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Is The Treasury's Imminent Launch Of Floaters The Signal To Get Out Of Dodge?
Today, our favorite IMF economist, and arguably one of the few people who sees the big picture, Manmohan Singh issued a paper titled "Money and Collateral", which, not surprisingly, deals with the issues of money and collateral. And while it provides an interesting read, we can jump to the conclusion which is, not surprisingly, that there is simply not enough collateral within the global financial system, which in turn inhibits the proper intermediation of banks in traditional monetary conduits (due to the need for central banks to intervene in the place of traditional banks and shadow banking entities), which keeps the money multiplier low. We have extensively covered the issue of collateral scarcity and encumbrance previously (read: "Encumbrance 101, Or Why Europe Is Running Out Of Assets", "No Record Profits For Old Assets: Jim Montier On Unsustainable Parabolic Margin Expansion For Dummies", "A Few Quick Reminders Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming)", "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement") so the paper's conclusion should not come as a surprise: until cash is used to replenish a diminishing, cash-poor asset base, nothing can change. Unfortunately, in the ultimate Catch 22, under central planning companies are disincentivized from investing cash into CapEx and organic growth, and instead are spending it on M&A and dividends, the two worst decisions management can take over the long run. It was one of the tangential "boxes" in the Singh paper titled "Floating Rate Note “puts”—are they forthcoming?" that caught our attention because it reminded us that in all the distraction over the past 3 months, we had forgotten that probably the most important event of 2012 is about to take place, and it has nothing to do with Europe, or with a central bank's balance sheet. Namely: the imminent arrival of Floating Rate Note Treasurys, or Floaters. In reality, while we noted this very curious development before (here and here), we did not think too much into what the Treasury may be signalling. Which was a mistake, because if Singh is correct, the US Treasury may be telegraphing to the world that it, or far more importantly, the TBAC, is quietly preparing for a surge in interest rates. Which as everyone and the kitchen sink knows, is THE black swan event (or gray for you taleb purists).
But before we go there, let's take a tangent of our own to a point in history 61 years prior, known simply as The Accord of 1951. Here is how Wikipedia summarizes this footnote in history, which the Fed, the Treasury and any US administration would be delighted to have never been made public.
The 1951 Accord, also known simply as the Accord, was an agreement between the U.S. Department of the Treasury and the Federal Reserve that restored independence to the Fed.
During World War II, the Fed pledged to keep the interest rate on Treasury bills fixed at 0.375 percent. It continued to support government borrowing after the war ended, despite the fact that the Consumer Price Index rose 14% in 1947 and 8% in 1948, and the economy was in recession. President Harry S. Truman in 1948 replaced then Chairman of the Federal Reserve Marriner Eccles with Thomas B. McCabe for opposing this policy, although Eccles's term on the board would continue for three more years. The reluctance of the Fed to continue monetizing the deficit became so great that in 1951, President Truman invited the entire Federal Open Market Committee to the White House to resolve their differences. William McChesney Martin, then Assistant Secretary of the Treasury, was the principal mediator. Three weeks later, he was named Chairman of the Fed, replacing McCabe.
Few things to note here:
- The Fed keeping rates artificially low is nothing new - the Fed did it during and after World War 2, when the short end was anchored at ZIRP, even as inflation was soaring. So much for bonds indicating inflation.
- There was a time when the Fed was "reluctant" to monetize the debt. The result was a termination of the Fed head.
- There was also a time when the Fed was truly independent. That led to the Administration and the Treasury to force a coup at the Fed, and to put in a puppet regime which would monetize debt no questions asked. This in turn led to official media to proclaim that a thoroughly subservient Fed is now "independent"
- Nothing like naming the Fed's Washington D.C. HQ for the one man who dared to stand up to the president's demands for infinite monetization... and get sacked for it.
He hope this little incident that nobody talks about puts everything we live through nowadays with the Fed, and its endless appetite for US paper, in a far more comprehensible light.
Yet while entertaining, this historical incident also teaches us about the future, and what may be imminent. Here is Manmohan Singh:
Floating Rate Note “puts”—are they forthcoming?
At the time of the discussions leading up to the Fed-Treasury Accord of 1951 which ended an extended period of artificially suppressed interest rates on Treasury bonds, there was much internal debate about the potential deleterious impact on bondholders from a “surprise” rise in rates. There was also concern about a potential buyers strike and/or fear that a new market equilibrium would entail a sharp spike in rates. This discussion was conditioned by the similar situation faced by the U.S. Treasury in 1919 after it promised to stabilize bond prices during and after WWI. This policy caused conflict with certain Fed policymakers and the eventual losses on Liberty bonds were still remembered by Congress and the Treasury in 1951, 30 years later. As a consequence, at the time of the announcement of the Accord, buyback options were offered by the Treasury, that is the U.S. Treasury offered to swap the outstanding stock of long-term debt with new long term debt with higher coupons (coupled with restrictions on sales before maturity). The idea was to cushion the market from capital losses.
Bingo: "prevent capital losses" by way of the modern version of 1951's Treasury puts. In a day and age, i.e., now, when investors generate the bulk of their wealth from capital appreciation (thank you ZIRP), and in which capital losses would be the deathknell for a US market in which the bulk of consumer and non-financial cash is already invested in the capital markets (recall "This Is Where The Developed World's Households Have Invested Their Money"), capital losses within the one asset that has been a cash magnet ever since the Second Great Depression, would be devastating. How devastating? Simple bond math: since a bond's yield is determined by its fixed cash coupon and its price, in an environment of rising interest rates (especially on the short-end which are duration magnified exponentially by the time they reach the long end) when the coupon can not be changed (or is 'fixed' as stated), the price of the bond has to drop to keep the yield rising. A good example are the new Greek 10 Year bonds, which because of their ~4% cash coupon, and 20% yield demanded by the market, are trading at just about 20 cents on the dollar.
