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Indirect Bidders Are Fleeing The Short Bond

Tyler Durden's picture




 

Treasury International Capital data provides an interesting glimpse into foreigners' bond purchasing habits: since the beginning of Quantitative Easing (April TIC data) through October 31 (the last publicly available data point for TIC), foreigners have bought a total of $236 billion in Treasury securities, which includes Bills, Bonds, Notes, TIPS and Cash Management Bills (from total holdings of $3.262 trillion in April to $3.498 trillion in October). What is known is that in April total marketable debt consisted of $1.988 Trillion in Bills, $3.822 Trillion in Notes and Bonds and $530 Billion in TIPS, for a total of $6.34 trillion. By October, this number had shot up to $4.5 trillion in Notes and Bonds, $567 Billion in TIPS, while Bills had been reduced to $1.85 trillion for a total of $6.925 trillion.

Zero Hedge has gone through every single Bill, Bond and Note TreasuryDirect auction and compiled the data for Indirect Bid auction take down numbers. We observe that the gross take down for Indirect bidders for Bonds and Notes amounts to a substantial $577 billion in the April-October period, and estimating redemptions of $162 billion, implies foreigners purchased a net amount of $414 billion in Bonds and Notes (we exclude TIPS as the number is largely nominal for the purpose of this exercise). Yet as we pointed out, TIC indicates that the total number of UST holdings only went up by $233 billion, implying foreigners (aka Indirect Bidders) were net sellers of $181 Billion in Treasury Bills. And this occurred at a time when there was still some modicum of yield on the short-end of the curve. With Bill yields now at record lows, and a record steep yield curve as a result, will foreigners ever step in to fill a void which apparently has been filled exclusively by Primary Dealers and the Federal Reserve in the attempt to keep the curve at record steepness? If yields continue being so low that only domestic banks, which benefit from the steep curve, are buying the short-end, this leaves a major question mark for the future. 

Data analysis

Zero Hedge, using TreasuryDirect data, calculated monthly Indirect take downs beginning in April through the end of October (the last date for which TIC provides total foreign holdings). The monthly auction data for all Bonds and Notes (excl. Bills, CMBs and TIPS) is as follows:

Out of a total $1.215 trillion in Bonds and Notes auctioned off in April-October, Indirects were responsible for taking down $576 billion. The average indirect take down of any given auction is 47.5%, implying that indirect bidders, aka foreigners, are responsible for nearly half of the end demand for any given Bond/Note auction.

Next, using Daily Treasury Statement data for Treasury redemptions, we calculated that in the April thru October period, $342 billion in Notes and Bonds matured/redeemed by the Treasury. We estimate the amount of Indirect redemptions using the same ratio of take down at about 47.5%, to reach a number of $162 billion. Netting out this redemption amount from the total indirect take down of $576 billion, we obtain an estimate for Indirect Purchases net of redemptions in the 7 month period of $414 billion. Net Indirect Bidder activity for April thru October is seen on the following chart:

Using comparable TreasuryDirect data for Bills and Cash Management Bills (CMBs) we obtained the following breakdown of gross purchases for Indirect and Total buying take downs. Notably, the average take down ratio over the 7 month period is noticeably lower at 38.5%. Already, the demand interest is markedly lower by 900 basis points (and this ignores any redemption netting).

Likewise, to estimate Net Indirect take downs, we determined the total amount of Bill redemptions using DTS data, and allocated a portion to indirects using the same process as above: using the take down ratio of 38.5% in reverse. The conclusion: Indirects took down $1.367 trillion in Bills while redeeming $1.523 trillion, for a net negative balance of $156 billion.

Combined, these two data sets yield the following observations for Net Indirect Treasury Activity in the April - October period:

The cumulative sum of all monthly net data results in $257 billion. As a reminder, according to TIC, the total change in all foreign holdings in the comparable time period was $236 billion. We are confident that if we had refined our redemption assumptions, the two data series would overlap.

In summary, while Indirect Bidders have continued to express an interest in US Treasury holdings, the duration profile of their portfolio has shifted dramatically, with a rotation of nearly $260 billion from short bonds into the dated side of the curve. This is how the comparison between the TreasuryDirect primary data and the TIC data looks graphically.

Conclusions

The record steep yield curve is having the desired impact of pushing Indirect Bidders away from the short end of the curve, and, contrary to conventional wisdom, is forcing foreigners to buy further down, or rather, right, the curve. This begs the question: with foreigners so obviously shunning the Bill space, who is it that provides the massive take down interest each and every Bill auction to allow short rates to be in a record tight range? The answer is obviously Primary Dealers, and the broader banker community, which courtesy of Q.E., are the only ones who are able to take advantage of the record curve steepness, and load up on cash at close to zero rates and subsequently lend it out or leverage this new capital via traditional fractional reserve mechanisms.

In very much the same way that near zero money market rates are expected to push retail investors out of safe cash-equivalent investments, so the record steepness is increasingly forcing ever more foreign lenders to go to the right of the curve in order to collect yield.

The question remains: with still a record high ratio of Bills to all other marketable government securities, will the government be able to push enough investors out of the relative safety of the short end into riskiness of "higher" yielding bonds, especially with increasing speculation that inflation may finally be around the corner. If this recent trend of shifting away from Bills into Bonds and Notes by Indirects is any indication, then inflation fears are indeed significantly overdone. Yet if in fact the Fed succeeds in stirring up the money multiplier hornet's nest, and banks finally do turn on the small and middle-business lending spigot, and inflation does intensify, the rush out of Bills will be taken up by everyone, not just Indirect, which would, in our opinion, result in a substantially overall flattening of the curve. This in turn would force all those asset managers who are positioned comfortably in expectation of further record steepening, to rush through the exits and cover their positions, thus create a feedback loop which could potentially cause a near flat curve at some point in the future. In the meantime, the risk of this occurring is minor, and with the 2s30s still at record steepness of around 375, we anticipate that ever more momentum chasers will continue jumping on the most popular trade of the year until such time as the spirit of Volkswagen rears its ugly head once again.

