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The Minsky Moment Approaches
- Ben Bernanke
- Bill Gross
- Black Swans
- Bond
- Carry Trade
- Central Banks
- Consumer Credit
- Credit Crisis
- Creditors
- Equity Markets
- Federal Reserve
- fixed
- Foreign Central Banks
- Funding Mismatch
- High Yield
- Japan
- Lehman
- Liquidity Swaps
- Moral Hazard
- None
- Quantitative Easing
- Reality
- Recession
- recovery
- Sovereigns
- Trade Deficit
- Unemployment
- Yen
- Yield Curve
Today, the yield curve hit a record. At 380 basis points, which incidentally was the widest spread between the 2 Year and the 30 Year ever, it has never been easier for banks to make money on the short-long interest spread.
Indeed, there are some wacky things happening in bond land. Recently, just like in the days after Lehman imploded, short-maturity bills traded at negative yields. While that particular rush for short maturities was at the time explained by a desire for year end window dressing and cash parking, the continued exuberance in bills (see chart below) can no longer be explained that simply.
There are a variety of explanations as to this surge in steepness, as well as for a continued preference of the short end of the curve. Some of these include the desire of foreign buyers to minimize duration, and as we have been pointing out over the past several months by deconstructing TIC data, the bulk of foreign purchasing has been in the Bill sector. And while there is no shortage of Bill interest, the traditional 30-Year buyers have shunned the long-end, and instead are opting for corporates for a better duration-risk profile. This is further coupled with the global doctrine of moral hazard which has made corporate failure essentially a thing of the past. With Bernanke onboarding private risk to the public balance sheet, the next big blow up will undoubtedly be sovereigns themselves. This is, in fact, confirmed by a glance at the spread between the SovX and the ITRAXX MAIN ex-FINS: for the first time in history, it is riskier to be a sovereign that it is to be an IG credit (green line on chart below).
So with the sweet spot in governments being exclusively Bills, it is natural to see further steepening, as more and more investors avoid the long end due to increasing sovereign and perceived inflation risk.
Yet there is nothing inherently wrong with steep curves. The bogeyman in credit land has always been the flat (or, heaven forbid inverted) curve. As CreditSights characterizies the flat curve situation:
A flat yield curve usually occurs when the market is making a transition that emits different but simultaneous indications of what interest rates will do. In other words, there may be some signals that short-term interest rates will rise and other signals that long-term interest rates will fall. Investors are uncertain and the margin for error is high. Tails get fat. Black Swans fly. X-Factors propagate.
What are the benefits of steep curve? They are numerous for all investor classes: i) a steep curve allows a wide margin for error, which incentivizes yield seeking lower in the capital structure, primarily equities; ii) banks can borrow cheap and lend expensive, which is a green light to "print money", and iii) a knee-jerk trading response to a steep curve is to buy equities, which creates a self-referential feedback loop, whereby steepness leads S&P higher, which increases asset prices, and hikes inflation expectations, which leads to an even steeper curve. The relationship is mapped on the chart below:
Lastly, by pushing yields down, the Fed is naturally trying to encourage the "virtuous cycle" of encouraging consumption and corporate investment. When inflation expectations are high and rates are low, companies and individuals are encourage to borrow as they should anticipate this debtload will be inflated in the future. However, judging by the latest consumer credit report and exorbitant excess reserve levels, Bernanke's plan has failed, as only Goldman et al can borrow at the short end.
In the current environment, in which economic reality is disjointed with the market, the steep curve is a source of concern. As CreditSight notes:
A steep yield curve can be a good thing. It should help the economic recovery and debt and equity markets. One could even argue that the Fed has done its job. ZIRP-American-style has both helped repair banks balance sheets and forced investors to take on riskier assets. Steep yield curves are generally seen at the end of a recession, when the economy is about to kick into full-gear.
