon_Gekko]

I will prefer death to buying treasuries.

[Mad Max]

Gordon Henry.

"Give me physical or give me death."

[Anonymous]

Dude, you are working way too hard.

[Anonymous]

$3 trillion of money market funds earning 0.02%. That's the funding source. No QE necessary. Just pay 1.5% on 3 month t-bills and you'll draw $1 trillion easily.

[Anonymous]

Tyler, I have a feeling you and Sprott are dead wrong on the household sector. You said the following:

"Yet as a reminder, the two key components of Household Treasury holdings include Savings Bonds, which are what households actually buy when they wish to purchase government debt, and Other Treasuries, which are marketable Treasuries, and which average households have no access to."

Do you seriously believe that households do not have access to marketable Treasuries? Have you heard of something called a brokerage account? Last year alone I went from $0 in Treasury holdings to putting 50% of my assets in Treasuries. I purchased all of them on the secondary market. I do not need a lecture about being stupid for buying Treasuries. I'm also buying massive amounts of gold and silver. In my mind, the only things worth owning are Treasuries, gold, and silver. I will say this: the 11/2018 3.75% note I own is already trading 20 basis points under the 10-year rate. As the Fed is forced to keep rates btw. 0%-1% for years, I will continue to watch the 8 year 10 month note I own turn into a 7 year, 5 year, etc. and watching the yield continue to fall over time, regardless of what the 10 year does. Time is on my side. I will not sell it prior to maturity, so I do not care how low in price the note could go if for some reason the Fed grows a pair and does hike rates. And, in the meantime, if Treasuries rates want to march higher, I'll make a boatload on the gold and silver I own, while collecting a 3.75% yield (state tax exempt, so yield is effectively higher).

[Gordon_Gekko]

I do not need a lecture about being stupid for buying Treasuries.

I think you do, because you are. Well, did you ever consider the possibility of the currency in which the bond is denominated (i.e. the dollar) crashing? Would you be satisfied with a 4% return when food prices are rocketing 10-20% a MONTH? The currency is only as useful as what it buys you - period. 

[laughing_swordfish]

Well said GG.

Why is this fool putting only 1/2 his money in Au or Ag?

The ANSWER IS: GOLD (and possibly silver)...BITCHES!!!

[Master Bates]

You're right.  He should put ALL of his money in an asset that will soon be in a downtrend, and most likely already is.

.end sarcasm.

[Anonymous]

I have most of my money in 10 year treasuries. Yield can't go up above 4%. Tie ins to mortgage rates would neccesitate Fed purchases of the 10 year should this happen, so potential downside is small. Upside is large if we have a stock market crash. If status quo prevails, I'll just enjoy my coupons. I also have 20$ of my money in physical gold, jsut in case!!

[Gordon_Gekko]

US Treasury is the most risky/toxic asset on the planet you can buy. Might as well just take out all your cash from the bank and set fire to it.

[Anonymous]

he's doing the slow burn for the weiner roast
he is planning....

[Pike Bishop]

As a Main Street Civilian to the intricacies of Markets, thank you for the assessment and explanation. Although I'm sure there are probably implications for nuances which I lack understanding, the message is clear. Through artifice and intention, we have juggered the bond markets into a nexus of accumulated risk. The dynamics being some combination of a perpetual motion machine and a Ponzi scheme. One only exists in delusion, and the other falls upon itself by it very weight. And these risks can have stunning impact on the economy, here on the ground.

I would like to add to the discussion that history according to Simon Johnson (and (consistent with machinations to date) would indicate that any shortfall in demand for Treasuries would require the rounding up of the usual suspects. Every oligarchical regime or corporatocracy continues to flog the peasantry, until the national economic seed corn has been devoured, along with the feed corn.

An obvious strategy being to return the bounty from this annoying (to them) habit of saving, to subsize the fumbling illusion of a recovering economy.

One way or another, they will cattle-herd it back into their sovereign debt game. If it is going to be capital which no longer supports headliner GDP spending, then it will be commandeered for (their) next best utilization.  Whether they push it or pull it, is immaterial. The game must continue, until the economy catches up to support its weight.