Needless to say an 80% capital loss on the 10 Year Treasury would be cataclysmic for all those who believe their money is "safe." Also for America, and for modern capitalism.
So what is a Treasury to do? Well, unfix the fixed portion, or the cash coupon, so that rapid moves in interest rates are absorbed not by the capital loss to keep the yield higher, but by a spike in the variable interest margin over Libor. That way even if the Fed were to lose control of both the long and the short end, capital losses would be minimized, something of absolutely critical value in a society transfixed with capital preservation.
In other words, the market under the guise of the TBAC will provide the instrument, or product, that will be best suited to buffer a surge in interest rates. Ironically, the very act of rolling out this product is thus the alarm bell that higher rates are a-comin'.
This is how Singh sees the current comparable event, the imminent launch of FRNs, as comparable to the bond swap of the 1951 Accord:
Might the U.S. Treasury go down a similar path again in conjunction with an eventual Fed exit strategy? In the current environment, markets have witnessed a 30 year secular decline in bond market yields. Serious market turbulence might result, significantly greater than that associated with the February 1994 “surprise” rise in rates initiating a tightening cycle, were the market to believe it were embarking on a steady (or rocky) rise in rates from near zero to a “neutral” fed funds rate of 400 bps and a "normal' 5 percent yield on 2-year U.S. Treasuries. The recent TBAC’s proposal for floating rate notes (FRNs) seems an obvious option to cushion the transition for the market. As an indication that the eventual unwinding and normalization of the yield curve will take time and inflict pain on holders of fixed income debt, the market appears already to be requesting such "puts". In this context, it is useful to quote from recent TBAC report (Jan 31, 2012)
“… ways to explore the viability of Treasury issuing floating rate notes (FRNs). In particular, the presentation [attached] assessed potential client demand, optimal maturity, reference index, and reset frequency. The structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Pricing for a hypothetical two year FRN was estimated to be in the arena of 3 month Treasury bills plus 8 basis points.”
What is also obvious is that if the TBAC is quietly shifting the market into preparation mode for "a steady (or rocky) rise in rates from near zero to a "neutral" fed funds rate of 400 bps and a "normal" 5 percent yield on 2 year U.S. Treasuries" as the IMF warns, then all hell is about to break loose in stocks, as by now everyone is aware that without the Fed liquidity, and not just liquidity, but "flow" or constant injection of liquidity, as opposed to merely "stock", VIX will explode, equities will implode, and all hell would break loose.
It is not yet certain if the TBAC will proceed with implementing FRNs. Although, since the proposal came from the TBAC, read Goldman and JPM, and what Goldman and JPM want, they get, it is almost certain that in about a month, concurrent with the next quarterly refunding, America will slowly but surely proceed with adopting Floaters.
The second charge was to explore the viability of Treasury issuing floating rate notes (FRNs). In particular, the presentation [attached] assessed potential client demand, optimal maturity, reference index, and reset frequency. The structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Pricing for a hypothetical two year FRN was estimated to be in the arena of 3 month Treasury bills plus 8 basis points.
A discussion then ensued over whether 3 month Treasury bills or Fed Funds Effective was the more appropriate floating rate index. In conjunction with fixed-rate issuance, FRNs give Treasury an attractive alternative to increase the average maturity of its debt. While more analysis on the specifics of the program must be done, the Committee was unanimously in favor of Treasury issuing FRNs.
As a reminder, this is what Treasury's Mary Miller said earlier:
Treasury continues to study the possibility of issuing Floating Rate Notes (FRNs). The Treasury Borrowing Advisory Committee suggested in its February 2012 charge that FRNs could complement Treasury’s current suite of products.
Treasury recognizes that FRNs may provide a number of benefits to government finance, and plans to announce a decision regarding whether or not to introduce an FRN product at the May 2012 Quarterly Refunding.
What happens once we get Floating Treasurys nobody knows. But if 1951 is a precedent, when the unstoppable force of central planning finally rammed right into the immovable wall that is reality, it may be time to start heading for the cliffs.
Finally, here is the TBAC's FRN presentation:
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The encouraging words are appreciated. This one has my head spinning. I clearly recognize that I do not have a truly deep understanding of the whole picture and all its possibilities. That being said, this article as interesting as I find it, leaves me scratching my head trying to understand what the hell to do with it? I continue to have a sinking feeling that they will find a way to fuck us all, and throw many very unexpected wrenches into even the best laid plans. When I start to feel a bit overwhelmed I just try to remind myself to keep it as simple and basic as I can..................and smile every once in a while.
Consider accepting that a complete 'true and deep' understanding will never come, even if it appears so. Those that think they have a complete understanding of such intricate and dynamic systems are limiting themselves beyond description.
Shock
ditto what BadL says
ZH is a learning place and sometimes you go to bed no better informed than when you got up. The comments are where I go for info on confusing, technical topics. In between "silver bitchez!!!" there are often good explanations (or at least funny cussing) that lead to greater understanding. Even if you do not understand the topic you can go to wiki and find out what the acronyms mean (TBAC =Treasury Borrowing Advisory Committee) see!!
"such as myself who's only investments are cash, staple food stuffs and the shiny metals?" that's a damn good start!
I'm just a caveman! I don't understand all your fancy ZIRP's and LSAP's....but one thing I do know is that if interest rates are climbing then debt and equity will be crashing, and that can only mean one thing, an all out scramble for dollars! In that case (a screaming dollar), I think PM's will fall, along with equity.
In my humble caveman opinion, of course.
addendum:
I don't think we've begun to see the REAL deleveraging yet! It hasn't been nearly painful enough. Homeowners defaulting? Tiny Greece restructuring? PUH!