So why all the worry? Well here is the rub: the evidence for economic expansion or the elements that make up an upward sloping yield curve are just not there yet. While it is a lagging indicator, credit creation has been scant. A recent survey from the Federal Reserve showed that since peaking in July 2008, consumer credit is down more than 4.8 percent. Bank lending is also down more than 8 percent over the past 12 months. Without a recovery in credit, there can be no self-sustaining economic recovery.
Also, it is interesting that we are seeing inflationary expectations when there is a complete lack of wage or producer price pressure. Employment (also a lagging indicator) has been weak and consumption continues to decline (though given its historic rise over the past decade, this could be a good thing). None of this seems consistent with a steep yield curve.
One certain outcome of a steep curve is dollar debasement: one of the goal of the Fed all along. And as Zero Hedge has been noting for almost half a year, the current FX dynamics are such that the dollar has supplanted the Yen to become the funding currency of choice (much to the chagrin of the BOJ). Logically, the question arises: how big is the carry trade?
From CreditSights:
The carry trade notably reared its wild and wooly head during the late 90s, when Japan announced a Zero Interest Rate Policy (sound familiar). Traders sold short the yen and bought just about anything else they could find, because everything was higher yielding. Indeed, if you were a mortgage trader, chances are you funded trades in yen. If you traded emerging markets, you crossed in yen. Baseball cards? Sell yen. Before the last time the world blew up, way back in 2007, the yen carry trade was estimated to be about $1 trillion (but who knows for sure). When the credit crisis hit, this trade was unwound, quickly. The dollar was (is) still the world’s reserve and money flocked to safety. Dollars were needed. The carry trade was killed and people lost big.
How do we tell there is a dollar carry trade? First off, Chairman Bernanke seemed to give the carry trade his blessing during his recent speech at the NY Economic Club, firmly saying that interest rates will not be raised in the short term. This gives traders license to sell dollars, not fearing that the Fed will raise rates and they will be caught out short.
Second, correlation. Everything seems to be correlated to everything (and we know how well that ended in 2007).
As the dollar weakens, investors look to harder or higher-yielding assets to contain some of the depreciation effects, causing asset classes to rise in tandem. In a recent piece, we pointed out that the correlation between equities and debt had an R-squared of greater than 90 percent. Dollar-equities, same thing, but inverse. Indeed, this is the first time since 1938 that we have had zero interest rates, dollar depreciation and equity markets rising. High yield continues to receive record inflows, despite coupons and current yield falling far short of extraordinary. Gold is also at record highs.
Zero Hedge has previously discussed why due to a funding mismatch, the globalized economy was on the dollar shortfall hook for a number as large as $6.5 trillion, which in turn explained why the Fed has to rush to save all Central Banks by pumping hundreds of billions of FX liquidity lines.
And here comes the first estimate ever attempted at quantifying the Fed sponsored "Dollar Destructive" moral hazard: the
upper bound of the total loss in the case of a major liquidity event
occurring with the Fed's complicit bailout on the table would amount to
a staggering $6.5 trillion from a dollar duration funding mismatch
alone! This is an astounding, unfathomable and untenable number. Yet it is likely the same now as it was at the onset of the Lehman crisis...As the H.4.1 discloses weekly, the Fed's liquidity swaps are now back
to almost zero. This means that foreign Central Banks believe they have
the FX swap and dollar maturity situation under control. They thought
the same before Lehman blew up. And they were wrong. As the DXY
continues tumbling ever lower to fresh 2009 lows, the trade de jour is
once again the dollar funding one, although unlike before when the Yen
was the carry currency of choice, this time it is the dollar itself,
positioning banks for the double whammy of not just a dollar funding
shock, but one coupled with a potential massive and historic short
squeeze. If and when an exogenous event occurs, not even $6.5 trillion
in Fed swap lines will be sufficient to bail out the world economy.
We wrote this in October 2009, before Roubini et al became dollar carry trade experts. We would like to highlight that the last time around, the dollar funding risk did not include the incremental need to cover hundreds of billions if not trillions in dollar shorts. The next time there is a risk flaring scenario, the cost to fund the dollar mismatch will be even greater due to additional rush to cover shorts.
