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Goldman's Jim O'Neill On The Consequences Of The 10 Year Hitting 5%

Tyler Durden's picture




 

Here's a hint: it's all great. Just like the 10 Year hitting 0% was great for stocks, Jim explains why its round trip bacl to 5% is even gooder. In fact, it may be one of the goodest things to ever happen to the gnome underpants business that Goldman suddenly believes the US economy is: "I would guess that GDP growth could be above 3 pct, and it would not surprise me if some start forecasting close to 4 pct soon...checking my simple stats with Jan Hatzius this weekend, the US stock market would “only” need to rise by around 19 pct in order for the 168 bps rise in government bond yields to be entirely neutralized...Are 5 pct US 10-year yields and an S+P of 1475 possible in 2011? We shall see. In my opinion, a 19 pct rise in the US stock market seems quite likely. As for 5 pct bond yields, I think they are much less likely, but not impossible. If they did occur, it certainly wouldn’t have to be for negative reasons." That's all fine and great even if it is totally and utterly insane. The real win here, and it may be hidden at first, is that we now have not a phrase, but an entire essay to challenge that all time dumbest thing ever uttered: "If it weren't for my horse, I wouldn't have spent that year in college"...

From Goldman Sachs Asset Management:

WHAT WOULD BE THE CONSEQUENCES OF 10 YEAR US BOND YIELDS GOING TO 5 PERCENT?

In the past two weeks, we have witnessed a remarkable rise in US interest rates. Those people who are one step removed from the financial markets might not be really notice, however, since the level of interest rates is still remarkably low. But, in the past 2 weeks, the rise across the whole maturity spectrum of US rates has been quite noteworthy. The topic was discussed by John Authers in Saturday’s Financial Times. According to John, 10-year rates rose 14 pct on Tuesday. And, since their absolute bottom on October 7th, they have risen 37 pct. As I shall discuss below, this rise has led to numerous discussions, many of which suggest that the Fed’s so-called “QE2” has not worked. Others suggest that this rise is the work of bond market vigilantes punishing the US ala European style for fiscal excess, and a small number acknowledge, in fact, that it simply recognizes that the US economy is suddenly looking quite a bit perkier. The latter argument is my own preferred one. More on this later, but the fact that shorter term interest rates have risen sharply in my judgment supports this view.

US 2-year note yields have risen from around 0.38 basis points (bps) to around 0.64 on Friday – a near 70 pct increase! Presumably, this part of the yield curve is less vulnerable to pure market forces and more closely related to perceptions of central bank policy over the next 2 years. If this is correct, then I can’t understand why the more negative assessments of rising rates are appropriate.

WHY HAVE INTEREST RATES RISEN SO ABRUPTLY?

Of course, none of us really know or never will. There appears to be 4 possible explanations. First, the most abrupt rise happened last week, coinciding with signs of an agreement between President Obama and Congress for an additional fiscal stimulus. Given the underlying fiscal deficit and debt situation, which on a cyclically-adjusted basis appears to be on a par with Portugal, the bears are arguing that the vigilantes are suddenly out in force, expressing their distaste for the wanton disregard of any kind of budgetary discipline in the world’s largest economy and major reserve currency. While this is certainly possible, I am far from sure that it is the case. If it were true, how come the Dollar rose during this period, and US stock indices continue to make fresh highs?

Second, some bears also argue that, possibly related to the first point, it is the beginning of an inflationary surge in the US and the appropriate punishment for the lavish monetary and fiscal stimulus that has been applied to help exit from the severe recession induced by the housing collapse and credit crisis. This seems even easier to refute in my view, as much of the rise in yields can also be seen in “real yields” through the TIPS market, and most measures of inflationary expectations have been quite stable.

A third argument, also possibly linked to the others, is that it is simply recognition that, whatever the state of the economy, there will be no more quantitative easing given the hostility in which QE2 was greeted, both by many politicians domestically and by overseas policymakers. While it is probably the case that the Fed is somewhat surprised by the strength of opposition expressed to their move, my view is that the Fed will judge their future monetary policy needs and obligations by both the actual evidence and outlook for real economic growth, employment and inflation.

The final fourth and quite simple argument is that, “It’s the economy, stupid.” In the past few weeks, with the exception of the November payrolls, most important coincident and lead indicators for the US have improved notably. Of most importance, there has been a sharp improvement in weekly jobless claims, a good guide to underlying unemployment and a pretty good predictor of the stock market. The November manufacturing ISM survey kept hold to much of its previous monthly outsized gains and, towards the end of last week, the October trade report showed a further sharp improvement in exports. If you add the possible 0.5-1.0 pct stimulatory impact of the budget deal, it is looking more and more likely to me that 2011 is going to be an “above trend” year for US real GDP growth. I would guess that GDP growth could be above 3 pct, and it would not surprise me if some start forecasting close to 4 pct soon.

If the latter explanation is conceivable, then this would sit more easily with what has happened to all financial markets, including the stock and foreign exchange market.

I have thought since late September that it was quite possible, even likely, that once the mid-term elections were out of the way, the negative mood surrounding the US might lift. Indeed, I have joked on a number of occasions that everyone I met seemed to think that they had a below consensus view of the US economy. Well, this is no longer the case. And, for those that stick with a negative cyclical outlook, they have got to be hoping that rising US interest rates choke off the budding recovery.

HOW MUCH MORE CAN THIS MOVE PROGRESS?

I have 2 completely contrary opinions.

The first, and the one I am assuming, is that in the near term, US rates will not rise much further. I had thought back in September when I first smelled signs of stronger US growth than generally perceived, that if the data started to back me up, then it would be likely that the case for QE3, i.e., even more Fed easing would quickly fade and the US 2-year note sometime in Q1 2011 would get to 0.75. That is now only 11 basis points away, a mere 17 pct! I assumed that 10-year yields might manage 3.50 pct, a mere 18 bps and now just 5 pct away.

If the Fed is conducting policy on what might be referred to as an “output gap” basis, then it is going to take a lot more positive growth before the Fed gives up its recent concerns and those stated reasons which led it into its last monetary easing. While the view will vary depending on individual assumptions of the growth trend, some key Fed officials like Bill Dudley have used phrases like “many years” in describing how long the Fed might have to stick to its current policies.

For the 2-year note to move up to 1 pct and beyond, I think the Fed will need evidence of 5 pct real GDP growth for 2011 before that were warranted. Of course, this strength of GDP growth is not impossible and the next month’s ISM and payroll data are likely to be highly illuminating.

If 2-year notes don’t move much above 0.75 pct, it is tough to see 10-year yields rising much above 3.50 pct unless the darker interpretations from above were the main culprit, i.e., fiscal profligacy and sharply rising inflation expectations.

The second opinion is very different.

Within a couple of weeks of my move into this new exciting phase of my life, I started to spend quite a lot of time wondering about the “consequences” of 5 pct 10-year US bond yields. There are many reasons why this came into my head including that, at some stage in the future, if the US economy returned to normal health, 5 pct would be the likely 10-year yield. Such a future might be described by inflation returning to 2 pct and a more normal growth cycle, which would vary around the trend growth rate somewhere between 2.5-3 pct. Adding a small risk premium, such an environment would be broadly consistent with US bond yields at 5 pct.

I now find myself thinking that if these thoughts go through my mind, then the same is likely to be true for many others when they start to believe that the US economy might be returning to normality. It is conceivable that this could happen in 2011, especially if the US and other companies around the world starting spending their large cash holdings and banks return to lending.

WHAT HAPPENS IF US BOND YIELDS RISE TO 5 PCT?

Surprise surprise, none of us know that either. But let me take a stab.

For all the bears that think it could only occur because of the irresponsibility of US fiscal policy and rising inflation, and others that probably believe a rise to 5 pct bond yields would lead to another recession, the key way of thinking about the issue is in terms of US financial conditions.

In the GS Economics Department’s US Financial Conditions Index (FCI), a close proxy for10-year bond corporate bond yields have a weight of 55 bps. It is probably the case that a 168 bps rise in 10-year government bond yields would have a significant impact on the FCI, although it is possible that corporate–government bond spreads would narrow. The direct impact, if the FCI used only government bond yields, would be just over 90 bps.

What would happen to the overall US FCI would then depend on the other 45 pct, made up primarily of short-term interest rates, the trade-weighted Dollar, and an index related to the stock market.

If the bears were right, and such a rise is really because of the state of US fiscal affairs, then the Dollar might fall and corporate bond spreads tighten, which would offset some of the 90 plus bps tightening. A decline in the equity market would tighten conditions further. Such a move of the FCI would itself, in turn, dampen the longevity of any sharp US recovery.

