Taper Talk

The all-seeing, all-knowing Bernank is playing with fire.

Bernank The Magnificent thinks he has things under control but the daily parade of Goon-speak MOPE is causing an acceleration of the selloff in treasuries. What the heck is going on here?

Take a look at this chart of the 10-year Tresury note September futures contract. The selloff in bonds began with the May BLSBS data and it continues today, six weeks later.

The yield on the 10-year note is now up to 2.23%. That may not seem like much but, when you consider that not too long ago is was yielding near 1.40%, you realize that rates have moved up by more than 50% in the past 8 months. That's a lot. The acceleration in the decline since early May suggests only two possibilities:

  1. The discussion of a "Fed taper" isn't just talk...it's actually happening. Right here and right now. The reduced demand from The Fed leaves more sellers than buyers and bond prices are falling.
  2. The Fed has not begun to "taper" and is, instead, still directly monetizing $45B/month, augmented with the $40B/month in corporate welfare MBS purchases from the Primary Dealers. Selling by all of the other market participants is overwhelming The Fed's daily bid and driving prices lower.

Which is it? Well, here's a chart of The Fed's balance sheet from back in late January when Fed "assets" eclipsed $3T for the first time.

And in the five months since, the total has grown to $3.342T according to the latest weekly press release. (http://www.reuters.com/article/2013/05/30/us-usa-fed-discount-idUSBRE94T12L20130530) Let's see...a little, quick back-of-the envelope math...$85B x 4 months = $340B...so this $3.342T number looks about right.

So, if The Fed is still pumping out $85B/month, we can rule out #1 above. Hmmm...I guess that leaves us with #2 (no pun intended)...and this is where it gets interesting.

Even leaving out the $40B/month in MBS purchases, The Fed is still directly monetizing $45B/month in treasury debt. Regardless, in the past month alone, bond prices have fallen by 5 points and rates on the 10-year note have backed up from 1.6% to 2.2%. Jeez Louise! It's as if there is currently no other buyer of bonds in the U.S. Every other market participant is selling! They have to be in order to swamp and over-run the Fed's daily bid to this extent. So, who are these sellers?

Are they the dreaded "bond vigilantes"? Haven't heard that term for a while but do a quick Google search and you'll find plenty of new references.

Is it the Creditor Nations? Seeing the "QE∞ writing on the wall", are the Chinese and the Russians accelerating their divestment of treasuries?

Is it just everybody? The vigilantes, The Chinese, The Russians, the hedge funds, the pension funds..

Either way, ole Ben's got quite a problem on his hands. When you are the bid of last resort...when you are the market maker or specialist...the responsibility falls upon you to provide liquidity. You must be there to buy when everyone else is selling otherwise you risk a panic and a crash. Obviously, a tremendous amount of selling is currently taking place in the U.S. treasury market. At the same time, popular opinion and SPIN holds that The Fed is contemplating a "taper" of their bond purchases. OK, great. So instead of buying more bonds to support the market, The Fed is going to buy less? Seriously?? And someone thinks this is actually going to end well???

And this is what so many of us have been warning since overt QE began in 2009. Once The Fed decided to enter the market, they made themselves the "specialist", the buyer of last resort, and now they cannot exit...ever...without causing a catastrophic jump in interest rates. Think I'm crazy? Rates have moved from 1.6% to 2.2% (a 40% increase) in six weeks on simply the MOPE and SPIN of a "taper". Can you imagine the move if The Fed were to actually decrease their buying? At this point, they may be left with no choice but to increase their monthly purchases. Recall that that specific language was inserted into the latest FOMC minutes but hardly anyone seemed to notice. (http://www.federalreserve.gov/newsevents/press/monetary/20130501a.htm)

In the end, I'm simply not a believer that The Fed will soon "taper their asset purchases". How can they? Yes, 10-year note prices will likely fall even farther in the days and weeks ahead, dropping through 128 and heading toward 124-125. You can see it coming on the chart below:

At that point, I expect the MOPE to reverse. Some type of crisis will arise that will stem the selling of treasuries as "global investors seek the safe haven" of the U.S. dollar and U.S. treasuries. Maybe Europe will be shoved back to center stage? Perhaps war will finally break out in the Middle East? Something will happen to cause a return flight back into treasuries, of that you can be certain. However, if that effort then fails, The Bernank will be left with no choice but to increase QE, whether he wants to or not. Rates simply cannot and will not be allowed to move through 2.5%, toward 3% and beyond. The resultant economic slowdown will crush tax revenues and the rate increase will exacerbate debt service levels...a double whammy which would serve to rapidly accelerate the demise and unraveling of The Great Ponzi.

