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EJ
03-10-08, 09:02 PM
http://www.itulip.com/images/lendingQuincyMED.jpgThe American Bond Crisis

I was talking to the head of the fixed income desk of a major investment bank in London the day last week when agency debt spreads increased more than 90 basis points over US Treasuries. Agency bonds, namely mortgage bonds from GSEs, have an implicit US government guarantee so they usually trade close to treasuries with little spread.

Then all of a sudden they didn’t. The reason? Leverage – and lots of it. In fact, my friend told me, there is by his estimate $6 trillion in excessive leverage built up over the past ten years that has to be unwound. So the credit crisis that started June 2007 with obscure financially engineered debt products such as CDOs has not evolved to include bonds presumably backed by the US government. Guess what’s next after Agency debt? You guessed it!

Our road to the American Bond Crisis starts with another note from my pal Rick Ackerman today. He recently published Inflation's Last Gasp (http://news.goldseek.com/RickAckerman/1205073812.php) and attributes a number of comments on inflation to me.

As Ronald Reagan would say, “There he goes again!”

The first challenge of an argument with Rick is that he tends to invent a position for me then take the other side. If Rick and I were arguing about how to treat an illness versus the economy and I said, “Take an aspirin” he’d say in his rebuttal, “Eric says we should eat carrots when in fact we all know perfectly well that we should use leaches.” For example, “Eric and the inflationists implicitly believe not only that those fat raises for airline employees and autoworkers are coming, but that our homes are about to increase in value dramatically.”

Why say that I imply something when you can instead simply restate what I actually say? I’ve been warning of an eventual major correction in real estate since August 2002 (http://www.itulip.com/qc082002.htm) and finally called a top in June 2005 (http://www.itulip.com/forums/showthread.php?t=606) after describing the crash process in Jan. 2005 (http://www.itulip.com/housingbubblecorrection.htm) that pretty much lays out what’s happened. More recently I said I expect a 38% correction nationally (http://www.harpers.org/archive/2008/02/0081908) before the whole sorry episode is over. Well, 38% at least in real terms. Perhaps in nominal terms prices won’t fall so much.

Because we’re going to get so much inflation.

And here he goes again.
"Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up."
No, I say the Fed says that. I say wage inflation will certainly get inflation rising faster, but it is not politically expedient, in terms of economic policy, to do so. Which is not to say there is no wage inflation but you have to know where to look. In our not-so-fair, not-so-free-market system if you are in the top 99th percentile of wage earners your wages were up 7.6% between 2004 and 2005 and if you were among the tippy top 0.5% why your wages were up a very healthy 16% over that one year period.


http://www.itulip.com/images/snap20070328.gif


But I doubt six or seven hundred thousand high paid folks are driving the inflation we've seen since 2004. But then what is? Why has wage inflation been unnecessary to create the present high rate of inflation? We’ve got $108 oil, $3.25 gas, groceries and food prices rising since 2004 and all the while nominal wages, except for the folks at the top as noted, have been flat and in fact falling in real terms, that is, adjusted for the inflation that you and others have said for years wouldn't happen.


http://www.itulip.com/images/20080220wages600.gif


Inflation adjustment of wages is necessary on account there has been so much inflation as shown here in commodity prices.


http://www.itulip.com/images/crbCCIvsSpot.gif


If the US economy didn’t need wage inflation to get all that price inflation we've experienced since 2004, why will we need wage inflation to have more in the future? Where is the logic in that?

The reason we have all of this inflation is because the dollar has been declining. Had it declined more we’d have even more inflation. Going forward, all that has to happen for inflation to continue to rise is for the dollar to continue to fall as it has and for energy and other import prices to increase as they have.

So forget wage inflation. The only inflation input that is necessary to keep building inflation expectations in the US economy is the rising price of everything priced in dollars, even as the recession deepens.

But wait, you say. In a recession demand falls and goods prices with it. Well, that was true back when producers weren’t good at anticipating a fall in demand and cutting back on production ahead of it. Welcome to the 2000s and computers and the Internet. In the 1930s producers didn’t have the tools or data to cut production ahead of falling demand. Now they do, and they will, and they have.

For example, since 2004 oil demand has been falling everywhere except where it is subsidized by government – China, India, oil producing countries – as prices rose 400% in dollars. But what happens to poor J6P if jobs are scarce and inflation is eating up his meager savings and he's out of new sources of credit all at the same time?

As I've said, this is not your average business cycle recession.


http://www.itulip.com/images/recession.gif........http://www.itulip.com/images/recession-itulip.gif


Okay, so we have all of this cost-push inflation from dollar priced imports, except the made-in-China stuff is still cheap, until it isn't either – that comes later as China allows the yuan to rise the way our genius Congress says it should.

Debt defaults are rising. Credit is tightening. Unemployment is rising. It’s getting ugly out there.

How about we throw a US Treasury bond crisis into the mix?

I was talking to the head of the fixed income desk of a major investment bank in London the day last week when agency debt spreads increased more than 90 basis points over treasuries. Agency debt has an implicit US government guarantee so they usually trade close to treasuries with little spread. Then all of a sudden they didn’t. The problem? Leverage. In fact, my friend told me, there is $6 trillion in leverage that has to be unwound.
Fed Needs to Buy Agency Mortgage Bonds, Pimco (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aABd9Ci2k3O0)
March 10, 2008 (Bloomberg)

The Federal Reserve or another part of the U.S. government should start buying so-called agency mortgage-backed securities to stabilize the market, a Pacific Investment Management Co. executive said.

Concern that Freddie Mac and Fannie Mae, which plunged to the lowest since 1995 in New York Stock Exchange trading today, may fail have contributed to the rising spreads, David Land, a mortgage-bond portfolio manager at Advantus Capital Management in St. Paul, Minnesota, said in a telephone interview today.
No surprise to us. Years ago in Ka-Poom Theory is a Rhyme not a Repeat of History (http://www.itulip.com/forums/showthread.php?p=2905#post2905) we could see that the Fed was likely to wind up buying mortgage paper. So guess what’s next? You guessed it!
Hedge funds reel from margin calls even on Treasuries (http://biz.thestar.com.my/news/story.asp?file=/2008/3/11/business/20603476&sec=business)
March 11, 2008 (TheStar)

LONDON: The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.
What happens to inflation in an American Bond Crisis? Why hypothesize when there are recent real world examples to learn from?

Let’s take a look at what happened to Russia during their bond crisis in 1998. See money growth and inflation declining steadily from 1995 to 1998? Then... whammo! The Russian Bond Crisis hit.


http://www.itulip.com/images/russiainflation1995-2000.gif
Russian money growth and inflation 1995 to 2000


The year it hit in 1998 GDP growth was –4.9%, a serious recession. Must have had price deflation after that, right?

Nope. That year inflation averaged 84.4%.


http://www.itulip.com/images/russiakeyindicators1997-2002.gif


Can that happen in the USA? Not to the extent of the Russian Bond Crisis because the Russians had way too much short term debt owed in foreign currencies. US foreign debts are largely long term and owed in US currency. A uniquely American version of the process is occurring.