The Minsky Moment
Today we pointed out that the VIX is at multi-year lows: complacency once again reigns supreme. So if indeed the market is correct, and growth is back, the Fed presumably has the tools required to facilitate and unwind, whether it is rising rates or using reverse repos. A return to Fed normalcy, however is not in the cards, as Bullard's presentation earlier highlighted. In fact, look for more Q.E., and more ZIRP.
So what happens if the optimists are wrong. A CreditSights readers makes the following observations:
I think what you are suggesting is a reversal of the high beta compression trade; we haven’t really seen economic recovery, just return from the precipice, so the markets have probably gone too far too fast.
Of course the brutality of the unwind in the carry trade depends on what moves the Fed off its mark. If it is inflation concerns, fixed income asset prices are dead and probably equities too, just on the discount factor. If it is due to real signs of economic recovery, then the carry trade unwind is mitigated by dollars chasing the economic recovery story in credit and equities. Third possibility is that the Fed intervenes on concerns about dollar weakness, but I really don’t see that happening.
To which CreditSights responds:
To have a dampening effect on dollar depreciation, the Fed would have to raise interest rates early and dramatically. Drawing from Chairman Bernanke’s recent statements, high unemployment and worries about choking off the recovery too soon are of greater concern. Also, a weak dollar solves a lot of problems for the US—of course, it creates problems for the rest of the world. But, as long as the US’s creditors are willing to accept dollar denominated debt, currency devaluation has to dual effect of monetizing the US’s debt and helping rebalance the trade deficit. But what happens if the world is no longer willing to accept Uncle Sam’s IOU? Last I checked, the US had some pretty big deficits it needs to finance.
The last is precisely what keeps PIMCO's Bill Gross at night, and is one of the main reasons why we believe the Fed has no option but to continue with Quantitative Easing...No option but to perpetuate the status quo which will merely make the ultimate unwind truly unprecedented.
The confluence of all these risk factors implies that there are simply too many variables for the Fed to be able to sustain control over what is an inherenetly chaotic situation:
An overly steep yield curve, combined with run away dollar depreciation generally indicates that authorities have lost control. There is a legitimate and real risk that the long-end could become “unstable,” as supply/inflation fears kick in. While consumer leverage is declining, leverage in the financial world is on the rise. And, it does feel like we have been here before: 2002, 2007—the so-called Minsky Moment years.
We have come full circle, only this time it took a mere two years. As Justin Lahart so effectively summarized some years ago:
At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote.
When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived.
The Minsky moment is, once again, knocking on the door.
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Have to love CNBC teeing up an analyst to tout the blowout AA results and they cut away to the EA preannounce then onto some puff piece. nothing to see here....
What a load. I am so sick of guys like you ripping on CNBC. IF they're so stupid and you keep watching them AND COMMENTING ON THEM, what's that make you, Bozo?
Agreed.
Only brain-dead idiots watch CNBC.
Agree with the brain dead comment but sadly some of us are made to suffer through it by office mandate - though understanding the mindset counts for something.
As for anon, watching does yield a better understanding of the kaleidoscope through which retards like yourself view the markets - move along troll
couldn't have--and didn't--put it better myself
- Sun Tzu
I cannot know my enemy unless I am aware of what they are feeding the public. That simple.
Exactly. Keep you friend close, and your enemies closer.
That's why I consider Sex and the City research.
Righteously done, SDRII.
Yep--wierdly entertaining to see the bullshyt they spew forth- Surreal, yet like a bad car crash, sometimes you want to look.
When I want to get beyond pure entertaiment to see what is really going down, I hit the other sites--including this one. It is particularly gratifying to see Steve Liesman called out for being the bought and paid for shill that he is.
CNBC's viewership has plummeted for a reason.
The CNBC happy voices may be spewing bullshyt, but they've also been right for the past year, and anyone who followed their recs is quite happy. Those who follow the permadoom predictors here have been wrong, and much much poorer.
