Mark J. Grant: It's Me Baby, With Your Wake-Up Call

Tyler Durden's picture

Via Mark J. Grant, author of Out of the Box,

Alarm clock starts ringing
Who could that be singing
It’s me baby,
With your wake-up call!
                 -Toby Keith, How Do You Like Me Now
A great friend of mine and one of the best bond traders on Wall Street said this recently:  “Get ready for The Great Bond Shortage in North America.  If it has a cusip and it is rated, it is going higher/tighter.” I am down with his observation. The compression in bond spreads since the Fed started all of their “made-up/newly printed money for free” antics is the root of all of this and I do not expect a change anytime soon. There are various estimations for the 2013 net new issue supply in all sectors of Fixed Income but I peg it around $400 billion.  Around $800 billion will be paid to bond holders during the year in coupon payments and, if reinvested, will cause a supply deficit of about $400 billion for the year.  Exacerbating all of this is the Fed, who will buy around $500 billion in MBS this year and perhaps the same amount in Treasuries which could take $1 trillion out of the market all by itself. Consequently we face a lack of bonds denominated somewhere between $900 billion and $1.4 trillion, depending upon the Fed, which will increase the rolling train of compression, lower interest rates further in all likelihood and cause great angst for investors who will find very little of value left in the Fixed Income markets. Safety; yes but yield; no.
While this is taking place we will find a different scenario in the equity markets. The Fed will not be investing money directly in equities and so the liquidity that has propped the stock markets during the Treasury buying phase and will help at the margin with the MBS purchases is not going to have such a dramatic influence in my opinion as the MBS cash is likely to flow back into other segments of the bond markets and not so much into equities. There is also the American Fiscal Cliff, the worsening recession in Europe, the slow-down in China and the possibility of some political event in Greece, Spain, Portugal or Ireland as the funding nations in Europe get strained and could break during 2013. There is a point I assure you and I think we are verging on it where the people of various nations, under their own strain of recession, just cannot afford the grand scheme of European Union and revolt. The IMF is already getting testy with Greece and when Spain shows up hat in hand, their data is found to be inaccurate and the price tag far past the ridiculous estimations of the EU/ECB then “buddy can you spare me a dime” may fall on deaf ears. It should be noted that during the worst year of the Great Depression, 1933, that America had an unemployment rate of 25% which is exactly where we find both Spain and Greece today. A telling sign of things to come perhaps?
"We all know what to do, we just don't know how to get re-elected after we have done it."
                  -Jean-Claude Junker
A New Dynamic Since 2008
We all hear this is the next new, new thing and it will be different this time as the talking heads blather with wild abandon. Not wishing to join this group either in theory or style I am always quite reticent to walk into this space but the world since 2008 has been different than in past difficulties in one very poignant manner. The world’s three major central banks have all acted in concert and so we have been dealing with, really, just one set of responses that have been conducted on a global scale. Since we cannot invest off-planet or in some parallel universe the options that we have then are quite limited which is why, in my opinion, that the focus on Inflation or Deflation, historically always the epicenter of the discussion when major changes are made to monetary supply or fiscal policy, is not getting played out in the manner that most might suppose. I will go further, it is not Inflation or Deflation that are going to matter in the short run, though it will later; it will be the lack of bonds of any sort to purchase and a stock market that may be dangerously out of sync with the fundamentals opening the possibility of a crash and not a small one if it occurs. Institutional investors are edgy, that I can tell you with certainty, and it would not take much to see a flight from equities into bonds/commodities/gold regardless of the available yields and just because the money was relatively safe. Americans lost thirty-six percent of their wealth during 2008/2009 and while memories are short the pain of that experience has not yet been forgotten.