And, finally, this is where it gets really, really dangerous. If current holders of treasuries, treasury futures and treasury derivative contracts continue to sell regardless, the amount of QE needed to stem the tide and support the bond market will grow exponentially. This is where ole Ben is truly playing with fire. He may believe that he is all-seeing, all-knowing and all-powerful but...if the global market chooses to over-run him...panic, chaos and hyper-inflation will follow.

Still thinking about converting your physical metal back into fiat? I hope not.

TF

277 Comments

Strawboss's picture

Inflation or Deflation...

That is the big question.  Will we have inflation due to the Fed (and others) having to continually increase the amount of QE to keep the system propped up?

Or will we have deflation as defaults overwhelm the QE?

Only time will tell but history suggests that gold is the go to asset in either scenario.

Keep an eye on Germany as they hold the key.  Between their court deciding whether or not the ECB and use OMT and Merkels election in September - there is the potential to blow the lid off the Euro.

That would cause a massive rush into the US dollar which would be hugely deflationary...

Interesting times...

If any of you are interested in profitably trading silver see my thread below

http://www.tfmetalsreport.com/forum/4560/agq-trading-system

Oh - and in the finest of traditions...First.  cheeky

AlienEyes's picture

two

YES!

Two.

cool

Rui's picture

As Ben steps down this year

There might not be much easing that propels metal higher in the near term. We might have to settle for side way actions this in 2013 and then some kinda meaningful rally the next two years.

Just A Regular Guy's picture

Clive Maund

Wallace Hartley's picture

Fif!

POMO Tuesday!  And a HUGE decision in Germany today...

dgstage's picture

SRS

Did a awesome job on this report. Most likely posted, but fot those that did not see it.

http://www.silverseek.com/node/12170

JY896's picture

For a 'good' time...

Do an image search for: Williambanzai7 bernanke. Or just search on Flickr, or click the stream directly.

Sandiaman's picture

8th

Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

kenklave's picture

Turd

I've heard it said other places that with the deficit expected to decrease this year (maybe $800B instead of $1.2T) that there will be a natural reduction in the need for QE and thus the "taper" will be automatic due to changing circumstances.  The government does not need to issue as much debt so there isn't the need for the Fed to buy as much essentially.  What are your thoughts on this and any implications?

The Watchman's picture

True

bernanke+comic.jpg

meegoreng1's picture

@ Turd

Since your last negative post on PM when that propelled PMs to rise significantly the next day, you have not made any more pessimistic predictions.

In fact, you have been pretty optimistic on your posts. That hasn’t helped our cause. Instead of predicting another HEH event, how ‘bout a Slam-a Dam prediction where Gold goes down below $1200 and silver to the teens. And then follow up with another post like that. Maybe we may have a rare 2 days rally.wink

BTW, I really appreciate all your sacrifices here. You have created a forum here unlike no other. The folks here are well informed unlike my families and friends who are ‘well groomed’ sheeple.  

¤'s picture

But....does it need to end well?

Out of chaos/confusion is where drastic change aka capital controls might rear it's head.

Think Cyprus on steroids and ask yourself....would market turmoil give cover (again) to far greater draconian capital controls while at the same time liberating the Fed/Treasury further to monetize whatever is needed?

Nothing goes straight up or lasts forever.....but it can pause and catch it's breath and morph into something bigger and somewhat similar.

Capital controls and outright unabashed monetization on steroids simultaneously will occur....but not before there's pain.

tyberious's picture

Another Great Analysis

Thanks Turd!

Silver_investor's picture

Discouraged

My "mistake" was that I made two purchases in the $40s, which skewed my DCA. I have too much capital tied up in silver, capital that I would like to have right now to do other things. The only thing I can do is wait for the price to rise. But what is it going to take for PM prices to rise? A nuclear war? Are the bullion banks really net long? If so, does it really matter? I'm just frustrated like many in the community. 

SRSrocco's picture

BILLIONAIRES DUMPING STOCKS...

With the continued propping up of the broader markets and the ongoing manipulation of lower gold and silver prices, it looks like several of the top Billionaires are dumping stocks...even Warren Buffet:

Billionaires Dumping Stocks, Economist Knows Why

Bugzy's picture

Yes!

Superb post Turd.