Just sayin'
phuck, i had no idea that this was a trading and investment advice site. all this time i thought i was receiving another view of the wall st/banking/fed/us gov't oligarchical complex.
i apologize to all for my comments over the past year about rule of law, cronyism, ponzi schemes, fasb 157, ad infinitum, when i should have been talking about what a great buy amzn is at a 75 multiple.
you're just sayin'.
No need to apologize. No one reads your stuff anyway. You can go join Denninger now. He's in the padded cell on the left.
No one reads your stuff anyway
You just did.
be careful using absolutes like "no one"....
-1,000,000,000,000
I look for deadhead when I read ZH comments. He is measured, polite, smart, informed, and sensible.
+1
wanting to put yourself on many people's auto-ignore list, looks like.
Too funny.
More bullshit from the bashers. I can tell you I made a lot of fiatcos partly based on the information I gathered from this site. It was here I found all the evidence I needed that Bernanke was going to kill the currency, and got as much as my money out of USD and into commodities and PM. My count of fiatcos was up much more in percentage terms than the stock markets last year (not that it makes me feel "wealthier", more like I preserved my wealth).
Sorry if you misinterpreted the information that was presented here. Anyone reading this site should have understood that the Administration and the Fed would do anything to kill the currency to bail out their pals on Wall Street.
Granted, when this site started there were plenty of bears, but they all seem to have disappeared, and/or changed their tune.
As for CNBC, they are a lot like Leo - right, but for the wrong reasons. As measured against just about any global commodity, the equity markets were down last year, it is just that Bernanke debased the currency so much it looks like they are up. But of course a tool like Steve Liesman wouldn't get that.
If you invested in the broad market, you did OK, you didn't lose too much wealth, at least not as much as the deflationists, but you still lost global purchasing power.
"Those who follow the permadoom predictors here have been wrong"
Until suddenly and painfully the music stops and the number of chairs is one fifth of what it was to start.
it makes him/her someone who understands that you have to keep tabs on what the fools are doing. yes bloomberg is better.
shut up and move on
Jesus Christ, I can't believe someone on here not only watches CNBC, but defends it with a passion. Why are you on this blog? Go out and buy a new house and a car, because it's a great time to do so and you're just going to get priced out of the market if you wait. We all wish we had the balls (and money) to do something right, and something for the good of America.
hey Joe Kernan, you're the worst
+100
Ah....it's my Bozo friend again. And my second chance to operate the Junk button.
yeah..."sales top expectations", though. or if you prefer marketwatch, "alcoa posts narrower loss"...mmhmm
EA is such an irrelevant shit-sandwich of a company. i'm not going to lose sleep over the dent they just put in my atvi gains. i'm buying more tomorrow. modern warfare 2, avatar of the gaming world
Kamikazee bingo anyone?
Thats why I love ZH---NOTHing gets by you guys!
"...an astounding, unfathomable and
untenable number."
he used untenable.
I guess after Dick Bove screwed up "live" last year, no respectable analyst wants to appear on their "Earning Central" show. CNBC is a joke...
Screw the facts. Take the cannoli
Uh, last I checked "AA" is not some large bellweather.
Did you notice that mortgage paper had its best performance in the last 2 months? If this is a Minsky moment why have all bonds come back from 30-40-50 to 60-70-80-90 over the past year?
The Minsky moment was 1-yr ago. This is the recovery. Hello!
Banks may be able to borrow at 0% but they can't loan if no one applies and they continue to tighten lending standards. Question comes down to whether the Fed Res can pump cash onto bank books faster than the value of their loan portfolios deteriorate. So far so good, but sometime, somewhere the rubber meets the road.
exactly. FYI, the steepest ever yield curve in Japan was recorded at the start of 1996, with nominal GDP hitting it's nominal all time peak the next year. So yield curves get things terribly wrong too.
