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The Real Reason the Fed Won't Touch Treasuries Again... and Is Tapped Out

Phoenix Capital Research's picture




 

 

Over the last week I’ve introduced the concept of collateral: the basis for the entire financial system. We’ve also addressed why any EU sovereign default would bring about an epic meltdown as EU bonds, particularly those of Spain and Italy are the collateral underlying hundreds of trillions of Euros worth of trades for EU banks.

 

Again, the most important issue for the financial system is the search for high quality collateral.

 

Indeed, it is the search for high grade collateral that has caused such periodic spikes in Treasuries, German Bunds, French sovereign bonds, and Japanese bonds (all of these have yielded 0% or even negative yields in the last five years). Big banks are moving away from PIIGS bonds into safer havens.

 

This is also why the Fed isn’t touching Treasuries with QE3 and why it won’t touch short-term Treasuries with Operation Twist 2 (this program sees the Fed selling short-term Treasuries to buy long-term Treasuries): the Fed wants to keep as much good quality collateral in the system as possible (long-term Treasuries are problematic because institutions know it’s highly likely the US will default within the next 30 years).

 

However, even this move is problematic because much of the Treasury market is locked up with governments both foreign and domestic.

 

Total US Sovereign Debt

$16 trillion

Foreign Nation holdings

$5 trillion

Intergovernmental holdings

$4.8 trillion

US Federal Reserve

$1.5 trillion

Remaining

$4.7 trillion

 

Again, this is why clearinghouses (which oversee the derivatives markets) are now allowing Gold as collateral: they know that eventually sovereign bonds will be worth less or even worthless. And they want access to their clients’ Gold for when this happens.

 

With that in mind, the countries that will ultimately be considered safe havens when the BIG collapse starts are those with the largest Gold reserves.

 

Country

Gold Holdings

% of Foreign Reserves in Gold

The US

8,133 tonnes

75.1%

Germany

3,395 tonnes

71.9%

Italy

2,451 tonnes

71.3%

France

2,435 tonnes

71.6%

China

1,054 tonnes

1.6%

Switzerland

1,040 tonnes

14.2%

Russia

918 tonnes

9.2%

Japan

765 tonnes

3.1%

Netherlands

612 tonnes

60.2%

India

557 tonnes

9.8%

 

I’m not going to get into the issue of whether this Gold exists still (many commentators claim that Central Banks have in fact sold much of this) as I have no way of proving it. The key issue is that the financial elite are now trying to get their hands on Gold as collateral because they realize that sovereign paper based collateral from the EU will soon be worth much less or even worthless.

 

It is no coincidence that Germany floated the idea of accepting other EU nation’s Gold in exchanged for bailouts back in May 2012 when Europe teetered on the brink of collapse:

 

Europe’s debtors must pawn their gold for Eurobond Redemption

 

Southern Europe’s debtor states must pledge their gold reserves and national treasure as collateral under a €2.3 trillion stabilisation plan gaining momentum in Germany.

 

The German scheme -- known as the European Redemption Pact -- offers a form of "Eurobonds Lite" that can be squared with the German constitution and breaks the political logjam. It is a highly creative way out of the debt crisis, but is not a soft option for Italy, Spain, Portugal, and other states in trouble.

 

http://www.telegraph.co.uk/finance/financialcrisis/9298180/Europes-debtors-must-pawn-their-gold-for-Eurobond-Redemption.html

 

It’s also not coincidental that Germany is performing an audit of its Gold holdings today, either.

 

Bundesbank Says NY Fed to Help Meet Gold Audit Request

 

The Bundesbank said the Federal Reserve Bank of New York will help it meet auditing requirements related to its gold reserves that were demanded by Germany’s Audit Court.

 

“We have been in discussions with the Federal Reserve Bank of New York about the Bundesbank’s holdings of gold,” the Bundesbank said yesterday in a letter to the German parliament’s budget committee. “The discussions have been fruitful and the Federal Reserve has expressed a commitment to work with the Bundesbank to explore ways to address the audit observations, consistent with its own security and control processes and logistical constraints.”

 

The agreement is part of a compromise between the German central bank and the Audit Court, which has called on the Bundesbank to take stock of its gold holdings outside Germany, saying it has never verified their existence.

The Bundesbank distributed the letter to reporters after board member Carl-Ludwig Thiele and the Audit Court’s head Dieter Engels testified to budget committee lawmakers in the lower house of parliament in Berlin.

 

http://www.bloomberg.com/news/2012-10-25/new-york-fed-to-help-bundesbank-meet-gold-audit-requirements.html

 

I realize that the last few essays have been pretty dense. So I’ll summate everything here:

 

  1. The #1 issue for the financial world is too little quality collateral backing too many trades.
  2. The search for good collateral has lead investors to seek high grade sovereign bonds (Treasuries, German bunds, French bonds, Japanese bonds) as a safe haven between 2008-the present.
  3. The folks who monitor the derivatives market (the large clearing houses) realize that sovereign bonds are not going to be a safe haven for much longer and so are looking at Gold as a new form of collateral for trades (this has NEVER been the case before).
  4. Germany and other nations will be increasingly looking to audit and accumulate their Gold holdings.

 

Keep all of this in mind at all times going forward. This is the BIG picture for the financial world.

 

Again, and I cannot stress this enough: when Spain defaults (and it will) the system will experience a collateral crunch that will be exponentially higher than that which occurred following the Lehman bankruptcy.

 

This is why I’ve been warning that the 2008 was just a warm-up. It’s why the Powers That Be in Europe are absolutely terrified of what’s happening there. And it’s why those investors who do not prepare in advance for what’s coming will lose everything.

