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What is the Bond Market Really Telling Us?
Everywhere I turn these days, I hear a rising clamor and rancor to cut the spending that is creating deficits that will lead to the death of us all and destroy the lives of our grandchildren. CNBC reporter rick Santelli walked off camera maniacally screaming “stop spending, stop spending,” while commentator Larry Kudlow religiously devotes a full hour to the topic every day.
My interest piqued, and to attempt to bring some clarity to readers who must be as befuddled as me, I decided to find out what this borrowing is all about. And what do I find in my mailbox, but the chart below from my friends a Clusterstock. If a picture is worth 1,000 words, then this one is worth 2,000.
Out of a current projected budget deficit of $1.3 trillion, $700 billion, or 54% comes from the Bush era tax cuts, $320 billion (25%) from a tax revenue fall off caused by the Great Recession, $200 billion from the wars in Iran and Iraq (15%), and $50 billion (4%) is generated by Obama’s recovery measures. The TARP and the bailout of Fannie Mae and Freddie Mac are so small, they don’t even register on the chart. All of the angst, complaining, moaning, blustering, and carping is about the 4%.
You often see this in politics, where the debate gets focused on where the problem isn’t, not where it is, and is a big reason why I’m not in that business. Markets have a fascinating way of seeing straight though this impenetrable fog. So while the noise out of Washington is trying to convince us that these deficits are ruinous, the ten year Treasury bond yields we saw yesterday at a stunning 2.97% are telling us that, in fact, they are no problem at all, and that the government can now borrow nearly infinite amounts of money at the lowest interest rates in history.
There are some other really interesting things that this chart and the bond market are telling us. The Bush tax cuts expire next year, and a recovering economy will bring a return of tax revenues, eliminating 79% of the deficit. The scheduled withdrawal from Iraq next year will cut another 7%. This assumes that Obama is unable to get a single additional piece of legislation through the congress, a distinct possibility if he loses control of congress in November.
This is the writing on the wall the bond market is attempting to focus our blinkered eyes on. If anyone else has another set of believable numbers that reaches a different conclusion, I am all ears.
And what happened to Franklin D. Roosevelt’s grandchildren, the last president to preside of massive, depression fighting government borrowing? That would be me and my generation, and I think we’ve done pretty well.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Writer of this article shall go home and do a lot of home work before posting another article here. Bond rates are so low because people just watched Euro/Greek scare movies and decided flight to 'safety'. Without these movies, we already saw bond rates at two digis. If rates ever rise to certain levels, you will certainly watch PIIGS fly show later. Why bond rates are kept so low because they try to save your ass: Housing. This is QE2.0 in action, people just didn't realize.
After reading all the comments posted thus far, I haven't read one that refutes his premise. They just call MHFT an idiot and except as gospel that we must pay down the deficit RIGHT now and never allow the Bush tax cuts to expire. Well, as someone on the fence, his argument is more convincing but I'd like to hear a coherent, cogent argument as to why the yield is at that level and why he is wrong. I don't want to hear ad hominen attacks disguised as facts, as so many of the comments seems these days...moreover I think group think has invaded the comment section, luckily TD is immune and I still get a rich array of opinions here.
Your reading comprehension leaves much to be desired, sir.
The big IF in here is the "recovering economy" factor. Yes if tax revenues rise, and there is anything left to tax, other than corporate profits, which are off limits, then yes, deficit reduction is possible.
If the economy were actually recovering rates would be rising. Bonds are telling you no recovery, ergo no surge in tax revenues, and a deflationary spiral. We are quikcly approaching the moment when everyone is on welfare. Unless they tax welfare payments, like they tax Social Security, at rate greater than the cost of the program, we are fast disappearing. What will HFT think of 0% bond yields? Will that create a budget surplus?
First, one has to buy onto MHFT's allocation of the reasons for the deficit being what they are. i.e., so much due to this, so much due to that. As we know, to date , Fannie and Freddie have cost over $160 billion and that had to come from somewhere. Second, as I noted in an earlier post, the analysis is static. The government will spend, even in anticipation of its receipt, every incremental dollar, nay penny, of revenue it will receive. To argue that somehowm, a great windfall of revenue will come upon Dc and that it will be used for deficit reduction is simply, well, MAD.
Finally, the bond market. I ask you to look at the corporate market and not the Treasury market because that is where the real action is. I say that because you do not know for sure how much in Treasuries the Berbungler is buying either directly or through his proxies and therefore you do not really know what the market clearing oprice of Treasuries really is.