It will be a bloody summer when all the new A-loans and pick-a-payment loans come to their predetermined conclusion.
Banks will not be able to hide the truth for too long.
The average house price in Detroit is 7k and one dollar houses are the plenty. Same scenario may be coming to a city near you come end of 2010.
Jaysus Christ, Psquared! Next you'll be suggesting America might actually consider creating some sort of real economic engine to drive this phantom recovery.....
The charade has gone on so long that I'll believe this when I see it...
...and maybe even then I won't believe it.
I am loading up on TLT puts
+100
I was there in '87...who knew...it started with a few down days, nothing huge...then recoveries, but nobody noticed lower highs and lower lows, then BAM!! One third market value in no time...before dark pools, before HFT, before algos...boy this next time is really going to be something!
Then market was higher... 3 months later. Wooppee!
You guys would be screaming at Greenspan in '87 for lowering the rates!
Silly people. The downside was in '08. Its over.
Kunstler is not too good with his predictions, but he has come out today with the proclamation that the economy has 6 months to live:
http://kunstler.com/blog/2010/01/six-months-to-live.html
So, only one Friedman unit left to go?
http://www.urbandictionary.com/define.php?term=friedman%20unit
thanks for brining up Tom Freakman, the $3.2 billion-dollar-bozo!
I have a picture of him (triple chins and all) at the bottom of my toilet.
Hah! I clicked the link from here at work, and was "Access Denied---Category Entertainment".
Doesn't there have to be willing, qualified borrowers for banks to make money on a steep yield curve?
That is such old school thinking!
Just churn out an ever-increasing number of credit derivatives (Pinnacle Notes, anyone?) and keep swapping 'em back and forth.
My question is in terms of the full extent of the spread, not the ability to arbitrage CDS, which of course happens constantly.
The banks can also buy USTs. Or, since the Fed can now pay interest on reserves, the banks can just deposit their money at the Fed as excess reserves, right? What is the Fed paying, 0.75%? Nice work if you can get it. Am I understanding the "paying interest on reserves" thing correctly? So, the bank borrows from the Fed at 0.25%, then turns around and deposits it back at the Fed and gets paid 0.75%. Can that even be right? It sounds so...Ponzi-like... Either way, the banks screw us over.
The Fed is paying a quarter point, or 0.25%. This is simply an offset to the fact that the Fed Funds rate is at 0.25%, which is astronomically higher than the 3 mo. T-bill at 4 basis points. In other words, banks that do not deposit "reserves" with the Fed would simply suffocate under the Fed's current confiscation scheme, as they do not have enough willing or qualified borrowers.
Now, those dealers that are simply buying long bonds with 0.25% cash from the Fed are taking on huge risk because they would have to either roll or sell within 30 days (the "overnight" fed funds rate can actually be up to 30 day terms). That assumes, of course, that the Fed is not buying the long bond back immediately thereafter (back door monetization).
So, again, I say that the steep yield curve has a very limited benefit to the banks in the current environment, and is not the boon that many pundits suggest.
I feel like I'm missing something, but why wouldn't said banks with the window just buy long-end treasuries and pocket the net spread of 3+%. This gives the UST the buyers that they need and shunts profits to banks from the spread (courtesy of the taxpayer of course), so where is that wrong?
If banks are purchasing long bonds with 30 day cash then they have roll risk because the cash should be returned after 30 days. So if they are buying long bonds and holding, it is basically out of their operational cash flow.
Sure, but why not just roll that 30 day cash with new cash from the Fed window of equal amount (paying the .25% while booking a profit from the long end coupon of their holdings). Rinse. Repeat.
understood but the banks would still have monster risk holding long bonds, especially right now. the point of banks "making money of a steep yield curve" refers to borrowing money very cheaply and lending it out at a higher rate. It does not refer to bond or whatever other kind of arbitrage.
there are no borrowers, so the effect of a steep yield curve is very muted on balance, inclusive of any arbitrage.
Ah, I see. I knew I might have misunderstood how that worked.