 

If you do not want to be one of them, you need to get moving.

 

We have produced a FREE Special Report available to all investors titled What Europe’s Collapse Means For You and Your Savings.

 

This report features ten pages of material outlining our independent analysis real debt situation in Europe (numbers far worse than is publicly admitted), the true nature of the EU banking system, and the systemic risks Europe poses to investors around the world.

 

It also outlines a number of investments to profit from this; investments that anyone can use to take advantage of the European Debt Crisis.

 

Best of all, this report is 100% FREE. You can pick up a copy today at:

http://gainspainscapital.com/eu-report/

 

Best Regards,

 

Graham Summers

 

PS. We also offer a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a copy of this report at:

 

http://gainspainscapital.com/gpc-inflation/

 

 

 

 

 

 

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Wed, 11/21/2012 - 19:38 | 3003541 archon
archon's picture

The Fed is shooting blanks now, while the EU is raw and flaccid.

Wed, 11/21/2012 - 18:01 | 3003374 SpanishGoop
SpanishGoop's picture

I love this on Discovery channel, "Dommsday preppers".

 

Wed, 11/21/2012 - 16:37 | 3003151 Quinvarius
Quinvarius's picture

Yeah they will.  You are going to see QE 4 all over Treasuries within 6 months.  They already friggin announced it in their last fed minutes, and they have no choice.

Man it just isn't as hard as some people want it to be. Make a decision matrix.  What happens if they keep pumping money into the system vs what happens if they stop?  It is pretty clear the money is going to keep on coming.  

Wed, 11/21/2012 - 15:19 | 3002893 govttrader
govttrader's picture

Arguing that any central bank (such as the Fed) will willingly terminate QE before organic growth has elimated the need for said QE, is like arguing that people do NOT choose to WALK AWAY from their homes when it would be significantly cheaper to just up and live someplace else (of course they do...everyone is a trader...even if they don't admit to it).

 

Newsflash - people (and governments) act in their own economic best interests as long as possible.  There may be a grey area at the border...but until that border and grey area are clearly in the rearview mirror (either Recovey or Bust)...you should expect more of the same.  The Japan experience proves that this can continue for DECADES.

 

and btw...Bust = homeless, hungry, sick and dying.  While we might be "on our way towards bust," the country isn't busted yet.  Ask anyone of the recent 20mm whose status went from "happily employed homeowner" to "unemployed homeless poverty living off govt subsistence" if they would willingly speed up that process...and the answer will be a resounding "hells to the no."  Expecting the remainder of the well-off to give up their comfort level for the benefit of the busted is noble, charitable, and according to human nature, NOT GONNA HAPPEN.

 

Expect the Fed to print USD and buy UST until either the USD is no longer accepted as a medium of trade, or everything is rosy again.  This is not something that will happen today, tomorrow, or a year from now.  Maybe 4 years...maybe 8 years...but not tomorrow. 

 

In the meantime, trading UST is one of the easiest ways to daytrade in the capital markets.  I don't know about you, but I can't afford to sit on my hands for the next 10-20 years waiting for the next hyperinflation to come (maybe).  Slowly accumulationg physical gold as a savings account...sure..thats fine...but as far as trading advice goes...early = late = WRONG

http://govttrader.blogspot.com/

Wed, 11/21/2012 - 15:04 | 3002843 davidsmith
davidsmith's picture

 

 

"the concept of collateral: the basis for the entire financial system." 

 

Really?  What's the collateral for a Federal Reserve Note?  Is the author over 14 years of age?

 

"the most important issue for the financial system is the search for high quality collateral."

 

"the Fed wants to keep as much good quality collateral in the system as possible"

 

The facts show the Fed doesn't give a damn about this.

 

According to....

Wed, 11/21/2012 - 14:10 | 3002595 strannick
strannick's picture

Phoenix Capital said there'd be no QE3. Wrong.

Now they're saying there will be no more Treasury buying when Twist runs out in January. I wouldnt bet on Phonenix's advice

Wed, 11/21/2012 - 14:14 | 3002614 Jack Sheet
Jack Sheet's picture

if you don't, you will lose everything  !!!

Wed, 11/21/2012 - 15:11 | 3002870 the not so migh...
the not so mighty maximiza's picture

Unless of course you sign up for his free report. Then you will be saved.

Wed, 11/21/2012 - 13:56 | 3002527 digitlman
digitlman's picture

GS is saving the planet by recycling his material.

Wed, 11/21/2012 - 13:55 | 3002522 stinkhammer
stinkhammer's picture

The Fed won't tough treasuries?  poop story

Wed, 11/21/2012 - 13:55 | 3002520 SheepDog-One
SheepDog-One's picture

Well, Im sure at some point very soon, or later, reality WILL again come suddenly crashing back in...until then Im drinking Jack single barrel and chilling.

Wed, 11/21/2012 - 16:48 | 3003150 DeadFred
Wed, 11/21/2012 - 13:42 | 3002468 Jack Sheet
Jack Sheet's picture

This stuff is as stale as an Afghan's armpit.

Wed, 11/21/2012 - 13:34 | 3002430 The Continental
The Continental's picture

You could have saved yourself a lot of writing by simply stating the fact that "gold is money, everything else is credit."

Wed, 11/21/2012 - 13:30 | 3002419 lordbyroniv
lordbyroniv's picture

Not this shit again.

Wed, 11/21/2012 - 13:30 | 3002417 Winston Churchill
Winston Churchill's picture

If you believe those tonnages of 'gold' held in reserves ,I've

got some lovely seaside property for sale in Arizona ,Graham.

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