We need some real F'd up shadow banking seizure type wrath! We need to wipe out some SERIOUS debt/"non" mtm assets!!!
I was really hoping some for some SHTF before Obama got re-elected.
"I think PM's will fall, along with equity."
If interest rates rise, the FED/gubmint complex will have to generate massive more injections of fiat (CTL + P) to keep up with the huge increases in interest payments on the national debt, which should buoy PMs, and maybe stocks intermittently also. Look what happened to PMs in the 70s - it took really high interest rates to finally crush inflation and bring PMs back down to earth again. FED can't do that today with the interest payments and runaway deficits.
I think there will be waves of deflation (we've seen that haven't we) and inflation (we've seen that too), even in various sectors. I've got my money on PMs though - literally.
can someone explain, in goddamn "engrish" what this means to a person, such as myself who's only investments are cash, staple food stuffs and the shiny metals?
Nothing to see here, this article is a false alarm, no way will Fed raise rates any time in the future.
Why? Because raising rates would balloon federal government interest expense, implode the federal budget, and trigger a massive credit downgrade, like BBB or BB-, something like that, Fed couldn't buy treasuries anymore, which would throw everything into chaotic downward spiral.
ZIRP is the ONLY way they can keep the $16 trillion federal debt ponzi scheme going.
So ... you've ruled out the owners of the Fed, BIS and Vampire Squid (ie. Vatican) acting together to implode the US federal budget? That's a relief!
Exactly. Cranky-old-geezer, if you want to over-condense things then go ahead but you're likely not doing anyone any favors. May I suggest that it's more valuable to understand the principles/concepts put forth in pieces like this rather than to replace the information/truth that they offer with a model/projection that (a) assumes a worldview that is grossly removed from the inner circles of Fed, UST, TBTFs, and Whitehouse and (b) keeps fellow zh readers from growing their knowledge and understanding of the tectonic plates beneath the global finantial 'system'.
And for ffs people, please mod down posters that post drivel -- from "* bitchez" to all the 1-2 liners that do nothing but soak up comment real-estate, increase SnR, and encourage other kiddie behavior. zh staff, feel free to take me up on it, but I'd happy contribute $1k to reworking the comment mod system so that the kids (and adult-shaped kids) get filtered out. Sites like slashhot and countless others use friend/foe models for high-quality posters to both passively and nonpassively filter out low quality posts and posters. The key algorithmic principle is that poster types tend to clump together (in terms of who friend and foes who). As those groups form, approved zh staff members simply do light spot auditing of representative posts of the algorithm pools, and things fall into place.
The more we can make zh a forum of high quality finantial discission, the more people get informed, the stronger the value proposition to the authors of pieces such as these, and the more public benfit is offered to a world in desperate need of spreading the word of what's coming. I may own a disturbing amount of PM and think the system is well past the point of no return, but that doesn't mean we shouldn't work together to build the best community possible.
Bernanke thinks of himself as "Mr. I studied the Great Depression & can avoid it happening"...
Anything that works contrary to that egotistical thesis would be his nemesis... Although if the Treasury threatened him with a 'Marriner Eccles' type situation "Play or you're out", he has his escape route... Frankly, I think he'd take it, he already knows he's failed and would love to skip town before history hangs him with that tag...
Well the answer is that you will be impacted minimally or not at all, financially. Of course whatever job you have will be eliminated because commerce will grind to a halt. It seems to me that you are well prepared.
There is no other way but.....TO INCREASE THE INTEREST RATE...in some way, any way.
The way it's going we could have a failed UST auction soon since why would people bid of electrons that give nothing back. The resource producers will dig out enough material to gain dollars to exchange with other materials or food. That's why the PD return most of the money to the Fed. Nobody wants to exchange it with goods.
Currently the world seems to function in a practical barter system where the dollars are used for easiness of electronic transactions and for accounting purpose, but not as actual money.
BUYER'S STRIKE = FAILED AUCTION. No other way, but increase in interest rates.
Auctions won't fail and interest won't rise as long as the fed is willing to print money to buy them. Everything else will go crazy like commodities. Sounds familiar? Guess who is buying most of the long end of the treasuries? Yes, the FED. Do you think the printing is done? Not if they don't want interest to rise and the auction to fail.
The moral of the story is invest your money in hard assets.
I think we are both saying the same thing.
Money created but not exchanged with real goods is ALREADY A FAILED AUCTION. Most of trillions are back to the Fed without being used at all, hence it's already failed.
the debt the fed creates goes to banks at zero interest they buy tresurys
and then the banks losses are paid by future tax payers aka the children, aka slaves to the fed.
= REVOLUTION
How far can people bear with food and crude oil prices so high?
Americans have guns, they're not europeans or canadians. Different world down south.
Obama's executive order clearly showed fear of American Spring = food revolts.
The people are revolting.
http://www.youtube.com/watch?v=TYpYs9GBXwY
Allowing hard assets to inflate in this economy will bring it to its knees. The Fed has to be ready to raise interest rates in a controlled fashion in order to take the allure out of commodities. They've got their balance sheet loaded with long T's and they have no reason to care about their own balance sheet "losses." They can let rates rise to slow the attraction of commodities without having much effect on the liquidity question. They can also mysteriously "affect" margin requirements in the commodities sector.
That's not unreasonable, BUT... think about what that does to the interest on the US guv debt - it sends it into orbit, leading to default.
Looks like the game is spinning out of control.
I'll keep saying this every time it comes up until it becomes like "Bitchez!":
There will never be a failed treasury auction. The Fed will buy every last scrap of debt with newly printed cash.
Sir
Question: How is it not a failure when money created goes from the computer where the treasury account is to the computer when the Fed keeps its accounting, but nobody accepts that money and it stays there. It is practically a failed auction. Not legally, but practically it is. Reality is what matters, not legality.