 

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Sun, 01/17/2010 - 21:36 | 196907 Burnbright
Burnbright's picture

No, investors will be pushed off the table, not down the yield curve. Why on earth would anyone let the US government hold on to their money for 10 yrs plus when they are already afraid of losing money by only loaning it out for 6 months?

Sun, 01/17/2010 - 22:39 | 196938 Anonymous
Anonymous's picture

The above analysis is correct. "Real money" uses long
dated treasuries (due to their positive convexity) as a means to extend the av. duration of their portfolio. Also
treasuries are used as a hedge against the negative
convexity of mortgages. Real money has a view and uses
different tools in the rates mkt to more express their prevailing views on volatility, inflation, asset/liability
management. As derivatives gurus are somewhat of a dirty word at the moment it seems folks are reverting to the "old" ways.
The carry trade can sit it out for some time as their
dollar short can be rolled back into the yen if need be
as the curve won't flatten anytime soon for the above reasons. Also the mystery direct bidders of late could be
any number of folks for the reasons I've just cited. Don't
forget 60% of the world's assets are dollar denominated
and we are a reserve currency.

Mon, 01/18/2010 - 18:52 | 197764 Burnbright
Burnbright's picture

If I had your pretense that dollars always had value then I would agree, but I do not agree with the assumption.

Mon, 01/18/2010 - 19:03 | 197770 Anonymous
Anonymous's picture

Evidently your view is in the minority I haven't seen the
dollar tank anytime recently or have I missed something
please enlighten me. Further to that what assumption
are you referring to that you disagree with? Kind of
lame in my view to say I disagree and not even say why.

Mon, 01/18/2010 - 23:51 | 197999 Burnbright
Burnbright's picture

If I recall correctly the dollar lost 10% of its value in 2009, which inversely means there was inflation because there was a loss of purchasing power. Ignoring that fact however my point was that if people are afraid to lend the US money for longer than 6 months because of the uncertainty of lending them more for a longer period of time, in order to agree to purchase UST 10yr or 30yr you would have to assume that the interest rate was out pacing the loss of capital due to inflation or that the dollars value would remain some what static.

And I told you why I disagreed, I don't believe that the dollar has any intrinsic value, further more I doubt you could tell me what the value of the dollar was other than some idiot is willing to trade you stuff for it.

Mon, 01/18/2010 - 01:37 | 197000 Anonymous
Anonymous's picture

When the equity and bond markets become political tools to indicate the extreme political whimsy of the day, instead of being rigidly true economic indicators or barometers of the mass inputs of free market agents, people investing with their OWN money walk.

The nationalization of the USA economic processes (from health care, heavy industry--GM, war contractors, banking system) and the Stalinization of our markets are a DEEP confirm of the Potemkinization of our wealth drivers.

America is a producer of the accounting unit commodity ($$) which it uses with abandon and without restraint to exploit the labour pools of the earth in an ad hoc slavery contract. Its absolute and competetive advantage is in muscle, extortion, fraud, control of money supply, and crisis management. Occasionally it produces superior leading-edge technology and design, but offshores all production.

A greater majority of USA citizens have been so marginalized that they have little ability for productive input. The smaller wealthy minority use the USA as a base with a very secure mercenary force to protect the perimeter and use the rest of the world as their resource and labour inputs while infiltrating all gov't's to direct policy to their advantage.

Gov't's dependent upon this minority for direction and corrupting influence cannot be trusted irrespective of bond yield enticements. The public purse is newly and openly devoted to the advancement of the wealthy elite untroubled by conscience or scruples.

Investors outside the game may find yields seductive,until and ever, they are relieved of their fortunes by the manipulations of a banking elite/shadow banking cabal.

Mon, 01/18/2010 - 16:25 | 197578 Anonymous
Anonymous's picture

You should post this about every 2-3 days until everyone gets it thru their head.

Mon, 01/18/2010 - 17:22 | 197648 Mad About Ewe
Mad About Ewe's picture

I second you recommendation annon.

Mon, 01/18/2010 - 17:13 | 197639 Anonymous
Anonymous's picture

Huh? How did you come to such a jaded view of this
country? Are you natural born US citizen or here on
a work visa? Clearly you are not of the Republican
persuasion but you sound sorta communist in your views.
My recommendation if you don't like it leave otherwise don't bite the hand who feeds you. Possibly China or
Russia is more to your liking go there and see how
much fun it is. Don't believe everything you see and
read in the press Utopia exists nowhere but in your
addled brain.

Tue, 01/19/2010 - 00:59 | 198029 Anonymous
Anonymous's picture

i am a natural born usa citizen and find that the hand of
government is the hand which oppresses....

considering republican vs democrat is the height
of fucktardedness.....

and if you would like a little history lesson about
the hand which oppresses, it would be appropriate
to reflect on the murder of martin luther king....

mlk was not murdered by james earle ray as the cia
controlled newsfaking press would have it....no
mr king was murdered by a consortium of the cia,
us army, memphis police department, local hoodlums
lead by the fbi....you can read about it at
the mlk website or look up james douglass on
youtube.

and i will bite the hand which murders and steals...
if your brain weren't sitting in your butt you
too could be addled.