On the corporate side, the fact is nobody is issuing! Put aside that there is no reason to issue because there is no need for capital spending because of all the excess capacity in the economy. Even at these absolute low levels, a) corporate spreads have widened; and b) high yield has blown out.
The deficit is going through the ceiling. There is no recovery. The $1.5 trillion of MBS debt on the Fed's balance sheet is deficit spending. The $160 billion+ needed for F/F is deficit spending. MHFT is exactly that. Mad.
Apologies. Dup.
Dup.
the bond market is currently seen as, has been,
safety. financing government. these resources
then do not get invested in anything on the
producing side of the marriage of production
and governance, the system becomes a loop
of creating debt to finance debt at the expense
or neglect of actual production other than
government dictated. so yes it can go on but...
where is it going and who will care after a while?
only misfits and malcontents. meanwhile the
banks will have made free money, as always, but
the economy will be in such shambles and so inflated,
reflated and debt saturated that prospects will be
nill, so all investment will be elsewhere where
friendly governments have no problem going through
their workforces like toilet paper. but,
at least the government can continue to dole out
foreign aid, cash, to our enemies and allies.
.
did you say coherent?
$160B and rising doesn't register? And no mention of the entitlement programs which are not only in complete runaway mode, but have already gone negative and can no longer be borrowed from to cover up current deficit.
I thought that there was mention of "entitlement programs," all that money that the banksters got!
...
Out of a current projected budget deficit of $1.3
trillion, $700 billion, or 54% comes
from the Bush era tax cuts.
..
again typical idiotic article from someone WHO KNOWS NOTHING..
hey stupid ,, before blaming BUSH have you ever
looked at data called daily/monthly treasury statement ???
I did..here's some simple analysis
US fed budget revenues comes from 3 major sources:
# federal income taxes - 50% ( around 1 trl$)
# SS / empl taxes - ( 600 trln $)
# corp taxes -- v,v,v, volatile from 150- 400 bln $
## rest of..
#1
so during BUSH peak of federal income taxes (AKA 12 month rolling sum) was
at apr 2001 and it was about 1,06 trln $
peak of corp taxes was at end of 2000 yy about 200bln $
REMEMBER, IT WAS PEAK INTERNET BUBBLE OF 2000XX
#2 at the end of 2000-2002 recession bottom of federal income was apr 2004 , and it was about 770 bln..
so from top to bottom difference around $ 300 bln
corp taxes were at bottom 1 year earlier , apr2003 and it was around 100 bln,, so,,
SS // EMPL TAXES DON'T MATTER CAUSE They never fell during BUSH recession..
so summing up : from peak to bottom of BUSH recession taxes fall around +-400 bln $
funny his figure almost equals average BUSH'S term year budget deficit 500-600 bln $ per anum..
so, even if you split this figure
BUSH cuts account for only 200 bln $$,, hardly 700 bln $..
what stupid jerk
alex
i think you left out deficit spending, why congress
is addicted to the fed/res system. both parties.
"yanking our chain".
that is all that is left.. /.. lots of that lately.
ps. another perspective. perhaps the fed
and it's money system / policies is just nature's
infinitely wise way of making death seem
relatively appealing for the great majority of
the population versus living past the age
of 62. these institutional life forms have
functional significance that defies the individual
intellect and it's capacities to comprehend, ya
know.
Talk about "seeing through fog"? The reason the 10Year is at 3% is because the US is not borrowing at the long end because they know they can't! They are borrowing at the short end. Which is nothing more than a form of sub prime teaser rate.
"So while the noise out of Washington is trying to convince us that these deficits are ruinous, the ten year Treasury bond yields we saw yesterday at a stunning 2.97% are telling us that, in fact, they are no problem at all..."
"The ten year Treasury bond yields we saw at a stunning 2.91% are telling us that the government can borrow nearly infinite amounts of money at the lowest interest rates in history..."
"Out of a current projected budget deficit of $1.3 trillion, $700 billion, or 54% comes from the Bush era tax cuts, $320 billion (25%) from a tax revenue fall off caused by the Great Recession, $200 billion from the wars in Iran and Iraq (15%), and $50 billion (4%) is generated by Obama’s recovery measures. The TARP and the bailout of Fannie Mae and Freddie Mac are so small, they don’t even register on the chart. All of the angst, complaining, moaning, blustering, and carping is about the 4%...."
