The Monetization Of America

Tyler Durden's picture

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

In the piece I wrote over the weekend and subsequently published as an “Out of the Box” yesterday I touched upon the Fed’s buying and what it will mean for the bond markets. Today I wish to concentrate on the implications of what the Quantitative Easing will do to the fixed income markets and, to a lesser extent, to the equity markets. Many people, and erroneously, think that all of the purchasing by the Fed will go to both markets in equal amounts but this is not the case. More money for the stock markets would have to come from asset reallocations by money management firms, insurance companies, pension funds and the like and this is not going to happen anytime soon given the 2008/2009 experience. Consequently the greatest flows generated by the Fed’s recent and forward actions will affect the bond markets much more than the equity markets.  What this means is a massive compression of available securities against Treasuries which continues what has been underway since early last year. The demand for Treasuries will also push down absolute yields so that my springtime prediction of a 1.25% ten year Treasury yield, the actuality is 1.38% so far so I was close enough, will be breached in 2013 as the Fed takes in and monetizes somewhere between 80-100% of all new Treasury issuance.
J.P. Morgan, in a recent piece, suggested that between the MBS purchases and the next upcoming stimulus push that the Fed would account for 90% of all new debt issuance and I then calculated a demand imbalance between $400 billion to almost $2 Trillion depending upon the actual Fed announcements. However you cut it though it means that the Fed will be purchaser of securities and that what is left is insufficient to meet demand so that compression and lower yields for anything/everything are on the horizon. There are many problems here and significant problems that will face the markets in the years ahead as the Fed will balloon its purchases so that they singularly support the financial markets. The Fed currently holds about 18% of the U.S. GDP on its books and it could bulge to 23-28% a few years out depending upon the continuation or increase in current programs. There are academic arguments to all of this and very real dangers when the Fed, if the Fed, ever turns and stops their purchasing but in the meantime we play the game to win and the strategy is simple enough. Buy every bond that is long where you can deal with the credit risk and take advantage of the compression. For those of you that do not watch the institutional bond markets like I do I can tell you that now, not off in the distance but now, there are almost no discount bonds left in the long end of the market as compression and the absolute decline in yields will push bonds to yet unseen levels and institutions are already or will be soon setting up to take advantage of these conditions.
This all works, by the way, only because all of the world’s central banks are working in concert so that there is no imbalance and money cannot be invested off-world. In effect, we are stuck but that is the way of it these days. There is no use arguing with what is and neither wishful hope nor predictions of crash will help you in the short run. One day there may well be the question of valuation and the worth of currencies but it will not be now so that betting upon doomsday scenarios is not a good play but never close your eyes to fact of the monster that has been created. It looms out there like the great silent beast that it is and it is only the ring of nothing else to buy on this planet that curtails his rampage. The beast is currently kept in his pen but if the gate of the worth of currencies is ever opened then not even Katie will be able to bar the door.
The world will continue to operate on relative value in the meantime and the Fed, as the buyer, will destroy what absolute value there is because their intentions and goals are vastly different from investors. Yields will not make sense empirically because of the actions of the Fed but it will make no difference; lower yields and greater compression will be the rulers of this part of the drama. The “Fear Factor” will come and go but the trend will be as I have predicted because the most fundamental of laws apply; demand will vastly be greater than the supply. The Mad Hatter rules and the Red Queen has installed a new croquet court!

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tirpitz's picture

So, higher bond prices mean lower interest rates. And lower inflation.

Ain't that the opposite of what Shalom Bernanke claims to achieve?

EnslavethechildrenforBen's picture

How about we all put a printing press in our garage and we monetize things from now on...

ozzz169's picture

????  do you have any understanding of this at all???  fed buying bonds putting more money into circulation is inflationary more dollars = less value/dollar.  a side effect is driving yields down as they are creating a shortage in bonds. 

GetZeeGold's picture



In Ctrl-P we trust.

LawsofPhysics's picture

But the bernanke said that he "would never monetize" anything.

The fraud and mis-allocation and malinvestment of capital and resources will continue...


No one will be held accountable until the suppy lines break, and then everyone will be.

GetZeeGold's picture



Under oath no's got balls. You gotta give him that.

I am more equal than others's picture

Staying with the Alice in Wonderland pic and so the Queen of Heart say 'off with their heads.'  Dr. Guillotine, where are you when you are so needed... metaphorically of course.  

fonzannoon's picture

I don't know Mark....sounds like you just explained the biggest fuckin bubble in history....and recommended people get in. Asshole.....

SheepDog-One's picture

That's the way it sounded to me too...also he threw in this bubble is teflon coated as well....I'm not buying it myself! 

I think its desperation, not the new 'just how its gonna be' at all.

DavidC's picture

Spot on. It is absolute desperation.


Super Broccoli's picture

The equation is simple : if the fed doens't print it nobody lends it. We're playing a board game with a spoiled kid that claims to change the rules everytimes it starts losing control ...


So when will the shit hit the fan ? The answer is easy : when hyperinflation have people rioting both government and banks.