Mon, 01/18/2010 - 18:01 | 197707 Anonymous
Anonymous's picture

In response Mr Genius to your first paragraph it's
been done for decades. An insurance company etc tries
to match their assets to their liabilties. If they have
long term liabilties in the form of annuities sound management says closely match assets to pay for those
commitments at some time in the future get it? Just
because you can't make a quick buck off their thinking
doesn't make this category of investor wrong in their
behavior. Having a CFA certfication comes to mind about
now. Check into it you might find it worthy of your
attention. I forgot you must have more weighty matters
on your mind.

Mon, 01/18/2010 - 20:15 | 197844 Anonymous
Anonymous's picture

In your final paragraph who are the outsiders that find
our yields seductive that are relieved of their fortune? Realty is you have it reversed savers of the world
just snuck off with a fair amount of the US net worth
due to our spendthrift ways fortunately we seemed to
have learned our lesson before it's too late. However
many folks now find themselves long alot of junk worthy
only of a garage sale. These investors you refer to I
have a novel idea why not buy their own paper? I can
assure you these investors were sophisticated and
have their eyes wide open when they make an investment
decision maybe you should ask them why they buy $
denominated investments in bulk.

Sun, 01/17/2010 - 22:07 | 196915 john_connor
john_connor's picture

Q:  Why would any small or mediuim sized business want to leverage themselves right now when any and all business not related to fading porkulus is going nowhere fast?  And I mean real revenue growth, not cost cutting. 

A: Regardless of the huge rally in the bs US equity market, the real economy is still in the toilet, and there are not enough willing borrowers even IF the banks wanted to lend, which they don't.

Therefore the hypothesis presented in the last paragragh is unlikely.  Further, if short term rates somehow moved up, the Fed would be compelled to follow, but in the process they would destroy even more people with floating 2nds and HELOCs, which would then make the upcoming Alt-A debacle worse and make the garbage assets on banks balance sheets worth 40 cents on the dollar rather than 60 cents.

Long rates, on the other hand, may "surprise" everyone and go down or just stay flat, especially if an "event" scares the algos out of equities.

Mon, 01/18/2010 - 10:44 | 197109 Anonymous
Anonymous's picture

Why do you think business is so bad?

Restaurants are full. Good hotels are full. Intel just posted great earnings and most technology companies look very strong. Financial companies are getting stronger, and look like they will have a good 2010. And with commodity prices higher farming, mining, and industrials look good.

The consumer is starting to benefit from v v low housing costs, with rents down 10-50% and purchase prices lower by the same. In the long run, lower home prices are a very good thing.

Unemployment is a lagging indicator.

Mon, 01/18/2010 - 13:49 | 197328 anarkst
anarkst's picture

Which planet do you live on?

Mon, 01/18/2010 - 16:12 | 197561 RockyRacoon
RockyRacoon's picture

He lives in Potemkinville. 

I hear it's a nice place somewhere near Stepford.

Mon, 01/18/2010 - 17:32 | 197663 Anonymous
Anonymous's picture

it looks like the newly discovered planet of the
here and now that reads a financial journal once in
awhile. I recommend you visit it from time to time it has clean air which is condusive to good brain function. Sound appealing?

Mon, 01/18/2010 - 15:45 | 197516 dnarby
dnarby's picture

...Sarcasm?

Mon, 01/18/2010 - 16:35 | 197590 Anonymous
Anonymous's picture

What part do you guys disagree with?

That good restaurant owners continue to just produce cash-flow? (Check for this Sat night at 8pm? Cannot get a table). Course this also means waiters, bartenders, meat sellers, etc.

Or that lower house prices are good for everyone? Economic growth is being able to produce/afford more for everyone. We can all afford alot more So. Florida condo than we could in 2006.

Time is on the side of recovery.

Mon, 01/18/2010 - 19:16 | 197787 Anonymous
Anonymous's picture

Quite prompted by frustration at people who seemingly
don't think before they write. God invented the preview
button on blogs for a reason to read and think about
what they are saying. Don't just sound off with some
lame insult try and come up with some reason if and
why you disagree. Friendly debate is a good thing. Hurling insults is childish and counterproductive. I want to
believe the members of this blog are at least voting
age for gosh sakes.

Mon, 01/18/2010 - 16:33 | 197588 Anonymous
Anonymous's picture

Where do you live? In the disUnited States, Canada,----

I know, Washington,D.C. where business is truly booming with all those new government employees doing shit, but doing it well.

Mon, 01/18/2010 - 17:42 | 197677 Mad About Ewe
Mad About Ewe's picture

As long as we're discussing anecdotes from anonymous sources, I feel like I should add my thoughts to your comments:  You obviously don't live in a farming community.  Come on out to my community, park in front of the general store, walk in, grab a cup of coffee, walk up to one of the dairy farmers there who has been paying to work for the last year, and tell him that farming looks good.  If you didn't catch what I have just said: many dairy farmers in this country have been losing money for every hundred weight of milk they produce for the last year.  They've either had to sell their herds, in order to not lose money while producing milk, or keep milking and lose money for every day they break their backs.  "Farming looks good."  Do you have any idea how hard it is to farm while you are making money.   Commodity prices are up and so is fuel and grain.  Profit margins haven't been thin, they've been negative.  Now farmers can break even.  Lets break out the champagne and celebrate our new found prosperity.  Sorry for the sarcasm.     

 

Mon, 01/18/2010 - 18:24 | 197740 Anonymous
Anonymous's picture

Here in the Bay Area - restaurants really are packed. House up the street sold in 3 days. Lots of pending signs on other homes. False sense of security here, in my opinion. Most of my friends are optimistic so I come here to keep in touch with reality.

Mon, 01/18/2010 - 18:44 | 197756 Anonymous
Anonymous's picture

Makes sense that SF is doing well. Technology looks strong. Intel should lead MSFT, HPQ, Dell and the PC space. iPhone and Google are in even better shape.