" a recovering economy will bring a return of tax revenues, eliminating 79% of the deficit."
MHFT, surely ye jest in quadruplicate.
Were you also the member of CBO that figured 100% tax rates would heal the economy overnight?
Hidden healthcare hikes in tax rates already stole 3% GDP off the recovery, and repealing W tax cuts may make Twin $1.3 Trillion deficits under 0 look modest in retrospect.
Since when does government create anything anyone wants?
Is it even remotely possible 50-year lows in mortgage rates reflect the abysmal state of our economy?
Keep toking that medical marijuana, banning pets and voting for Nancy.
Soon all your problems may be over.
Good bit ZH...
And don't forget that MHFT's analysis is static and that the Givernment will spend every single penny of new revenue it takes in.
MHFT's analysis also PRESUMES that the $USD is infallible.
MHFT's perspective here is based on several HUGE assumptions that have already been de-bunked... MHFT=joke.
and that the government can now borrow nearly infinite amounts of money at the lowest interest rates in history
this statement in particular scares the shit outta me
personally, I'm typically interested in what the MHFT has to say, but this fucks his cred up with me - there is no such thing as free - the piper must always be paid, whether now or later - it's physics - action/reaction - benefit/cost - the fact that we haven't had to pay it yet don't mean it's not out there - I mean "Come on, maannnnn...."
what a cluster fuck worthless piece of shit article this is! Almost (no, not really) worth the comical relief of 30 secs it took to read it.
I am not Chumba Bumba Numba Rotumba or anyone else...
Wrong, Wrong and wrong. Expiration of the tax cuts robs more from the private sector, thus further dampening anemic demand, thus leading to more joblessness, defaulted debt and credit constriction. And the final backwash is a comensurate dampening of fed and local tax revenue due to increased private sector joblessness.
The 10 year T yield reflects a flight to perceived safety in a sovereign world filled with unsustainable debt. The yield is not an indicator that the runaway cumulative deficit in the USA is just peachy.
Feeding more to the wild government beast is not a solution. Your assumption that government would use additional revenue as part of a deficit reduction strategy is extremely "optimistic" ( I'm being kind ).
The tax cuts were only on the very rich. Demand will not shrink at all; the very rich can only buy so much. Now, they may emigrate, but they're not going to spend any less.
I couldn't agree more.
+10 And dead on. You ARE too kind.
The "private sector," like the "financial sector?" Or, perhaps you mean that agricultural sector? Or, maybe... the energy sector?
2) ending the tax cuts will cause riot and
further the deflating trend.
4) war has a mind of it's own and many slaves
who pray to it's structural evil glow. never
get enough till they hurt themselves irreparably.
7) fraud and opaque leverage have become
political i.e.d.'s and sway 99% of legislation, my
estimation, no real numbers here, real numbers,
that is a good one. ( no disrespect intended ).
1) i suspect the fed is financing the bond market,
giving the treasury away to market powerhouses,
banks, near and far, and leaving the tab on the
future taxpayer / current taxpayer. qe supreme.
6) i'm thankful that i am not 17 years of age
and looking at going into debt to the amount of
$200,000.00 to enter the unemployment line or
be trained to kill dark skinned people in exotic
locations. or do surveillance of your countrymen?
5) didn't intend to go all negative, but these are
the concerns that cause some clamoring concerning
the 4%.
4%) our problems, environment?, will not be
silenced or solved by a negligible percentile.
.
here, a range of manipulated madness? i'm not
sure what to make of it either.
http://maxkeiser.com/2010/07/09/two-minutes-hate-al-gore/
.
plus.. the bond market might be saying one thing to
us today but we may not understand what it meant
until tomorrow? whose language is it speaking in?
fear and greed, what if these two become synonyms?
as in Orwellian.
Problem with continually low yield on bonds is eventually, buyers of bonds will dry up and shift their capital allocation to other areas. With the US continually rolling its debt, and enlarging the national deficit, with bond issuance, one failed auction with low bid to cover is going to sound an alarm throughout the world. When it happens, it's going to be fight to see who can unwind their bond holdings first, leading to a run against US treasuries.
Why do you believe that Fed stealth bond purchases are not already happening? I believe that without the Fed bond purchases through various actors that a dislocation in the US bond market would have already occured. Please raise your hand if you are willing to purchase 10 year US paper yeilding 2.95%...anyone? If you are not willing to buy this stuff then why is it selling like hot cakes and who is buying it?China? Europe? Russia? Japan? Brazil? India? Pension Funds/Mutual Funds and Hedgies?...Please explain this one to me with facts/links.
