This page has been archived and commenting is disabled.
Threads In A Foreboding Tapestry
Courtesy of Lee Adler of the Wall Street Examiner
Two weeks ago I began to report to subscribers of the Wall Street Examiner Professional Edition Fed Report that foreign central banks (FCBs) had begun to engage in unprecedented levels of disgorgement of their massive holdings of US Treasury and Agency paper.
Prior to this year, the FCBs had typically absorbed the equivalent of 25% of new US Treasury issuance month in and month out. That was effectively a subsidy of US financial markets. It lowered long term interest rates artificially and injected cash into the US markets and banking system.
Then about a year ago the FCBs began to slack off in their buying. In reality, that is what necessitated the Fed's program of Quantitative Easing. The Fed had to step in and fill the demand gap left by the FCBs gradually reducing their rate of purchases. Had the Fed not acted when it did, long term Treasury yields would have started to rise and along with them mortgage rates and other long term rates, something that the US economy and the US Government simply could not afford.
When the negative unintended consequences of the Fed's QE money printing, primarily skyrocketing commodity prices, exploded in Bernanke's face, he was forced to discontinue the program and allow the Treasury market to fend for itself. The Fed had convinced itself through its self congratulatory and masturbatory in-house research, that there would be more than enough demand for Treasuries for the market to stand on its own without the Fed propping it up.
Ironically, the US bond market was rescued by the European sovereign debt and bank meltdown, so it appeared for a while that Dr. Bernankenstein might be right and his monster experiment would be vivified on its own. The European panic triggered massive capital flight that ended up, where else, flooding into the US, mostly into purchases of Treasuries. Not only could the monster walk on its own, it could actually fly! Once again the Treasury market benefited benefited from an unusual subsidy, this one driven by fear. Bond prices flew into the stratosphere with yields sinking to record lows.
About 6 weeks ago, something changed. FCBs not only slowed their buying of Treasuries, they stopped altogether, reversed course and actually began selling them. Three weeks ago their selling reached a level that I characterized in my weekly Treasury update for subscribers as "dumping." It was simply unprecedented. I opined that this could be the beginning of the end of the Treasury bull market, in spite of any effect that the Fed's new Operation Twist might have.
In fact, I expected that effect to be nil, and it has been. If anything, the announcement of Operation Twist, where the Fed offered to buy long term Treasuries from the Primary Dealers while simultaneously selling them short term paper, rang a bell for some investors. The Fed's announcement told them that the time had come to sell their long term paper. If the Fed was buying, they decided that they would be glad to sell. Today, the yield on the 10 year Treasury note rose to 2.16%. That's up an astonishing 44 basis points since last Thursday's open.
Every other day, the Treasuries open on a huge gap. They are trading more like pork bellies than stodgy government bonds. Worst of all, the yield on the 10 year is up approximately 45 basis points since the low in yield reached the day after the Fed announced Operation Twist. Bernanke has egg all over his face. The man simply does not understand financial markets. And this move does not look like a fluke. As a result of today's market, the yield on the 10 year has broken out of an intermediate term base. Unless yields pull back immediately, the implication is that the intermediate term target is 2.50. Meanwhile, Bernanke had assured investors that long term yields would fall as a result of his doing the Twist.
Apparently, the FCBs were among those who took the Fed's announcement as a sell signal. They are selling at the heaviest pace in the 9 years that I have been tracking this data. Normally, prior to the last 5 weeks, the instances when they were actually net sellers were few and far between. What has been going on here lately is no less than a sea change.
Making matters worse is that the Primary Dealers have also become massive sellers of Treasuries and all manner of fixed income paper in recent weeks. This chart of the Primary Dealer fixed income holdings is posted weekly in the Wall Street Examiner Professional Edition Fed Report. This data is released with a 10 day lag, so we only have data through September 28, but given the market action this week, this trend is certainly continuing.
The dealers appear to be in trouble. They began selling off their fixed income paper of all types in early September. That accelerated to what I can only characterize as wholesale dumping in the weeks ended September 21 and 28. It is no coincidence that those where the weeks where we began to see yields reverse from their record run.
These are troubling developments, not just for their implications for the bond market, but for what they imply about the health of the backbone of the US financial system--the Fed's Primary Dealer (PD) network. If the Fed is the head, these guys are the spinal cord. Isolating on just their corporate bond holdings the picture becomes even more troubling. If major corporations are supposedly doing so well and their balance sheets are in such great shape, why did the PDs not accumulate their fixed income securities throughout the equities bull market of 2009 and 2010? And especially why have they been frantically dumping their corporate holdings since June?
Something is rotten here. These are signs of major systemic stress.
