http://market-ticker.org/archives/622-Fiscal-Cat-5-Hurricane-Warning.html
You only think the Stock Market has been smashed.
Just wait until you see what will come next.
If you're playing "Buffett", following his claim (note: there is no penalty for lying on national television about what you're doing in your personal account) that he's buying here, there is a little ugly fact you need to be aware of.
That fact is treasury issuance.
See, to fund all this crap that Congress, Paulson and Bernanke have in the pipe (you know, the TARP, the newly-minted SIV that Ben announced this morning to buy commercial paper, etc) the treasury issue requirements will be north of three trillion dollars in this fiscal year.
Oh, and that's before Obama wins (and he will) and promises another $1 trillion worth of new spending without a nickel's worth of ability to fund it.
To put this in perspective the total amount of treasury securities owned by all foreigners at present is about $2.7 trillion.
Only a few months into this we're already requiring a crazy "tail", which is the amount of "goose" that has to be paid in order to get people to take down that debt. Its running around 20 basis points right now, and there was one disastrous auction that ran 40.
Historical norms are in the ~2-3 basis point area for off-the-run securities.
Now why does all this esoterica matter, you ask?
You've probably heard that the "IRX", or 13 week T-Bill, has come up in yield recently, and this is being touted as a clear sign that the credit markets are normalizing.
Not quite. Price and yield move in opposite directions, and when you issue a lot of short-term supply, the price goes down (supply and demand, natch), while yield goes up.
In fact, kinda like "straight up." Impressive eh?
But what's nasty here is that right now we're seeing a flight INTO longer-term bonds (the 10 in particular), which means the market is anticipating another stock panic, and with good reason.
See, Treasury has only two options here:
1. If they issue all in the short end of the curve (as they're doing now) they flatten the banks, as the entire point of a bank is to borrow in the short-term market and lend in the long term. When you compress the yield curve you destroy their capacity to make money off their ordinary business model.
2. If they issue in the long end of the curve (e.g. 10s and 30s) then the long end will skyrocket in yield. Anyone remember 18% mortgages? They could reappear. This, of course, will destroy what's left of the housing and consumer credit markets.
Now sure, The Fed can start printing money like mad and buy all these Ts, making their balance sheet expand like a balloon - or a bubble. And Bernanke, yesterday in his testimony, claimed that this didn't constitute "printing money" or "inflating the money supply."
He may be technically correct but in practice he's lying through his teeth, and unfortunately Congress is both too uninformed to call him on it and lacks the balls to stop him (which they can do through the threat of, if not actual, legislation.)
His production of money in exchange for Treasuries is nothing more than a sham sterilization action. He thinks this will go unnoticed by the markets, because he's swapping a dollar for an "illiquid" asset.
The problem is that this is only monetarily neutral if the asset is actually worth a dollar. If it is in fact worth 50 cents then he printed the other 50 cents, and devalued every other dollar in the world by the same amount.
The claim, of course, is that these assets are in fact "money good" but illiquid.
I call bull**** on that claim.
An asset is worth only what an uncoerced buyer and seller will transact at. This is first-semester economics, and Bernanke, who claims a PhD, is fully aware of that fact.
So he, like Treasury with their TARP, is effectively buying assets that are not worth what their face value indicates. In this case Bernanke gets around the inconvenient law that prohibits him from purchasing things (as opposed to "discounting a note", that is, lending) by setting up "private" SIVs run by JP Morgan/Chase (gee, Jamie Dimon, no conflict of interest there!) and then lending the funds to the SIV.
But wait - wasn't this Paulson's original SIV plan back in 2007?
It sure as hell was.
It went exactly nowhere because the banks came to the conclusion that they were being robbed; there was in fact no value equal to the claimed face in the instruments, and that plan died on the vine as a consequence.
Now, suddenly, it reappears for ABCP (asset backed commercial paper) to "liquefy" the commercial paper and money markets.
Horsecrap.
Bernanke is doing what Paulson tried and failed at in the "free" (coerced by arm-twisting by Paulson) market through executive fiat, and he is printing money to fund it. Exactly how much money he is printing (as opposed to lending) depends on the precise amount of overpayment that is being induced through these so-called "loans", but that it is happening is not open to question.
Why has this become necessary?
Ben and Hank produced a dislocation in this section of the marketplace by favoring other debt instruments with federal guarantees, thereby forcing money out of these instruments.
This in turn created major problems for money market funds who buy this paper as a routine matter of course in that when they needed to redeem deposits they suddenly found no buyers for the securities, as those people had fled to other instruments that Ben had guaranteed payment on!
As each new facility is rolled out by Ben and Hank a new area of debt becomes backstopped by the government in some fashion, thereby forcing money out of other instruments and causing those instruments to become distressed!
We are rapidly reaching the point where only The Fed and Treasury are providing any lending at all!
This is insanely dangerous to economic and monetary stability; all market discipline has been removed and now we're seeing in the credit markets that which began in the equity markets with Bear Stearns.
Ben and Hank are going to produce the bond market dislocation that I have been warning about since earlier this year if he is not stopped immediately.
The base gambit is cute - force all this new Treasury issue out into the market before the election and Inauguration, when Hank is going to be replaced with someone who might not be nearly as charitable as Hank is to issuing Treasuries like a drunken sailor, and pray that the bond market tolerates his game long enough for the issue he needs to fund this abortion to clear into the marketplace.
The ugly is that there was a small inversion in LIBOR a week or so ago. That's really bad, as LIBOR normally never inverts. As Ben has played his games of late the inversion disappeared from LIBOR but moved over into the intermediate area of the US Treasury Curve, where it is far more dangerous.