But why am I arguing with you using examples? You tell me, "As you will have long since surmised, I prefer to argue the case for deflation more from instinct than in accordance with economic theory."

This is just the real world, not the colorful make-believe world based on imagination and intuition where leaches work as well as aspirin. In the real world the currencies of defaulting countries do not appreciate, they depreciate. Show me a country with a depreciating currency and all-goods price deflation and I will gladly slap on a leach or two next time I'm ill.

As the credit crisis continues to evolve, the dollar plumbs new lows, dollar priced commodities such as oil and precious metals rise, and inflation pressures intensify, I hope that we can soon put to rest worries about an appreciating dollar and price deflation. Deflation was the last crisis, in 2001 and 2002, but is not this crisis. I also hope that we have in the process of arguing this point finally come up with a name to replace the incorrect label "subprime crisis" that the mainstream press carelessly slapped on the box filled with stories about the symptoms of the process we laid out in Risk Pollution and the Housing Bubble (http://www.itulip.com/forums/showthread.php?t=1071) and elsewhere on iTulip over the years.

This will go down in history as The American Bond Crisis.

See also:
The deflation case: caught, gutted, poached and eaten (http://www.itulip.com/forums/showthread.php?p=28835#post28835)
Door Number Two: moderate inflation vs hyperinflation vs deflation (http://www.itulip.com/forums/showthread.php?p=26304#post26304)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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whitetower67
03-10-08, 11:59 PM
It seems to me that another difference between the Russian '98 crisis and the current US crisis is that the Russian annual budget deficit in '97 was 6.7%/GDP. In equivalent terms, a 6.7% deficit relative to US GDP today would yield nearly a trillion dollar annual deficit. This difference would, of course, reflect a combination of a much larger US economy and more constrained public spending (compared to the Russian government at any rate).

So, in theory, the US government can continue to issue debt (i.e., "stimulus plan," public spending) in its attempt to revive the economy and still avoid Russian-style "hyper-inflation."

Or am I off on this?

Contemptuous
03-11-08, 01:42 AM
There is America, already stagflationary ... And then there are the rest of the world's rampant inflationary signals.

Mr. Ackerman's position risks becoming increasingly confined and uncomfortable as these trends exacerbate. There is an increasing risk that Mr. Ackerman may come to be percieved as more devoted to buttressing his past arguments than he is to carefully re-examining the proliferation of new facts on the ground.

______________

An excerpt from the inimitable Gary Dorsch - reporting news from the Euromoney Bond Investors Conference in London.
______________

... the (ultra inflationist) Frederic Mishkin, defended the Fed's policy of ignoring food and energy prices when deciding on the correct level of interest rates.

"Stabilizing core inflation, which excludes food and energy, leads to better economic outcomes than stabilizing headline inflation. The shock of energy price rises is likely to have only a temporary impact on inflation, because inflation expectations are contained," Mishkin argued on Feb 25th.

"When inflation expectations are well anchored, the central bank does not need to raise interest rates aggressively to keep inflation under control following a supply shock. If central banks raise rates aggressively to counter inflation caused by a sudden rise in oil prices, unemployment will be markedly higher, than if policy-makers set borrowing costs in response to fluctuations in core prices."

"The Fed's credibility on inflation is rock solid," said deputy US Treasury secretary Phillip Swagel on Feb 26th. "Overall, inflationary expectations remain contained," he declared.

But in a show of hands, in a packed hall of delegates at the Euromoney Bond Investors Conference in London, listeners overwhelmingly disagreed with Swagel. Instead, the audience thought the Bernanke Fed had let the inflation genie out of the bottle.

Back to reality, Chicago Board of Trade wheat futures are up 160% from a year ago.

Spring wheat futures on the Minneapolis Grain Exchange staged a historic rally on Feb 25th, rising more than 25% in a single day after the exchange lifted daily trading limits on the front March contract.

March spring wheat settled at $24.00 per bushel, up $4.75, after reaching $25.00, the highest-ever price for any US wheat contract.

Soybean futures for July delivery rallied to a record $15 per bushel, up 90% from a year ago, fueled by aggressive Chinese demand for soybeans and soy-oil. China's soybean imports jumped 41.5% in January to 3.4 million metric tons from a year earlier, and demand is expected to rise ahead of the Beijing Olympics.

China bought up to 25 cargoes of soybeans and 300,000 tons of soy-oil last week alone. Rough rice is up 70% from a year ago, a big worry in Asia, where more than two billion people depend on rice as their main source of calories each day.

Platinum is up 90% to $2,145 per oz amid supply disruptions from South Africa; cocoa futures are up 65% at a 24-year high; coffee is up 60% to a 10-year high; sugar is up 35%; Gold and silver are up 50%, and crude oil is banging against $100 per barrel, up 80% from a year ago. Crude oil or "black gold" is not just an industrial commodity, but is utilized as an inflation-hedge and alternative to stocks.

Thus super-easy central bank money policies – plus rate cuts in Canada, Hong Kong, Saudi Arabia, the UK and the United States, combined with strong demand for industrial and agricultural commodities from emerging China, India, and the Arab oil kingdoms – are laying the groundwork for a new era of hyper-inflation worldwide

_________________


Commodity Bubble? "Super Cycle" sweeps into Japan

Japan is an industrial powerhouse, but it imports all of its oil, most of its raw materials, and almost two-thirds of its food consumption.

So it wasn't surprising to hear that Japan's annual wholesale inflation hit a 27-year high of 3% in January due to rising oil, raw material and food costs. Tokyo says its economy is still wrestling with deflation, but the truth is, Japan escaped the deflation trap four years ago.

Still the Bank of Japan pegs its overnight loan rate at only 0.50%, the lowest on the planet, and far below the 3% inflation rate. In other words, Japanese bank deposits and bond yields offer negative interest rates, whetting the speculative appetite of Tokyo gold traders, who are bidding up the yellow metal to stay ahead of global inflation, and the arrival of a new Bank of Japan policy chief.

Despite the surge in inflation to multi-decade highs and soaring commodity prices, BoJ chief Toshihiko Fukui said he won't react hastily to short-term developments.

"Companies won't be comfortable if we suddenly tighten or ease," Fukui said, adding that the BoJ was examining both downside risks to the economy, and long-term risks of inflation overheating, before deciding on adjusting interest rates.

Gold traders have known all along that Japan's inflation figures are phony and designed to give the BoJ the cover to keep its interest rates pegged at negative rates. Tokyo Gold Prices closed above the psychological ¥100,000 per ounce level in late Feb., up from ¥45,000 three years ago.

In Yen terms, crude oil is up 64%, and rice is up 60% from a year ago, yet Tokyo's propaganda machine, indicates that consumer prices are only 0.8% higher.

Gary Dorsch full article here:

http://www.commodityonline.com/news/topstory/newsdetails.php?id=6233

_________________


Those who would lead the rest of us purportedly to safety in these uncertain times have a special duty to continually reexamin their premises, in light of accumulating new facts on the ground.

There is some literary hyperbole in the quote below, and no intent of overt disrespect is intended here to Mr. Ackerman - but he might dwell on this cautionary quote, from the novelist James Baldwin - suitable as we are living in extraordinarily dangerous times.