The bond story is only one of probably thousands of illegal actions, or actions outside the Fed Charter, that the Fed has to keep under wraps and why an audit of the Fed, or any central bank, can not be permitted.
It sure looks that way, but how can so many people keep this huge story under wraps?
Methinks the Mad Shitter is yanking our chains. He's been writing about shorting the long bong for the past 18 months.
Your point about the tax cuts makes perfect sense...so long as the recipients of those tax cuts simply took the money and buried it.
If they didn't bury it, then I assume many spent it.
If they did spend it, didn't the spending generate significant tax revenues along the way? If tax revenues were generated from the tax cuts, isn't your dollar for dollar replenishment of the budget misleading?
This seems obvious. Too obvious, so I must be missing something here.
I will bet 5oz's of gold that USGov will have multi trillion dollar deficits even after the Bush tax cuts expire because they will simply spend whatever extra comes in.
Are you kidding? They will spend whether it comes in or not. Repeal of the Bush tax cuts will increase taxes by 50% on the lowest tax rates (Yes from 10% - 15% for the lowest tax rate) ... this ain't going to happen, and with the pledge to not increase tax on those making less than 250K, what do you think repeal of the Bus tax cuts will look like? A major tax increase on those making over 250K ... this will sure help with our economic recovery.
is there a reason you have a swatstika as an icon? i try not to be too sensitive about mere icons, but are you trying to popularize a symbol of intolerance , white supremacy and general violent insanity?
The new fascists ... The Green Movement
Yep.
Congress is already planning a post-election (lame duck) Porkfest. I fully expect next year's budget deficit to dwarf 2010's record-breaking deficit. Of course, Congress can/will refuse to prepare a budget (just as they did this year), thus avoiding both their legislative duty and the unnecessary creation of hard evidence of their corruption.
I trust you meant the wars in Iraq and Afghanistan. That is, unless the bond market knows something we don't know...
Hmmm....politicians vs financers- bankers in a 1 on 1 ring match...wonder who loses that match.
Oh ya...I forgot...the taxpayer...always.
"You often see this in politics, where the debate gets focused on where the problem isn’t, not where it is, and is a big reason why I’m not in that business."
MHFT, are you suggesting your own profession is transparent? Finance bought the political system, not the other way around.
Chicken and egg. Have fun.
The bond market is telling us that current prices/yields throughout the curve are exactly what the master bankster fraudsters want prices/yields to be
I disagree - That is a pretty big manipulation to create, and the "master bankster fraudsters" are really not intelligent enough to execute on it.
been the case since 9/11 imho
Wow.
Riddle me this:
If we can borrow infinite money forever, why are Americans forced to pay taxes at all?
The government has an infinite amount of money at it's disposal, but yet it seizes a larger percentage of a person's income than that spent on food, clothing, and shelter combined?
Please explain your logic here.
sorry for butting in....
The responders are writing a truer and better article. Lol
Thank you folks for truly being here and now with reality.
Many of us J6P live in the twilight zone and close to the bone. Further lies simply rob us of the truth, aint they took enuff from us?
So thanks for the many corrections and the humor too.
there is no economic reason requiring payment
of taxes, these payments only serve to bind the
population to authority politically and psychologically.
that is the trick. end the destructive usurious fed .
This is a silly argument because implicit in the US's ability to borrow is that we have the wealthiest tax base in the world.
You fell right into Rusty's Ad Infinitum approach...And proved his point at the same time.
Way-to-go!
I'll admit, that in today's "Reductio Reality" it's hard to make this type of argument, but in this situation it really makes sense.
For the guy above who states that people only buy treasuries because they know that FedGod can always tax for the money, I'm pretty sure it's already widely known that it is mathematically impossible for the FedGod to meet it's financial obligations regardless of tax rates.
So, that particular argument is clearly incorrect.
Your reply is far sillier... from it I can presume that your prescription for our many problems it simply to tax the wealthy to fund an expanding federal nanny state. Interesting that the leading proponents and practitioners of this socialist ideology (europe) are now moving in the opposite direction with very un-european haste.
Please explain the socialist/distributionist endgame in light of "wealthy" europe's pending bankruptcy?
I won't hold my breath waiting for a deluded non-hypocritical reply...