I think the rough numbers on the apps store is that App developers are making roughly $100M/month and that number could easily grow annually at 2-5x. Lotsa start-ups will chase that revenue.

Love the people here who think, "its all downhill", "the US makes nothing". Grab yourself an iPhone and get the econ101 app and a few business publications.

To the dairy farmer -- you make a number of fair points. However, I do think that higher commodity prices are key to farm income as fixed costs are significant. 1-yr ago had to look alot worse, no?

Mon, 01/18/2010 - 22:18 | 197953 Anonymous
Anonymous's picture

Here in "Fabulous Vail" and the surrounding areas, depopulation is problematic since the former construction and development industry has shed hundreds of jobs.

Community College enrollment is up 10-15% as remaining adults re-train - our local solar technology classes are full, for example. Some local solar programs have 2 year waiting lists. Sales of solar systems themselves, even in the face of the lowest materials costs ever, have plummeted - trainees graduating now are having difficulty finding local work. Certified building energy auditors are getting $100/hr to train more auditors, rather than do audits.

Skier-day numbers are down, despite season pass prices that equal 6 days of day-rate tickets. 70% of commercial space, much of it brand new, in downvalley areas is vacant. County sales tax revenues are down 20%. Aline passenger counts are down, as are ground transportation passenger counts.

Property valuations are falling, though slower than in some areas, and Eagle County government is laying off staff, with those still working told to expect more layoffs next year and the year following, when the actual effect of lower valuations takes effect. Garfield County, with a $50MM budget last year, expect to only be able to fund $30MM this year.

$19 million dollar, 20K ft/sq luxury homes are not selling in Aspen, even with prices SLASHED to only $11.9MM!

It's a tourist area; the best restaurants still require reservations - but you can call in the afternoon and evening and get in a 8pm when two years ago you had to call 24 hours in advance.

Data for the sausage makers ... make of it what you will.

Mon, 01/18/2010 - 18:27 | 197741 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

(Dis)illusions of grandure, what 'Merica knows best.

Buy Silver.

Mon, 01/18/2010 - 22:06 | 197939 john_connor
john_connor's picture

Anon wrote "Why do you think business is so bad?"

Check out California and Illinois, which are two of the most populous states in the union and proxies for the national picture.  As you will soon find out, entities that are not part of the Fed and Treasury money laundering and counterfeiting scheme will be allowed to fail; and guess what, there is no federal bankruptcy protection for states.  Why will they fail?  Cash is disappearing from plunging tax revenues on both an individual and corporate level.  Why are tax revenues plunging?  Because business is that bad.  When states fail, they simply can not pay people anymore, and that will be when the tidal wave starts.  And again, it will foreshadow the national picture.

Let's see how far the IOU's go before someone says "I need cash to eat."  And then the margin calls will start, and won't stop.   

Mon, 01/18/2010 - 23:36 | 197987 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

JC, predictions?  JPM to take control of CA?  Jay, ME Diamond(!) for (Supreme)Governor?  Sup?

Sun, 01/17/2010 - 22:03 | 196920 Anonymous
Anonymous's picture

I'm massively long 25 year zero coupon bonds. The most crowded trade in existence right now is the "inflation is just around the corner". LOL!!! Is private sector credit grown right around the corner too? How about the tooth fairy?

Sun, 01/17/2010 - 22:47 | 196946 Doug
Doug's picture

I'm short gold for essentially the same reasons.  Not massively short though - not yet anyway.

Mon, 01/18/2010 - 16:15 | 197564 jeff montanye
jeff montanye's picture

government yields rose 1930-1933 (sidney homer, a history of interest rates). 

Mon, 01/18/2010 - 18:33 | 197747 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

"The most crowded trade"?  You jest?  "Tooth fairy"?  Try BS Bernanke telling me "inflation is not a concern."  Here is your tooth fairy, with his lower mandible flush in white, he is a talking skull.  Yes...

Buy Silver.

Sun, 01/17/2010 - 22:27 | 196929 gookempucky
gookempucky's picture

Tyler thanks to you- Marla-and ZH staff for all your hard work......

This is the Feds form of layaway as they are trying to use time as an ally.

Sun, 01/17/2010 - 23:12 | 196953 Anonymous
Anonymous's picture

Great work, ZH.
Anybody who pretends to know which way inflation will break and when is posturing. This is beyond confident prediction.

Sun, 01/17/2010 - 23:22 | 196959 deadhead
deadhead's picture

anybody got any thoughts on the Treserve crew ratcheting up attempts to bring long yields down aggressively now in anticipation of march end QE and the spring home buying season?

Sun, 01/17/2010 - 23:43 | 196972 Burnbright
Burnbright's picture

My guess they are trying to artificially spur more credit consumption via borrowing. And if long rates move lower they can point to it as a symptom of deflation and give them the excuse to continue QE.

Mon, 01/18/2010 - 21:37 | 197916 Anonymous
Anonymous's picture

First of all the government doesn't need to artificilly
do anything there is no evidence of inflation and at
the moment. There is real demand for treasuries on the
long end for a variety of reasons just pointed out
in the above blogs. They will continue QE because they
feel they should no conspiracy there. Borrowing from whom
and for what? last year saw record buybacks from US cos.
that could in the bond market.Credit at the household
level is contracting and it's not over. You summed it
in the beginning with "My guess"

Sun, 01/17/2010 - 23:28 | 196962 Madcow
Madcow's picture

Asset decay and general anxiety will continue to drive people and other financial custodians into US Government debt.  But there's just not enough new cash being generated by the economy to feed all the rents public and private. 