It's been a while since both stocks and bonds have rallied together. In recent months stocks could only rally when bonds sold off, which was rare. For the most part bonds were rallying and stocks were selling off. There just has not been sufficient systemic liquidity to keep levitating both markets simultaneously. It was either one or the other. But even the days where the stock market rallies when bonds sell off and yields rise may be coming to an end, and the day where both stock and bond prices fall and yields rise together, may be at hand.
These are just a couple of the factors that I track in my weekly reports covering the Fed, Treasury, Primary Dealers, foreign central banks, money supply, US commercial banking system conditions, fund flows and other key elements of US market liquidity. The fabric of the US financial markets is intertwined and complex. I track what I believe, from my years of observation, are the most important threads in that fabric, to try and gain an understanding of the context in which the markets are operating. That context is important to the technical analysis side of my work, where knowing the liquidity picture can help in understanding the patterns unfolding on the charts of the markets themselves. There are always loose ends, but more often than not, even with loose ends most of the threads tie together into a neat tapestry with a story that is clear. This may be one of those times, and it's not a happy picture.
*****
Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, and get regular updates on the US housing market in the Wall Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!
Pic credit: Jesse’s Cafe Americain
»
- ilene's blog
- 12360 reads
- Printer-friendly version
- Send to friend
- advertisements -
About 6 weeks ago, something changed. FCBs not only slowed their buying of Treasuries, they stopped altogether, reversed course and actually began selling them. Three weeks ago their selling reached a level that I characterized in my weekly Treasury update for subscribers as "dumping." It was simply unprecedented. I opined that this could be the beginning of the end of the Treasury bull market, in spite of any effect that the Fed's new Operation Twist might have.
**********
Woudn't the drop off in foreign Treasury buying be related to weakening trade?
If the US runs a defit and China runs a surplus-then China has to do something with those dollars-less dollars = less Treasury buying-
If the US does not buy as much from China then China has less need to buy US Treasuries-
There seems to be lots of evidence of diminishing trade over the past few months-
**********
In Long Beach, the second-busiest container port by volume, August imports fell by 14.2 percent from August 2010. While the port has not yet released September volumes, a spokesman, Art Wong, said it expected about a 15 percent drop from September 2010.
http://www.nytimes.com/2011/10/12/business/at-us-ports-flow-of-imports-s...
********
Dick Steinke, executive director of the Port of Long Beach, says shipping volumes have posted two consecutive months of declines, and he's anticipating a double-digit drop for September. The last time the port experienced no peak was during the height of the recession in 2009, he says. Before that, the phenomenon was unprecedented.
http://online.wsj.com/article/SB1000142405297020477460457662688248207476...
Let's see, central banks and everybody else selling the shit out of their bonds... You don't think it could be because they would rather have the cash, is that inside the realm of possibility? With all the talk of a crisis in sovereign debt coming up, sounds like a good plan. And no matter what Ben plans, all the smarties out there will figure a way to game it. Fed would be better off playing the quiet game.
Just a countdown to the endtimes for a lot of those fools. Good riddance!
Interesting perspective you have. I'm wondering what "cash" is. Fiat money in a big pile in the bank vault? I doubt it. Cash these days in merely one form of inextinguishable debt as opposed to another. Most banks being "recapitalized" are merely being saddled with more debt. Debt is today's "asset" or "capital". The historic form of capital has been misunderstood, or un-understood, for the last several decades at least. It's fiat musical folding chairs and the last guy standing will just start a domino of collapsing seating arrangements. Doesn't look very promising nor encouraging, does it?
everybody is singing systemic point is here in EU and yet Greece does not fold. The first domino has not fallen yet. Its like watching a movie where image is stuck on one sequence...where's the projection attendant to fix the bug?
In September, 2007, I said that monetary policy involving bailout plans and currency manipulation would not work, because there is no money in them. There still isn't.
http://georgesblogforum.wordpress.com/2011/10/06/crash-course/
"Sovereign debt" is an oxymoron.
It's earnings season people. Those "profits" had to come from somewhere. Can't let the markets down before the next election don't cha know.
I heard an interview by a guy who had personally served as a consultant to virtually all of the central banks in the world. He said said as he travelled around the world he noticed they were all academics, PhD types who had never had a job outside academia in their lives. The one exception, he said was China, where all the CB execs had senior-level trading backgrounds on the dealing desks of the world's largest banks, in forex, bonds, etc.
If you look at China's political class, you see a similar story. They all have senior-level qualifications in real sciences, mostly advanced engineering degrees and the like. Compare that to our political class, in Washington and in our CB. Those guys really have no clue what they're doing other than sucking up to lobbyists.