Ted is turning up.
The foreigners are sliding away from our 5 year plus portion of the curve. Only here is that noticed (well at my blog also but ZH has cooler graphics and posters). This is a nightmare that Bernanke will not address but I think the day of 100% QE is coming sooner rather than later and if anyone thinks that we will not hyperinflate to save the Republic and banking system as it exists now, they are gravely mistaken.
This will end, perhaps, with dollar being replaced with a 21st century Assignat backed by the real estate securitized by FRE, FNM, and probably the FHA, etc. Exchangeable by the Chinese for farmland or whatever else they need. The US is then colonized by it's creditors.
Perhaps I should learn how to drive a tractor.
I am learning Mandarin Chinese. Need a translator?
I used to read Japanese at a 6th grade level, but I'm losing the Kanji. At least I can look up Chinese characters in a dictionary.
stoploss...good for you. i've advised my 2 older children, both of whom mastered spanish, to take another language. son 1 took all the arabic he could at college and son 2 is deciding between chinese and arabic.
understanding another language is an excellent addition to your skill set.
I am Death, at least when it comes to the languages I study.
Years ago, when oil was $40/bbl (then an all-time high) I became an Arabic speaker. Oil crashed.
I learned Japanese and began trading in Japan in the late 80's. Dai Boraku.
I learned Thai in the late 90's. Asia Crisis '97.
Gave up on the mainstream languages, out of fear for my safety (getting burned as a witch), and learned an obscure, unwritten tribal language of a minority people. Don't ask.
Tomorrow I start Mandarin. Watch out China!
This has to end with some kind of formal transfer of asset rights to our creditors, or war, or both. We are already providing security for Chinese miners in Afghanistan. I wonder what the Chicom government will name their farmland holdings here in the U.S.?
I honestly worry about war. The Chinese really fucked things up with their one-child policy, now they have 3 horny dudes for every chick (not sure of the exact proportion). What are they going to do with all those extra dudes?
War is a convenient way to clean up that excess.
That is one of the funniest-scariest things I've read in a year of funny-scary things. What an image--24 million horny Chinese men invade US. We'll have to sell them US women in advance.
As for CNBC, as long as MCC is "out front" all is well.
I like your ideas and thoughts. by chat Greetigns..
You want messed up, think about their population and the fact that they could lose from their lexicon words like uncle aunt brother sister cousin and the likes....no sense of family...just setting up a bunch of selfish mental cases...there may not be murder and crime over there like here in the US, but when one of those folks lose it, they totally check out... We are selfish, but at least we tend to take care of families and in the long run families run pretty wide and deep in the US...
120 to 100.
Not quite 3-1, but bad enough.
Derek
I think that's exactly right, Mr. Galt. It's the ultimate power play with the world's reserve currency. If they won't buy our long-end T's, we'll just take 'em all ourselves and see what the world has to say about it. They're obviously aware that this scenario is coming. The Fed govt is looking at $1 trillion deficits for a decade forward. They know the Republic's need for debt sales is going to outlast the capacity of every buyer, foreign and domestic, to keep buying.
Agreed to nearly all of the above, but could you please post a link to the creditsights report?
Whether requiring a subscription or not, slight tidbits help to create the illusion of support behind a thesis while full disclosure would help to further substantiate or provide the basis for alternative and informed opinions. Understandably, most ZH readers don't want to do their own homework, but it would be nice for the rest of us who don't always see eye to eye with anonymous opinions, even if we find your work to be exceptional.
All these T-Bill holders?
they're the ones standing by the door so they don't get crushed in the mad scramble for the exit.
more of the same in mortgage land...
http://www.lpsvcs.com/NewsRoom/Pages/20100111.aspx
"
JACKSONVILLE, Fla. – Jan. 11, 2010 – The December Mortgage Monitor report, released by Lender Processing Services, Inc. (NYSE: LPS), a leading provider of mortgage performance data and analytics, showed that one in every 7.5 homeowners in the United States is either behind on mortgage payments or in foreclosure. The December 2009 Mortgage Monitor report is an in-depth summary of mortgage industry performance indicators based on data collected as of November 30, 2009.
