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Twisted Tuesday - Treasuries are not an Option

ilene's picture




 

Twisted Tuesday - Treasuries are not an Option

Courtesy of Phil of Phil's Stock World

Remember Operation Twist?

Last week, Freddie Mac reported record lows on rates, with the 30-year notes at 3.91%. This has not, of course, encouraged many people to go out and buy homes but it has DISCOURAGED people from putting their money into bonds and ENCOURAGED them to put their money into stocks.  

There is, however, a problem with this. When people put money into Treasuries, it is "locked up" for a period of time but stocks are more liquid so, as soon as rates begin going up (and they will when the panic in Europe subsides despite the Fed's efforts), then money can come out of stocks as quickly as it went in and move into 5% paper. 

See, I said 5% paper and you were thinking "Yeah, I'd like some of that." So are Trillions of Dollars worth of other investors and that means, sorry to tell you, that this little Federally-funded rally is full of holes you can drive a truck through.  

The Fed's stimulus plan is the central bank's third definitive attempt to aid the U.S.'s patchy economy since 2008. As expectations grew that the Fed would act in the weeks leading up to the bank's actual announcement, which came Sept. 21, 10-year yields dropped nearly 0.30 percentage point. Since the Fed's official statement, yields have already risen modestly, to 2.026% on Friday, from 1.95% on Sept. 20.

The program's final debt purchase of the year was Thursday, when the Fed bought $4.6 billion in long-dated securities. The final sale Wednesday targets $8 billion to $8.75 billion worth of notes due in 2014. It will be a holiday-shortened week: The bond market was shut Monday and will close early, at 2 p.m., on Friday.

The problem is some corners of the market think the Fed's tools are losing their punch. The financial system is already flush with money from the bank's previous easing programs, and analysts argue that the Fed's extra money is increasingly less useful. Borrowing costs, for instance, are at all-time lows and yet many investors aren't taking advantage. If Operation Twist isn't enough to get us through 2012 - what's going to be left in the Fed's tool belt once the Global panic into Dollars begins to subside?  

Slow-inflation

You can see, on the above chart, where the Fed announced Operation Twist in September as it allowed the oil crooks to borrow cheaply and jam prices back from $80 to $100 (25%) and that took money OUT of consumers' pockets into Q4 but at least they were able to increase their debt load as borrowing costs came down so it all works out - for the oil companies...

Banks in Europe paid attention to my cash call this weekend and parked a record $540Bn in the ECB's overnight deposit facility, up from $500Bn the day before. The previous record overnight deposits were $501Bn, at the onset of the Greek crisis in June of 2010 so - DESPITE all the nonsense to calm the markets - the European banks are as panicked now as they have ever been and the inter-bank lending system (LIBOR) is less liquid now than it was in the crash of 2008.  

The ECB's so-called benchmark allotment pointed to a major liquidity overhang in the euro zone's financial system Tuesday. Benchmark allotment, which is the ECB's estimate of the liquidity banks need to conduct routine operations, was minus €493 billion. The negative allotment figure indicates the presence of excess liquidity in the financial system. The ECB further said banks borrowed €6.13 billion from the ECB's overnight lending facility, compared with €6.34 billion borrowed Thursday. When markets are functioning properly, banks only use the facility to the tune of a few hundred million euros overnight.

I'm sorry to be a Debbie Downer for the holidays but it's my job to search the truth and, as I was doing research for this year's Secret Santa's Inflation Hedges, I discovered that I can't advocate any at the moment because the pressure is more deflationary than inflationary and, in fact, I am leaning towards putting up Secret Santa's Disaster Hedges for 2012 - getting in-line with the Mayans for the moment.  

I'm still gathering my evidence so I don't want to jump the gun but, as you can see from this post - I'm very much in macro mode at the moment, looking out at the bigger picture as we prepare to re-allocate our capital for 2012.  

Barring some immediate disaster this week (and we are short already), our Secret Santa Hedges for 2011 are 4 for 4 with all 4 of our trades up well over 100% and XLF and XLE both at max returns with DBA just off our $29 target at $28.60 but that only applies to very greedy people who didn't take this trade off the table in August, when DBA was $34 and we soured on the sector. I'll do a full write-up as we officially close out that portfolio this weekend but I can't in good conscience replace it with 4 more bullish positions for 2012 as I'm not finding 4 things to be bullish about.

We'll see how Europe acts this week but already they are not acting "fixed" and, if a Trillion Dollar commitment can't cheer them up - what will it take?  

Let's be careful out there!  

Top picture credit: thestreet.com 

Cooling Off chart from the Wall St. Journal

Cartoon credit: Bizarro Comic

Check out Phil's Stock World's Stock World Weekly free trial here.

 

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Wed, 12/28/2011 - 13:37 | 2016533 Nacho.Libre
Nacho.Libre's picture

I think the deflationary side is with regards to the destruction of the money supply, not so much the actual cost of staples.  The whole biflation thing.  I would tend to agree that they money printing is not showing up as much as you would expect and that it is being offset by the capital destruction and that is showing up in the liquidity (lack thereof). 

Wed, 12/28/2011 - 10:05 | 2015737 Loan Gunman
Loan Gunman's picture

 

I am reasonably certain that European Banks do not follow Phil's advice. Even if he is right, he just isn't that significant.

 

Phil is always right...after the event happens.  Never been wrong, wonder why he is still selling his advice for a low monthly fee.  I do see he has throttled back on the unabashed Obama love though.

Wed, 12/28/2011 - 10:59 | 2015886 homersimpson
homersimpson's picture

"I do see he has throttled back on the unabashed Obama love though." Not referencing his love for Barack for a few articles doesn't mean his love for Obama has subsided. Besides - that love has turned into hate toward the GOP.