“People who shut their eyes to reality simply invite their own destruction, and anyone who insists on remaining in a state of innocence long after that innocence is dead turns himself into a monster.”

--James Baldwin Biography - Fiction Writer, Essayist, Social Critic, 1924-1987

Chief Tomahawk
03-11-08, 01:44 AM
I'm building an ark.

Am I the only one for whom the "Top Investors" section no longer functions?

Jim Nickerson
03-11-08, 01:55 AM
I'm building an ark.

Am I the only one for whom the "Top Investors" section no longer functions?

Nope.......

Hey, FRED, are you awake in the control room. Oh, yoohoo, FREDie, the Top Investors Threadie isn't working.

GRG55
03-11-08, 04:12 AM
The American Bond Crisis

I was talking to the head of the fixed income desk of a major investment bank in London the day last week when agency debt spreads increased more than 90 basis points over US Treasuries. Agency bonds, namely mortgage bonds from GSEs, have an implicit US government guarantee so they usually trade close to treasuries with little spread.

Then all of a sudden they didn’t. The reason? Leverage – and lot's of it. In fact, my friend told me, there is by his estimate $6 trillion in excessive leverage built up over the past ten years that has to be unwound. So the credit crisis that started June 2007 with obscure financially engineered debt products such as CDOs has not evolved to include bonds presumably backed by the US government. Guess what’s next after Agency debt? You guessed it!




Northern Rock, and Fannie Mae...separated at birth? :rolleyes:



"...Northern Rock, the first U.K. bank to suffer a run on deposits in 140 years, was nationalized this month..." http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFmTMKztD0_A






"...Agency mortgage securities are guaranteed by government- chartered Fannie Mae (http://www.bloomberg.com/apps/quote?ticker=FNM%3AUS) and Freddie Mac or federal agency Ginnie Mae. The almost $4.5 trillion market is about the same size as the U.S. Treasury market...



...Concern that Freddie Mac and Fannie Mae, which plunged to the lowest since 1995 in New York Stock Exchange trading today, may fail :eek: have contributed to the rising spreads, David Land (http://search.bloomberg.com/search?q=David+Land&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a mortgage-bond portfolio manager at Advantus Capital Management in St. Paul, Minnesota, said in a telephone interview today..." http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aABd9Ci2k3O0With the exception of those few brief years between the Tea Party, Lexington and Yorkton, sure seems like you Brits and Americans prefer to take turns leading the way to the same destinations (war, housing bubbles, nationalised mortgage mongers, what's next?)

randallriggs
03-11-08, 07:24 AM
There is America, already stagflationary ... And then there are the rest of the world's rampant inflationary signals.

Mr. Ackerman's position risks becoming increasingly confined and uncomfortable as these trends exacerbate. There is an increasing risk that Mr. Ackerman may come to be percieved as more devoted to buttressing his past arguments than he is to carefully re-examining the proliferation of new facts on the ground.

______________

An excerpt from the inimitable Gary Dorsch - reporting news from the Euromoney Bond Investors Conference in London.
______________

... the (ultra inflationist) Frederic Mishkin, defended the Fed's policy of ignoring food and energy prices when deciding on the correct level of interest rates.

"Stabilizing core inflation, which excludes food and energy, leads to better economic outcomes than stabilizing headline inflation. The shock of energy price rises is likely to have only a temporary impact on inflation, because inflation expectations are contained," Mishkin argued on Feb 25th.

"When inflation expectations are well anchored, the central bank does not need to raise interest rates aggressively to keep inflation under control following a supply shock. If central banks raise rates aggressively to counter inflation caused by a sudden rise in oil prices, unemployment will be markedly higher, than if policy-makers set borrowing costs in response to fluctuations in core prices."

"The Fed's credibility on inflation is rock solid," said deputy US Treasury secretary Phillip Swagel on Feb 26th. "Overall, inflationary expectations remain contained," he declared.

But in a show of hands, in a packed hall of delegates at the Euromoney Bond Investors Conference in London, listeners overwhelmingly disagreed with Swagel. Instead, the audience thought the Bernanke Fed had let the inflation genie out of the bottle.

Back to reality, Chicago Board of Trade wheat futures are up 160% from a year ago.

Spring wheat futures on the Minneapolis Grain Exchange staged a historic rally on Feb 25th, rising more than 25% in a single day after the exchange lifted daily trading limits on the front March contract.

March spring wheat settled at $24.00 per bushel, up $4.75, after reaching $25.00, the highest-ever price for any US wheat contract.

Soybean futures for July delivery rallied to a record $15 per bushel, up 90% from a year ago, fueled by aggressive Chinese demand for soybeans and soy-oil. China's soybean imports jumped 41.5% in January to 3.4 million metric tons from a year earlier, and demand is expected to rise ahead of the Beijing Olympics.

China bought up to 25 cargoes of soybeans and 300,000 tons of soy-oil last week alone. Rough rice is up 70% from a year ago, a big worry in Asia, where more than two billion people depend on rice as their main source of calories each day.

Platinum is up 90% to $2,145 per oz amid supply disruptions from South Africa; cocoa futures are up 65% at a 24-year high; coffee is up 60% to a 10-year high; sugar is up 35%; Gold and silver are up 50%, and crude oil is banging against $100 per barrel, up 80% from a year ago. Crude oil or "black gold" is not just an industrial commodity, but is utilized as an inflation-hedge and alternative to stocks.

Thus super-easy central bank money policies – plus rate cuts in Canada, Hong Kong, Saudi Arabia, the UK and the United States, combined with strong demand for industrial and agricultural commodities from emerging China, India, and the Arab oil kingdoms – are laying the groundwork for a new era of hyper-inflation worldwide

_________________


Commodity Bubble? "Super Cycle" sweeps into Japan

Japan is an industrial powerhouse, but it imports all of its oil, most of its raw materials, and almost two-thirds of its food consumption.

So it wasn't surprising to hear that Japan's annual wholesale inflation hit a 27-year high of 3% in January due to rising oil, raw material and food costs. Tokyo says its economy is still wrestling with deflation, but the truth is, Japan escaped the deflation trap four years ago.

Still the Bank of Japan pegs its overnight loan rate at only 0.50%, the lowest on the planet, and far below the 3% inflation rate. In other words, Japanese bank deposits and bond yields offer negative interest rates, whetting the speculative appetite of Tokyo gold traders, who are bidding up the yellow metal to stay ahead of global inflation, and the arrival of a new Bank of Japan policy chief.

Despite the surge in inflation to multi-decade highs and soaring commodity prices, BoJ chief Toshihiko Fukui said he won't react hastily to short-term developments.

"Companies won't be comfortable if we suddenly tighten or ease," Fukui said, adding that the BoJ was examining both downside risks to the economy, and long-term risks of inflation overheating, before deciding on adjusting interest rates.

Gold traders have known all along that Japan's inflation figures are phony and designed to give the BoJ the cover to keep its interest rates pegged at negative rates. Tokyo Gold Prices closed above the psychological ¥100,000 per ounce level in late Feb., up from ¥45,000 three years ago.

In Yen terms, crude oil is up 64%, and rice is up 60% from a year ago, yet Tokyo's propaganda machine, indicates that consumer prices are only 0.8% higher.