I would have highlighted the run for the exits piece though, I think this may be very significant.

Prize Fighter's picture

Great post Turd.  I need all

Great post Turd.  I need all the help I can get with understanding rate and taper talk and this helps a lot.

didier's picture

very

Interesting Turd

Sirtitan45's picture

@ srsrocco

That is not new. That post has been recycled perpetually since last yr.

Hunt brother's picture

Buy EXK at $4

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Jun 11, 2013) - Endeavour Silver Corp. (EDR.TO)(EXK) TSX: EDR,) announces that exploration drilling on the San Sebastian property in Jalisco State, Mexico continues to intersect high grade silver-gold mineralization over thick intervals along a 900 metre (m) long by 300 m deep portion of the more than three kilometre (km) long Terronera vein, still open for expansion.

The latest drilling highlights at San Sebastian include:

  • 1,226 grams per tonne (gpt) silver and 3.19 gpt gold over 3.5 m true width, or 41.3 ounces per ton (opT) silver equivalents over 11.5 feet (ft), in hole TR3-5, including 5,580 gpt silver and 15.9 gpt gold over 0.52 m true width, or 190.0 opT silver equivalents over 1.7 ft
  • 421 gpt silver and 0.84 gpt gold over 11.5 m true width, or 13.7 opT silver equivalents over 38.4 ft, in hole TR4-5, including 1,085 gpt silver and 2.11 gpt gold over 1.21 m true width, or 35.3 opT silver equivalents over 4.0 ft

The following table highlights the results of 16 holes drilled over the past six months. Click here to view the Terronera Vein Longitudinal Section:http://edrsilver.com/_resources/maps/Longitudinal-Section-Terronera-20130610.jpg. Silver equivalents are calculated at a 60: 1 silver: gold ratio.

Silver_investor's picture

@kenklave

I was thinking along the same lines. The budget deficit for this year will be lower due to the fact that the federal government currently has no additional borrowing authority and is therefore limited to spending what it takes in each month in tax revenue. The statutory debt limit was reached at the end of 2012. A month later the Congress passed legislation that temporarily suspended the statutory debt limit, but that temporary suspension expired on May 19th. The Secretary of the Treasury then declared a debt issuance suspension period wherein they began suspending investments to certain federal trust funds to avoid breaching the debt limit and to enable the federal government to continue paying bills. So, if the federal debt is not increasing during the current suspension period, is there a need for the Federal Reserve to be buying $45B/month? Hmmm. I don't know. I'm just putting this out there. Perhaps someone with more insight can chime in. But maybe proposition #1 in the TF's post above is the case.  

SRSrocco's picture

Reply Sirtitan45...

Sirtitran45... thanks for letting me know that.  Didn't realize it.

steve

zman's picture

@ken

Yes, the current QE does cover the debt that is being issued, but there is still $14 trillion of bondholders out there that could sell into the market!

What we don't know is the point the bond yield goes to high? Maybe 2.7% to 3% is acceptable, maybe not.

Ben could always shave a few thousand points off the Dow and have investors pour back into the bond market, he will use all of his tricks.

Big deal, even if Ben has to increase QE in the future, so what? So will the ECB, BOE, and BOJ.

Before it's all said and done, the Fed balance sheet will be $8-10 trillion, QE is still in it's early stages.

buzlightening's picture

Amazing!

Black magic illusionist bentrod burnokio yak attacks are so eaten up as it would appear by the paper fiat money chasers.  How much longer the wonk going to be able to talk down paper metals and blolw off top the bow wow dow; s&p before the crashcading of paper mkts begin.  Tell me and then we'll all know as it has gone much farther than expected.  Keep that in mind next time you begin stacking.  The upcoming mania of the precious metals bull is about to expose it's monstrous appetite to eat up every last piece of paper ponzi assets among the neoCONzi paper chasing crowd.  I've often said when the beastly dead head fed banksters don't need the sharks, hedge funds, institutions, pensions, and insurance carriers among thew most chasing paper assets, the heavy handed orchestration of thieves perpetrated  upon the public will be offered up on the paper ponzi sacrificial alter.  Big bilderberg global power brokers working for the rothschilds, will disinherit the baby parasitical pond scum as red headed bastard children.   The red headed bastard children of the parent bankster companies will be pitch forking up freight train loads of baby red headed bastard pond scumming children to the dump; or carving them up in paper asset ponzi chop shops.  Not far distant stackers.  Saw it right off many years ago.  The agonizing, pathetic blown away financial deaths of paper ponzi structure no longer needed for financial terrorism.  It will be one horrendous vaporizing to ashes big names which become a hiss and bye word over night.  For the revengeful, you may take some pleasure in these blowups.  For the rest of us beyond financial destruction,tion in humans terms we will not as the second  late great epic depression will sweep away many rank and file citizens.   Likely with 50 million on snap, dead head fed gov food stamps program, these will be immediately cut off outright in an economic collapse.  Many having hearts which fail them as others take to the streets, as Celente puts it, losing it after having lost everything. 