So sure - they can keep the money rolling into the Treasury and into the Fed - but at the cost of the destruction of everything else. 

Unless the West reduces government spending by 75%, there's forced borrowing and monetization to make up for the money that isn't being invested - not because of lack of will or confidence - but because of a fundamental lack of EXISTENCE.

The magical gold-egg laying perpetual motion machine has been destroyed.

Mon, 01/18/2010 - 12:04 | 197172 Anonymous
Anonymous's picture

Exactly! It's just that we haven't seen that reality reflected in the markets and pervceived value of the currency.......yet.

The bubble has burst and the government/Fed is trying everything in their power to reinflate that sucker with very little effect other than to stave off the real collapse for a few months/years. However, for each day they hold off the raging flood that will come the water keeps building behind the dam.

When the fucker finally bursts it going to be a real disaster unlike the faux crisis of fall '08.

Mon, 01/18/2010 - 22:03 | 197936 Anonymous
Anonymous's picture

I guess you've never lived in an economy going through
the delevering process. Prices are coming down because
of decades of overbuilding we are working thru oversupply both in commercial and residential markets that may take
years. Many me included believe creative destruction
is healthy. You act like monetization is a new
phenomenom we've been a fiat currency for quite some
time now. Money isn't being invested at the moment
because all the tarp money to the banks is being
tucked under the mattress in tsys. and working thru
a mountain of loans to households that are in default.
Lastly and most importantly what magical gold egg laying
whoo haw are you talking about that is destroyed seemingly
forever which happens to be a very loooong time last
time I checked.

Mon, 01/18/2010 - 00:42 | 196987 RobotTrader
RobotTrader's picture

From the "This can't go on! (but does, forever)" department...
Rasputin - Sat, Jan 16, 2010 - 08:37 AM

...comes Doug Noland's latest "Credit Bubble Bulletin", found here:

http://www.prudentbear.com

And one of the several key passages from Doug's rant is in regard
to the massive, staggering, exponential growth of US current account
deficits, resulting in "Rest of World" holdings of our bogus paper.

Here, let Doug tell you in his own words:



Taking a different perspective on the issue, the Fed’s
Z.1. “flow of funds” report has the Rest of World
(ROW) holding $943bn of U.S. financial assets at the end of 1985. ROW
holdings ended last September at $15.052 TN.

(Ras): That's right, folks. Over the preceeding twenty-five years,
the US has foisted FIFTEEN TRILLION FIATSCOS of debt and other
instruments on the bagholding suckers. Furthermore, as also discussed
by Doug in his article, the US has gone from a paltry three-billion
fiatsco current account deficit amassed throughout the ENTIRE DECADE of
the 'Seventies, to OVER FIVE TRILLION in the decade just passed--with
no sign of letup.

However, as a chastised Rasputin can completely corroborate, Mr.
Noland notes that the naysayers and Cassandras who have predicted our
imminent demise have had their collective noses rubbed in the "Bretton
Woods II" doo-doo for decades now, with any and all glitches, crashes,
collapses, and other minor "inconveniences" papered over with
ever-greater amounts of fiat flinging.

(Ras Conclusion): We're NOT, I REPEAT, NOT scroomed. Infinite Fiat
is indeed infinite. Deficits don't matter. All the above numbers can be
doubled, tripled or even quadrupled with no consequences or
ill-effects. All bears, GHSers/SHSers, US Treasury shorters,
housing-bubble-screechers and other miscreants and malcontents should
give up their rantings and ravings and buy AMZN, GOOG, and especially,
AAPL because either you're with us (the Bretton Woods II gang and the
hundreds of millions of sheeple worldwide), or you're against us.

LOL

Mon, 01/18/2010 - 02:19 | 197019 Anonymous
Anonymous's picture

I agree. They will keep pushing the ball down the road. The U.S. is isolated from much of the worlds maddness (politically and geographically). They will stop pushing the ball down the road when the U.S. becomes well...more like France.

The complication of the financial landscape will continue as it is the easiest way for the rich and elite to get richer. The little guy will get more screwed over time...this type of thing has been repeating throughout history over and over again...someday ROME will crumble but it will be quite some time before it happens (to the U.S.). I think it is enevitable for any government.

Mon, 01/18/2010 - 12:59 | 197262 Charles Mackay
Charles Mackay's picture

While at first what you are saying may seem too obvious, it is in fact the most important consideration.

As mentioned further down, all we really have to worry about is wars, famine, disease, etc. striking the US.  Since the odds of those are generally low, we don't have much to worry about except whether QE2 starts on April 1, May 1, or June 1.  So there is a timing issue, but not much.  We had two corrections of about 10% in the second half of 2009, and basically they have almost been forgotten as the market keeps going higher.

One caveat - I am a small time Treasury shorter.  The Fed won't be able to stop all interest rates increases - being the price of basic commodities and food will rise faster than most everything else, which will cause real inflation.  More on that another day.

 

 

Mon, 01/18/2010 - 22:28 | 197958 Anonymous
Anonymous's picture

Actually, all we really have to worry about is declining global oil production. While we're awash with it now, with 137MM bbls in tankers alone (a <2 day global supply, that, at 80MM bbls/day), it's due to the recession.

Without increasing oil production, economic growth based on oil is impossible. MK Hubbert, 1956

Wake up, folks.

Mon, 01/18/2010 - 14:56 | 197445 THE DORK OF CORK
THE DORK OF CORK's picture

Infinite fiat might not matter to you guys over there in the 50 states and also the 51st but the rest of the world is getting seriously pissed off, we are expected to pay tribute to New York and London gangsters for a increasingly poor service  (you do not even make good movies now) - in fact we are as mad as hell and are not going to take it anymore

Mon, 01/18/2010 - 18:32 | 197746 Anonymous
Anonymous's picture

+1

If the US were in a vacuum it could work - but nobody wants our dollars anymore.