It's "MOPE". Management Of Perception Economics.
As long as most people believe that the auction was successful, it's a success. That's the current reality. We're outliers and don't count.
Place your bets accordingly.
BUYER'S STRIKE = FAILED AUCTION. No other way, but increase in interest rates.
***************
Or let prices fall-that would even be better than gaining on interest rates as your dollar would be gaining buying power-
Of course that could only be possible in a deflationary scenario-
My favorite solution. Better Death and Resurrection (accute deflation + debt forgiveness) than Death by a thousand cuts that is happening right now.
than Death by a thousand cuts that is happening right now.
************
Absolutely-to those not in debt and heavy in capital-deflation is a wealth generator-
So right. Just simple math.
When the system is envisoned as a machine that requires energy to be used, heat to be exhausted and work to be derived from that energy, it looks so simple.
Ray Dalio uses the same analogy, but one must be an engineer to catch up to it relitively quickly.
As long as there is enough money for booze, cigarettes and drugs then the average American won't notice that his idyllic trailer park existence is about to come to an abrupt end.
Trailer parks are tornado magnets... Just saying...
2-year notes trading at 5%?
llllllllll0ooooooooooooooooooooooooooooooollllllllllllllllllllllllll
Never again, unless it's T +/- 1 month of a US Treasury default. And that ain't happening anytime in the next 5 years - there's way too much real wealth that has yet to be extracted from US citizens.
How will these floating rates be set? bid/offer on yields?
I thought the reason why coupon rate were fixed was due to usury laws which prohibit charging interest above a specified level. For that matter, the interest rate is set at the state level, so how would federal debt be sold.
Greece like bond paying a 30% coupon would be illegal in every state of the union.
Floating rates will be set just as TIPs are - by a bid/ask process.
In the USA usury laws are a function of the individual states; there are no Federal usury laws. There are no internatiional usury laws.
xela2200, I'd love to agree with you, but cannot. State usury laws were overturned in the 90s by CC/bank/fed govt. regulations. Or do you think Payday Loans are not usurious?
If usury laws existed, there wouldn't be this mess.
Let me know when the US Treasury issues bonds backed by and interest paid in grams or ounces of gold. Until then STFU US Treasury I'm not interested.
http://vegasxau.blogspot.com
FDR and Nixon proved their backing don't mean shit.
Any one up for a game of "Monopoly" ? I want both the " Corzine" get out of jail free cards!
Whats the timeline on this? After November right?
FIGHT CISPA
Who loses if interest rates go up? Treasury holders. And who is the largest holder of treasurys? The Fed.
The Fed is going to shoot themselves in the foot by raising rates (or letting them rise)? This will wreck the stock market, the economy, housing and the Federal Government borrowing costs will increase significantly.
I just cannot see it. for a long time at least.
sschu
We wrote this in April 2010:
Why Is The Fed Actively Managing A $25 Billion Maiden Lane MBS Portfolio When Its $2.4 Trillion SOMA Holdings Have A $1 Billion DV01? (And Are Unhedged)
It is $2 billion DV01 now.
Link didn't work, this should:
http://www.zerohedge.com/article/why-fed-actively-managing-25-billion-ma...
Canada's Carney repetitively telling Canadians that they are fucked as household debt is full retard. He is basically saying that ZIRP is over. Or hyperinflation. The sooner Momos realize this the sooner we can all join the new #OWS streets.
Carney sayth but Carney does not doeth. Stevie is all over him. It's all blah, blah.
Man Canadas welfare system is insane from what I've seen.
Thanks for the link. "Why is the Fed Actively managing..." was a good read.
The Activity described reminded me of the taxi ride Bill Murry gives the old lady in the opening scene of the 1981 movie "Stripes"
It is $2 billion DV01 now.
So an increase in rates by 100 basis points causes a $200B decrease in the Feds bond portfolio? And Bennie will still be employed if this happens?
Such is the hazard of central planning, they are now completely boxed in with no way out. The Federal government laughs at these guys, why should they rein in spending if the interest cost is minuscule? Fannie and Freddie are insolvent now, what will happen if their mortgage portfolio crashes? Does anyone own MBS and what happens to these guys?
Take housing (or pick any major sector of the economy). What will happen to housing (in the short term) if mortgage rates go to a more normal 7% or even higher because of inflation? My first mortgage in 1985 was 11.75%, and I thought it was a good deal. Of course demand for houses will collapse and so will prices. Eventually the market will clear and people will start buying, but all those 1sts and HELOCs will have to be liquidated by then because who wants to pay a mortgage when they are 50% underwater? And who exactly holds these notes?
Bennie etal are fools, and we will all pay big time for it.
sschu
The Fed is going to shoot themselves in the foot by raising rates (or letting them rise)?
**************
Sometimes the Fed loses control of the long bond rates-
Greenspan tried to make them jump by hiking the FFR 17 times to try and cool the housing/credit bubble but the long end called his bullshit-
http://bit.ly/s86T8y
Just a nominal loss for them. There are bigger issues at stake calling for rate normalisation, notably that the economy is certifiably dead as long as zirp remains.
I really don't see any path to higher interest rates. With the amount of debt out there, they cannot let rates rise. They WILL not let rates rise. They can continue to buy the bonds and keep the rates artificially low. That is exactly what happens each time rates creep up in Europe. Not saying they can keep this up forever but just saying they will do everything in their power to keep rates down. Way too much debt today. Hard to compare 1951. If rates were to go to 8% the federal government would be paying around a trillion a year in interest alone.
If I am missing an obvious point here, I am open to being educated. I just don't see any path to higher interest rates.......without a near immediate collapse.