I'm not blindly just saying China does everything right, clearly they don't. But they seem to have won the Cold War without firing a shot.
Joseph Nye is a political science guy who came up with the ideas of "hard" versus "soft" power (military versus diplomatic). He says the Chinese play a much more nuanced game he calls "subtle power", where it's all about friendly trade relations. They succeed at an incredible balancing act, "friends" with North Korea, "friends" with South Korea (or at least not enemies). "Friends" with the with Israel , "friends" with Iran at the same time. Instead, the US positions "us versus them", creating enemies around the globe, requiring a vast amount of treasure to maintain a global military presence. While the US runs around lecturing people on what political and cultural system they should have in their country, China ignores all that and just gets what they really want...favorable trade and access to markets and resources.
Oh yeah China is such a playa, folks there are just trying to line their pockets... And how did all that "soft" power work out for them in Libya when the roundeye cabal just went in there with guns and tore up all of your oil contracts? When is that investment going to pay back?
Machivelli said something like to be unarmed is to be contemptible... so true.. empire baby, lick my boot.
its called american hubris. The europeans had it before 1945. Now the USA owns it.
I heard that same interview. Trying to think who and where it was from.... thinking KWN or other GATA-ish link. Anyway, it was very striking what he said about the CBs individuals and I got a tickle out of it. The USA has devolved into pointing guns at people to force them to trade in the USD and maintain it as WRC.
What a load of bullshit.
Yep, those Chinese sure are smart! The inheritors of Chairman Mao [who had everyone killed who ever thought about thinking outside the box] are all scientists. Sure. That's how to get to the top of the Communist Party in China. Advanced Engineering Degree. What bullshit.
Look, the Chinese are practicing bribery, corruption, shoddy poisoned goods, dumping, you name it. The banksters allowed businesses to be moved there in the interest of exporting pollution to the third world. The banksters will punk China down the road, trust me. Shutting down the ports on the West Coast would collapse the Chinese economy very quickly. Printing up a a couple of hundred trillion dollar Federal Reserve Notes and sending them via diplomatic courier to pay the US debt to China would finish them off. Followed by the new currency a couple of months later, so sorry, old FRN not convertible, don't you see? Gold or silver only please.
Yep, those Chinese sure are smart.
I forgot to mention, the same bullshit was said about the Japanese in the 1980's, I lived through it. They were going to own America, they were smarter and better etc etc. Now they have lived a couple of lost decades. They were smoked long before this double whammy they just had.
Yep, those Japanese sure are smart.
And after 20 years of a crippling recession Japan STILL owns a third of all US overseas debt; China even more. Who said they don't own America?
and a delicous recipe for dog on a stick
They must be giving Sparky free crystal meth at the shill call center! Do you guys get 401K?
and so goes the relentless climb to oblivion.
Implication for PMs?
Bullish for brass & lead.
The fact that this article does not mention PM's once and asks "well where is all the money going if not bonds and equities? should signal
tangible assests.
some tanglable assets and some rearranging of the books to appear very "profitable" during earnings season. A.k.a - where is my dividend?
Since I was quite obnoxious in my arguments that the market was oversold and due for a bounce back to 1,200 from 10/3 lows I thought it only fair to come back and tell Everyone I'm closing out the trade today.
The market is now overbought and fairly valued even in a no recession environment.
I've sold all my UMDD and FAS after a 35 & 9 run to 53 & 12.
I'm going to keep the puts I sold to buy FAS at $4 and $5, as well as my puts in RIG, WFT and UPL. I still think the people that bought those are crazy. I'm also hanging on to a few stocks that dropped 50%, but haven't popped more then 20%.
Not going to aggressively short here as earnings could burn me. Might buy SMDD if it hits $20.
Very thoughtful analysis. Thanks ilene.
Nice summary! I liked this sentence...."In reality, that is what necessitated the Fed's program of Quantitative Easing."
Ironically, Tactically, the US bond market was rescued by the simple construction of a European sovereign debt and bank meltdown...
In a race to the bottom, the bookies can't let one horse get too much of a lead, or else the ticketholders might realize the fix is in.
12/21/2012 - IT'LL BE NOTHING COMPARED TO LISTENING TO ZH DOOOOOOOMSDAY PRE-GAME.
ZH HAS COST PEOPLE REAL MORE MONEY AND/OR OPPORTUNITY COST THEN THE BERNANK AND COMPANY.
GOT DOOM ????????????????????????????
If so, you should be quite wealthy from doing the opposite of what most people on here advocate. Have you been short gold the last 5 years?
Maybe even wealthy enough to have someone show you the shift key.