Has anyone already posted about derivative contracts just being the next clever way to capture foreign wealth? "Our banks" get bailouts if they make a wrong bet, but the Chinese realized its lose-lose because they'll just get more dollars anyway -

Mon, 01/18/2010 - 01:39 | 197002 Anonymous
Anonymous's picture

OK a layman's thinking. The number of debt instruments is going to shrink massively. That is the $3.4T in debt that is not going to be paid off is going to be written off. That means the supply of QUALITY debt instruments is going to come down massively, while there is a lot of demand out there. This will cause the price of government bonds to boom and interest rates to come down MASSIVELY. Like Japan in the 1990's. The value of the dollar is going to go way up. The Japanese yen was at 240 to the dollar and spiked all the way to 78 (an increase of over 3X). 3.4T is 30% of GDP, assuming the fed holds on to this debt it will take about 20 years to substitute Treasury debt for the MBS type paper it holds without causing the economy to collapse. This assumes the government puts it's own fiscal house in order and does not run a 9+% GDP deficit. It looks like deflation for the forseable future.
Just a thought.

Mon, 01/18/2010 - 02:32 | 197024 Anonymous
Anonymous's picture

.

With him or against him...this is a must read:

http://economicedge.blogspot.com/2010/01/martin-armstrong-creating-float...

Meanwhile...back at the ranch...

Neko Case
Things That Scare Me

http://www.youtube.com/watch?v=EBLI9jq6tUY

Fluorescent lights engage
Blackbirds frying on a wire
Same birds that followed me to school When I was young
Were they trying to tell me something
Were they telling me to run

The hammer clicks in place
The world's gonna pay
Right down in the face of God and his saints
Claim your soul's not for sale
I'm a dying breed who still believes
Haunted by American dreams
Haunted by American dreams

.

Mon, 01/18/2010 - 04:00 | 197036 Anonymous
Anonymous's picture

Robottrader,

So this whole game will go on forever? What happens when physical gold runs out, and COMEX goes bust? The dollar system is only able to continue operating today because people can still go to their local pawn shop or online dealer like (apmex.com) and redeem their paper "fiatscos"

CAN GOLD BE INCREASED FOREVER THE SAME AS BONDS AND PAPER MONEY?

Mon, 01/18/2010 - 06:49 | 197062 Anonymous
Anonymous's picture

The first sign of the end will be when Chinese inflation (from maintaining the peg) becomes domestically (and therefore politically) unsustainable. This is starting to happen now, with inflation outstripping income growth.

That will start to make the peg unsustainable. Next, the Chinese will think about exiting the peg, but will want to maximise the value of their $US reserves before they exit (knowing full well that paper stuff will be nigh on worthless when they do).

So, they will start making more and bigger plays for US-based companies. If the authorities keep on rejecting those plays, based on nationalism, and if the Chinese stop just taking the rejection...then we are at the end.

Tue, 01/19/2010 - 03:50 | 198072 Burnbright
Burnbright's picture

Yep and we get to experience hyperinflation as countries stop exporting to us to support their own countries problems and money outside the US comes flooding back in.

Yippy!

Mon, 01/18/2010 - 11:21 | 197128 Anonymous
Anonymous's picture

Where were the bulk of QE purchases by the Fed focused?

Mon, 01/18/2010 - 12:08 | 197174 TumblingDice
TumblingDice's picture

In the near future, the banks don't want the money multiplier to rise or even go above zero. The continuation of this environment is ideal for the banks and other parties involved. The weak economy is a good excuse for banks to avoid lending to small business and the middle class. Instead the inflationary advantages of the the steep yield curve in combination with modern and traditional fractional reserve mechanisms can be used to continue lending primarily to the government and large corporations. This will have the effect of securing a more consolidated control of the economy while keeping the bad economy/high risk environment in tact.

Another effect is that during his Congressional hearings, Ben Bernanke can say that he has done his job: "inflation has been low" is a line I remember. The next question is about the other objective of the Fed and the answer is a quick admission of failure.

The dilemma presented is whether the system has any chance of surviving for very long with a dramatically low money multiplier. They have managed to direct inflation to their liking with the help of the gravity of the black hole (this can refer to the Fed or the threat of massive future credit losses). But if consumer credit continues to recede then it might create an unintended and extralegal effect: massive legal and illegal consumer default. If the banks lose credit then it is game over. So somehow the system has to prevent this while at the same time keeping the multiplier low, and this job is up to the government. It will continue taking on the consumer credit losses and then having programs that help joe sixpack "pay it back" and not let consumer credit enter into waterfall that will leave a whole that is impossible to fill with the other credit sectors.

A peaceful debt revolt or the election of a President that gets rid of the Fed are the only options I can see that can prevent this outcome.

Otherwise this will continue for as long as it can, with the marginal productivity of debt becoming lower and lower and always approaching zero, the numbers becoming bigger and bigger, with all the money going towards maintaining the safe bets of big corporations and governments (but I repeat myself) while letting the private sector go to rot. Wars will not be fought between the large international powers, but rather in the same spirit of consolidation of the oil bearing territories.

The problem with the two solutions that can prevent this outcome is that elections can be rigged and debt revolt goes against the short term preservation instinct hard wired into every American family.

Direct war between powerful nations might be the only thing that bucks this trend. When world oil production accelerates its decline the international consolidation might move past the friendly phase. Which is yet another reason why it is in the best interests of the fascist sector to keep the economy at a very low capacity utilization by preventing inflation from seeping to the middle class. If the economy picks up then the middle class might again start burning through the oil and bring this unstable situation of possible war even closer, before more measures of control are installed.

