Wednesday, December 17, 2008


This guy can be an entertaining, if emotional, financial read. If you're into contemplating worst-case scenarios, have a look.

It begins:

Yesterday we closed at a historic low, and early indications today are even worse, at 21.20 The IRX, or yield on the 13 week T-Bill, is essentially zero.

One cannot argue one simple fact - Bernanke hasn't yet started buying the long end of the curve to any material degree. But he's been threatening, and today the FOMC statement made explicit what had been whispered before.

The mouth-breathers were all over CNBC and elsewhere yesterday and today claiming that this would "stabilize" the credit markets and make credit (and the economy) better, with the most outrageous displays of stupidity being put forth by Cramer and McCulley of PIM(p)CO.

Yeah, right.

Now let's take a more cynical, but realistic, view.

Remember last year. Oil went from $60 to $150 in the space of a few months. Why? Because it was no longer profitable to buy CDOs and RMBS, as they were imploding. The money has to go somewhere, and so traders bet in front of what they believed Bernanke would do - crank down interest rates at an insanely-accelerated rate, which would spike prices in commodities, as the economic slowdown had not yet occurred - and wouldn't for several months.

They were right. Bernanke did it, oil shot the moon and Goldman (and a few others) made a whole bunch of money.

Who paid?

You did, by paying $4/gallon for gasoline.

Now let's back up a bit. 2003, to be exact. What happened? Greenspan (and Bernanke) played the same sort of game and house prices went ballistic. A handful of people made fortunes securitizing various mortgage and other "assets" into complex (and opaque!) securities, foisting them off on the world.

Who paid?

You did, by overpaying by 20%, 50%, 100% or more for a house.

Ok, so the housing bubble collapsed, then the commodity bubble collapsed.

Now we've got people who for the last month who are once again front-running Bernanke's playbook, which he was convenient enough to publish in advance as his doctoral thesis. They are buying the long end of the Treasury curve not because they think that a 2.35% yield for ten years is a reasonable rate of return over inflation, but rather because they expect The Fed and Government to drive prices higher than when they bought the securities.

That is, they're after capital gains, not yield or "coupon", and are specifically gaming the government and Fed.

Who's going to get the bill this time?

You are!

How? Simple. Treasury seems to think they can issue essentially limitless debt to bail out banks and others, having committed nearly $7 trillion thus far. Most of that has been issued through various short-term paper which has a near-zero (or actually zero!) interest rate - that is, up until now that debt issue has been essentially free!

What happens when this bubble bursts?

You think it won't? Like hell it won't. And when it does - that is, when Mr. Market calls the bet and forces Bernanke to actually make good by starting to unload all these "accumulated" Treasuries into his gaping maw, we will see "shock and awe" of another sort.

See, if the selling starts rates go up. To stop that Ben has to take up the supply. This causes him to print more money (expand his balance sheet) which means that the full faith and credit he relies on is further damaged. That in turn causes more people to get the idea that they better sell now which in turn causes him to buy more which.....

Remember the waterfall in September and October in stocks?

The same thing can happen in the Treasury market, and if it does it will force a political decision to be taken - risk the destruction of the dollar and our government or remove - by immediate statutory change (and force if that is resisted) The Fed's authority.

1 comment:

Matt said...

I think I'm going to be sick.