Absolultely! They're past the point of no return. There ain't no turning back anymore. The only question now is where-when do they crash.
I found this snippet on the "internets" and it kind of helps make sense of this bullshit...
If interest rates do rise, the Fed's existing portfolio of nominal debt will lose value. A large enough increase in rates could place pressure on the Fed's capital base. At some point, if interest rates rise quickly enough and to much higher levels, the capital base could actually show a deficit. Perhaps by switching a portion or all of its existing debt stock to floating-rate notes, the Fed could reduce this risk or reduce losses.
In a speech delivered in May 2003, Fed Chairman Ben Bernanke specifically discussed the potential for absorbing such losses through the purchase of floating-rate notes from fiscal authorities.12 He referred to the relationship between the Ministry of Finance in Japan and the Bank of Japan in the mitigation of potential investment losses due to rising rates:
“…the Ministry of Finance would convert the fixed interest rates of the Japanese government bonds held by the Bank of Japan into floating interest rates. This “bond conversion” – actually, a fixed-floating interest rate swap – would protect the capital position of the Bank of Japan from increases in long-term interest rates and remove much of the balance sheet risk associated with open-market operations in government securities.”
In light of this speech, the issuance of floating-rate notes by the Treasury could provide the Fed with a better tool for balancesheet expansion. On the other hand, perhaps the issuance of FRNs would lessen the need for the Fed to conduct LSAPs. In particular, to the extent that FRN issuance replaced note and bond issuance, the change would remove both duration and yield from the Treasury market. In turn, that removal could nudge investors further out on the risk spectrum in order to get duration and yield. Since LSAPs have the same purpose, presumably fewer of them would be needed.
Thank you. This was helpful mate.
FIGHT CISPA
you make it sound as though the Treasury is going to sell FRNs to the Fed to boost their balance sheet? and how would this happen a straight swap? this isn't a retail product?
Who would pay the interest? The government? If they don't have money, the FED will have to print to pay which would cause inflation which would cause interest rates to rise etc etc.
They can come up with all their models and programs, but at the end they are all gimmicks that won't solve anything. If the fundamentals are not sound, it will crumble. The market will assert itself at some point. The longer it takes, the worst the reset will be. I don't care if they float, or twist, or use lube.
FYI, the Fed will never show a loss because they don't mark their gov't debt to market; they hold to maturity. In addition, they passed an accounting rule about a year ago (give or take) in which they allow themselves to pass any losses onto Treasury, so again they won't lose money. They've already protected their own asses.
Won't that kill everybody???
- Switzerland (113B)
- Taiwan (150B)
- Carabean banks (185B)
- Brazil (206B)
- Oil exporters (232B)
- Insurance companies (250B)
- FEDS (284B)
- UK (429B)
- State and local government (484B)
- Mutual Funds (653B)
- Pension funds (842B)
- Japan (1.03T)
- Other investors (1.1T)
- China (1.13T)
- FED (6.3T)
Interest rates rise, bond price collapse right?
Dr. Manmohan Singh is the Prime Minister of India first and an IMF economist 2nd.
Come on TD
That's fabulous. They also happen to be two totally different people.
Hahahahaha. Singh, Kim, Jones and Smith can really cause confusion.
...and financial apocalypse
....I was so lazy to verify it...thx
my apologizes then
One learns so much at ZH
Two people in a population of 1.2 billion people have the same name? That's unpossible.
MY MAIN MAN...Always, ON TIME!
The trap is sprung. Bravo again Tyler.
Pwned
Muppet Stream Media will blame this event on proles experiencing GMEFMS [Global Metabolic Eye Floater Market Syndrome]
As a consequence, at the time of the announcement of the Accord, buyback options were offered by the Treasury, that is the U.S. Treasury offered to swap the outstanding stock of long-term debt with new long term debt with higher coupons (coupled with restrictions on sales before maturity). The idea was to cushion the market from capital losses.
Maybe I'm wrong, but this CAN'T be done today... where are they gonna get the money???
You have to be kidding! Oh, you are? OK.
We should bundle up all that unused "fiat' , and roll it into " Duraflame" fire logs! ( Then sell it to Eskimos), Hows that for collateral?
Sounds like a segment will be replaced with floating rate bonds, which would crash the stocks, taking the PMs (gold) down with them like in 2008... (a great buying opportunity?) The housing market would absorb another huge hit (if there is any room below?) How about the exchange is limited to US citizens, so the chinese take in in the rear? All their bonds take a 80% haircut with no formal default... maybe that is the whole idea after all. Then theyagain "devalue" with gold repriced to $10,000/ounce, after a bank holiday... no need to confiscate as so few hold gold... Only problem is, I doubt if the US has any real gold left...
No, the Fed will most likely swap the floaters to fixed, but then the Banksters will be counterparty risks. The whole thing will ultimately blow up as confidence continues to erode. There will be a reckoning.
Someone care to explain what this means for PM? I assume its plus for bonds and equities get a beating ??
Interest rates rising? The housing market would go from crumbling into a heap of ashes. I don't see it happening before the election.
If it's not Floaters coming out of the FED then it's the Coney Island Whitefish you have to look out for....
Big question here: if FRNs allow capital preservation for those who buy the bonds due to the floating coupon, doesn't that potentially create a problem of interest payments becoming untenable at some point?
The sales pitch is that the new shiney FRN's preserve capital when in fact it is just a different instrument to continue the Ponzi. New bag, same old bagholders.
Bond is an interesting name so close to the word bondage ie. slavery.