If the optimists were right, and if any rise in US bond yields continued because of a return to normality, then in fact, the Dollar might rise, corporate bond spreads certainly tighten, and the stock market rally, possibly significantly. In fact, checking my simple stats with Jan Hatzius this weekend, the US stock market would “only” need to rise by around 19 pct in order for the 168 bps rise in government bond yields to be entirely neutralized.

Are 5 pct US 10-year yields and an S+P of 1475 possible in 2011? We shall see. In my opinion, a 19 pct rise in the US stock market seems quite likely. As for 5 pct bond yields, I think they are much less likely, but not impossible. If they did occur, it certainly wouldn’t have to be for negative reasons.

WHAT ARE THE CONSEQUENCES FOR EVERYTHING ELSE?

This is a topic for a separate piece. But, in my judgment, among reasons why it wouldn’t entirely be a bad thing are the two great debates surrounding the future of the monetary system, and separately the true strength of conviction about US$ based capital moving into so-called “emerging markets.” A few things seem clear to me:

1. The Dollar would strengthen somewhat, especially against the Yen. All comparisons with Japan’s lost two decades would rightly diminish.

2. The problems of European Monetary Union would appear relatively starker, although a stronger US economy combined with the strength of the BRIC countries would be good for European growth.

3. World GDP growth might exceed 5 pct for a while.

4. Money would leave emerging markets by those that treat them as old fashioned emerging markets, leaving the table more open for those that rightly regard a lot of those countries, especially the bigger ones, as “Growth Markets.”

5. More money might flow from debt to equity in the EM/Growth World, rather than back to the more developed markets.

Much to look forward to, not the least of which is the coming holidays and all that exciting football in the next fortnight!
Jim O’Neill

Chairman, Goldman Sachs Asset Management

in other words:

 

 

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Sat, 12/18/2010 - 15:26 | 815682 asdasmos
asdasmos's picture

Burn, baby, burn.

Sat, 12/18/2010 - 17:44 | 815906 Eternal Student
Eternal Student's picture

He's certainly burning something, and I caught a whiff of it. Woof. That's some strong hopium. Now if you'll excuse me, I need to step outside and let my head clear.

Sat, 12/18/2010 - 18:22 | 815974 Herd Redirectio...
Herd Redirection Committee's picture

I liked his suggestion that somehow Quantitative Easing will come to an end because it is politically unpopular!

This is basically Goldman Sachs trying to convince us "No no, its not a small Oligarchy that is running things, its the free market that decided interest rates will go up, and if the people disagree with the Fed's policies like QE2, the Fed will listen!"

Yeah f*cking right!  The illusion of democracy is all that remains, so good luck GS, on maintaining it!

Check out our latest PsychoNews story: "The Calm Before the Storm"

http://psychonews.site90.net

"In other news, the Bank of Canada announced its intentions to devalue the Canadian dollar.  It is America's fault, naturally.  Canada did not want to devalue, but for the 'good of all Canadians' it will.  This is exactly why PsychoNews was founded, because Central Bankers are constantly making decisions which they purport to be in the best interests of everyone involved, while actually only being in the best interests of a small financial elite."

Sat, 12/18/2010 - 18:45 | 816004 tgatliff
tgatliff's picture

I loved his "no one will ever know"... It certainly cannot be that foreign capital is rushing away from the worlds reserve currency.. No, I mean no one would know if that happened.  Nope.. Nothing to see here.. Move along.. Move along...

 

In short, were screwed and he knows it...

Sat, 12/18/2010 - 19:17 | 816038 Malcolm Tucker
Malcolm Tucker's picture

I agree. Here is Nigel Farage at his best wishing the EU a happy holidays :)

http://fedupmontrealer.blogspot.com/2010/12/nigel-farage-euro-crisis-is-like.html

 

Sun, 12/19/2010 - 14:19 | 817046 deez nutz
deez nutz's picture

if only most American knew how much benefit Canadian businesses received from a weaker dollar.  Can you imagine having a 20% price advantage over your competition? 

Beggar they neighbor.

Sun, 12/19/2010 - 01:08 | 816550 IQ 145
IQ 145's picture

 World GDP growth might exceed 5%? WTF.? What a wingnut.

Sat, 12/18/2010 - 15:32 | 815694 Drag Racer
Drag Racer's picture

goodest

ha ha, you've been listening to our presydend

Sat, 12/18/2010 - 15:36 | 815702 RobotTrader
RobotTrader's picture

Did bonds finally bottom out Thursday?

Sat, 12/18/2010 - 16:01 | 815740 liberal sodomy
liberal sodomy's picture

The bottom corresponds to the tic with bill gross implying that he will be selling bonds and buying equities.

Sat, 12/18/2010 - 16:15 | 815760 edwardscpa
edwardscpa's picture

Since when did Gross become a top-ticker?

Sat, 12/18/2010 - 16:35 | 815789 Spalding_Smailes
Spalding_Smailes's picture

I thought he was a fluffer'

Sat, 12/18/2010 - 16:41 | 815797 liberal sodomy
liberal sodomy's picture

He's not.  That's the point.

Sat, 12/18/2010 - 16:15 | 815761 Lionhead
Lionhead's picture

No, you're confusing true supply/demand sentiment with FED POMO operations that distort any true reality in the UST market. You know better than that.... Any countertrend rally enables the shorts to reload at higher levels.

Sat, 12/18/2010 - 17:15 | 815850 taraxias
taraxias's picture

No, sadly, he *doesn't* know better than that.........

Sat, 12/18/2010 - 17:48 | 815915 Eternal Student
Eternal Student's picture

Is it me, or does the POMO game not seem to be doing much? Real Estate is coming apart, stocks are so-so, and JPM has been getting hammered in their efforts to beat down Silver.

It seems like they are in the process of losing control.

Sat, 12/18/2010 - 17:00 | 815829 bbtrader
bbtrader's picture

You don't know?

Sat, 12/18/2010 - 17:40 | 815895 penisouraus erecti
penisouraus erecti's picture

More videos like one you posted above.........

Sat, 12/18/2010 - 18:19 | 815967 gerd
gerd's picture

wait, now you're a top/bottom picker and not a trend follower?!

Sat, 12/18/2010 - 18:48 | 816010 tgatliff
tgatliff's picture

Oh no... FED Super Heros Activate!!  Go super Timmy... Threaten those foreigners with your MAD argument super powers!!  Go super Benny... Hose down with cash anyone who even mentions the idea of abandoning the great cartel...

Sun, 12/19/2010 - 00:30 | 816492 AR
AR's picture

ROBO  /  As always, we hope you are well.  The other day we posted the following on Bonds (see below).  Bonds will remain a little sloppy and volatile for the next 2-3 weeks, but can retrace some of the 8-10 day recent sell-off (see levels suggested below). Nimble traders can probably trade BOTH sides of this market during this time pulling out 16-32 ticks. In this period, we would not marry oneself to any particular side however (rather trade the ranges the market gives you).  Good luck our friend, as we always find your posts worthwhile and entertaining.---------------------

by AR
on
Wed, 12/15/2010 - 15:13
#809157   / 
In BONDS  /  Yesterday (On Tuesday 12/14) we suggested the following:

by AR  /  on Tue, 12/14/2010 - 17:03  / #806134 

We might be a little early, but, we suspect this recent down leg in treasuries is close to a short-term bottom. 30's tested our 119.07 support target area today. Thus, it would not be unusual to see 30's bounce and retest the 124.00/125.00 area testing the staying power of the shorts. We've had a quick 8-9 handle move down in the last 10 days. Therefore, the risk here is overstaying one's shorts. This market will give everyone another sell signal from higher levels. It's prudent to peel back some exposure down here if one hasn't already. Good luck everyone.  -------------------------------------

Today (On Wednesday 12/15), again, we just retested these levels (actually 118.21).  There is a lot of "overhead pressure" on this complex right now (which will abate in the next 2-3 weeks). Much of it comes from the fact that few PM's are in the black in this sector after this recent 10 day meltdown of 8-10 handles. If long positions are initiated, do not be afraid to quickly take profits and trade them aggressively until you see some better stability in price levels. 16-32 ticks per day is not unreasonable trading them with this type vol and in this environment.  Short-term risk is down to 117.27 area if these levels are breached in 30's. We are hearing margin departments are being very aggressive this week as the direction (lower) wasn't a surprise, however, the size of the move in this short time period was. Some too may want to look at the calls for the 123 to 125 strike (February or March expiry). Good luck everyone.  --------------------------------------------

 

Sun, 12/19/2010 - 03:36 | 816672 chopper read
chopper read's picture

friday.  temporarily as CME Group raised margin requirements while Fed bought them back up.  desperate one-two punch.  when it crosses through the weekly 21-period moving average and touches the far side bollinger band, then sell the bounce.  if the T-bond goes back to 2010 highs then I'll eat my hat. 