Are you just stupid or do you completely lack any form of ethics? Do you really belive that the stock valuations are correct? Or is it you don't care how crooked the market is, how fraudulent the data is, how much earnings are overstated, and how much damage a worthless public corporation given a few billion dollars in markt cap can do to what is left of smal business private America.
Fuck stock market money. It is built on nothing. An economy can not exist on the transfer of paper. All th stock market has done is increase the wealth of the top 5% while pushing the rest into poverty.
For most people the Dow going to 30,000 might mean that thier invested money might double or triple. If you hd $50kinvested and now have $150k big whoop. It still isn't enough to retire. That is why most people have dropped out of the game.
100% of the gains from 2009 have come straight from the Federal Government. You think that can be sustained? You are the fool that will be left holding the bag once again.
You better come up with something better than paraphrasing some lame ad campaign, Sparky. This is not the Yahoo Finance Message Board.
I'm up 17% YTD and almost 60% in the last couple of years because I listened to those "crazy" zero hedge people and put my money in physical gold. I think that's pretty much been the central thesis here, right? If the stock pumpers want to continue down that road, no skin off my back, hope that nearly 50% underperformance relative to gold was worth the dogma.
With what, up with, should he come?
ZH is the absolute harbinger of all things misdiagnosed and predicted. As a fact, the predictive capability of the posters on this site is beyond laughable. The dollar will crash, the euro will crash, the markets will crash, we are in a depression and on and on.
How about this; ZH needs to "come up with" something better than faulty predictions on an endless range of subjects if the TD group ever wants to be anything more than a reference for the perma-wrong perma-bears in the MSM. How about Ireland? Remember when ZH touted the new government and how it was going to give the bondholders a haircut? Do you remember all the writing on this site about that issue? How about hyperinflation? Remember BAC? It's out a here!! Buffet has lost his ass!! Hmmm.... tagged 6.70 today not $0. Chirp chirp goes the criket.
So, the day ZH can find a way to go beyond the standard crisis dejour, I will consider this site what it is; a massive pity party for the failures of society. Those who got their ass kicked in the real world and want those who have done well to pay and pay dearly. Those who can hope, but have nowhere near the intellectual resources to make such an event occur.
So, LaVorgna, how are your unemployment numbers holding up?
Lloyd? Is that you?
No Mas, if the postings on ZH are as you say they are and you feel compelled to post your comments in order to inform ZH of your position in a lame effort to proselytize, then YOU are the one to that needs to 'come up' with something better rather than subjecting yourself to read ZH. Go read some other forum because you are BORING us as well as wasting valuable bandwidth.
the irish did give the bondholders a haircut. but only after it had given the irish people a crew cut
What is truly lame is ZH keeps trying to get their readers to put a square peg in a round hole.
Soon it'll be DOW 36,000 and you guys will be wondering what the hell happened.
ZH is truly insane.
@SparkySC
Then get lost.
Shit, ZH has provided much profit and insight into front-running all kinds of market moves. Try to keep up sparky, you can make money when the market goes up AND down.
And your a dick,so bugger off somewhere else.
What is truly lame is ZH keeps trying to get their readers to put a square peg in a round hole.
Soon it'll be DOW 36,000 and you guys will be wondering what the hell happened.
ZH is truly insane.
And yet, here YOU are. Spreading YOUR gloom and doom wisdom of demonizing opines.
Why are you here?
I don't think any of us will be surprised when the dollar loses so much value that the DOW is at 36,000.
If the DOW hits 36,000 then you can safely bet that gold will be the same price!
I would be suprised if it did not do so rather soon.
We should hit the debt ceiling target, again, before this Christmas. Ask yourself, what would have to happen to get The Bernank and the CBs to stop printing money? Then ask yourself, how likley is it?
If the Dow hits 36,000 anytime within the next 10 years it will be because the $ has been debased by another 300%.
Real Variables and Nominal Variables Explained:
http://economics.about.com/cs/macrohelp/a/nominal_vs_real.htm
It's like the Seinfeld episode where Kramer keeps driving the car around even though the gas gauge is pegged passed "E".
Has anyone Trademarked the term "hyperlevitation' yet?
That was one fucking hilarious episode. In a sitcom 50 years from now, someone like Kramer would be a scream playing the part of the Bernak trying to levitate the Fed, in a show something akin to Hogan's Heros, that reframed the Nazis into a bunch of bungling fools (once the pain and misery pf WW II wore off enough so we could laugh about it).
Thanks. That's some scary shit.
Dear Bernake: fuck ZIRP. And fuck you.
http://www.youtube.com/watch?v=pc0mxOXbWIU
Cue Bernanke in the headlights.