Gary Dorsch full article here:

http://www.commodityonline.com/news/topstory/newsdetails.php?id=6233

_________________


Those who would lead the rest of us purportedly to safety in these uncertain times have a special duty to continually reexamin their premises, in light of accumulating new facts on the ground.

There is some literary hyperbole in the quote below, and no intent of overt disrespect is intended here to Mr. Ackerman - but he might dwell on this cautionary quote, from the novelist James Baldwin - suitable as we are living in extraordinarily dangerous times.

“People who shut their eyes to reality simply invite their own destruction, and anyone who insists on remaining in a state of innocence long after that innocence is dead turns himself into a monster.”

--James Baldwin Biography - Fiction Writer, Essayist, Social Critic, 1924-1987


ok, I get it....we're heading into a hyper inflationary period. How does the average small investor protect his assets in this environment? I can't put all assets in gold!!!!! should I spread to some agri ETFs? Oil? I little help please!!!!!!!!!!!! I'm 50% in gold now which has done nicely by the way, 10 FXE ans the rest in cash.

magicvent
03-11-08, 09:04 AM
What will happen when other central banks start to cut rates?

skidder
03-11-08, 09:30 AM
If this assessment of the FED's strategy is accurate, what is the likely impact going forward? (financialsense.com article)

We have conclusive proof that Fed is attempting to drain cash from the economy to support rates (and indirectly the $) whilst pumping funds directly into the balance sheets of the banks. Therefore the whole series of measures are not to deal with a liquidity issue but are to combat a breakdown in the capital reserves of the banks and a freezing/tightening/collapse of the credit markets.
US banks are being nationalized, temporarily, whilst they attempt to take cash away from all sectors of the economy, by either de-leveraging positions or calling in all debt owed to them on the flimsiest of excuses. Any non-performance in debt servicing by either Corporations or private citizens, for whatever reason, will result in immediate and swift foreclosure and an asset grab. I expect most credit lines to be withdrawn and limits imposed on the size of cash transfers and withdrawals in the very near future. All of these actions are to bolster bank reserves and the Fed itself believes this will take a minimum of 6 months. Some believe that is not enough. Kansas City Fed Pres. Hoenig called for the TAF to be made permanent

FRED
03-11-08, 10:32 AM
Nope.......

Hey, FRED, are you awake in the control room. Oh, yoohoo, FREDie, the Top Investors Threadie isn't working.

Our IT services guys fixed the problem with the server going offline so often and in the process broke the Stock thingy. We're still trying to figure out how to fix it. We may have to re-install it in which case everyone will have to re-enter their positions. Bummer, I know.

quigleydoor
03-11-08, 12:07 PM
If this assessment of the FED's strategy is accurate, what is the likely impact going forward? (financialsense.com article)

We have conclusive proof that Fed is attempting to drain cash from the economy to support rates (and indirectly the $) whilst pumping funds directly into the balance sheets of the banks. Therefore the whole series of measures are not to deal with a liquidity issue but are to combat a breakdown in the capital reserves of the banks and a freezing/tightening/collapse of the credit markets.

US banks are being nationalized, temporarily, whilst they attempt to take cash away from all sectors of the economy, by either de-leveraging positions or calling in all debt owed to them on the flimsiest of excuses. Any non-performance in debt servicing by either Corporations or private citizens, for whatever reason, will result in immediate and swift foreclosure and an asset grab. I expect most credit lines to be withdrawn and limits imposed on the size of cash transfers and withdrawals in the very near future. All of these actions are to bolster bank reserves and the Fed itself believes this will take a minimum of 6 months. Some believe that is not enough. Kansas City Fed Pres. Hoenig called for the TAF to be made permanent

Interesting. I'm not an expert on Japan's 1990s experience, but it sounds like Fed is consciously trying not to fall into the same trap, by aggressively cleaning up nonperforming loans (bad debts). Good for banks, maybe good for future growth—bad for the borrowers, be they victims or fools.

GRG55
03-11-08, 12:11 PM
What will happen when other central banks start to cut rates?

This chart from bart will answer your question...
http://www.itulip.com/forums/showthread.php?p=29958#poststop

dbarberic
03-11-08, 12:29 PM
I expect most credit lines to be withdrawn and limits imposed on the size of cash transfers and withdrawals in the very near future. All of these actions are to bolster bank reserves and the Fed itself believes this will take a minimum of 6 months.

Aka = Capital Controls. :eek:

This is a little scary. I have safe money to weather the downturn incase of an emergency (e.g. job loss). However, if they start implementing withdraw limits, etc, this could put a serious crimp in gaining access to emergency money or cashing out profits in positions designed to profit from this mess.

FRED
03-11-08, 02:47 PM
Interesting. I'm not an expert on Japan's 1990s experience, but it sounds like Fed is consciously trying not to fall into the same trap, by aggressively cleaning up nonperforming loans (bad debts). Good for banks, maybe good for future growth—bad for the borrowers, be they victims or fools.

Not only is that what they are doing, that is exactly what they said they would do.

Ka-Poom is a Rhyme not a Repeat of History - Janszen - Sept. 2006 (http://alwayson.goingon.com/permalink/post/5192)

kelton56
03-11-08, 02:59 PM
Inflation adjustment of wages is necessary on account there has been so much inflation as shown here in commodity prices.


http://www.itulip.com/images/crbCCIvsSpot.gif



From Rick Ackerman's "Inflation's Last Gasp" Commentary:
"Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up. Our response is that this commodity inflation is very different from all others before it simply because it has been fueled, not by physical demand, but by torrents of speculative capital fleeing rapidly deflating financial assets. If ever there were a trend that could not continue for long and which is likely to end in a crash, this is it."


My comment: It would appear that Rick Ackerman believes the chart above to be the sole result of speculative froth entering the commodities markets - only recently - hence the "but this time it's different" argument. Clearly the chart shows the most recent commodities surge to have begun in 2002 or so, which, of course, long predates "torrents of speculative capital fleeing rapidly deflating financial assets" as hysterical hedge fund managers belatedly realize Jim Rogers was right about commodities in 1999.
As the chart clearly illustrates, a long run-up in the 1970s was followed by 20 years of bull-bear appreciation/correction, but for the most part held a significantly higher plateau comapred with prior to 1973.


I do not disagree with Ackerman that there could be exciting swings above and below the current price levels of commodities given an ample amount of speculation in the past year, but more likely is the global-demand-based possibility of sustaining a new plateau at much higher price levels, which, eventually, always will result in wage inflation. Think of those who entered the workforce after college in the late 1970s, probably at about $10K a year, only to see that jump to $30K- $40K within 5 years or so as the rampant inflation of the era worked its way through the economy.


I also think that China, with all that potential for social unrest over food and fuel prices and shortages, and all those U.S. dollars it owns devaluing daily, will be more than happy to put the greenbacks to work buying some social stability.


Unless every American renounces consumerism and returns to three-generations living together in thousand-square-foot housing and no cars, I think we're gonna see inflation.