Sat, 12/18/2010 - 15:38 | 815704 litoralkey
litoralkey's picture

( 19 pct rise in the US stock market ) equals some ( X pct drop in USD )

The US Dollar would have to devalue for the S&P (with 47% of revenues from foreign operations ) to hit 19% gains next year, or the devaluation will be a tightly wound spring that will devalue rapidly... The Bernank said there will be no rapid deval scenario allowed, so a continued USD devaluation in 2011 between 5 % to 10 % is baked into this report.

Sounds more bullish on commodities than equities.

???

IMHO... any thoughts on this?

Sat, 12/18/2010 - 15:41 | 815708 hedgeless_horseman
hedgeless_horseman's picture

 So at age 19, I found myself sitting on ol' Trigger outside a butcher shop in Belgium, and no money.  If it weren't for my horse, I wouldn't have spent that year in college.

Sun, 12/19/2010 - 01:21 | 816567 dark pools of soros
dark pools of soros's picture

mmm belguim horse meat burgers

Sat, 12/18/2010 - 15:49 | 815721 LeBalance
LeBalance's picture

What would happen to real estate with a 10-Year rate of 5%!

HFS!

Sat, 12/18/2010 - 17:40 | 815897 Salinger
Salinger's picture

have you noticed that most pundits while acknowledging that real estate has much more room to drop are also discounting the impact of that deterioration on the wider economy

the thinking goes something like -

 

things have fallen so far, what's another 10 or 20%

employment in the home building sector has already been hit no more downside

banks have already taken the right downs

 

sort of like the list of lies from an article a few days ago

 

http://www.zerohedge.com/article/guest-post-whos-lying

 

Sat, 12/18/2010 - 18:36 | 815994 Cdad
Cdad's picture

Salinger,

Exactly!  It is contained.  Who cares if another million people bail on their houses?  To hell with plumbers and electricians...we don't need them anymore.  And we don't need any more copper and that won't affect things over seas.  As well, Average Joe does not need a taste of Wealth Effect. 

None of this will have negative impact on UnicornDew production or PixieDust factories. And nothing matters any more because The Bernank will just print another trillion dollars and jam it into the Blight of America bank. 

So I am with you, brother...sipping some UnicornDew right now, in fact.

Cdad

Sat, 12/18/2010 - 17:41 | 815900 penisouraus erecti
penisouraus erecti's picture

Do they care?

Sat, 12/18/2010 - 15:51 | 815722 Rainman
Rainman's picture

Yup, I guess he figures a 5% 10y will bottlerocket sales in the housing market and really clear out the massive shadow inventory. Okie-dokey.

Sat, 12/18/2010 - 16:25 | 815775 SteveNYC
SteveNYC's picture

Don't forget the "healthy (Bernanke) gains in real income that we are all experiencing, hand over fist, right now!! Yeah baby!!

Sat, 12/18/2010 - 15:50 | 815723 lamont cranston
lamont cranston's picture

Good God, where did this bozo matriculate - Whatsommatta U.? Sheetrock State Teachers College with grad work at Bob Jones?

So, let me get this right...if the 10 goes to 8 or 10% the market will zoom another 15-25%???

Sun, 12/19/2010 - 00:18 | 816479 zaphod
zaphod's picture

Harvard b-school, I think thats were they teach this stuff.

The K-12 schools do a good job of instilling this line of thought also.

Sat, 12/18/2010 - 15:58 | 815737 liberal sodomy
liberal sodomy's picture

The ponzi scheme run by goldman at the NYSE can "go up" 19% if the bernank devalues the ponzi dollar by 40%.

That is all.

 

Sat, 12/18/2010 - 16:20 | 815764 Spalding_Smailes
Spalding_Smailes's picture

Stocks like the ( large money center banks/usa ect ... )C,BAC,JPM,WF---also LVS,MGM .... will go up with the dollar next year.

Book it.

Sat, 12/18/2010 - 16:36 | 815783 liberal sodomy
liberal sodomy's picture

Too bad about the avalanche of option arms resets coming due q1 that aren't going to like these higher rates one bit. But that is the point now, isn't it?  Debt as weapon.  The jews' stock in trade.

Sat, 12/18/2010 - 16:44 | 815800 Problem Is
Problem Is's picture

Hmmm... Modus Operandi of a backdoor bailout program for TBTF banks by increasing revenue/ cash flow by skewering option arm resets?

How deviously clever of you Bernank....

Sat, 12/18/2010 - 17:11 | 815804 Spalding_Smailes
Spalding_Smailes's picture

The big banks will benefit from continued improvement in credit and lower provisioning and charge-offs will be a big boost to earnings. The shadow issues are under the rug/off balance sheet/priced in, gone.

C & BoA will go up 50% in the next 12 months.

 

Price / eps = deal of a life time with the banks. Buy low, ( blood in the water - sure news is bad ) you will look back in 12-15 months and wish you did.

Sat, 12/18/2010 - 18:44 | 816003 Id fight Gandhi
Id fight Gandhi's picture

Good points. Seems they have no interest in saving this country, just suck it dry and move on.

Sat, 12/18/2010 - 16:16 | 815762 CrashisOptimistic
CrashisOptimistic's picture

Pretty much all such analyses are data mining.

Rates on the 10 year will rise to 5% and reflect strong economy?  But won't a rise of 10 yr instruments to 5% immediately raise mortgage rates and smash even more house buying, lowering house prices and lead more people to choose strategic default?  And doesn't that add more worthless mortgages to bank inventory?

He had 4 different reasons for a rise to 5%, chose one that was glowing, and ensured that one carefully did not address impact on housing.  This is not good analysis.

My guess is the bonds will not surge their rates any further because growth will not manifest itself.  American net worth remains predominantly in their houses and those have rolled south once more in the latest Shiller data.

The one item of strength to think about is how corporate CFOs have aggressively run up debt for their companies at these hyper low rates.  That's the source of their cash.  Where will it go?  Share buybacks, acquisitions and bonuses.  Equities will be supported as unemployment raises post acquistion, as redundant personnel are booted.

 

 

 

Sat, 12/18/2010 - 16:18 | 815765 Atomizer
Atomizer's picture

Much bigger event to look at.

Dispatch: Presidential Elections in Belarus From: STRATFORvideo | December 15, 2010  |

Regardless of whether incumbent and likely winner Aleksandr Lukashenko emerges victorious from Belarus' upcoming presidential election, Analyst Eugene Chausovsky says Belarus will remain under Moscow's thumb.

Sat, 12/18/2010 - 16:27 | 815779 CrashisOptimistic
CrashisOptimistic's picture

First of all your link doesn't work.

Second of all, why is this important if nothing is going to change? 

Sat, 12/18/2010 - 16:49 | 815805 Atomizer
Atomizer's picture

Abracadabra... waves black wand & throws pixies dust into air.

You need to follow politics to make money. Your in the mist of a global labor war. Governments don't pay for new infrastructure, peasants do.

http://www.youtube.com/user/STRATFORvideo

Sat, 12/18/2010 - 16:36 | 815785 Problem Is
Problem Is's picture

What a crack head...

" GDP growth could be above 3 pct, and it would not surprise me if some start forecasting close to 4 pct soon."

Sat, 12/18/2010 - 17:09 | 815841 Spalding_Smailes
Spalding_Smailes's picture

Its true.

By the middle of next year you will be kicking yourself for not buying in December. LVSands will be $70-80, US Steel $80 plus..

Sat, 12/18/2010 - 17:53 | 815924 penisouraus erecti
penisouraus erecti's picture

Wish in one hand, shit in the other. See which one gets filled first. 

And we see this by the ENORMOUS jump in hiring going on out there.

 

Sat, 12/18/2010 - 16:33 | 815787 10044
10044's picture

HOT OFF TOPIC:

Julian Assange Calls ABC News Reporter 'Tabloid Schmuck' And Walks Off When Asked About Rape Charges
http://www.businessinsider.com/when-asked-about-rape-charges-julian-assa...
Sat, 12/18/2010 - 17:25 | 815875 Salinger
Salinger's picture

FYI businessinsider could also be considered 'Tabloid Schmuck'

Sat, 12/18/2010 - 19:38 | 816061 One Ton Lady
One Ton Lady's picture

Curious use of terms for a Aussie. 