When will hyperinflation kick in ? Hum hard to say. You see bailout money flows to the financial markets thru banks and to bonds thru state so it's not like it was designed to have us peasants consuming it ;-) But eventually the state will just get bigger and bigger compare to our deflationary real economy and the state intervention will be even more distorting real economy. Same thing with the stock market : at some point someone, somewhere, will be willing to cash that out + deluting dollar's value makes imports nominaly more expensive to the general public ... So nobody knows, all we know is it's coming quickly.

francis_sawyer's picture

The girl on the Snorg Tees ad has a shirt on that says 'I pooped Today'... Bernanke is getting ready to monetize that [not the shirt]...

rsnoble's picture

I already told you guys not to excited because that's really Stephen Tyler when he was 19.

escargot's picture

Oh, God, I don't want to hear that women do such things.  I have much more traditional values.  Nice girls don't need to use toilets.

rbg81's picture

No interest income of any kind, Bitchez!!  Author's analysis is correct.  All Central Banks are acting in concert to ensure that Governments can borrow unlimited funds at zero interest.  And who pays the price?  The savers and investors, a group safe to punish as they're civilized people who won't riot.  The Markets are broken but there's not a damn thing anyone can do about it.  And the Politicians luv it because all that spending potential increased their power.  For now anyway.

new game's picture

Dear Mark Grant,

Your admission that the game is rigged and the players must play tell me you should retire and get out b/4 kaboom...

and just maybe you be part of the problem-eh, fuck you for the most obvious advice...


rsnoble's picture

Looks like the US markets are approaching another selloff area in which case they will get an abrupt selloff lasting a couple days for several hundred points.  Then they can spend months hyping good news and have little mini rallies here and there and have everyone back in la la land before they do it again.  Everything is surely better now.  If this market isn't topped out I don't know the definition.  Of course they keep trying as they have now spun dropping off the fiscal cliff good for stocks. 

Curiously what would happen if things got so bad and the states actually did break up?  Who would control the millitary?  Would we be sitting ducks for the likes of China?  Would we all become little UN suckasses and do everything we are told to do?  I'm thinking it might be close to the time of getting out of this shithole.

adr's picture

There is no future for America. It isn't possible to repair the damage and get out of this mess. There may be a future for a few individual states if they break away, but the debt level of the US government can't be sustained and the liabilities of welfare will bankrupt every city within ten years.

When corporations that make nothing are valued in the billions, because it is an "it" thing for investors to mak millions wth IPOs, you don't have a funtional economy.

I figured out America was over when the entire media swooned over a project called It. All the financial sites claimed it was the investment of a lifetime. Every college professor was claiming It would change the world. Everyone believed the hype, I never believe in hype. I was mocked for mocking It. I was called an idiot by one of. My professors when I said It would turn out to be a decent product, but hardly anything that would cause cities to be designed around it.

It turned out to be the fucking Segway. A product that then had an entire cottage industry built around it, just to prove the hype was real and the product was actually usefull. To force people to swallow the bullshit.

The entire American economy is a group of wealthy people with an entire cottage industry, the financial press, created to force people o swallow bullshit. The great American recovery is a hype machine that turns out to be a fucking useless scooter.

toomanyfakeconservatives's picture

Nicely put. I used to drive Dean Kamen's limousine and remember the "It" hype like it was yesterday.

SheepDog-One's picture

Really. I thought the plan was 'all-out desperation pumping for elections, then the reality comes in' just more of the same? 

Something tells me thats not really the plan at all. 

topspinslicer's picture

can't invest off-world? sure you can -- gold comes from asteroids beaches!!!!!!!!

Quinvarius's picture

I am pretty sure the market will come up with as much debt as the insurance companies can handle.  It is called loaning into the economy via other debt.

Flaming Ferrari's picture

But but weak dollar=strong gold says the GBugs?? Not at the moment. Waiting for what the positive spin on this gold price action is.

Quinvarius's picture

That it is probably going to close higher today than it did yesterday when they are done blowing out the stops under 1700.

DowTheorist's picture

This is like the coyote (road runner) running on the air before falling down....when reality sets in, things may end up badly. This ratio may help time the "run for the exits" when the going begins to get really tough for bonds:

yogibear's picture

Bernanke's monthly monetizing and it's media hype should help metals increase further. In the long run Bernanke's destruction of the US dollar will lead to people getting out of the currency.



Flaming Ferrari's picture

As much as many of us would like to believe that, the price action does not look encouraging. QE Infinity gold rally is done. It now needs Ben "Buzz Lightyear" Bernanke to deliver QE Infinity and Beyond.

Dan Conway's picture

So holding cash is the same as buying bonds? 

asteroids's picture

Instead of having asset deflation, where the lenders (ie banks) take a hit, we are having (via money printing) dollar deflation. This hits everyone, but it hits the poor and middle class the most. The FED wants this. The politicians are too stupid and short sited to see it. Buy gold or GLD.

Nothing To See Here's picture

"It looms out there like the great silent beast that it is and it is only the ring of nothing else to buy on this planet that curtails his rampage."

There's this one thing to buy, and it's barbaric : GOLD

Once their controls on the price of gold fail, their system falls and we start anew.

venturen's picture

I just started an "OFF-WORLD" ETF you can invest in....the fees are a bit steep!

woggie's picture

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

woggie's picture

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