How can this be stopped? Is there any other way than a new monetary system? Can this be done without making some massive contract law violations? How can we focus when Jay Leno is being such a douche?

For now, while no better solutions are around, I believe ZH has exactly the right idea: educate and inform the citizen so that he can learn how to play the game.

Mon, 01/18/2010 - 16:23 | 197575 RockyRacoon
RockyRacoon's picture

There you go again, Dice!  Being reasonable and measured -- and accurate.

How can I focus on who will take Simon's place on Idol with you forcing me into a logical thought mode vis-a-vis the economy. 

Aaargh, the pain....

 

Mon, 01/18/2010 - 12:16 | 197187 Anonymous
Anonymous's picture

Why are Indirect buyers fleeing?

Don't need a Bloomberg or detailed analysis of the auction data.

Look at the 2009 returns of BWX ~ 11.25% vs VFSTX ~ 14% vs VFISX ~ 1.44%.

I have fled with them.

Mon, 01/18/2010 - 13:16 | 197291 Anonymous
Anonymous's picture

You guys are scared of numbers out-of-context. Put them in context.

World wide fixed interest debt/savings is about $100T.
Average interest rate is 4-5%, so avg interest per year is roughly $5T.

Now lets look at just one piece of that... the US mortgage market is about $10T in nominal debt. About 6% avg interest... so $600B/yr in interest. About $800B/yr in payments. Every year, like clockwork.

These are not really problems. Payments get made. Savings and debt balance.

The US external debt is about $8T, at an average rate of 2.6%, for total annual interest costs of $200B for the Federal Govt. Total federal tax revenues are above $2.5T.

More importantly, from 2003 to 2006 (the last recovery) annual tax revenues grew by $625B.

Why, again, am I worried?

Mon, 01/18/2010 - 16:40 | 197596 Anonymous
Anonymous's picture

..and why doesn't US Internal debt count? Because we owe it to ourselves? And therefore, what never have to pay it?

What are boomers going to do about their Sosh? Just take a
worthless dollar and smile?

Mon, 01/18/2010 - 19:04 | 197771 Anonymous
Anonymous's picture

Uh, "debt" owed from one account to another... is not really the same, is it?

So yes, SS and Medicare (much more so) need some small simple adjustments. Again, nothing to be scared of. Something as simple as continuing to raise the standard retirement age by 1-month each year would make this "funding prob" dissappear. In fact, massive surpluses would appear.

This would mean, that if one were 31 today and scheduled to retire in 36 years at 67 year of age (year = 2045) you would wait 36 more months or 3 more years and retire at 70. If one was 64.5 today and scheduled to retire in 1yr... you would wait 1 more month.

Simple. Easy. Uniform. Nothing to be scared of...

Tue, 01/19/2010 - 04:56 | 198083 Herd Redirectio...
Herd Redirection Committee's picture

Except I don't want to retire at 70.5

I have had to watch my parents generation retire at 50, 55,  60.... With generous retirement packages, severance and benefits.

It looks like retirement ITSELF will be history within 30 years, and so therefore my generation gets f*cked, royally.

So excuse me for not providing uniform support for your gloriously uniform solution.

Oh, except it is not uniform for those that are 27 the same that it is uniform for those that are 60 or 64...

This is going to end in a clash not only between the classes, races, and sexes,  but ALSO the ages!  The baby boomers better get real good with those guns, because they were terrible at keeping the gov't in check! 

Distance yourself from your peer group as swiftly as is possible, without causing alarm.  Attempt to educate the young (under 30) who are still open-minded and have not yet turned on the older generation.  This is imminent (within 10 years, so imminent is maybe a bit strong)

Mon, 01/18/2010 - 17:06 | 197628 Anonymous
Anonymous's picture

sanguinity comes at the price of foolishness....

tax revenues are not growing - they are shrinking
and there is no recovery....or if you prefer the
rah rah recovery bit, tax withholdings are shrinking
during a recovery....

interest rates are sure to rise - i don't have
a date but the total amount of debt will have
grown by the time rates start to surge....

that 2.5t represents 1-2t per year borrowing...
i can assure you that the average rates will increase
from 2.6% to something much higher...

the marginal productivity of debt tells us that
a "recovery" is impossible.....

2.5t per year will not cover unfunded liabilities...

that clock of yours is headed for a huge unwinding...

Mon, 01/18/2010 - 18:47 | 197759 Anonymous
Anonymous's picture

Uh... two straight Qs of significant positive GDP growth and some small positive inflation.

Why exactly do YOU, KNOW that next Q is down?

Isnt the continuation of the trend since April much much more likely?

I believe in the business cycle. Tops will happen again, but this is not one. This looks alot like 1983, 1993, 2003.

Mon, 01/18/2010 - 22:07 | 197942 Anonymous
Anonymous's picture

uh....there was 1 quarter of q-to-q growth in
3q09 purchased by the federal government
courtesy of massive debt. year to year gdp is
still acutely down. when intel becomes the
usa economy then i will start looking to them
as a bellwether....

if you want to see nonsensical trends then
look at the stock market trend from october
1929 to july 1930....great trend there too
wasn't it?

this is not 1983...gdp came roaring back in
the early/mid 1980s on declining interest rates,
technical innovation, and overhauled tax policy -
not on the back of massive debt and leverage
and growing inflation as we have now (6%)....and
i assure you that interest rates will climb this
time....

those companies which people often cite as important
indicators derive 30-80% of their business overseas
so they indicate more about foreign results than
america.

2003 was a fed bubble which is why you will always
believe in business cycles....i would love to be
wrong and you may come back to gloat if i am but
the data does not support the theory of a recovery...