Sun, 12/19/2010 - 00:25 | 816490 zaphod
zaphod's picture

Now that's how you treat the press. Mock away Julian, they'll still follow you around and love you.

Sun, 12/19/2010 - 04:54 | 816703 chopper read
chopper read's picture

ABC?   ...truer words were never spoken. 

Sat, 12/18/2010 - 16:36 | 815790 Atomizer
Atomizer's picture

China and Russia on currency.

Yuan Trading to Expand on Micex as China Market Ties Deepen: Russia Credit

http://www.bloomberg.com/news/2010-12-17/yuan-trading-to-expand-on-micex-as-china-market-ties-deepen-russia-credit.html

Next..

China and Pakistan have confirmed they will further strengthen relations through energy cooperation and increased trade ties.

Chinese Premier Wen Jiabao arrived in Islamabad on Friday and held talks with Pakistani Prime Minister Yousaf Raza Gilani.

Welcoming Wen at the start of the talks, Gilani said China is Pakistan's closest friend. Wen replied that the 2 countries are bound by strong ties.

Pakistan and China have a longstanding friendship. The 2 leaders confirmed they will further develop the relationship by boosting energy cooperation. China will help Pakistan solve its electricity shortage by assisting in the plan to build 2 nuclear power reactors in the center of the country.

http://www.youtube.com/watch?v=Sbr4sNYU-Qo

Look over here, we have US national security issues. TSA groping at airports, Wilkileaks copy-cats, Low retail figures, High unemployment, etc, etc.

Don't worry.. To be continued

Sat, 12/18/2010 - 16:39 | 815795 liberal sodomy
liberal sodomy's picture

Anything that hurts this brown and jewish country is just fine by me.  I am living in occupied territory and wouldn't shed one tear if dc were nuked.

Sat, 12/18/2010 - 18:25 | 815978 LowProfile
LowProfile's picture

Now look here Eric Cartman...

If you just substitute "welfare parasite" and "banker" for the racial and ethnic terms, you won't get junked, mmmkayyy?

Sat, 12/18/2010 - 18:51 | 816014 Id fight Gandhi
Id fight Gandhi's picture

But some need to know the real source is likely his point.

Sun, 12/19/2010 - 04:56 | 816704 chopper read
chopper read's picture

"id fight Gandhi"   - too funny!!!

Sat, 12/18/2010 - 19:39 | 816066 One Ton Lady
One Ton Lady's picture

Here it is at Christmas time and we can't have a Christmas tree at the White House but we damn sure can have a Menorah.

Sat, 12/18/2010 - 20:32 | 816130 adissidentishere
adissidentishere's picture

Kwanzaa is very PC.

Sat, 12/18/2010 - 16:36 | 815791 gwar5
gwar5's picture

Funny how GS and the "vigilantes" blame the politicians and the lack of tax hikes as the reason for the bond meltdown and a rise in rates ... er... so sorry, but tax rates were already baked in the cake a long time ago.

It's the FED -- stupids.

It's trillions and trillions of dollars spent on TARP and in foreign and domestic entities, recently revealed, and known to have bad/no collateral. The FED has lent money to the world at little or no cost.

Now we pay for it in higher rates.

 

Sat, 12/18/2010 - 16:41 | 815798 RobotTrader
RobotTrader's picture

If we keep having moves like this in retail names..then 1400 on the S & P is not so far fetched.

I mean really, who would have expected an absolute buying orgasm by the "resilient consumer" just 2 years after the biggest financial market implosion in 50 years?

 

Sat, 12/18/2010 - 17:07 | 815837 MarketTruth
MarketTruth's picture

Robo,

    CONGRATULATIONS! You finally found a real WOMAN and not another anorexic stick figure. Good to know that some things DO change.

     Signed,

    MarketTruth

Sat, 12/18/2010 - 18:25 | 815979 LowProfile
LowProfile's picture

You think those are real, lulz.

Sun, 12/19/2010 - 03:45 | 816676 Rodent Freikorps
Rodent Freikorps's picture

Who cares?

Sat, 12/18/2010 - 17:24 | 815862 Spalding_Smailes
Spalding_Smailes's picture

Robo _

Put up a 1yr chart of (ZEUS - Olympic Steel) Its about to explode higher after breakout. The tristate/manufacturing is booming cat,bucyrus,joy global all rolling.

Sat, 12/18/2010 - 17:45 | 815909 Atomizer
Atomizer's picture

Robo, always enjoy your great chick flicks. The reality, that beautiful woman is going to place you into an austerity program aka. alimony. With the size of those tits, she can demand her lifetime monthly austerity premium.. if things should go wrong.

Sat, 12/18/2010 - 20:06 | 816093 gwar5
gwar5's picture

Well, what did you expect? DKS is a real Dick.

They took almost three years to get back to 31.

That'd be a little too tantric even for a Peter Lynch. 

Did you put on a condom before you bought the fucking dip?   

Sat, 12/18/2010 - 20:36 | 816147 Cdad
Cdad's picture

Robo,

That tears  it!  I know that this might not be all "down with it" here.  I don't care.

Quit posting bouncing titties in places that will distract the brotherhood of ZH from the fact that things like past is not prelude, or past performance is not indicative of future returns, and such.

It is our duty--or so we used to understand it as such--not to get all bent out of shape on lust so much that we lose track of things like:  morality, faith, virtue, and how posting 12 month charts about things that have already happened is not the same as a sign post to "our wildest dreams." 

But hey, I know that SOME here are very clearly engaged in that sort of thing, trying to refer to the back side of road signs as being important when trying to figure out where the hell we should be going now....but instead watching bouncing boobs...ga ga ga.  You follow Robo?

Lay off it already.

Cdad

 

Sat, 12/18/2010 - 23:16 | 816395 Uncle Sugar
Uncle Sugar's picture

Shut up and just scroll down if you can't handle it.

Sun, 12/19/2010 - 01:20 | 816566 IQ 145
IQ 145's picture

 Who would have expected it? Well, certainly not you we know that much. good luck with your make believe trader persona.

Sat, 12/18/2010 - 16:50 | 815817 Rogerwilco
Rogerwilco's picture

Wow, a 4% GDP print. Just imagine what the numbers would look like if the federal government did someting crazy like run multi-year deficits equal to 12% GDP with interest rates at zero. We could see insane imbalances and some bat-shit crazy market activity.

But we have responsible people in Congress backed by a vigilant Federal Reserve, and they would never be reckless with spending like the Chinese.

No sir, this is America.

Sun, 12/19/2010 - 00:27 | 816495 zaphod
zaphod's picture

+10 LMAO

Sat, 12/18/2010 - 17:17 | 815854 knukles
knukles's picture

post hoc ergo propter hoc
quod erat demonstrandum

Sat, 12/18/2010 - 17:25 | 815869 Atomizer
Atomizer's picture

Hopefully you understand that certain events are staged to create new agendas. Some very unclever, mindless, mentally challenged academics are going to choke on the very philosophical teachings they inbreed into several generations. The risk of success is lower than TPTB could have predicted.

Some will use snitching tactics to retain their pensions and protect ones 401K/wealth. You will indeed witness a snake eating its own tail.

Sat, 12/18/2010 - 17:27 | 815877 Quixotic_Not
Quixotic_Not's picture

All you traders that hedged in PMs; Please liquidate your Au/Ag/Cu positions quickly into equities!

I need a *major* PM market correction so I can exit U$T/Ca$h no later then next summer...

Thank you in advance for your sacrifice uber-comrades!

Sat, 12/18/2010 - 17:28 | 815880 Misean
Misean's picture

"I now find myself thinking that if these thoughts go through my mind, then the same is likely to be true for many others when they start to believe that the US economy might be returning to normality..."

I find myself thinking if I smear my face with pizza sauce and pour cheap beer on my head, I'll look 20 years younger and if 21 year old women start thinking the same thing, then I'm gonna get in on some HAWT! coed action tonight...

Sat, 12/18/2010 - 17:49 | 815922 penisouraus erecti
penisouraus erecti's picture

"Wish in one hand, shit in the other. See which one gets filled first."

Sat, 12/18/2010 - 17:28 | 815882 deadhead
deadhead's picture

I found an excellent nugget in the article with the emphasis mine, to wit:

 


WHY HAVE INTEREST RATES RISEN SO ABRUPTLY?