The Watchman's picture

From ZH

Very Weak 3 Year Bond Auction Prices At Highest Yield Since July 2011, Lowest Bid To Cover Since 2010

 
Tyler Durden's picture

If there is one word to describe today's 3 Year $32 billion auction it would be atrocious. With the When Issued stopped at 0.577%, the closing high yield tailed notably at 0.581%, a dramatic spike from last month's 0.354% and the highest yield since July 2011, indicating substantial turbulence on the surface. Beneath the surface it was the same story, with the Bid To Cover plunging from 3.38 to just 2.95, the lowest since December 2010, driven by a crash in Direct Bidder take down to just 8.4% from 14.6% and a TTM average of 12.9%: this was the lowest Direct interest since August. The result was that Indirects were left with a sizable 33.1% of the auction well above the 26.3% TTM average, and Dealers had to absorb the remainder, or 58.4% of the auction. All in all, a very ugly auction although with investors still demanding only 0.5% to hold 3 year paper it would appear that any fears of an imminent hike in rates (regardless what the Fed does with the longer-end of the curve), is still far away.

3Y%206.11_0.jpg

Just A Regular Guy's picture

Interesting

http://www.reuters.com/article/2013/06/11/cnews-us-usa-security-germany-idCABRE95A0T820130611

Comments disabled - see the reason (it's a joke considering the article is probably less than 12hrs old).
"By Noah Barkin

BERLIN | Tue Jun 11, 2013 11:52am EDT"

TD's picture

Laugh or scream

I was watching a show on tv yesterday featuring a doctor who explained the health benefits of laughter... of how important it was for ones health to have a good long belly laugh throughout the day. He said that a young child normally has 400 good laughs in a day. The average adult has five.

I believe I have a dozen or two light chuckles in day... but a belly laugh, now that is rare in my life. So, I resolved to do better. I watched Blazing Saddles last night. Man, how did they ever get away with a movie like that? would it be possible to make something like this today?

Here I sit today, reading this site and others like it. I find nothing to chuckle about. And plenty to scream about. Is a good scream as good for me as a good laugh? What is happening to my country? to the world we live in? We appear to be on a fast train towards unimaginable ruin.

I am so proud of Ed Snowden, stepping forward exposing the NSA. Would I have been capable of the same?

heyJoe's picture

Great Analysis Turd!

yes To infinity.  

Bill of Rights's picture

HR 684: a disaster for gold/silver investors – CMI Gold & Silver

http://www.cmi-gold-silver.com/blog/hr-684-disaster-gold-silver-investors/

Gold and silver investors will face a real-life nightmare if a bill that recently passed the Senate becomes law. The bill would tax commerce between the states, something that has been exempt (except for certain circumstances) since the Constitution was ratified. Now, the bill is in the House, where it is known as HR 684 “Marketplace Fairness Act of 2013.” The bill’s supporters say that it would “level the playing field” between “bricks and mortar” stores, which collect local sales taxes, and sellers that deliver across state lines without collecting sales taxes. In reality, it would be a massive tax increase and would burden businesses, large and small alike, with huge compliance costs. There is nothing “fair” about the act, and certainly not for gold and silver investors. The bill would, for residents of many states, immediately impose taxes on gold and silver purchases while such investments as stocks and bonds remain exempt. This, of course, would not be a “level playing field.” There is no doubt about it, HR 684 would take the luster off investing in gold and silver. HR 684 can be stopped in the House–if enough Americans let their Representatives know that they should oppose the bill. Members of the House, because they serve only two years between elections, DO LISTEN to their constituents. Contacting members of Congress is not that difficult. It can be done via emails, letters, faxes and phone calls. Visiting your Congressperson’s office is not necessary but could yield tremendous results if you personally know your Representative. To find out who your Representative is and to learn the various ways to contact him/her, go to Find Your Representative and type in your ZIP.

Silvergunn's picture

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