FRED
03-11-08, 03:15 PM
Inflation adjustment of wages is necessary on account there has been so much inflation as shown here in commodity prices.


http://www.itulip.com/images/crbCCIvsSpot.gif



From Rick Ackerman's "Inflation's Last Gasp" Commentary:
"Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up. Our response is that this commodity inflation is very different from all others before it simply because it has been fueled, not by physical demand, but by torrents of speculative capital fleeing rapidly deflating financial assets. If ever there were a trend that could not continue for long and which is likely to end in a crash, this is it."


My comment: It would appear that Rick Ackerman believes the chart above to be the sole result of speculative froth entering the commodities markets - only recently - hence the "but this time it's different" argument. Clearly the chart shows the most recent commodities surge to have begun in 2002 or so, which, of course, long predates "torrents of speculative capital fleeing rapidly deflating financial assets" as hysterical hedge fund managers belatedly realize Jim Rogers was right about commodities in 1999.
As the chart clearly illustrates, a long run-up in the 1970s was followed by 20 years of bull-bear appreciation/correction, but for the most part held a significantly higher plateau comapred with prior to 1973.


I do not disagree with Ackerman that there could be exciting swings above and below the current price levels of commodities given an ample amount of speculation in the past year, but more likely is the global-demand-based possibility of sustaining a new plateau at much higher price levels, which, eventually, always will result in wage inflation. Think of those who entered the workforce after college in the late 1970s, probably at about $10K a year, only to see that jump to $30K- $40K within 5 years or so as the rampant inflation of the era worked its way through the economy.


I also think that China, with all that potential for social unrest over food and fuel prices and shortages, and all those U.S. dollars it owns devaluing daily, will be more than happy to put the greenbacks to work buying some social stability.


Unless every American renounces consumerism and returns to three-generations living together in thousand-square-foot housing and no cars, I think we're gonna see inflation.


This is why iTulip took the "buy gold" position in 2001. Indebted governments don’t want interest rates to rise above the rate of inflation, and whenever they suppress the natural tendency of markets to price inflation risk into bond prices inflation goes through the roof. All you have to do to trade the gold market is note the direction of the spread between the 10 year and inflation. Even the phony gov’t inflation numbers will do for this purpose. The big spike in commodity prices noted above correlates to the 10yr and inflation parting ways in 2003.


http://www.itulip.com/images/idiotsgoldguide.gif

We're selling as soon as we get the impression that 10 yr bond yields are going to rise above the rate of inflation. Last time this happened inflation expectations were so deeply embedded in contracts after more than 10 years of inflation that the Volcker Fed had to raise rates until the 10 yr yield was 9% over the official inflation rate CPI-U before money exited hard assets for financial assets. Inflation is not as bad this time, yet, but we don't see how the Fed can try to push long rates even to parity with the inflation rate with $6 trillion in debt leverage in the financial markets and the economy already in recession. As a matter of fact, by providing all of this liquidity they are doing the opposite.
Stocks Up Sharply After Fed Credit Plan (http://biz.yahoo.com/ap/080311/wall_street.html)
Tuesday March 11 2008 (Joe Bel Bruno, AP Business Writer)

Wall Street Moves Sharply Higher After Fed, Other Central Banks Move to Ease Credit Crisis

NEW YORK (AP) -- Wall Street rebounded sharply Tuesday after the Federal Reserve and other central banks said they will pump $200 billion into the financial markets to help ease the strain from the credit crisis. The Dow Jones industrials surged nearly 230 points.

Slimprofits
03-11-08, 04:04 PM
We're selling as soon as we get the impression that 10 yr bond yields are going to rise above the rate of inflation.

Fred, I have to ask for assistance with this. The chart says that 10 yr bond yield is around 1.8% right?

Are you referring to the 10 year treasury constant maturity rate (http://research.stlouisfed.org/fred2/data/GS10.txt)?

qwerty
03-11-08, 05:15 PM
"`Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.''

I read something five years ago which predicted in future the Fed buying junk bonds, equities - the lot - in order to support those markets. But they had to stop when the treasury auctions started to buckle. The buckle because lenders to the US Government realize that they are in fact lending to corporations, banks, etc. or indeed some kind of equity position, and decide to cut out the middle-man.

March 11 (Bloomberg) -- The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.

Contracts on 10-year Treasuries traded at a record 16 basis points earlier today, compared with 15 basis points on German government notes, according to data compiled by BNP Paribas SA. In July, U.S. credit-default swaps were at 1.6 basis points, compared with 2.5 basis points on bunds.

Federal Reserve Chairman Ben S. Bernanke announced plans today to lend as much as $200 billion of Treasury notes in exchange for debt including private mortgage-backed bonds to avert an exodus from the securities that threatens to deepen the housing slump and economic slowdown.

``The U.S. government is not immune from the consequences of the credit crisis,'' said Fabrizio Capanna, BNP's head of high-grade corporate trading in London. ``Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.''

metalman
03-11-08, 06:03 PM
"The American Bond Crisis"

thank you for finally giving this crisis a name. i was gitting sick and tired of the bogus "subprime crisis" title.

what took you so long?

GRG55
03-11-08, 11:54 PM
"`Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.''

I read something five years ago which predicted in future the Fed buying junk bonds, equities - the lot - in order to support those markets. But they had to stop when the treasury auctions started to buckle. The buckle because lenders to the US Government realize that they are in fact lending to corporations, banks, etc. or indeed some kind of equity position, and decide to cut out the middle-man.

March 11 (Bloomberg) -- The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.

Contracts on 10-year Treasuries traded at a record 16 basis points earlier today, compared with 15 basis points on German government notes, according to data compiled by BNP Paribas SA. In July, U.S. credit-default swaps were at 1.6 basis points, compared with 2.5 basis points on bunds.

Federal Reserve Chairman Ben S. Bernanke announced plans today to lend as much as $200 billion of Treasury notes in exchange for debt including private mortgage-backed bonds to avert an exodus from the securities that threatens to deepen the housing slump and economic slowdown.

``The U.S. government is not immune from the consequences of the credit crisis,'' said Fabrizio Capanna, BNP's head of high-grade corporate trading in London. ``Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.''

Well they've already trashed the "real time" bonar (Federal Reserve Notes), trashing the "bonar futures" market (Treasuries) would seem but "one small step for Ben".

Anybody who was holding the sovereign debt of the US of eh yesterday morning got hammered...

jk
03-12-08, 04:40 AM
Well they've already trashed the "real time" bonar (Federal Reserve Notes), trashing the "bonar futures" market (Treasuries) would seem but "one small step for Ben".

Anybody who was holding the sovereign debt of the US of eh yesterday morning got hammered...
yes, but prior to the hammering treasuries had had quite a ride upward as part of the flight to safety. take a look at http://www.itulip.com/forums/showthread.php?t=3460 for another view of what's been happening in the treasury market.

GRG55
03-12-08, 06:51 AM
yes, but prior to the hammering treasuries had had quite a ride upward as part of the flight to safety. take a look at http://www.itulip.com/forums/showthread.php?t=3460 for another view of what's been happening in the treasury market.

Holders of bonars had quite a ride upward too. Between 1st Q 1995 and mid-2001...prior to the hammering.

History may not repeat, but the Fed is doing the Treasury market no favours.