Inflation and Deflation, it should be noted, only work in operative systems. The question then becomes what takes place if the system breaks down and value, of any sort, is no longer present and that would be the scenario labeled “Crash.” Recently the senior spokesperson for bonds, the eminent Bill Gross, suggested buying Gold and I can well understand the rationale for his comment. If so much money is printed and so little regard is placed upon fundamental economic principles then the Real Estate crash of several years ago will look like child’s play by comparison. Then if you add in a Europe that could implode from the demands of the troubled nations, some sort of social revolution taking place in the same countries or the sounder nations refusing to fund or even being unable to fund then we have an economically impaired world that is squared and cubed by worthless currencies. Remember assets are not only relative, which is how we approach them in a functioning system, but they are absolute and indicative at the same time. All three operate in tandem and while the latter two are mostly ignored; they are there none-the-less. If gold becomes the reserve currency and is trading at $8,000 or $10,000 an ounce then the value of the Dollar, the Euro or the Yuan is close to worthless. The Inflation factor of food and other goods with costs that are prohibitive to buy basic essentials is another option but that would be even worse in my opinion. This is not the way of it yet but there is a tipping point where so much capital is created that a currency loses its value as a tool of purchase.
“Money for nothing and chicks for free” may play out for awhile in the glitter of Friday and Saturday night but Sunday through Thursday may write another story. Inflation and Deflation have another edge and that is Valuation which is why “Crash” may precede their better known cousins based upon Valuation which would be a systemic breakdown of the first order. Gold, silver and metals are really a currency option at some point if the value of paper money is found to be wanting. It won’t be the Dollar as evaluated against some other currency but the value of any and all of them that may come into question. The path would be out of equities and into bonds with yields not only falling to zero but perhaps through zero and then out of bonds and into cash and then out of cash and into gold and other metals. “Systemic Breakdown” would be the functioning words.
“As happens sometimes, a moment settled and hovered and remained for much more than a moment. And sound stopped and movement stopped for much, much more than a moment.”
              -John Steinbeck, Of Mice and Men
Late Friday the Stabilization Funds of Europe lost their “AAA” rating mostly having to do with the economic deterioration in France. If Germany follows then it may be the first step in some sort of breakdown. At the same time America has been downgraded and our step over the Fiscal Cliff could have the same sort of affect here. I think that it be accurately said that easy credit, loose money and an overabundance of capital caused the events of 2008/2009 and since then the central banks have pumped even more liquidity into the system begging the very real question if we aren’t in for some sort of do-over of those events. No one is sure, I am not sure, but the possibility is no longer some other universe outlier or black swan that cannot be sniffed in the early morning breeze. If the mood changes and all currencies are viewed as lacking value then relative comparisons are hardly the point. Milton Friedman and Ben Bernanke have argued that the events of 1929 were caused by a contraction in money supply and hence our current policy but what is the other side of this coin if monetary expansion and capital supply is so great that the valuation of every currency declines as a result of their lack of worth; there is the appropriate question in my view.
Another interesting aspect of this consideration is what people do if there is no yield and the equity markets are in decline. If investors cannot generate enough income, one way or another, then what becomes of the seniors and others on a fixed income? Will it be the inability to pay mortgages, rents and then defaults and then bank failures? Some very unpleasant consequences to consider but if the expansion of money and credit are to continue unabated here and in Europe and if Draghi’s “Save the World” speech gets enacted then where does it all stop and what happens in America and Europe if there is no end in sight?
"No, you’re wrong there—quite wrong there. The bank is something else than men. It happens that every man in a bank hates what the bank does, and yet the bank does it. The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.”
             -John Steinbeck, The Grapes of Wrath