The US is a country that doesn't MAKE money, it SPENDS it. Therefore hard assets compete with the US's main asset, the greenback. The greenback is a product. Sometimes encouraging buying of said product requires incentives like higher rates. Increasing rates strengthens the greenback and decreases the cost of commodity inputs. Initially when rates rise, so does gold, as its a sign that inflation is high enough that it has to be fought. Later, when interest rates rise enough, gold stops rising. Higher rates will get rid of excessive speculation, since J6P can get 4% from the bank, and that's a simple investment. Housing prices will drop, in the UK when rate increases dropped house prices, 50yr mortgages were offered for awhile.
ah, reserve currency status?
Priceless!!
America's Debt Is Greater than Entire Eurozone's (and U.K.'s) Combined Debt
http://www.weeklystandard.com/blogs/americas-debt-greater-entire-eurozones-and-uks-combined-debt_636847.html
srsly
Rep. Cleaver faces Bank of America suit, but could be bailed out by taxpayers
http://thehill.com/blogs/floor-action/house/220697-rep-cleaver-faces-bank-of-america-suit-but-could-be-bailed-out-by-taxpayers
Death, Taxes Collide as Fatal Crashes Mount on Filing Day
http://www.bloomberg.com/news/2012-04-10/death-and-taxes-collide-as-fatal-crashes-mount-on-irs-filing-day.html
courtesy Drudge
All I gleaned from the article was, that no building in DC will be named after Bernanke in future.
Maybe the outhouse!
But a serious point, Greenspan was lauded during his time in office, but now regarded as a bad thing. Maybe an inverse fate awaits Bernanke. If he succeeds in his aim of normalizing rates he may just deserve it. Economy probably collapses first though. But best thing.
Next Fed chairman: "okay guys, I'm off to the Bernanke, just give me five minutes."
Knowing grins all round.
Speaking of floaters,whats floating in those CHEMTRAILS that are being sprayed on us everyday.....????
water vapor dumbass....
Bansters, those chemtrails are full of experimental compounds that affect everything from the weather to human health. As you know, they are being sprayed not only in the U.S., but everywhere there are airplanes, around the world, all of the time. There is a giant organization of pilots, air traffic controllers, ground personel, suppliers, etc. who have made sure that this secret program remains in place, everywhere, as it has for the past 50 years. To date, not one of those pilots, controllers, suppliers, etc. has blown the whistle, as they must know that an army of international assasins will kill their families if they come clean.
Also, when the pilots land, they wear invisible face masks that protect them, and their families, from the chemicals. They use special charcoal filters on their fresh water systems, and they only eat food grown in those few places on earth that are unaffected by the atmospheric chemicals.
You now know the truth, since you read it here on the internet.
skeptical is fine, satire is great. but, i don't know how old you, are or how much time you spend outside- but the shit that's spooooged in the skytoday does not behave the same way as the nice innocent ice contrails of yesteryear. sorry. i trust my own eyes. now, if someone would admit the atmosphere has change drasticly to account for what i observe-then i will listen. but the denial is deafening. plenty of room to breed all sorts of theories.
Gold.
As in golden shower.
i wish. more like berilium. i have always refered to TPTB as the TBTP
- the bowers' that pee.
linking two previously unrelated comments... i realize.
Okay someone correct me on this if I'm wrong
I'm a bit noobish so I might be..
If they issued a floating rate, would I not invest in that instead of gold. If hyper inflation does hit yes gold sky rockets but so would this floating rate. Would not the only key here be when to leave and cash the bond and transfer it to gold before the real collapse? If higher interest rates suck in dollars and the dollar appreciated. Then wouldn't I make the killing on the floating?
The only downside I see is it the rates dropped but how the heck are they dropping below 0?
Real inflation will be raging at 20% and the government will give the inflation rate as 2%. The Fed will pay 2.5%. That's how you'll get shafted.
LOL ... good plan! ... pick up some more pennies in front of the steam roller!!
BTW -- while you're here -- what date do you expect "the collapse" to occur? ... You know, so that we can get out a day or so beforehand?
Personally, I'm expecting it around mid-August this year. Others expect it in the next few days or weeks. Others expect it in 10 or 15 years. So what's the actual date? (I got caught badly in October 1987 and wouldn't want it to happen to me again....)
You're sleeping right now so I'll wake you up a few ticks before the event is about to occur (factoring in a little time for you to go take a piss)...
Used on an extensive scale ( and how could it be stopped once started), it would seem to inevitably be the onramp to the hyper-inflationary expressway. Quickly everything would become indexed . In the transition period however, would prices of the fixed long bonds stay up if the FRN' s were in fact a viable "put/take-out " ????? Anyone have any thoughts on this?
man this post is heavy... so what I got:
" the very act of rolling out this product is thus the alarm bell that higher rates are a-comin'."
but the reasoning is unclearish to me.
I think the conversation may have gone like this.....
"No one will buy the bonds at auction any more! What are we going to do?
"Super long term bonds?" No we tried that.
"How about pay more interest?" No, we can't do that it will piss off our big holders and make them lose value of their current priciple, not to mention our own portfolio.
"Floaters, how about floaters!" Good Idea, We can structure them with a negative real interest rate and still come out ahead. Plus we can swap them for all the crap in our own portfolio. Let's announce it next month and see what kind of response we get.
& if it's still too hard to understand, here's the 'Cliff's Notes to the 'Cliffs Notes' version...
"Let's just think up some shit to keep the Ponzi going a little longer..."
because bond holders are too big to fail.
Crysis 3 is coming this year.
In recollection of this saying: of the banks, by the banks, for the banks, here's my take.
This is nothing more than a relief valve for the primary dealers who buy a boat load of TSYs. They can continue buying knowing that their balance sheets can't be impaired.
This is a bridge (or can kick) to the next stage, but all the while saving the banks.
It will buy time until the interest rate goes so high, making interest payments untenable for the USG. At that point, it won't be the banks problem, as they will be protected; it will be the US people's problem.