Total delinquencies, excluding foreclosures, increased to a record high 9.97 percent, representing a month-over-month increase of 5.46 percent and a year-over-year increase of 21.29 percent. Loans rolling to a more delinquent status totaled 5.01 percent compared to 1.52 percent of loans that improved. Of loans that were current in December 2008, 4.37 percent were either 60 or more days delinquent or in foreclosure by the end of November 2009, a rate higher than any other year for the same period.
Foreclosure inventories also continued to climb to new highs with November’s foreclosure rate at 3.19% – a month-over-month increase of 1.46 percent and a year-over-year increase of 81.41 percent. Compared to 2005 levels, foreclosure inventories across all loans are now nearly seven times higher, while jumbo loan foreclosure inventories are nearly 100 times more than levels four years ago."
So, cash will be king? Cash in a bank or in your hand?
Will that be the place to hide?
Or will this trigger a currency reform? Strike three or more zeros?
Cash? As in FRNs?
Hoard those all you want, at least you will have something to wipe your ass with, that is all they will be good for.
The fedres & fedgub already own the entire mortgage market and a huge chunk of the bond market, do you really believe they wouldn't buy the entire stock market as well?
I believe they started buying equities hard last March. If not March then July. As someone that has traded options for a long time, there's something very different about these markets over the past 8-10 months.
I am convinced they started back in March as well, that is one of the valuable things I got from this site, there was plenty of evidence of FRB equity pumping.
One of those pieces of evidence that convinced me to get the hell out of FRNs and stay out.
The main view of this data would appear to be (and I don't understand bonds)that money would rather take a loss in bonds than put it in stocks.
Nothing means anything anymore. It's a zombie economy. It's no longer a functioning but a collapsing economy/nation. That said, I think the steep yield curve means that everybody is just waiting to exit (i.e. move their money out of) the US economy/debt at a moment's notice.
Zombie economy. What a great observation GG. No one wants to borrow, no one wants to build or hire in this awful environment, waiting to see what surprises are coming from Obama and Congress.
I have precious metals and a decent investment outside the USA. But, I am hanging on to some FRNs in case something yummy and cheap comes along.
Let's not forget how we've gotten to these credit valuations: The 2-Year Treas. is basically pegged to the FF rate, currently at historic lows; while the 10-Year Treas. is currently at 3.820%, a rate last seen (before the 2008 crash) during the 1960s, and continues to trend upwards towards historic norms.
The fact that the yield curve is hitting all-time highs is due to the un-Godly loose Fed policy, and as the (ahem) appearance of economic healing takes place, it's very much expected that yields at the long end of the curve will rise.
The only reasons the yield curve WOULDN'T continue to steepen are: (1) the Fed raises rates (which it won't), (2) investors fear disinflation, or (3) QE 2.0 occurs.
Correct.
People seem to want to make the yield spread more complicated and mysterious than it is, and then offer complex explanations and spin elaborate multiple predictive scenarios involving everyone on the planet.
The Fed (even with Q.E.) has less control over the long end of the curve than the short end. A negative real FF rate always produces a low short term T-bill yield. Although the long end has been suppressed by Fed purchase of long T-Notes, the effect is somewhat diluted by the total quantity held and the total being traded.
If Q.E. were to end (don't hold your breath) the long bonds would rise somewhat faster than they currently are (independent of one's theories of deflation/inflation) and the curve would steepen yet more. If the FF were raised to 2006 levels the curve would flatten like a pancake.
Convoluted analysis of the yield curve is astrology.
Please see what our fav Alan Greenspan warns of the next "Steep Yield"
http://www.c-spanvideo.org/program/id/217026
sorry to say it but when this thing comes down, i think the metals will come with it. silver has formed a nice ascending edge with a throwover then broke the wedge and now retested the apex, forming a gravestone doji for the day. I think a big dollar rally is soon coming and just going by the chart, even metals wont be spared. I do intend to keep my physical core gold holding though, as insurance against currency devaluation.