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Karlus's picture

"If investors cannot generate enough income, one way or another, then what becomes of the seniors and others on a fixed income?"

The govt will attempt to paythem with "transferred" money or printed money to get their vote. The spiral deepens and eventually there will be a Black Market and two currencies (govt script and barter)

GetZeeGold's picture



In other words.....get some gold bitchez!

Spitzer's picture


This article made me laugh. It says that if all the bond income was reinvested , there will be a 400 billion supply deficit.

Umm, that's why gold exists..

Explained here

DoChenRollingBearing's picture

Spitzer gets it.  Nice and concise blog, keep up the good work.  I hope you ALL have enough gold so that you are happy campers when this all breaks.  And it does not take all that much -- just OWN some.

+ $100,000

CDSMonkey's picture

it also says without the income people can't survive, but that it mostly gets re-invested

cranky-old-geezer's picture



So he says well-rated bonds will become scarce, pushing prices up and yields down.  He says bonds are more for safety now, not yield.

I belive that's the logic for gold.  Safety but no yield.  So bonds are more like gold now?  Safety but no yield?

Let's examine that premise a bit closer.  It's unlikely a bond would ever sell for more than its original par value, even if the "shortage" he speaks of actually materializes.

But gold can easily rise in value and sell for more than the spot price when you bought it.  There's your yield.  The increased value.

Of course you don't see that yield until you sell.  There's no income flow otherwise, just like any other commodity you invest in has no income flow, but there can be significant yield at sell time.

I will go further, it is not Inflation or Deflation that are going to matter in the short run, though it will later;

He apparently hasn't been to the grocery store in a while. 

Inflation is an ongoing problem, particularly since massive currency printing started in '08.

This is not the way of it yet but there is a tipping point where so much capital is created that a currency loses its value as a tool of purchase.

Capital cannot be created on a printing press.  A printing press can dilute existing capital, but it can't create new capital.

Currency doesn't have stand-alone value like a commodity does.  It doesn't have intrinsic value like a commodity does.

Currency is part of a ratio, the bottom part.  The top part is GDP these days.  It used to be gold & silver, but it's GDP these days.

Since currency is part of a ratio, its value comes from the top part of that ratio.  Print more currency without increasing GDP, currency's value drops we've clearly seen since '08.  It's called inflation.

There is no "tipping point" where currency suddenly loses value.  It's a steady loss over time as that ratio slowly changes with more currency printing and stagant GDP.  "More dollars chasing the same amount of goods & services."

Bonds aren't capital.  Bonds are debt.  Bonds consume captial, just like borrowing money, you're borrowing someone else' capital.

This is where "misallocation of capital" comes from.  Capital used to buy bonds of unproductive issuers, like the US government.  Or capital used to buy MBS just to keep the price up, with no productive output.  Or capital used to buy junk securites from banks just to keep them solvent.  No productive output there either.

That same capital could be used to buy bonds of a manufacturer, where the capital would be used to produce some manufactured item there's market demand for.  That would be proper allocation of capital.

Today we see much of the available capital in America used to keep the government afloat and keep banks afloat.  That capital isn't avialable for productive things like manufacturing or providing some sort of worthwhile service.

Fact is there's not that much capital available for investment these days.  And what is available is being used in unproductive areas.

There.  My explanation is much shorter than his.  Maybe I should start a blog.

Popo's picture

When there is little yield, but there is value in equities -- then sooner or later it becomes clear to the market that the biggest possible return is in rapidly extracting the value from equities.  The big short becomes the 'big temptation' and the big crash becomes a matter of when not if.  Because those who time the collapse correctly, or more likely those who precipitate it, will become generationally rich at the exact moment when the world becomes destitute.

decon's picture

We'll see.  You must consider that the mechanisms to reward those that are positioned for the crash may also crash.  Precise timing will be critical but so difficult to execute.

Pool Shark's picture

What doth it profit a man to win his bet and discover the casino is bankrupt...

tooriskytoinvest's picture

Gold To Rise 500% From Current Levels: Inflation Is Guaranteed. Your Financial Survival Is Not. Anyone Who Does Not Own Physical Gold Is Committing Financial Suicide.

Sextus Empiricus's picture

Classic moment when Ron Paul questioned Ben Bernanke and asked Nanky if gold was money.  Nanky said no.  Paul said, "Then why does the Fed keep reserves?"

Nanky said, "Because we see it as an asset."

Yeah, a f*cking expensive asset.  I don't see the Fed sitting on chocolate.  That's an asset, too.

CDSMonkey's picture

He should stick to blabbering about Europe.  So fixed income will do well with all the money, but equities won't?  I think that is competely and absolutely wrong.  Good luck on that.