The fundamental fuck-up being,-- the longer you play the game, the more you diminish the economy's ability to come to the rescue. Plus when it gets there, it is so tattered and ugly, one must wonder for what the effort was.

"Hutchins, it's getting cold in here. Throw some more peasants on the fire."

[Seer]

Excellent!  Yes, often nuances are nuisances, distractions.

The "economy" won't be able to pick up because it is predicated on unsustainable consumption.  It's going to start getting really cold!

[Gloomy]

I have most of my money in 10 year treasuries. Rate is capped at about 4%. If it goes higher Fed will buy them to keep mortgage rates down. If market crashes I will make a nice bundle. If not, I'll just enjoy my interest checks. I also keep 20% of my stash in physical gold, just in case!

[Gordon_Gekko]

It's funny how happy you are having invested your money in "Guaranteed Certificates of Confiscation". The money sucking government machine's price managers have convinced everybody that it is great to buy something that THE FED IS ALREADY "BUYING" WITH "MONEY" CREATED OUT OF THIN AIR, and even better if you buy it during a crash. So let me get this straight - the stock market crashes because the US economy has cratered but then you go buy it's bankrupt government's debt as a "safe-haven"? ROTFLMFAO! Jesus man! Learn to think for yourself instead of blindly following whatever some idiot "economists" (even some bloggers) happen to spout. Really, there are very few humans left with a functioning brain these days. BTW, ever heard of something called purchasing power?. You are assuming the dollar's purchasing power will remain constant throughout your life, when in fact, it is decreasing exponentially.

[Gloomy]

   Well, having doubled my money during the market crash, I think its a bit unfair to criticize me so harshly. You know nothing about my investment skills.

   You are way too linear in your thinking. The Fed will monetize successfully for a long time. Sure, the day of reckoning will come. I think it will be more than 10 years though. First, Japan, China, and the Eurozone will implode. We'll get ours eventually. And by the time that happens I'll be long out of treasuries. If, a black swan hastens the day, gold will go up enough to more than make up for my losses.

[Seer]

The Fed will monetize successfully for a long time.

Are you confusing hope and fact?

If, as you imply, the Fed is able to be so successful, then don't you think that these same powers will, when the time comes, be successful in keeping you from being able to get Yours when You think the time is right?

Perhaps Treasuries will one day be good for shining gold bars?  Then you'd really be sitting pretty!

[Ned Zeppelin]

I dunno.  Cheesy puffs and LCD TVs still seem to be cheaper at Walmart.

[Cindy_Dies_In_T...]

Gloomy:

Facepalm as to Treasuries.

[Anonymous]

I look at our money supply as real money and magic money. Real money as an example is what was paid into social security and removed and replaced with IOU`s. Magic money is the money stacked to the heavens in the Feds back room. Thats the money they use to buy part of the debt and in return get interest from our Government on money they never had to begin with. I`m going with a push to grab the only real money left, money in our 401k`s and IRA`s. A push for forced participation to loot the last bit of real money around. Then not another peep until the morning we wake up to total default of our money and the rumble of United Nations tanks rolling into town to quell the unrest. A small few live happy everafter.

[simone]

How apropos for "Zero Hedge" to conclude their exposition with an admonition to hedge.

[THE DORK OF CORK]

Could you let little old Ireland come into the union - we would like that reserve currency thingy ,instead of paying taxes you print some money, sounds good to me

I am sure that the Kennedy clan would be more then happy to have us now that Massachusetts is no longer a shoe in for a future Kennedy.

[RobotTrader]

Trying to win the votes of fiscal moderates, President Barack Obama
formally endorsed legislation Saturday creating an independent
commission with the power to force Congress to vote on major deficit
reduction steps this year, after the November elections.

Read more: http://www.politico.com/news/stories/0110/31899.html#ixzz0dYj4LqO1

[Anonymous]

So why exactly do we elect our Congress & Senate Critters and bestow on them the power to tax and spend 18 Politburo members would suffice?

I'm sure Pelousy & Red will endorse this un-Constitutional power grab...they've had the practice.

What a friggin nightmare.
nmewn