Of course, none of us really know or never will

 

 

Sat, 12/18/2010 - 17:47 | 815912 penisouraus erecti
penisouraus erecti's picture

Quite a confidence builder there.

Sat, 12/18/2010 - 18:01 | 815937 Misean
Misean's picture

Cthulu, his slumber disturbed...

Sat, 12/18/2010 - 18:55 | 816019 Id fight Gandhi
Id fight Gandhi's picture

I hate articles that raise questions more than answers.

Nobody wants to stick it out in fear they will be wrong

Sat, 12/18/2010 - 17:30 | 815884 hooligan2009
hooligan2009's picture

There is something enormously grating when a commentator uses an FCI as a cause of an economic outturn and not just one expression of it.

The underlying assumption of Jim seems to be that any amount of intervention from either a fiscal or monetary perspective is unlimited.

The economy has had an injection of 2 trillion from Fed easing, covering bank losses on bad debts plus huge "temporary" nationalisations from the US Treasury; this has come on top of huge equity raisings by these banks to "repay" the US Treasury.

The economy has received fiscal bailouts equal to the increase in deficits from somewhat rational 4% of GDP to 10% of GDP for two years. The equity and debt markets are just now pricing in a third year.

It is rational for the equity market to be around 50-60% of its lows when the US economy has just recieved an injection of around 40% of GDP from the public purse (Fed and Treasury).

It is not rational that the bond market is pricing only a 3.5% ten year bond yield when the US is bankrupt and the currency is being actively debased by flawed economic policy.

It is not inflation that is the sole concern here. Bond markets have to price the binary outcome of Zimbabwe or Japan. Japan occurs for as long as no-one sees the obvious flaw in the Fed's pursuit of Zimbabwe monetary policy. So does Japan for that matter.

Similarly, the problems of the US, Europe and Japan are the same. Far too many promises made by politicians pledging future tax receipts in the full knowledge they can just walk away.

Small wonder this walking away attitude is copied by bankers and asset managers who have no debt, since they can simply game the system by producing 9/10 of rubbish and only 1/10 of value.

Neither Europe, nor the US nor Japan have the answer. Only a way to defer the issue til a miracle occurs or there is the simple reality check of tax payers not having funds to guarantee debt promised by bullshitting polticians and central banks stocked by civil servants with no grasp on the reality of paying back debt (like Jim).

For them, the game can continue forever and there is never any payback.

Sat, 12/18/2010 - 19:11 | 816016 Cdad
Cdad's picture

Hooligan,

Well said.  You said it straight, too.  I'm concerned that because you said it straight...and you took more than one sentence [capital letters and everything], and there were no boobies, that folk might not pay attention to what you just wrote here [I hope to be wrong on this]...which was very clear.

But you probably understand that the world is, right now, in this great big death struggle over the word "transparency" right now.  You hear that word being tossed around all the time now like it is some cool new thing like an Iphone 4...a white one.  However, the criminal syndicate known as Wall Street actually cannot survive in a transparent environment.  That's right, if you put a banker in a great big mason jar, he croaks...even if you punch air holes in the top of the lid [warning:  this is an analogy and not a call to put bankers in mason jars]. 

You see, if you put a banker in a mason jar, then you don't need the banker anymore.  No, those guys like it all murky....with really weird and counter intuitive assertions changing the math in EPIC WAYS.

But anyway, I did not mean to go all Cdad on your post because all I really wanted to say was...nice job putting a little TRANSPARENCY on the matters raised by the syndicate Wall Street banker Jim O'Neil.

I appreciate that.

Cdad

Sat, 12/18/2010 - 20:16 | 816101 delacroix
delacroix's picture

good idea. go long mason jars

Sat, 12/18/2010 - 20:47 | 816169 adissidentishere
adissidentishere's picture

Dear Santa,

All I want for Christmas is a banker's head in a mason jar.

Sat, 12/18/2010 - 20:34 | 816137 hooligan2009
hooligan2009's picture

"natioanlisations" was my longest word! heh..this isn't what you meant by going all cdad on my post was it?

http://www.wisegeek.com/what-is-cdad.htm

I will say "bail-outs" next time. Thanks for the comment, nice to be ackowledged, this is about the only forum where I can exchange big picture views that are not trapped in making money or spouting off on economics.

I am sure that Jim is a nice guy, it's just that he has been brainwashed and Wall Sstreet seems to be suffering from the "group think" that leads to things like "the cold war" and fascist organisations of the last century. There is more than a hint of "let them eat cake" going on here. I am still waiting for someone to come up with a "nom de blog" so to speak etc.

Thu, 01/20/2011 - 17:55 | 815887 Clapham Junction
Clapham Junction's picture

(d)

 

Sat, 12/18/2010 - 18:05 | 815932 Atomizer
Atomizer's picture

The to be continued story from my previous post

Its getting a little hot in the WH kitchen. Policy makers may seek early retirement, then there are the die-hards who are shelled monies to keep Change and Hope a possible 2012 vision.

GEAB N°50 (December 16, 2010

The second half of 2011 will mark the point in time when all the world’s financial operators will finally understand that the West will not repay in full a significant portion of the loans advanced over the last two decades. For LEAP/E2020 it is, in effect, around October 2011, due to the plunge of a large number of US cities and states into an inextricable financial situation following the end of the federal funding of their deficits, whilst Europe will face a very significant debt refinancing requirement (1), that this explosive situation will be fully revealed. Media escalation of the European crisis regarding sovereign debt of Euroland’s peripheral countries will have created the favourable context for such an explosion, of which the US “Muni” (2) market incidentally has just given a foretaste in November 2010 (as our team anticipated last June in GEAB No. 46 ) with a mini-crash that saw all the year’s gains go up in smoke in a few days. This time this crash (including the failure of the monoline reinsurer Ambac (3)) took place discreetly (4) since the Anglo-Saxon media machine (5) succeeded in focusing world attention on a further episode of the fantasy sitcom "The end of the Euro, or the financial remake of Swine fever" (6). Yet the contemporaneous shocks in the United States and Europe make for a very disturbing set-up comparable, according to our team, to the "Bear Stearn " crash which preceded Lehman Brothers’ bankruptcy and the collapse of Wall Street in September 2008 by eight months. But the GEAB readers know very well that major crashes rarely make headlines in the media several months in advance, so false alarms are customary (7)!

http://www.leap2020.eu/GEAB-N-50-is-available-Global-systemic-crisis-Second-half-of-2011-European-context-and-US-catalyst-Explosion-of-the_a5625.html

Again, this is all about creating a global currency. Problem, action, solution.

Sat, 12/18/2010 - 18:06 | 815948 CrashisOptimistic
CrashisOptimistic's picture

I am actually not a believer that the rise in rates means anything at all.  POMO is buying those issues.  It's a permanent bid.

Yet they fell in price.  My theory is something logistical.  Maybe new hires at the Fed insisted on lower prices for their purchases.  Simply that.

Sat, 12/18/2010 - 18:15 | 815961 -273
-273's picture

Over the past 40 years, when petroleum expenditures as a percent of GDP increased much beyond 5.5%, the economy tended towards recessions ( http://www.theoildrum.com/files/murphyfig_2.png ). This tendency is due mainly to the fact that oil infiltrates almost every facet of an industrial economy, from personal disposable income, to manufacturing, to service sectors. Therefore higher oil prices restrain growth via declining discretionary consumption as individuals allocate more money towards gasoline and home heating, or as the cost of producing a good increases, etc

If the S+P rises 19% so will oil and then we are all cooked again.

 

Sat, 12/18/2010 - 18:50 | 816013 Gloomy
Gloomy's picture

When Will the U.S. Become Greece?
  • by Martin Hutchinson
  • Tuesday, 14 December 2010 18:19

The insouciant approach which President Obama and the U.S. budget negotiators have taken to the federal deficit, adding around $900 billion to deficits over the next two years with no countervailing spending cuts, has been greeted by a sharp rise in Treasury bond yields. This brings into focus a very delicate question: at what point does the U.S. government’s credit cease being the world’s “safe haven” and become merely a much larger and more dangerous version of Greece?
 
For the last two years, anti-Keynesians like this column have warned that massive federal deficits run the risk of “crowding out” the private sector, especially the small business private sector, which has the most difficulty accessing funding. With dollar interest rates generally declining and Chinese and other foreign investors happily piling in to fund budget deficits of $1.3-1.4 trillion, this had appeared a purely theoretical problem. However with commercial and industrial loans (including small business, but also including the relatively active leveraged buyout sector) declining by 25% to $1.22 trillion in the two years since 2008 the problem has been a real one.
 