CrashisOptimistic's picture

That's not what he said.  It's not all new money.  It's interest payments to the coupons.  THAT money would be looking to re-invest in the bond vehicle and new issuance is going to be more scarce than the total dollars of interest to be re-invested.  The price therefore rises.

Negative bond yields are coming.  If you're in now, you're going to profit from them.  Corporate intermediate bonds this year have returned about 8% with another month to go.  This is less than equities, but it's also had far lower sigma, if not risk.

Pool Shark's picture

You don't recall 2008-2009 do you?

Dr.Engineer's picture

Wow.  It is not often you have a virtual conversation with someone who has really thought hard about things going forward.  That makes at least two vocal, major money managers that are looking over the cliff (not that make believe fiscal one but the global one) and tryng to see what is there.

Heed these words and questions.  Interesting that he quotes from the Grapes of Wrath.

There is nothing new under the sun.

Go Mr. Grant.  Please keep us informed of what you see.

Sextus Empiricus's picture

It's all contrived.  Debt economies burst.  And then a new 'savior' comes in with a new currency or form of manipulation.


Ignorance is bliss's picture

History is full of those once hailed as saviors such as Hitler, Stalin, and Pinochet, before they became history's villains. Once over the abyss anything is possible and history is replete with chilling examples.



francis_sawyer's picture

Better get ready for them to steal your 401ks... Don't fret ~ it was only paper anyway...

Dr.Engineer's picture

Yes, and here is your plan to avoid that.

Get a self-direct IRA.  Create an LLC.  The IRA holds all the stock fo the LLC and transfers all of its cash to the LLC. You are then liberated.

chubbar's picture

To Continue: You then proceed to buy physical gold coins and have them delivered to a separate address other than the one you plan to store them at. When they arrive you use a fisch device to confirm their authenticity and promptly place them where they cannot be discovered or destroyed in a fire, etc (make sure a distant, trusted relative knows where they are buried/hidden or have a sealed envelope held by the executor of your estate). Then sit back and know that you have done all that is possible to keep yourself solvent when the collapse comes.

CDSMonkey's picture

I had to read this one a second time, I don't think I have seen a worse thesis ever.  Spreads will rally because of liquidity but equities will sell off?  Good luck with that.  Might be worst advice ever.  Bad enough to be wrong about doom and gloom, and least that has a chance of happening, this idea is just stupid.

Fuh Querada's picture

But he rubs shoulders with the best traders in Wall Street. You should be genuflecting with awe.

CrashisOptimistic's picture

That's not the focus of what he said.

It's not new money.  It's interest payments to the coupons outstanding which will overflow new issuance for re-investment.  THAT is what drives the bond price up, and the yield eventually negative.

If yield is now 1.65% and it becomes -5%, and you own that bond, you have a substantial profit.

ShrNfr's picture

Stuff that is callable is being called. The total interest payments in the future will decrease as these are called after new bonds are issued at a lower rate to replace them.

CrashisOptimistic's picture

No evidence of that, and if it was so that just serves to reduce the bond supply further.  There is interest payment money looking for reinvestment bonds, and if they are scarce, the price rises.

Folks do not wrap their minds around where the money is.  It is in the hands of increasingly old people.  They Are Not Going To Buy Stocks, and they certainly aren't going to buy gold.

They are scared.  Bonds are where they were taught to hide.  And that's where they are going to hide.

So far, at very solid profits.  8% for corp intermediates so far this year.

Lokking4AnEdge's picture

Eventually two things will happen:

1.The US government will pass a law that will force on evryone the buying of savings bonds....for the skae of "savings" and helping the society....say 2-5% of every paycheck will go into these bonds and you cannot redeem them for at least 10 years.....

2.The gold hoeards of many countries will be sold by int'l creditors.....why should Spain have a huge hoard of gold while their bonds are hammered down? They will eventually default and int'l courts will force them to sell assets,,,including their gold.....this will come as a shock to many countries....just watch what is coming to Argentina and courts now.....

francis_sawyer's picture

So I guess those all powerful 'international courts' have standing army battalions ready & waiting to take away all that gold that they decree should be forked over...