You only think the Stock Market has been smashed.
Just wait until you see what will come next.
If you're playing "Buffett", following his claim (note: there is no penalty for lying on national television about what you're doing in your personal account) that he's buying here, there is a little ugly fact you need to be aware of.
That fact is treasury issuance.
See, to fund all this crap that Congress, Paulson and Bernanke have in the pipe (you know, the TARP, the newly-minted SIV that Ben announced this morning to buy commercial paper, etc) the treasury issue requirements will be north of three trillion dollars in this fiscal year.
Oh, and that's before Obama wins (and he will) and promises another $1 trillion worth of new spending without a nickel's worth of ability to fund it.
To put this in perspective the total amount of treasury securities owned by all foreigners at present is about $2.7 trillion.
Only a few months into this we're already requiring a crazy "tail", which is the amount of "goose" that has to be paid in order to get people to take down that debt. Its running around 20 basis points right now, and there was one disastrous auction that ran 40.
Historical norms are in the ~2-3 basis point area for off-the-run securities.
Now why does all this esoterica matter, you ask?
You've probably heard that the "IRX", or 13 week T-Bill, has come up in yield recently, and this is being touted as a clear sign that the credit markets are normalizing.
Not quite. Price and yield move in opposite directions, and when you issue a lot of short-term supply, the price goes down (supply and demand, natch), while yield goes up.
In fact, kinda like "straight up." Impressive eh?
But what's nasty here is that right now we're seeing a flight INTO longer-term bonds (the 10 in particular), which means the market is anticipating another stock panic, and with good reason.
See, Treasury has only two options here:
1. If they issue all in the short end of the curve (as they're doing now) they flatten the banks, as the entire point of a bank is to borrow in the short-term market and lend in the long term. When you compress the yield curve you destroy their capacity to make money off their ordinary business model.
2. If they issue in the long end of the curve (e.g. 10s and 30s) then the long end will skyrocket in yield. Anyone remember 18% mortgages? They could reappear. This, of course, will destroy what's left of the housing and consumer credit markets.
Now sure, The Fed can start printing money like mad and buy all these Ts, making their balance sheet expand like a balloon - or a bubble. And Bernanke, yesterday in his testimony, claimed that this didn't constitute "printing money" or "inflating the money supply."
He may be technically correct but in practice he's lying through his teeth, and unfortunately Congress is both too uninformed to call him on it and lacks the balls to stop him (which they can do through the threat of, if not actual, legislation.)
His production of money in exchange for Treasuries is nothing more than a sham sterilization action. He thinks this will go unnoticed by the markets, because he's swapping a dollar for an "illiquid" asset.
The problem is that this is only monetarily neutral if the asset is actually worth a dollar. If it is in fact worth 50 cents then he printed the other 50 cents, and devalued every other dollar in the world by the same amount.
The claim, of course, is that these assets are in fact "money good" but illiquid.
I call bull**** on that claim.
An asset is worth only what an uncoerced buyer and seller will transact at. This is first-semester economics, and Bernanke, who claims a PhD, is fully aware of that fact.
So he, like Treasury with their TARP, is effectively buying assets that are not worth what their face value indicates. In this case Bernanke gets around the inconvenient law that prohibits him from purchasing things (as opposed to "discounting a note", that is, lending) by setting up "private" SIVs run by JP Morgan/Chase (gee, Jamie Dimon, no conflict of interest there!) and then lending the funds to the SIV.
But wait - wasn't this Paulson's original SIV plan back in 2007?
It sure as hell was.
It went exactly nowhere because the banks came to the conclusion that they were being robbed; there was in fact no value equal to the claimed face in the instruments, and that plan died on the vine as a consequence.
Now, suddenly, it reappears for ABCP (asset backed commercial paper) to "liquefy" the commercial paper and money markets.
Horsecrap.
Bernanke is doing what Paulson tried and failed at in the "free" (coerced by arm-twisting by Paulson) market through executive fiat, and he is printing money to fund it. Exactly how much money he is printing (as opposed to lending) depends on the precise amount of overpayment that is being induced through these so-called "loans", but that it is happening is not open to question.
Why has this become necessary?
Ben and Hank produced a dislocation in this section of the marketplace by favoring other debt instruments with federal guarantees, thereby forcing money out of these instruments.
This in turn created major problems for money market funds who buy this paper as a routine matter of course in that when they needed to redeem deposits they suddenly found no buyers for the securities, as those people had fled to other instruments that Ben had guaranteed payment on!
As each new facility is rolled out by Ben and Hank a new area of debt becomes backstopped by the government in some fashion, thereby forcing money out of other instruments and causing those instruments to become distressed!
We are rapidly reaching the point where only The Fed and Treasury are providing any lending at all!
This is insanely dangerous to economic and monetary stability; all market discipline has been removed and now we're seeing in the credit markets that which began in the equity markets with Bear Stearns.
Ben and Hank are going to produce the bond market dislocation that I have been warning about since earlier this year if he is not stopped immediately.
The base gambit is cute - force all this new Treasury issue out into the market before the election and Inauguration, when Hank is going to be replaced with someone who might not be nearly as charitable as Hank is to issuing Treasuries like a drunken sailor, and pray that the bond market tolerates his game long enough for the issue he needs to fund this abortion to clear into the marketplace.
The ugly is that there was a small inversion in LIBOR a week or so ago. That's really bad, as LIBOR normally never inverts. As Ben has played his games of late the inversion disappeared from LIBOR but moved over into the intermediate area of the US Treasury Curve, where it is far more dangerous.