With the supply of long-term government debt so overwhelming, the yield curve between short-term and long-term interest rates has been artificially steep for over two years. Thus banks have been able to borrow in the short-term markets and invest in long-term bonds, picking up a 3% interest spread for doing so, which they leverage 15-20 times. In normal markets, such a policy would carry a fearful risk of enormous capital losses as interest rates rose – the First Pennsylvania Bank, a very substantial institution, was bankrupted by such activity in 1980. However with Ben Bernanke at the Fed, banks feel they can afford to take the risk – and after all, if it goes wrong, all the big banks will get in trouble simultaneously and taxpayers will have to bail them out.
 
As for small business, lending to it requires far too much effort, and is not particularly profitable. Medium-sized and smaller banks, which would normally make the majority of such loans, are struggling with the remnants of their daft housing and real estate lending in 2003-07. Just as theory would suggest but by a somewhat different mechanism, small business is being crowded out of the financial markets.
 
After two years of stasis, the bond markets have recently begun to move. Ben Bernanke’s announcement November 3 of the “QEII” additional $600 billion of Treasury bond purchases had a perverse effect: it pushed up Treasury bond yields, particularly at the long end of the curve. Fed purchases are being concentrated in maturities of less than 10 years, presumably to mitigate somewhat the gigantic principal risk on the Fed’s balance sheet, so naturally Treasury bond yields at the long end of the curve have increased.
 
The second trigger to bond market movement has been the tax cut deal reached last week between President Obama and Congress. Not only does this extend the 2001 and 2003 tax cuts, which had been assumed repealed in 2011 by the Congressional Budget Office projections, it also adds a temporary 2% payroll tax cut and other tax reductions for corporations and middle-income individuals. Together, these will add about $900 billion to the budget deficits in fiscal years 2011 through 2013, making deficits in 2011 and 2012 remain well above $1 trillion. While there is some likelihood of spending reductions from the incoming Republican Congress after January, the reality is that those reductions will be small in 2011 and probably not much larger in 2012. Thus in the next two years both fiscal stimulus and monetary stimulus are likely to be operating at full blast.
 
The short-term effect on the U.S. economy should be quite beneficial. Fiscal stimulus that takes the form of lower taxes is much less damaging than additional government spending, because it does not divert resources into unproductive uses. The Keynesian multiplier for fiscal stimulus, below 1 on almost all government spending and far below 1 when deficits grow to their current magnitude, is much closer to 1 for tax cuts, although the growth in deficits will continue to exercise a major drag through “crowding out.” If the tax cuts had taken the form of long-term supply-side cuts, such as a reduction in the tax on dividends (preferably through making them tax-deductible at the corporate level) and the deficit had been modest, the stimulus would have generated very substantial additional economic activity. Economic activity would also have been increased by a revenue-neutral tax change that increased incentives. For example, abolishing the home mortgage interest deduction and the charitable deduction – both of which divert resources into unproductive activities -- and using the revenue for dividend tax reduction and a tax rate cut would be thoroughly beneficial.
 
In this case, the new tax cuts have no positive supply-side effect, they merely avoid the adverse supply-side effect of increases in marginal tax rates on high incomes, dividends and capital gains that would otherwise have happened on January 1. Given the size of the budget deficit, they would without Fed “stimulus,” result in further crowding out of small business, thus being no more than neutral in the short run. However the net effect of the tax cuts and QEII really should act to bring down unemployment, probably quite quickly, as the QEII money creation will in the short run reduce the Treasury’s net funding needs.
 
We are unlikely to get more than a modest reduction in unemployment in 2011, probably reversing in the latter half of 2012 as a “double-dip” looms, for two reasons. First, there is the combined effect of extended unemployment benefits and intensified competition from emerging markets – the latter factor tending to depress U.S. wage rates ever since cellphones and the Internet came on stream in the 1990s. In the new world of easier outsourcing and more skilled emerging markets labor, wage differentials will narrow, and it is alas likely that much of that narrowing will come from downward pressure on U.S. wage rates.
 
In a free market, such downward pressure would quickly be reflected in lower U.S. wages, as those thrown out of work would be forced to adjust to the new reality. With prolonged unemployment benefits, adjustment to the new reality is delayed, at least for those unfortunates whose new equilibrium wage is close to the level of unemployment benefits. Prolonged unemployment benefits (and higher minimum wages since 2007) may have only a modest effect on the equilibrium unemployment level in a thriving economy. However there can be little doubt that, in a U.S. economy with high unemployment and strong downward pressure on wage rates, they will force unemployment to remain stubbornly high and new job creation to remain stubbornly low.
 
Second, our discussion so far has ignored the effect on the economy of the Fed’s $600 billion money creation. With the new tax cuts, that money creation has not diminished the federal deficit as it would have without them. Hence Treasury bond yields will continue to be pushed up both by the continued demands of deficit financing and by the beginnings of resurgent inflation. The quite sharp run-up in Treasury bond yields we have seen so far will be only the precursor of a much larger reversal of the long-term bond bull market that has been in place since 1982.
 
Initially, this will merely make borrowing a little more expensive. The 10-year Treasury bond yield has approached 4% on a number of occasions in the past two years, and it is inconceivable that even the over-incentivized, testosterone-crazed denizens of Wall Street and the major banks have not made reasonable contingency plans for a modest run-up to this level. Since as I write 10-year Treasuries yield only 3.25% there is some room for yields to rise before major adverse effects kick in, although as yields approach 4% there may well be some nasty reported losses on “bond trading” from those who have been too aggressive.
 
At some future date, almost certainly while the 10-year Treasury bond yield is between 4% and 5%, we will reach a break point. It must be remembered that the Modern Finance models of markets, assuming smooth trading and moderate price movements, are hugely in error. In reality markets move moderately only when they are between crises. In a crisis, the change in market behavior is analogous to that between the fluid dynamics of “streamlined flow” and “turbulent flow.” Price movements become much larger, trading volume soars to astronomical levels and risk parameters move far out of their accustomed channels. When this happens, traders’ belief systems about the market in which they work are destroyed, and they are forced to seek out another paradigm.
 
As 10-year Treasury yields move above 4%, there will at some point come a moment at which the comforting “safe haven” theory of U.S. Treasury bond investment is exploded in the minds of traders worldwide. Traders’ view of U.S. Treasuries will not then move to an intermediate level, in which Treasuries are regarded as only moderately risky. Instead, as in the markets for bonds of southern European governments, and in 2007 in the markets for subprime mortgage-backed securities, the traders’ view will move with lightning rapidity from “safe haven” to “serious default risk.” At that point, even if U.S. inflation still appears relatively benign, Treasuries will come to exhibit a substantial yield premium not only over risk-free debt such as that of Germany, but even over moderate-risk debt such as that of Colombia. Treasuries will trade as Greek-style junk bonds, in a market where the receptiveness to junk bonds has itself been markedly reduced.
 
The fiscal and monetary stimulus policies of November-December 2010 will thus impose a huge economic cost, not immediately but at some point, probably in late 2011 or early 2012, when there is a paradigm shift against U.S. Treasury bonds in traders’ worldview. When that happens, the U.S. economy may well enter not merely a second dip but a chasm.

 

Sat, 12/18/2010 - 19:04 | 816031 Mitchman
Mitchman's picture

Excellent post.  Hutchinson is great.  Thank you.

Sat, 12/18/2010 - 19:22 | 816044 divide_by_zero
divide_by_zero's picture

Read this the other day on Prudent Bear, but it seems like the 2% reduction in FICA tax would become regular income which would then become subject to state and federal income tax thereby lowering the Keynesian multiplier well below 1. SS fund already running negative will likely need to cash in more of the special USTs it holds perhaps forcing govt to borrow more. On the plus side(not mine) the Bernank should have plenty of UST supply to buy from the cost of the compromise bill $858B IIRC.

Sat, 12/18/2010 - 20:21 | 816109 liberal sodomy
liberal sodomy's picture

I welcome a collapse.

Sat, 12/18/2010 - 20:24 | 816111 hooligan2009
hooligan2009's picture

Don't forget that QE must match fiscal deficits. So everyone should be preparing right now for another 900 bn extra in QE over this year and next..we have QE2 taking an initial 600 bn of Treasuries. So we will need QE2 + 450 billion followed by QE3 of 1.2 trillion for FY 2012 plus another 450 billion from the latest bullshit fiscal measures totalling another 900 billion. You can't make this shit up.

This isn't rocket science, no-body has the money to buy Treasuries unless the Fed does.