The question is: how fast can FRNs be swapped for for fixed-rate TSYs at the dealers, as this could happen faster than we think, especially noting the debt ceiling issue approaching in six months. We know how well that went last time.
Also :
An Outraged Chinese General Tells The Philippines It's Their 'Last Chance'
http://www.businessinsider.com/china-the-philippines-is-facing-its-last-...
The Philippines said its largest warship was engaged in a tense standoff with Chinese surveillance vessels Wednesday at a disputed South China Sea shoal, after the ship attempted to arrest Chinese fishermen but was blocked by the surveillance craft.
http://www.breakingnews.com/
Zimmerman prosecutor : news conference within 72hres
http://www.clickorlando.com/news/Corey-to-present-new-information/-/1637...
DPRK announces fueling rocket for "satellite launch" now underway.
Syria rebels set 48 hour ultimatum, as peace deal falters (DPA)
Shall be an interesting next few days...
Might be worth adding this one to your list too
http://theextinctionprotocol.wordpress.com/2012/04/10/largest-air-force-exercise-in-gulf-history-takes-place-with-u-s-aircraft-carrier-group/
Well the source s DEBKA... so I wouldn't put much money on that.
Russia is always making a big drill off Georgia in October... and US-Israel have a big drill in October too... in Israel...
In about 10 days, China-Russia are gonna do a big naval drill right off South Korea.
Shit gonna get serious and real dangerous soon.
That is the Philippines' own fault. They had huge US Navy and Airforce bases right there on the Islands and they refused to renew the lease and told us to get out. We did that, so they need not whine if they can't protect themselves. China will have those shoals and anything else it wants from them.
'prevent capital losses'
No one will stop them from creating fraudulent derivatives faster than electronic collateral can be clicked into existance.
They are suicidal financial terrorists and must be dealt with accordingly.
There is enough hyperbole in your post that you don't need bold to draw attention to it.
Just when I thought there were no tricks left in the hat...
Amazing, really.
There's always a cat in the hat.
So someone tell me, layman that I am. Is this somehow fundamentally different than what they are doing in Greece as far as getting bond holders to exchange debt nearing it's term for new debt maturing later?
For those who have suggested that "the FED is out of ammo" or "there is no way out", these latest proposals demonstrate that the Fed and the Treasury have plenty of game left.
So when rates go up, the coupon for the FRNs go up. Tax payers foot the bill. Niiiice.
Until they can't, unless by printing their way to poverty.
But the bond holders (primary dealers) will at that point be protected as the risk has now shifted to the people, yet again.
Checkmate.
> but nobody accepts that money and it stays there.
When nobody accepts the currency or wants it Bernanke and Federal Reserve's money printing game is dead.
US rates should be a lot higher. Both the treaury and the Federal Reserve can't let rates increase unless deficits start coming down.
One thing is sure. I'll buy all the silver I can on every dip and I'll be a rich ZH reader.
Agree
I love the smell of napalm in the morning.
I like my bacon well done too but that's just ridiculous.
whoops. wrong place.
but now that i'm stuck here ... how 'bout a - GOLD BEESHAYS!
er uh, can i get get a BTFD !
whatever. cans of beans.
Excellent post ZH
Nothing on Earth will stop rates spiking thus the Fed taking hits on it's holdings. The floating rate would seem like a last gasp before reality.
Meantime the global ecomomy is about to be torn apart via CB manipulation last 6mths. Markets next 24hrs gonna be a hell of a ride...down.
dumbest post ever.
to state the fed acts the way it does is because of treasury and the white house is just stupid. the fed acts the way it does for the banks.
It's not about monetizing the debt, it's about avoiding deflation to make sure the banks are bankrupt and to cover yup the fact that the fed allowed the banks to overleverage.
http://capital3x.com/think-tank/hip-hop-and-march-gains-gone-in-two-sess...
March gains gone in 1 day
the other thing is that papaers like are serve a purpose. somebody writes the paper that justifies the policy they want to do. the idea that the paper itself has valididty is false.
"WOLF!"
Why do you lift sections from Wikipedia "The 1951 Accord" without attribution ? Isn't that almost a copyright breach ?
meh, wikipedia's content licensed to the public.
it's not like this is a school paper or some publication.
I don't care about School Papers and such drivel. I simply care about the content and do not consider Wikipedia a source worth quoting without having its references verified. That's all. Anyone who relies on Wikipedia as a standalone source is flailing, but you might think it is valid in all instances, I don't.
He attributed it to Wikipedia, look again!
Fine. I stand corrected and apologise
Well that was a nice waste of 30 seconds...
http://www.mybudget360.com/unsustainable-global-debt-total-global-debt-1...
Megaquake -
Magnitude 8.7 - OFF THE WEST COAST OF NORTHERN SUMATRAhttp://earthquake.usgs.gov/earthquakes/recenteqsww/Quakes/usc000905e.html
N E W S F L A S H !
Mag 8.9 quake just occurred 35 minutes ago 495km SW Banda Aceh Indonesia ... similar location to the Great Boxing Day quake and Tsunami.
UPDATE: Downgraded to 8.7 Mag near NW Indonesian coast.
Tsunami warning issued for Indian ocean basin areas.
http://www.abc.net.au/news/2012-04-11/strong-quake-strikes-off-aceh/3944352
Now confirmed to be at least a Mag 8.7, almost the exact same location as the Boxing Day quake and tsunami.
Magitude may be revised upward as more analyisis and calibration occurs from seismic stations the other side of the planet.
Reports coming in the quake was felt in Indonesia, Singapore, Thailand and Eastern India.
ABC/wires
http://www.abc.net.au/news/
Downgraded to Mag 8.6
Indonesia officials report aftershocks in Aceh include a 8.8-magnitude tremor; a new tsunami warning is issued.