Wed, 12/28/2011 - 09:49 | 2015704 Shizzmoney
Shizzmoney's picture

The only thing people should be "bullish" on is epic fail

Wed, 12/28/2011 - 09:35 | 2015685 dcb
dcb's picture

I think I am  bit more cynical than you (the poster), I have no illusions thyat the federal reserve in fact wants to help the economy at all. Help the banksters yes. each time the market starts to fall and things like oil really start to drop to give consumers some spending money the fed gooses it again, so each endogenous recovery (onbe that woulod happen because of production, never gets off the ground because all of a sudden there are increased input costs, plus fuel costs, and spedning decreases. then add the fact that each underwater homeowner gets a break from fuel to pay down home and credit card debt, and the fed gooses it again. then they give no interest incdome, so the fed ensures the vast majortiy of americans fall further behind.

It really has to do with the inappropriate demonization of deflation and assigning it blame for things, when it is a side effect not a cause. That happens because these sob are in the pockets of banksters

Wed, 12/28/2011 - 09:20 | 2015676 spinone
spinone's picture

Bernanke has clearly telegraphed his intentions.  It is called the Bernanke Doctrine.  He has told exactly the 7 steps he will take.  http://en.wikipedia.org/wiki/Bernanke_doctrine

Wed, 12/28/2011 - 11:13 | 2015926 PulauHantu29
PulauHantu29's picture

Good read. But if The Bernank allows The Deflation, how can he devalue the dollar at the same time? Can an economist 'splain that to me?

From your Wiki link:

5) Depreciate the U.S. dollar. Referring to U.S Monetary Policy in the 1930s under Franklin Roosevelt, he states that:

"This devaluation and the rapid increase in money supply ... ended the U.S. deflation remarkably quickly."

 

In practical terms, I think we may have more like a "Biflation: where certain sectors (like RE, electronics, cars, etc) continue to drop while other sectors (necessities like food, oil, etc) will increase in price. I hope someone on ZH discusses this sector variation in future prices.

Wed, 12/28/2011 - 18:57 | 2017436 spinone
spinone's picture

Depreciation is different than deflation.  In fact, its the opposite of deflation. Depreciation of the currency reduces the value, so it costs more to buy the same goods this year than last year. This is already occurring, but the CPI numbers are being fixed. 

Wed, 12/28/2011 - 13:27 | 2016546 Nacho.Libre
Nacho.Libre's picture

The same way they did it in the 30's.  you call a bank holiday and then revalue the dollar.  Back then it was valued at an ounce of gold.  Right now, it's just ones and zeros in some computer, easy to do!

For reference: see Mexico, Venezuela, North Korea, Argentina, etc.

Wed, 12/28/2011 - 06:16 | 2015555 unirealist
unirealist's picture

US Chess Federation just hiked its annual membership fee again.

My staple white bread loaf just went to $4.29 from $3.99 (it was 2.59 only four years ago!)

Four new tires cost $300, up from the last four at $240.

Cigarettes now @ $5.59/pack, up from $2.00/pack  five years ago.

Cheap nylon-upper tennis shoes @ $60!  WTF???  I paid $17. a pair in the late 1990's!

Netflix subscription just went to $24./month, near double what it was four years ago.

Where's the deflation?  Oh, yeah!--the value of my house dropped!!!

 

 

Wed, 12/28/2011 - 12:31 | 2016316 dmger14
dmger14's picture

Recent CPI is over 3%, and over 4% if calculated the same way it was when Nixon enacted price controls at 4% inflation.  We are living in bizzarro world!

Wed, 12/28/2011 - 05:15 | 2015526 The Alarmist
The Alarmist's picture

Banks in Europe paid attention to my cash call this weekend and parked a record $540Bn in the ECB's overnight deposit facility, up from $500Bn the day before.

I am reasonably certain that European Banks do not follow Phil's advice. Even if he is right, he just isn't that significant.

Wed, 12/28/2011 - 10:02 | 2015731 clones2
clones2's picture

Yeah - I like that as well.

IF the Euro crisis gets better and close to resolution.  Equities will RISE.  Why does he think money will come OUT of equities?

Money should definitely move out of US Treasuries and into Euro debt if this were the case.  US Banks are sitting on trillions in cash, and you will see a net inflow into the US Markets if Euro has a positive outcome.

 

Wed, 12/28/2011 - 03:39 | 2015470 akak
akak's picture

as I was doing research for this year's Secret Santa's Inflation Hedges, I discovered that I can't advocate any at the moment because the pressure is more deflationary than inflationary

Yeah, I am REALLY enjoying all the falling prices --- of gasoline, of groceries, of clothes, of utility bills, of insurance costs, of taxes, etc. etc. etc. 

Yep, in the Bizarro World of clueless financial doublespeakers, deflation is everywhere I look!

Now, back in that unfortunate real world called Earth ....

 

I guess I can write off this Ilene as just another clueless and/or disingenuous deflationary flat-earther and financial hack, in the same league as Robert Prechtologist and Herr Forumfuhrer Karl "I Ban You!" Denninger. 
Oh well, I suppose somebody had to fill leo kolonasskiss' clown shoes.

Wed, 12/28/2011 - 12:35 | 2016327 dmger14
dmger14's picture

tru dat.

I also don't buy into the conspiracy theory on "oil crooks" who manipulate the price of oil.   Oil is going up due to relentless creation of Bernanke bucks, diminishing worldwide supplies and yes, speculation about the Iran situation and its impact on supply, but not by oil crooks manipulating the price. 

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