I don't mean to be sarcastic, but hasn't the dollar rally already occurred?
Mr Anonymous, you fail to identify your key assumption: that the tight inverse correlation of gold/silver to the USD will persist as next major crisis evolves. Although I believe how well this inverse correlation will persist depends on tempo of the next crisis, I think the consensus here is that the crisis will evolve very rapidly as massive pools of wealth all dash for the exits in all kinds of asset classes.
So, I think we all agree that the faster the next crisis evolves, the better the fear trade for gold/silver will work. The thesis that gold/silver will move perfectly inversely with the dollar only works when there is a collective perception of global and US stability.
So, in short, I think you're nuts to believe that the next crisis will evolve slowly, that there will be no panic, and therefore gold/silver will move down as the dollar climbs. Let's not confuse the US's fiat relative value to other economy's fiat with the fact that in the face of large scale instability, fiat starts to look more and more like paper (increasing the demand for gold/silver).
On steepening and CDS indices: it could be that the treasury market is not pricing in inflation as much as credit risk.
Just a clarification... are you saying that the longer QE continues, the more extended the carry trade, and thus the unwind becomes even more deadly?
If so, watch LIBOR-OIS... it'll be the last and only warning.
Sorry off topic, but did anyone see the s&p down 89.68 points or 7.9% in the last two minutes, before they changed it to +2.
yea watched it for 1 or 2 min. strange or not
spy 1050 ?
While you're waiting for Minsky, you might take a look around and see who owns America now. My man Barry O has done what legions of lefties could only have dreamed of.
If you have the time dig into this little article and it might explain a short lived "cash is king" spike. All else will drop out shortly after.
Maybe some of the bigger brains on this site can evaluate this article's information and explain it better then I would be able to.
Before anyone jumps to conclusions, this type of info has a lot to do with the market/world/YOU.
Will be looking for a story in the future on ZH.
http://www.infowars.com/2010-food-crisis-means-financial-armageddon/
The info wars article is correct as far as I can tell regarding the USDA crop forcasts.Unfortunately, they always seem to go over the top on scare factor.The ag industry had a rough year last year, but it wasn't rough everywhere at the same time. Wheat took a real hit,corn was molding before it could dry, etc. But, almost every country grows wheat. Everyone should have 1-3 month of food on hand, that is a no brainer. Watch foreign countries restricting their exports of grain. Some did it last year and it is a telling sign that crop estimates, carryover supply might be tighter than the reports claim.
to anonymous 190525,yes,i did see that. I guess mistakes happen, but havent we seen a lot ore errors lately than ever before? There really is something very bizarre going on.
If the curve flattens by the long end dropping to anticipate the lost decade, the banks are screwed -- no more free money.
If the curve flattens by the short end rising to anticipate the dollar going down forever, treasury is screwed as the bill funding costs rocket.
There is no escape. The curve can't get steeper. If it flattens the only question is who goes down first: the banks or Treasury.
It says a lot about the incipient stupidity of economics that we have name, "the Minsky Moment" for something that is obviously to anyone with common sense. But, yes, Minsky is knocking.
China is going to pop then melt down into a starving mass of humanity. They have already destroyed and polluted one quarter of their country and another 20% is garenteed unless they do an immediate about face. They have more polluting boneheads there than we have. Even though you can spit from Beijing onto to Gobi now, they still over graze and destroy there diminishing land.
They will need food and alot of it. So they will be looking to cut deals with anyone who canp roduce food and that includes US.
Always great but I disagree about dollar shorts=the world is long dollars to the point of choking on them-the USD index is at 77 not 72 where it was last time.
As Trimtabs pointed out, just who the buyers are remains a mystery. I suspect, as they do that it is the same group who is funding the long end of the treasury curve-The FED.
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