Mon, 01/18/2010 - 13:56 | 197340 anarkst
anarkst's picture

Zero interest rates is the most effective form of financial terrorism possible.  

Mon, 01/18/2010 - 15:41 | 197506 Anonymous
Anonymous's picture

As of 4 November 2009 the federal reserve reported that the U.S. dollar monetary base is $1,999,897,000,000. This is an increase of 142% in 2 years.

M2, the broadest measure of money supply, has increased from approximately $7.41 trillion to $8.36 trillion from November 2007 to October 2009, the latest month-data available. This is a 2-year increase in U.S. M2 of approximately 12.9%.

This is a WMD as well.

Mon, 01/18/2010 - 15:44 | 197512 Anonymous
Anonymous's picture

Nah, why should one get paid to park money in the safest possible place? (USTs).

There is plenty of interest... you just have to take some risk to get it. HY credit bonds are up more than the stock market since 1-yr ago.

If you're afraid of risk, you deserve zero returns. Esp in a dis-inflationary world.

Mon, 01/18/2010 - 18:06 | 197713 anarkst
anarkst's picture

If you are 75yo and not in a position to risk what capital you may have, what then?

Mon, 01/18/2010 - 18:54 | 197766 Anonymous
Anonymous's picture

If you are 75yo...

Then you can spend up to 5% of capital per year. You can take some risk (10% here and there will not ruin you) and be out a bit on the curve (some 5yr debt, some 10yr debt). Small, smart risks work.

But generally, you should expect to spend principal, right? If you want ultimate security: dont expect much return.

Life is v cheap in many places -- Arkansas, Upstate NY, Mexico, Thailand, etc. If you want to live better consider adjusting your expense baseline.

Tue, 01/19/2010 - 05:03 | 198086 Herd Redirectio...
Herd Redirection Committee's picture

Yep,  life is cheap.

Who cares where your grandkids live?  Or your sons and daughters?

Move to Alaska,  cuz the houses are cheap */sarcasm*.   Mexico,  yessir, if you want to retire in peace I suggest a country run by drug cartels (the US is run by organized crime who hide behind the front of Wall Street and Washington)

Move to Canada (I recommend southern BC/Vancouver Island), atleast we can promise you shelter,  food, water, and some of the finest herb on the planet.

This idea that old people should just move where it is cheap, relatives be damned,  will see the USA disintegrate.  The family unit was the last thing holding this country together,  and it is on its last fibres.

Mon, 01/18/2010 - 14:19 | 197378 Anonymous
Anonymous's picture

ok.. and retirees if you want to send a message to the Prez then go out and vote Brown in tomorrow - not that the Reps would do anything differently, but atleast it might wake up the bozos in place !!

Mon, 01/18/2010 - 16:41 | 197600 JR
JR's picture

Speaking of elections, Peter Schiff’s Senate campaign’s latest Money Bomb has brought total contributions to date to more than $1,513,000 in its goal of $2,000,000 in a Republican Primary bid for Connecticut’s Senate seat occupied these many years by Democrat Chris Dodd who is his resigning the seat.

Schiff has long been an ardent supporter of free market economics and an early voice of caution of the pending financial crisis that has struck the United States and the rest of the world. Opposing Senate contender, Connecticut Democrat Attorney General Richard Blumenthal, says he was proud to support Sen. Dodd who is chairman of the Senate Banking Committee and he will aspire to the same record of conscious and achievement as a leader of the US Senate. Says Schiff, Instead of supporting Dodd, he should have been prosecuting him for the crimes he has committed.

Mon, 01/18/2010 - 14:24 | 197389 JR
JR's picture

Nathan’s Economic Edge featured two recent interviews with Marc Faber.  As for the markets and the debt bubble, said Nate:

“Marc thinks that the consensus for higher in the near term and over the course of this year is probably incorrect. He sees a marked correction and the possibility of finishing the year in negative territory...

“His long range outlook has not changed—he sees the eventual demise of our current dollar system.  Of course anyone who owns a pocket calculator can figure that out, if only they are brave enough to face the mathematical truth.” (ht Keith Hoops)

1/12/10 Marc Faber on Bloomber: This Year Will…

Dr. Marc Faber’s 2010 Predictions January 13, 2010—Faber: Bull Market In Bonds Is Over

http://economicedge.blogspot.com/

Mon, 01/18/2010 - 14:32 | 197403 Anonymous
Anonymous's picture

implying that indirect bidders, aka foreigners,

this assumption is shaky at best....indirect is defined more broadly than that....

the large reserves held by banks at the fed are probably one source of funds....monetization is another.

i am still interested in how the fed bought 91% of all treasuries (bills and bonds i presume) given the above data..

inflation is already quite healthy (6%) even as m3 velocity is 0 or negative....which means the economy is tanking at an incredible rate and/or credit is imploding....but imploding credit results in the former at some point...

abandon hope all ye who enter here (usa economy)....them green shoots you been seein is better smokt then fertilized...

Mon, 01/18/2010 - 16:32 | 197585 Anonymous
Anonymous's picture

This thread needs to migrate to the top of the list

Too much incisive information to be relegated down the pages.

Mon, 01/18/2010 - 23:46 | 197995 Anonymous
Anonymous's picture

This is what bankers do in their free time...

Bank One (JPM Chase) employee blowing up anthills.

http://www.youtube.com/watch?v=Jz86rFl04v8&feature=related

apparently banking system is not the only thing that they like to destroy :))

Tue, 01/19/2010 - 05:37 | 198092 Anonymous
Anonymous's picture

Julian Robertson (Tiger Capital) moved away from curve steepeners already in fall 09 and transferred over to curve caps with c. 5 year horizon.

Just FYI.

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