So the Fed will own approximately 3 trillion in Treasuries by the 2012 fiscal year end. Of course, this doesn't matter, since the Fed can not only reinvest MBS coupons..it can reinvest Treasury coupons AND it can pay everyones health and retirement income also. Simples.

Sat, 12/18/2010 - 23:13 | 816388 CrashisOptimistic
CrashisOptimistic's picture

The Fed's balance sheet gets too much attention.  They are not under any pressure to "unwind".  They can hold those Treasury securities until maturity and simply tell Treasury not to bother with paying par value.  The securities, at maturity, will cease to exist.

Sun, 12/19/2010 - 00:19 | 816480 Rogerwilco
Rogerwilco's picture

The Fed's balance sheet gets too much attention.  They are not under any pressure to "unwind".

OK, then let's run it up to $40T, surely that would "fix" everything. You have some interesting ideas Crash, have you ever considered a career in politics?

Sat, 12/18/2010 - 18:55 | 816021 redarrow
redarrow's picture

When the 10 year hits 5% oil will head back over 100 and kill the recovery. I smell stagflation at best.

Sat, 12/18/2010 - 19:33 | 816057 Horatio Beanblower
Horatio Beanblower's picture

If this doesn't fix the US economy, nothing will...

 


Porn Company Creates Interactive Sex Game for Microsoft Kinect - http://www.federaljack.com/?p=18673

Sat, 12/18/2010 - 19:58 | 816086 Salinger
Salinger's picture

Mish and Rosie have been calling for the crash of Canadian Residential real estate for 2 years - even with a 20% correction as Rosie has suggested the CDN real estate market is no Phoenix or Ft Myers -

Sat, 12/18/2010 - 20:07 | 816095 RobotTrader
RobotTrader's picture

Mish, Rosie, Robert Schiller, Nouriel Roubini, et al

Have been outright failures in being able to properly predict an 80% rally in the S & P 500 off the 2009 lows.

Even astute technicians such as Frank Barbera featured on FSO Newshour have totally missed the move in stocks and gold in 2010.

Therefore, I totally ignore what these guys have to say, at least with respect to stock market direction.

Sat, 12/18/2010 - 20:42 | 816153 Salinger
Salinger's picture

Blasphemy in this hood... but you are correct .. the term "suckers rally" was widely used by that group back in the spring of '09 - interesting how Roubi is putting down almost 6m for a new pad and Rosie touts his correct calls on bonds as he fends of critics of his equity calls

 

the other Dr. Doom (Faber) is actually bullish on equities at this time much like he was in the spring of 09 he seems to be the most grounded of the doomsters - I wonder how Shilling is doing with his bullish call on bonds  - at least he can fall back on  bee keeping

Sat, 12/18/2010 - 21:04 | 816199 Atomizer
Atomizer's picture

Your next AIG/Enron epic failure

http://www.berneunion.org.uk/

Sat, 12/18/2010 - 23:19 | 816399 Perseid.Rocks
Perseid.Rocks's picture

Who could have predicted the Fed would mortgage our great, great grandchildren's life savings to pay off the bad debts of a few elite and buy us an extra year or two before the final plunge ? These economists are good, but nostradamus they ain't.

Sun, 12/19/2010 - 00:20 | 816482 treemagnet
treemagnet's picture

But you can't judge the best bears calls on a "did it happen when they said it was gonna happen" metric.  Did what they say was gonna happen, happen.  Think of the dynamics at play and realize the possibilities that can play out after such a call.  Nostradamus they ain't.....but you wanna go long here?!  Harry and Robo are just right until they're not - no more, no less - and don't kid yourself, they know the score....they just enjoy poking a caged bear (sick fucks they are). 

What would make you believe in this "matrix".  I was always a bull - and will be again, after this thing resets.  Good luck bulls, cause hope ain't a strategy when time isn't your friend.

Sun, 12/19/2010 - 08:31 | 816756 Perseid.Rocks
Perseid.Rocks's picture

Sure, things are gonna get better.. we just need to borrow a few more generations into the future.. best of luck on that bet

Sun, 12/19/2010 - 05:45 | 816719 John_Coltrane
John_Coltrane's picture

Well, too bad if you didn't pay attention to Mish's deflationary predictions in 2007 as that  would have saved anyone who listened from even entering the market, or certainly selling out of commodities and equities and going to cash or bonds.  No one cares one iota about the so-called "rally" off a bottom that no one at the time could have known was the real bottom.   People who got out 2007-2008 and stayed out have way more capital now than those who rode it down and then back up.  You need to plot charts on a much longer time span if you want understand the "big picture". 

Sun, 12/19/2010 - 08:41 | 816763 thepigman
thepigman's picture

Exactly...the friggin thing has never
really recovered decent volume since the March 2009 bottom and now it's almost laughable. The GAAP multiple is about 23 or 24 at the moment and thats counting the phony financials' profits as real. Go back in history and see
what kind of multiple 2-3% GDP supports. Maybe 8-10 at the outside.
If we were actually going anywhere, it
would be one thing, but we've got
2-3% GDP as far as the eye can see
and structural unemployment. Anyone
long this thing is delusional. Call
me in 2015 or so for another look see.

Sun, 12/19/2010 - 12:30 | 816905 vote_libertaria...
vote_libertarian_party's picture

...and that 2-3% GDP 'growth' is with $120-$140B in funny money pushed into the economy.

Sat, 12/18/2010 - 20:28 | 816122 Park city skier
Park city skier's picture

I think we are going to come out of the eye of the hurricane really soon, I’m feeling or expecting an equity limit down day really soon. I’m not sure if the trigger will be Korea, China tightening, Iran, or a run from Spanish bonds/banks, or just plain profit taking that will kick in loads of stop losses.  I know the past 21 months should have taught me not to underestimate the resolve of the Federal Reserve and the invisible hand know as the PPPT<but I feel it in my bones that just maybe 1247SPX is the elusive p2 top and  stormy weather is really close. No one expects a limit down day with equity calls for 1400+ next year, but just maybe when people are in full on greed mood that the fed/monetary policy has the magic potion to create solutions that history tell us are impossible from preventing revision to mean and long term economic equilibrium.  Again, I know logic and recent history tell me first thought is probably wrong and the bears are more likely to capitulate and trigger a huge run up but just maybe human nature and the reality of the facts will run it’s course and create a trend change.

Sun, 12/19/2010 - 00:23 | 816478 CrashisOptimistic
CrashisOptimistic's picture

The squiggly lines on a graph, if they ever told anyone anything at all, told them something about human behavior.

There are no humans involved anymore.  There are no levels that mean anything other than the levels of earnings and earnings projections in the models.  At most, some computers may be trying to deduce other computer algorithms and attack in that way, but you, here, will never deduce anything because the resolution of measurement of trading is too coarse to identify computer trades done in a few milliseconds.

So step one is to forget that history matters as regards the "behavior of markets".  They are not only not sacred; they have been intentionally corrupted.  This is not capitalism taking place.  This is managed activity.  There is no deep and dark conspiracy.  Bernanke doesn't want to give the banks money.  He just believes he has to replace everything they lost to real estate.  His intent and hope is to back out very slowly in some way over many years and hope that he can return the world to capitalism.  He is in entirely new territory and does not know if this will work.

So from that context, it's not a market anymore.  It's not anything but created money provided to those who lost theirs, because not doing so would have killed people, literally and immediately.  There are no deep, detailed truths in squiggly lines that reflect no humans day to day, and billions of poured money week to week.

The only thing that they can't pour is oil.  They know it.  They hope for a miracle.  There's nothing else they can do.

Sun, 12/19/2010 - 09:27 | 816788 thepigman
thepigman's picture

Israel's bunker busters will be operationally deployable in March or
April. We know from Wikileaks the
Sunnis hate the Shiites, so no threat
there. Bebe doesn't strike me as the
type of guy that's going to tolerate
another North Korea in his back yard.

Sat, 12/18/2010 - 20:55 | 816185 Atomizer
Atomizer's picture

TIFFS report, not be confused with TGIF or FDICF.

http://www.tffs.org/pdf/meet/2010/worldbk0310.pdf

 

Sun, 12/19/2010 - 02:16 | 816617 primefool
primefool's picture

Middle aged "analysts" - I increasingly feel are merely trying to make themselves feel good. I mean the kinds of beliefs that a Jim Oneill espouses certainly raises the levels of your feel-good hormones , makes your prostate happy, releases endorphins etc. On the other hand the nihilistic, perma-bear, end-of-the-world thinking certainly suppresses the good chemicals, depresses the body and releases stress hormonmes that will probably shoten your life and keep you miserable.