Sapiens
03-12-08, 07:53 AM
Anybody who was holding the sovereign debt of the US of eh yesterday morning got hammered...

Ask youself, what would happen if yields collapsed to 0% on T-bills and bonds? Bankers don't eat if they can't charge enough interest to cover their expenses.

Don't fall for the charade.

GRG55
03-12-08, 08:33 AM
Ask youself, what would happen if yields collapsed to 0% on T-bills and bonds? Bankers don't eat if they can't charge enough interest to cover their expenses.

Don't fall for the charade.

Are you planning to lend your money to the Government of the US of eh for 30 years at zero interest? If not, then who do you think will?

Sapiens
03-12-08, 08:43 AM
Are you planning to lend your money to the Government of the US of eh for 30 years at zero interest? If not, then who do you think will?

Like I said, think. Under what circumstances would it benefit you to hold 0% 30 year T-bonds...

I know the answer, do you?

GRG55
03-12-08, 09:00 AM
Like I said, think. Under what circumstances would it benefit you to hold 0% 30 year T-bonds...

I know the answer, do you?

Holding a sovereign bond is a claim on the future productive output of that nation. And a bet on the future political stability and security of that nation, so you are likely to be able to collect on that debt.

Zero interest US T-bonds imply that all other alternatives in the world are perceived to be worse in respect to the above.

I am pleased to hear that you have enjoyed spending your time, having fun dreaming up scenarios where the rest of the world goes to hell and the USA is the only remaining safe haven.

Should I buy a gun too?

Sapiens
03-12-08, 09:09 AM
Should I buy a gun too?

Sure, why not.

Look at this scenario by Karl:


http://market-ticker.denninger.net/


Tuesday, March 11, 2008
The Short Bus Rolls Again

Let's do The Fed's action today.

The ostensible reason was to "liquefy" agency and other "AAA" securities.

Really?

Let's talk about reality.

Reality is this:

You short something it is to sell it to someone else. One of the ways the primary dealers make their money is by shorting Treasuries into the market, borrowing them from The Fed and then generating carry off the money.

Over the last six months the primary dealers have borrowed an insane amount in Treasuries and are short in aggregate close to $100 billion of them!

What's worse, they're long all the other debt instruments, lots of it involuntarily! Like, for example, LBO debt and mortgage securities they can't sell into the market.

So the primary dealers are short Treasuries, which are going up in price, and long everything else which is going straight in the toilet!

THE PRIMARY DEALERS WERE CAUGHT IN A CREDIT MARKET SHORT SQUEEZE!

You've seen it and might have had it happen to you. Been short home builders in the last few months when one of the "Quant" unwinds happens? You know what happens to the market for those stocks, right?

The price rockets higher.

Ok, what happens to treasuries when there is a huge demand? There is a similar rocket shot in price and down in yield.

Now think about how badly it sucks to be you if you're the idiot who packaged up all this crap debt and are watching it dwindling towards zero in value, while what you shorted in an attempt to earn carry is rocketing higher as everyone you sold your crap to is dumping it on the market and fleeing into what you're short!

So what really happened today?

We were almost certainly on the verge of the collapse of one or more of the primary dealers AND international banks FOR THE SECOND TIME IN JUST A FEW DAYS!

Remember, The Fed just took an "extraordinary" action in expanding the TAF!

Their only defense the primary dealers had to being forced to buy back those treasuries at a huge loss is to borrow even more of them from The Fed.

BUT THEY WERE OUT OF COLLATERAL TO POST OTHER THAN THESE MORTGAGE AND OTHER "AAA" BONDS!

What's worse, this short squeeze was being fed by people who did NOT want agency paper at any price; they were generating it by dumping the agencies and buying Ts. They have figured out that its contaminated (see below) and are freaking out about the potential for serious shortfalls or outright defaults.

Remember - "AAA" means "as safe as the US Government."

Except that lately, we've learned that its not - that the claim is a lie.

So The Fed decides that they're going to put in place a "swap" and let the primaries exchange Treasuries (of which they have several hundred billion) for "Agency and other AAA" paper - mortgages. The intent is to "pair" the two, thereby halting the spread widening and thus stopping the short squeeze.

The action today was nothing more or less than an attempt to stabilize Agency spreads which were blowing wide in a historic short squeeze that was threatening to collapse major financial institutions!

Yet if you listen to CNBS, including Fast Money, you hear these guys saying that "The Fed Injected 200 billion in money."

NO THEY DID NOT! IN FACT, THEY EXPLICITLY INJECTED EXACTLY ZERO DOLLARS INTO THE SYSTEM; A SWAP OF ONE SECURITY FOR ANOTHER OF IDENTICAL SIZE AND FACE IS A BIG FAT NET ZERO IN TERMS OF BALANCE SHEET AND MONEY SUPPLY IMPACT.

THE FX MARKETS "GOT IT" IMMEDIATELY BUT NOBODY ELSE DID!

The Fed did what it always does - try to bail out the banks.

Who's in trouble?

Who the hell knows - they won't tell us!

Gee, nothing like Reg-FD, Form 8Ks and the like, eh?

Nothing like actually following the law and disclosing material adverse corporate developments, yes? I mean hell, even Thornburg did file one, even if late.

And while we're at it, let's ask the next AND MOST IMPORTANT question:

What the hell is The Fed doing allowing their regulated primary dealers, who they are responsible for, to increase their short positions by TEN TIMES in Treasuries over the last few months WHILE THEY ARE ACTIVELY ATTEMPTING TO DRIVE TREASURIES UP IN PRICE BY ADDING LIQUIDITY AND LOWERING THE FFT?

What the hell is wrong with BEN BERNANKE and THE FED GOVERNORS?

LET ME BE BLUNT: They sat on their hands WHILE THE INSTITUTIONS THEY ARE RESPONSIBLE FOR multiplied their short positions BY MORE THAN TEN TIMES in securities THE FED IS FORCING UP IN PRICE and BOTH said nothing and DID nothing about it?

Then, when the INEVITABLE short squeeze that results from such an act of pure INSANITY ensues we get THIS as a response, along with a flat-out MISDIRECTION, otherwise called a LIE, as to what was REALLY going on and WHY with exactly ZERO clarification from The Fed as to both the true reason for the action and the fact that it is a big fat net zero on the monetary base?

But don't worry, its all ok. The Fed made it so, and the market believed it, up 416 today on the Dow.

The only remaining question is how big of a sucker YOU are for the LIES of the mainstream media, corporate executives who should be filing 8Ks by the truckload and The Fed itself who willfully ignored the ramping short positions in securities that are attempting to drive up in price!

Yes, that's the question folks.

Are you a sucker?

Because if you think this was about Fannie and Freddie paper being "money good" but the market "unreasonably" discounting its price, you are soon to find out that indeed you are that sucker. After all, the ABX says that "AAA" paper is worth..... wait for it..... somewhere between 53 and 70 cents on the dollar, depending on the vintage.

The Truth is that Fannie and Freddie paper is contaminated with mortgages that have "Back End" ratios as high as 65% in some cases, nearly TWICE the historical sound limit for mortgage lending. This is not commonly known by investors; most think "Agency" paper is "conservatively" underwritten.