JFC!! 8.8 aftershock? ... all I have seen is a report of an 8.2 aftershock ... which is still feckin huge.
EDIT: ah, just saw the 8.8 report ... this implies the main quake was even larger, mainly because I don't remember ever seeing any aftershock from a great quake that was larger than the main quake.
Apparently it's deeper and further out to sea.
I notice Geoscience Australia are insisting the second quake was around Mag 8.2 though, and calling the main quake a Mag 8.5.
BUY PHYSICAL GOLD, END THE CENTRAL BANKING SYSTEM
Hell, why don't they just put craps tables on the floor of the NYSE and let retirees and pensioners come in a roll a few?
Bring in the kids and tell them "You may win big, but you may lose everything, and the 'house' always wins."
What is the point anymore? Do we need a Federal Reserve for anything other than Ctrl-P to debase our fiat?
Insanity upon insanity.
So, in an attempt to avoid the readjustment required by their own policies, the Fed and UST are going to jam the pricing mechanism to curtail capital losses. Capital losses to whom? Well, one of the largest groups of UST debt holders are, you guessed it, the banks. They pocket the spread between their cost of funds (near zero) and interest earning on UST (say 2 to 3% dep on duration), lever it up 10 times and bingo, a nice gross operating return on equity of 20+%. Nice work if you can get it.
Now these poor dears have to be cushioned from possible losses b/c of their reckless over-indulgence in "risk free" instruments. So what will the floaters do, if sold? They will force adjustment along the quantity rather than price margin. They will raise Trasury's borrowing costs and force it borrow more (i.e., increase demand for the pool of loanable funds). This raises everyone's cost of funds and crowds out other (less "risk free" shall we say) borrowers. So fewer investments get made, fewer jobs created, fewer cars sold, and so on. That's bound to work well.
The point here is the Fed and UST are in a box of their own making. Rather than allowing the system to adjust, as it should have, in 2008, they have put themselves in the almost impossible position of having to raise rates in an environment of much higher debt levels. There are no good choices, and so no good outcomes (other than bankruptcy...only this time the bankruptcy wont be confined to irresponsible banks).
one thing missing so far in the thread: the various STATES and debt..CA on the brink now..this raising of rates would kill the states budgets..unless BEN then buys STATE debt serious times with few good solutions. PM's seem a answer but gov confiscation is settled law and done by a demorat no less.
any sound money left in the fiat world of nations..I do not know one. buy oil and nat gas wells and hope they let you keep em.
9:16pm: Indonesia's geophysics agency now says there has been another aftershock off Aceh of 8.1 magnitude, with the potential of a tsunami to follow.
9:15pm: The USGS records an 8.2-magnitude aftershock off Sumatra island, while Indonesia's geophysics agency says it has extended Aceh's tsunami warning by two hours.
8.58pm: Witness tells Reuters agency that sea water at Simeulue Island near epicentre of quake has been receding by about 10 metres.
8:54pm: Indonesia officials report aftershocks in Aceh include a 8.8-magnitude tremor; a new tsunami warning is issued.
Times AEST
These are very strange quakes, deep oceanic crust, well away from the accretion prism. The most recent 8.2 is given as 3km deep in deep-water oceanic crust, and near sediment pile's base (I doubt this depth can be correct, they won't have that level of resolution yet).
http://www.ga.gov.au/earthquakes/getQuakeDetails.do?quakeId=3196867&orid...
This is not at all a typical location for such a huge quake to occur. I don't remember seeing anything quite like this before in open ocean crustal rocks. the nearest boundry structure is the 90 East Ridge.
The initial quake was also well away and seawards from the subduction zone fault plane. Depth is unknown, although USGS applied the usual 33km depth, which is just a standard place-holder depth given for any and all unknown depth events.
http://www.ga.gov.au/earthquakes/getQuakeDetails.do?quakeId=3196376&orid...
Very peculiar.
"Weather" Sattelites. WTF was launched into orbit last week?
http://newsfeed.time.com/2012/04/05/rocket-with-top-secret-payload-launches-into-orbit/
Earth Quake 4-11-12
"Weather" Sattelites. WTF was launched into orbit at the beginning of March 2011?
http://www.space.com/11006-air-force-x37b-space-plane-secret-launch.html
Earth Quake 3-11-11
"Weather" Sattelites? WTF was launched in September 9-2009
http://www.wired.com/dangerroom/2009/09/theories-emerge-on-secret-satellite-launch/
Hatii Earthquake 1-12-2010
http://articles.cnn.com/2010-01-12/world/haiti.earthquake_1_earthquake-haiti-2010-peacekeeping-mission-president-rene-preval-haiti?_s=PM:WORLD
ROFLMAO !!!! Classic comment from the mission controller for the rocket launched last week (Tues, Apr 3rd):
They never tire of that meme!
Great article with enormous implications. Thanks ZH.
I hadn't heard a word about this!
Thank you Mr. Durden.
Why not government issued FRNs? All fiat currencies are "junk"; government bonds might as well be junk too. Power will float to the sheeple who will now force all banksters to pay up; earning enough interest on the sheeples' money to put bread on their tables. Globalization has made us all third world now.
.... and THANK you too Zero Hedge!
RiverRoad
Interesting comment. It does feel like the "New World Order" is certainly in the process of equalization. World Socialism as oBama's goal includes the destruction of the USA and it's Constitution, of which he has done a great job! His "Executive Orders" over the last 6 months have been amazing and with NO resistance whatsoever! Absolutely Amazing! I wouldn't have believed it was possible! But it's a DONE deal and if Romney gets a chance, he will perpetuate it the best that he can. Unless Ron Paul is elected, The USA and it's Constitution is OVER!
Money and Collateral
Manmohan Singh and Peter Stella
Money and Collateral
Manmohan Singh and Peter Stella
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