It Has To Be Said, So I'll Say It
The U.S stock market now off over 10% in the past three weeks. Pundits and analysts are panting and scratching their heads, searching for the root causes. The typical "news" story goes something like this, from the WSJ:
"There was no one single catalyst for the downdraft, traders said. Rather it reflected multiple concerns that have mounted over the past month and came to a head this week. Worries about a U.S. default, settled by a last-minute fix to lift the country's debt limit on Tuesday, have given way to broader fears about the failing health of the domestic economy. That will lead to close scrutiny of Friday's jobs report. In Europe, leaders are grappling with a widening debt crisis, which started in Greece and spread to Italy and Spain. An earlier bailout of Greece now appears insufficient. There are growing concerns about European banks and their heavy investments in the debt of countries with big fiscal problems. The Dow's decline was its biggest point drop since the market was plunging amid a crisis of confidence in banks in late 2008. On Thursday, the focus has shifted to world governments, which are laboring under mountains of debt and have diminished ability to prop up the financial system."
But financial writers and television talking heads rarely possess the wisdom and experience necessary to see through the "fog of war". Most just stick to the status quo and read the copy that is given to them. If they took the time to think critically, they might not simply glance over this, from Reuters:
"Thu Aug 4, 2011 4:31pm EDT
* Safe-haven bid sends 10-yr Treas yields below 2.5 pct
* Two-year note yields fall to record low 0.27 pct
* Major U.S. stock indexes down about 4.5 percent
By Chris Reese
NEW YORK, Aug 4 (Reuters) - U.S. Treasury debt prices
soared on Thursday as recession fears cued investors to flee
riskier assets like stocks and seek safety in U.S. government
Major U.S. stock .SPX.IXIC.DJI indexes plunged about
4.5 percent and the U.S. bond market was on track for its
sharpest week-long drop in yields since the height of the
global financial crisis.
"The market is beset by uncertainty and fear," said Milton
Ezrati, market strategist at Lord Abbett & Co in Jersey City,
New Jersey, adding "there are a lot of worries about the
economy. The double-dip fears are more real now than last year
-- people are throwing in the towel because they can't find
relief on any front."
The safety buying straddled the Treasury curve, with
Treasury bill rates trading in negative territory, two-year
note yields falling to record lows and longer-dated yields
dipping to the lowest in nearly 10 months.
Bank of New York Mellon Corp (BK.N) said it was being so
overwhelmed with deposits from investors fleeing risky markets
that it will begin charging for above-average deposits. Some
traders said this added to the downward pressure on T-bill
rates as investors looked for a place to stash their cash. For
details, see [ID:nN1E7730Y0]
Benchmark 10-year Treasury notes US10YT=RR traded 1-24/32
higher in price to yield 2.42 percent, the lowest since
mid-October and down from 2.63 percent late on Wednesday.
Benchmark yields are set for the biggest six-day fall since
December, 2008, and have shed over half a percentage point in
the last week alone."
Hmmm. What a curious development this is. The global level of fear is now so high that T-bill rates have turned negative, just like they did in 2008. Investors and money managers are so fearful, they are paying the U.S. government to take their money from them. Again, hmmm.
OK the above, by itself, is not that unusual. However, what if I next give you this, straight from the press release on Monday, issued by the U.S. Treasury Department:
"Treasury Announces Marketable Borrowing Estimates
WASHINGTON - The U.S. Department of the Treasury today announced its current estimates of net marketable borrowing for the July – September 2011 and the October – December 2011 quarters:
During the July – September 2011 quarter, Treasury expects to issue $331 billion in net marketable debt, assuming an end-of-September cash balance of $110 billion. This borrowing estimate is $74 billion lower than announced in May 2011. The decrease in borrowing largely relates to lower outlays and cash balance adjustments.
During the October – December 2011 quarter, Treasury expects to issue $285 billion in net marketable debt, assuming an end-of-December cash balance of $100 billion.
During the April - June 2011 quarter, Treasury issued $190 billion in net marketable debt, and ended the quarter with a cash balance of $137 billion, of which $5 billion was attributable to the Supplementary Financing Program (SFP). In May 2011, Treasury estimated $142 billion in net marketable borrowing and assumed an end-of-June cash balance of $95 billion, which included an SFP balance of $5 billion.
Additional financing details relating to Treasury’s Quarterly Refunding will be released at 9:00 a.m. on Wednesday, August 3, 2011."
And then I followed it up with this commentary from Zero Hedge:
"Tim Geithner has released his projection of expected borrowing needs for the final fiscal quarter of 2011 (ending on September 30). But before that, we learn that while back on May 1 the Treasury had expected to raise $142 billion in marketable debt in Q3, instead if raised $190 billion, with the difference going primarily to build up the EOQ cash balance which instead of being $95 billion, was $137 billion, obviously due to the threat of the debt ceiling breach. That threat however has not prevented the Treasury from assuming that the debt ceiling will be raised without a hitch, and it now predicts issuing $331 billion in net marketable debt issued in Q4, $74 billion less than the projection from May 1 (and further sees another $285 billion in borrowing needs in Q1 2012). In other words, if there is no debt ceiling deal, the Treasury will be $616 billion short in revenues over the next 6 months. Of course, the numbers net out the massive issuance that has to hit the market to fund the "disinvested" government retirement funds and various other mechanism that were used to prevent the Treasury from running out of cash, which amount to about $300 billion primarily in the form of short-term bills that matured and were not rolled over to make space for marketable debt issuance. In other words, gross issuance in the next quarter will be about over $660 billion. This is just a little under the total debt issued in the last 3 quarters (due to the May 16th debt ceiling breach)! And people think the Treasury can raise this money without the Fed monetizing at will? Fascinating."
Now we're getting somewhere. All of this led me to recall the first item I ever saw published by "Tyler Durden". Published on the day after Christmas in 2009, Tyler speculated on the source for U.S. government funding in 2010. A link to the entire post is below but here is a c&p of his main thesis:
"What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:
1) Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
2) Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
3) Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.
If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.
Merry Christmas and Happy Holidays to all readers."
I'll leave you tonight to draw your own conclusions. However, it does seem a bit coincidental that, just when treasury issuance begins anew at record levels, the world is suddenly, once again rushing toward the "safety" of U.S. government bonds. Oh, and remember, in the markets, there are no coincidences.
Rest well. Not only will tomorrow be crazy, next week will undoubtedly be memorable, too. TF