The Truth is that lots of mortgages placed with less-than-accurate appraisals and documentation (think "Streamline" or "Fast and Easy" refinances) are sprinkled through all of that mortgage paper. Again, this is not common known by investors; most think "Agency" paper is "conservatively" underwritten.

The Truth is that The Fed did not inject one thin dime of anything into the market today and this had exactly nothing to do with Agency paper "directly"; it was nothing more or less than an attempt to halt a short squeeze that was threatening to destroy their primary dealers.

The Truth is that this is the second time in just a few days that the entire primary dealer system has threatened to explode in everyone's face. READ THAT AGAIN FOLKS: IN THE SPACE OF JUST A FEW DAYS THE FED HAD TO RESCUE THE PRIMARY DEALERS AND BANKS ***TWICE***!

The Truth is that despite the banks and primary dealers being in such poor condition that they had to be rescued TWICE in the space of the last FEW DAYS "investors" bid up The Dow by more than four hundred points today. (Hint: If you have two heart attacks in three days' time, what do you suspect your risk is of a third - fatal - one in the next few days or weeks?)

The Truth is that The Fed has proven they will look the other way, allow, and even encourage their primary dealers to do stupid things while they intentionally drive the price of securities in the exact wrong direction, then come up with "sticksave" after "sticksave" when the unintended consequences are served upon them in a raw attempt to avoid the need to actually force those banks to file 8Ks and engage in what should be Reg-FD-mandated disclosure of the crap on their balance sheets.

The Truth is that The Fed pulled the pin on the next credit market grenade today and stuck it between its legs. It is now praying that it can hold the spoon tight and if EITHER long-bond yields rocketshot (that is, a "disorderly" unwind of people who are in them ensues) OR the spreads between them and agency paper blow further, the grenade will go off, destroying the basis in the swaps they engaged in today. In that circumstance either the primary dealers will be directly trashed or The Fed will have to throw them under the bus on purpose to avoid its own destruction.

WHEN (not if) these truths become apparent to everyone else, don't say you weren't warned.

Sapiens
03-12-08, 09:17 AM
On the other side of the spectrum, take a look at this:

http://www.trunews.com/financial.htm


Urgent Financial Warning from Rick Wiles….







... In 1998 the Holy Spirit instructed me to pay close attention to credit derivatives. Back then, I had never heard of derivatives. The Holy Spirit told me that when the derivatives start to collapse, it is a sure sign that the American economy will collapse shortly thereafter.

For 10 years I have kept the Holy Spirit’s admonition fresh in my heart and mind. I have diligently monitored the insane explosion in the credit derivatives markets. I have often wondered when the collapse will happen.

As a watchman of the Lord, I am issuing an immediate warning: This is it! I repeat: this is it.

The US banking system will crash very soon. The credit crisis is out of control. Decades of greediness, dishonesty, lying, and thievery are coming to an end. A major bank will close its doors in the near future. The collapse will be followed by numerous other bank failures. The shockwave will reverberate around the world. Many wealthy people will lose hundreds of billions of dollars in assets. You will witness something unseen since the 1929 Great Depression. God’s judgment on America’s sin and rebellion is entering a new level of intensity. In addition to bank failures, some major ministries and mega-churches will also collapse soon. They will reap a whirlwind of calamity for pursuing prosperity and purpose instead of the Kingdom of Jesus.

Take immediate precautionary measures! Do not hesitate. Withdraw your money from any financial institution that is heavily exposed to credit derivatives. Consider depositing your funds in locally-owned, prudently managed banks and credit unions that have little or no exposure to derivatives and/or subprime mortgages.

Here is the list of the Top 25 US banks with exposure to credit derivatives. (PDF file) Scroll down to pages 21-25. http://www.occ.treas.gov/ftp/release/2007-137a.pdf

Withdraw as much cash as possible. Consider all possibilities: gold, silver, offshore deposits in other currencies. Purchase food and necessities immediately. Batten down the hatches and prepare to ride out the storm. Do not tell anybody about your emergency preparations! Recall the images of New Orleans during Hurricane Katrina.

Most of all: Remain calm. If your faith and confidence is in the Lord Jesus Christ, you have nothing to fear. The Central Bank of Heaven is secure. There will be no “bank runs” in Heaven. If you have been faithfully depositing funds in Heaven by giving to soul-winning ministries and the care of orphans and the poor, God himself will see to it that you are cared for during this economic storm. If you haven’t been depositing your money into the Kingdom, there’s very little time left before you suddenly lose your earthly treasure. How long will you cling to your temporal wealth and ignore the Holy Spirit’s instruction to give substantial sums of money to the preaching of the Kingdom?

I repeat my urgent warning: This is it. Take immediate precautionary measures to cope with the financial tsunami that will crash upon America’s shores. Stay calm. Repent of your sins. Trust Jesus.


“Believe in the Lord your God, shall ye be established; believe His Prophets, so shall ye prosper.” (2 Chronicles 20:20)



Audio: March 12, 1933… FDR’s speech announcing closing of all banks http://www.npr.org/templates/story/story.php?storyId=88019870&ft=1&f=1003

YouTube video: CNN commentators discuss possibility of another Great Depression
http://www.youtube.com/watch?v=dR7h8NBQU3E

YouTube: Video and pictures of the first Great Depression
http://www.youtube.com/watch?v=Ig5Qg-_jvaw

jk
03-12-08, 09:26 AM
it must be easy to make money with the holy spirit as your investment advisor.:rolleyes:

bill
03-12-08, 09:36 AM
Look at this scenario by Karl:

The Fed did what it always does - try to bail out the banks.

Who's in trouble?

Who the hell knows - they won't tell us!


I asked this question several times, “what banks”.

qwerty
03-12-08, 03:01 PM
I'm sure there's an arcane technical reason for the existence of credit default swaps on treasuries, but at first take I have to wonder.

If the US Government defaults, what sort of state is the seller of the credit protection going to be in? LOL

jimmygu3
03-12-08, 03:13 PM
Like I said, think. Under what circumstances would it benefit you to hold 0% 30 year T-bonds...

I know the answer, do you?

T-bonds at very low rates would be attractive if you were expecting long-term dollar price deflation. However I see no advantage to holding 0% T-bonds vs holding cash. In the event of rising rates and/or inflation, cash could be invested or spent. 0% bonds would fall like a rock.

But then again, I am not a shadowy, Yoda-like know it all.... :rolleyes:

Sapiens
03-12-08, 03:56 PM
But then again, I am not a shadowy, Yoda-like know it all.... :rolleyes:


Ah, too bad for you...

randallriggs
03-13-08, 07:01 AM
The bond yield is the left part of the chart, not the right. That's CPI-U.

Slimprofits
03-13-08, 01:09 PM
I'm going to watch the video of the hearing that took place yesterday later on, but here is a summary from the Boston Globe (http://www.boston.com/business/personalfinance/articles/2008/03/13/house_panel_says_muni_bonds_rated_unfairly/):


State officials contend the three biggest ratings agencies - Standard & Poor's, Moody's Investors Service, and Fitch Ratings - have cost taxpayers billions in added interest and bond insurance charges by holding municipalities to higher standards than corporations.