Its all about the hormones.

Sun, 12/19/2010 - 08:57 | 816772 thepigman
thepigman's picture

Look, it's very simple. O'Neil's entire
identity is dependent on this horseshit, so he actually can't see any other outlook because it would threaten his very persona. The same
goes for nearly all of these guys. Fat,
pathetic Bill Miller cannot exist in a world where the inflows cease and he
can no longer double down on his
losers. They're pretenders...they have
to be....they've never done it any
other way.

Sun, 12/19/2010 - 12:18 | 816894 CrashisOptimistic
CrashisOptimistic's picture

No.

It's dependent on a retail sales nudge from a multi month foreclosure freeze, that stops in about 2 weeks.

Sun, 12/19/2010 - 02:39 | 816640 primefool
primefool's picture

Of course these high profile "analysts", bernanke and others of their ilk can and do say whatever they want. They are often wrong, but never admit to any weaknesses in their world-view. They are a power unto themselves, immune from criticism, immune from the legal system even. They are truly gods who stride upon the world stage spouting whatever comes to mind. All we mere mortals can do is crack fart jokes and snigger in the back-rows. 

Sun, 12/19/2010 - 02:41 | 816644 primefool
primefool's picture

the emporer may have no clothes but he has powerful armed guards. So when they comman the peasants to dance - dance we must. 

Sun, 12/19/2010 - 08:34 | 816761 Perseid.Rocks
Perseid.Rocks's picture

When the emperor declares war on his own citizens, you fight back.. I don't care how powerful his guards are, you fight.

Sun, 12/19/2010 - 03:38 | 816674 madmack
madmack's picture

What if he is dead on,scarry thought.

Sun, 12/19/2010 - 12:20 | 816895 CrashisOptimistic
CrashisOptimistic's picture

He is dead on in any world where the present foreclosure freeze is forever.

This world has the freeze end in 2 weeks.

We have forgotten that this is pumping 8 billion dollars a month into retail sales.

Sun, 12/19/2010 - 04:05 | 816684 Jones79
Jones79's picture

"If it weren't for my horse, I wouldn't have spent that year in college"...

 

she may have been from chicago and affably referring to her sorority sisters:  my whores sounds like my horse. think george wendt on snl skit:  da bears.

Sun, 12/19/2010 - 06:05 | 816723 buzzsaw99
buzzsaw99's picture

5% on the 10y would surely cause some of the trillions on the (very) short end to move out on the curve. This would cause an increase in borrowing cost for the fedgub without any net $ coming in. Bernanke would then be forced to buy the short end which yields the fed nothing. Game over man:

http://www.youtube.com/watch?v=dsx2vdn7gpY

This stuff smacks of their desperation to sell equities.

 

Sun, 12/19/2010 - 09:36 | 816797 Racer
Racer's picture

Surely Biden's spending comment make the all time dumbest?

"all time dumbest thing ever uttered: "If it weren't for my horse, I wouldn't have spent that year in college"..."

 

with his

“Well, people when I say that look at me and say, ‘What are you talking about? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, I’m telling you.”

Sun, 12/19/2010 - 10:28 | 816814 Old Europe Avan...
Old Europe Avant-Garde's picture

But if the FED is anyway buying all the treasuries, why should the interest rate ever reach such a level? Couldn't they well control it?

Sun, 12/19/2010 - 10:48 | 816830 Doug
Doug's picture

The Fed's co-ordinated propaganda campaign (and its willing contributors such as Mr. O'Neill) is becoming more and more obvious.  As has been happening since late 2008, any new developments that could potentially tank the markets are met by a PR onslaught such as this (and other recent nonsense glorifying the unexpected surge in rates, for example) in order to keep the game going.  I guess they are telegraphing that rates are going higher.  Trade accordingly.

Sun, 12/19/2010 - 10:53 | 816833 DR
DR's picture

In 5 months time, expectations have gone from fears of a double-dip recession, to an acceptance of a permanent lower growth or a “new normal” only to be replaced by the hope that the US economy is returning to past growth patterns.

I got to hand it to Bernanke for his subtle use of behavior economics in generating inflation expectations.

Sun, 12/19/2010 - 12:16 | 816891 CrashisOptimistic
CrashisOptimistic's picture

Nope.

It's not that.

It's the foreclosure freeze.  Retail sales goose.

Sun, 12/19/2010 - 11:32 | 816849 asteroids
asteroids's picture

Canadian real estate could easily fall 20% and it would still be overvalued on a historical average to income. Good thing I paid off my mortgage years ago.

Sun, 12/19/2010 - 11:45 | 816858 Steak
Steak's picture


These will be the last playlists I post for y'all. While it is not immediately apparent, there is a synergy between music and this site.  How that tradition will or won't continue in the future is something I'm not in a position to answer or influence, yet its my sincere hope that it does continue. To all y'all who have enjoyed these: thanks for clicking, dancing, contributing and coming to ZH in the first place.

Artist of 2010 - Arty: http://www.youtube.com/view_play_list?p=59866B8C070FA64C

Best of 2010 - Statica & Heatbeat: http://www.youtube.com/view_play_list?p=F79EBE9FB77C107C

Freshy Fresh (a freshened up from the last time playlist):http://www.youtube.com/view_play_list?p=B64086D4A6EDA49C

Sun, 12/19/2010 - 20:42 | 817617 MallaKite
MallaKite's picture

10 year does 2.3% before they whack off the inflation....

 

not quite there yet

Sun, 12/19/2010 - 22:27 | 817869 el-greco
el-greco's picture

Most of the stats that Jim Oneill works off are dodgy; no surprise then that his analysis is also dodgy. Regardless, if he can put together a deal to take Man U off the Glazers, all will be forgiven.

Mon, 12/20/2010 - 00:05 | 818022 Youri Carma
Youri Carma's picture

The argument from the FED always has been that low interest rates are good for the economy and even inflation is. Of course this is utter nonsense since both are not good for the economy.

Why does Bernanke wants to keep the rates so low anyways?:

1 - Provide cheap money to the Banks so that they can earn their way out of this mess

2 - To keep a lid on the national dept in interest payments

3 - To provide help to new homwowners with cheap mortgages

Point 1 won't work since the debts and mostly hidden debts of the banking system exceed what's payable by an economy which doesn't grow either so the "growth out" argument is lame.

Point 2 will only work as far as the interest can be kept low but they can't like in a way Bernanke admits when inflation steps up beyond 2% which it certainly will at some point (in fact it allready has but I am following MSM arguments now)

Poin3 Is a smoke screener for donut dupes cause nobody wants a mortgage now only a few which doesn't do anything significant for the economy at this moment.

I think the time for cheap money is over and the market recognizes the risks and demands a Ten-year on a normal 5% bases. These rates are only kept artificially low by the FED at great costs later which will come to revenge itself. It's only a matter of time. The Market is signalling this now and Marc Faber (as always) is completely right.

Goldman's Jim O'Neill is completely mummeling out of his little corperate little chill neck hairs now: (See Article Above)

Bernanke said he can higher interset rates over night to curb too much inflation:

1 - Utter nonsense cause ones the inflation genie is out of the bottle you can't put it back at once. Look at China now for prove on that. The China government even admitted they can't do nothing about the inflation now cause this is caused by stimulus which was put on the road a few years back.

2 - Bernanke he can say he can raise interest over night and I can jump of a cliff but won't do that either. Bernanke doesn't want to raise interest rates cause that would make the American debt look double so ugly all of a sudden so he won't do that. He's cornered and is just kicking the can down the road.

In fact his complete policy is build around the national debt in keeping low interest rates and deleberately creating inflation in a way to "inflate his way out of debt". All of that which is counter productive for the real economy. And you can't have both. Sucking of the economy and spending even more while bugging it down severely. Even American policy is ludicrous and self-annihilating in taxing the poor and skimming more money out of the economy to provide the rich with even more money they don't need and won't use in any sensefull way to grow the economy. The American highly corrupt political system's incentives are build in to kill itself off.

So it will. Kick back and watch the empire fall in it's own footprint like a controlled demolition in suicide banking and politics. Heck maybe I even call up Cheney (Back in office in next term - Right on time for the Iran attack) myself so we can look for fresh battlefields for our boys. I am thinking of a country with a lot of mountains and caves, to keep it interesting.

Inspired by SPECIAL HOLIDAY RELEASE - Jim Rickards, 19 December 2010, by Eric King (King World News) http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/12/19_SPEC...

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