Lokking4AnEdge's picture

very want to re-finance yoiur bonds? hand over some gold....

francis_sawyer's picture

Even easier:

Go Icelandic ~ Keep all your gold and tell everyone to fuck off...

francis_sawyer's picture

Even easier:

Go Icelandic ~ Keep all your gold and tell everyone to fuck off...

andrewp111's picture

How do you keep your gold if it is actually in New York?

Essential Nexus's picture

Your comment is better the second time around.

Urban Redneck's picture

They've been trying that one to no avail with Argentina for a decade.

Europe is slightly different because the debtors are increasingly vassal states of Brussels.

In the end, if the debtor's gold supply is stored at the NY Fed or BoE, then are other serious considerations for TPTB  before going down the "give me your gold" route...

andrewp111's picture

Easy. All that gold is actually stored in the NY Fed or the BOE. US and English courts have physical jurisdiction.

DavosSherman's picture

 "It should be noted that during the worst year of the Great Depression, 1933, that America had an unemployment rate of 25% which is exactly where we find both Spain and Greece today."


 It should be noted that during  the [SECOND] Great Depression in 2012, that America HAS an unemployment rate of 22.8%.

Today "baby", that's your fucking wake-up call.

And oh, by the way---during GD I they counted goberment workers as unemployed, so today it (the actual unemployment rate) is much worse.

Stanley Lord's picture

Who the Hell is Mel Kiper?  I mean Mark J. Grant.

Fuh Querada's picture

The lyric and literary quotes are incredibly pregnant with meaning.

2500saturdays's picture

Wasn't it money for nothing and the checks for free?

woggie's picture

the beast is on the gobble
and all that matters is we're all headed for it's belly

Pool Shark's picture

From the Department of Redundancy Dept...

GottaBKiddn's picture


Correction: “Systemic Breakdown” should read, Systematic Breakdown, by design and on schedule.

Yen Cross's picture

 Lot's of ifs' in this post. I like Mr.Grant/ I like the way he tears apart CNBS with his bow ties when everyone is 1/2 awake!

  I think Mr. grant summarized his intensions in the first sentence of this thread ;  “Get ready for The Great Bond Shortage in North America",

Until rates go up and everyone gets Fed.(pun intended) up with green toilet paper!

Yen Cross's picture

I'm retarded/ That was the "Seeking Alphas" Grant/ Thanks.  Don't jog and post at the same time!

In principle my comment stands...

Pool Shark's picture

Never take a bow tie for Grant[ed]...

Yen Cross's picture

So true/ I apologized- and credited the actual Author. I love the real [Mark G[rant] .

OptionNinjaNYC's picture

The author of this article makes a very legitimate point. What the central banks are doing right now is exactly a re-enactment of the same events that led us to the crash of 2008/2009; but this time on a much much much Larger Scale. Its funny that the end of humanity wont be caused by an asteroid or alien invasion or a natural disaster; but by a petty thing called 'Paper Money'. What a waste.

Howdan's picture

This is the best comment I've read all day!

So true.

A. The Central Bankers are trying idiotically to fix a debt problem with.........more debt

B. The CB's are only doing this to bail out the TBTF's which despertately need this "heroin" fix of cheap money to keep the ponzi scheme going

C. The CB's are pouring petrol on the fire just like Greenspan did after 9/11 and inflated a debt/liquidity fuelled market bubble which diverged from any kind of fundamentals.

As some of my fellow ZH'ers often say : Wash, rinse, repeat.

Trouble is, when will the (dire) economic fundamentals actually catch up with reality (i.e market prices)? Riddle me that.......

Bansters-in-my- feces's picture

So i wonder why the USA Gov. dont save the world with the big war chest it has tucked away in the Exchange Stabilization Fund.

Instead it choses to manipulate the price of Gold with it.

Tis a shame.