If the same rating scale were used for both corporate and municipal markets, most muni bonds would have a high enough credit rating that insurance wouldn't be necessary, Frank said.

The hearing was prompted by a campaign led by California Treasurer Bill Lockyer to change the way bonds are rated.

In a March 4 letter to Moody's (http://boston.stockgroup.com/sn_overview.asp?symbol=MCO), S&P, and Fitch, signed by 11 state treasurers and four other municipal and state issuers, Lockyer claimed that municipalities "have paid enormous sums to buy bond insurance."

They have "stolen billions, if not trillions, of taxpayers dollars from their pockets," said Representative Michael Capuano, Democrat from Massachusetts.

Part of the problem flows from the agencies' dual credit-rating system that appears to have saddled state issuers of municipal bonds with a high-risk rating.

Municipal bonds, which have traditionally been considered one of the safest investments, are more likely to receive a rating lower than triple-A, unlike corporate bonds, Lockyer said in prepared testimony.

One solution offered is a unified rating system for how municipal and corporate obligations are rated.

For its part, the Securities and Exchange Commission plans to allow local governments, public agencies, and other bond issuers to buy back their own debt as a way to ease market distress.

Slimprofits
03-13-08, 01:10 PM
The bond yield is the left part of the chart, not the right. That's CPI-U.

Thank you. Sometimes, I'm an idiot.

Slimprofits
03-13-08, 01:53 PM
Record drop in demand for muni bond insurance threatens monolines (http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080313/REG/406299905/1036)


State and local governments bought protection on 26% of the $40.8 billion in bonds they sold in January and February, down from 53% a year earlier, according to data compiled by Bloomberg. At that rate, 2008 will mark the steepest- ever annual decrease, wiping out almost two decades of growth, Thomson Financial data show.

Barney Frank gives muni raters a month to change standards (http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080313/REG/441164120/1036)


“I don’t think this is a situation we can tolerate,” Mr. Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, said at a hearing in Washington on municipal ratings, bond insurance and rising debt costs for local governments. “If this doesn’t get corrected, we will have to intervene.”

[..]

Moody’s plans to allow municipal issuers to request a corporate-equivalent rating for their tax-exempt bonds starting in May, Mr. Levenstein said. The so-called global scale ratings currently are only available on taxable bonds, and for an extra fee. Mr. Frank today called that extra cost “abusive.”

“I find that unacceptable to charge them double,” Mr. Frank said. “We will legislate against that.”

Munis to refinance $23 billion of auction-rate debt in next 30 days (http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080310/REG/256060607/1036)


States, cities and agencies are pulling out of the $330 billion auction-rate market, where costs almost doubled since January, according to the Securities Industry and Financial Markets Association. Municipal borrowers plan to sell about $22.5 billion of fixed-rate, tax-exempt bonds in the next 30 days, the most in five months, according to data compiled by Bloomberg.

“We’ve never seen this type of dislocation,” said Paul Brennan, who helps manage about $12 billion of bond funds at Nuveen Asset Management in Chicago. “We have a potential to see a tremendous amount of issuance,” he said. “We’re going to see a tidal wave.”

A buddy of mine at a Hedge fun in NYC, says that they are making a killing on muni bonds.

FRED
03-13-08, 10:24 PM
Fred, I have to ask for assistance with this. The chart says that 10 yr bond yield is around 1.8% right?

Are you referring to the 10 year treasury constant maturity rate (http://research.stlouisfed.org/fred2/data/GS10.txt)?

Yield is often expressed as Constant Maturity Rate.

FRED
03-13-08, 10:49 PM
Sure, why not.

Look at this scenario by Karl:

This guy Buzzsaw97 over at tickerforum has interesting things to say about Karl... (http://www.tickerforum.org/cgi-ticker/akcs-www?post=28171&page=7)

You guys trash EJ, then he comes on here to defend himself, then you just give him **** because he doesn't day trade with his home equity the way you do. You would rather take "DOW 4000" Kunstler's side of things. Very well, I am going to take itulip's advice and opt for a graceful exit. Wisdom is vindicated by all her children, but so far I have only seen the loudmouth fool and his folly on this forum. Pearls before swine. Gentlemen, I bid you good night and good luck.

Sapiens
03-14-08, 12:12 AM
This guy Buzzsaw97 over at tickerforum has interesting things to say about Karl... (http://www.tickerforum.org/cgi-ticker/akcs-www?post=28171&page=7)

You guys trash EJ, then he comes on here to defend himself, then you just give him **** because he doesn't day trade with his home equity the way you do. You would rather take "DOW 4000" Kunstler's side of things. Very well, I am going to take itulip's advice and opt for a graceful exit. Wisdom is vindicated by all her children, but so far I have only seen the loudmouth fool and his folly on this forum. Pearls before swine. Gentlemen, I bid you good night and good luck.

LOL, just read that thread. I don't know why do you waste your time. One fallacy in the inflation/deflation debate is not taking into account that in a crisis Gold/Silver become money in and of it selves due to their inherent qualities. Meaning that a Note priced at X bonars may cost less Y Au ozt regarless of the bonar/Au ratio.

Whatever.

Contemptuous
03-14-08, 01:37 AM
Fred -

I spent a little time looking over the posts on the Tickerforum link you provided. Was not familiar with this community so read through it with a little care. The difference in the caliber of poster (genuine intellectual sincerity and curiosity) between there and here is *notable*.

Tickerforum's members seem decidedly "low-rent" denizens compared to the contributors here - and a bit lost too - wandering in the desert looking for the bottom line. I am sparing in my "iTulip kudos" in order to not devalue that currency. But kudos must once again go to iTulip and it's contributors for leaving shrill blogs like Tickerforum behind.

I do however continue to appreciate Mr. Kunstler's critiques and observations. He may be an ultra-doomer and a bit "over the top" with the Calvinistic "retribution for humanity's follies" thingy, but I find a formidable streak of pithy observations within his commentary. However the venue, Tickerforum, left me wholly underwhelmed.

I grinned at this iTulip post there (seems to peg the clarity of their net contributions down with little sentimentality):

__________________________________________________ ____________

Itulip (http://www.tickerforum.org/cgi-ticker/akcs-www?user=itulip) [ posting at TICKERFORUM ]
Posts: 88
Incept: 2008-01-06
New Hampshire

Does Wage Inflation Cause Price Inflation? -- FEDERAL RESERVE BANK OF CLEVELAND

http://www.clevelandfed.org/Research/Pol.... (http://www.clevelandfed.org/Research/PolicyDis/pd1.PDF)

"Conclusion: There is little systematic evidence that wages (either conventionally measured by compensation or adjusted through productivity and converted to unit labor costs) are helpful for predicting inflation. In fact, there is more evidence that inflation helps predict wages. The current emphasis on using changes in wage rates to forecast short-term inflation pressure would therefore appear to be unwarranted. The policy conclusion to be drawn is that inflation can appear regardless of recent wage trends."

But that's just the silly Federal Reserve talking after doing actual professional research, not some asshat on the Internet "who knows a lot about economics" talking out his ass to the applause of deflationista dittoheads.

__________________________________________________ ____________

FRED WROTE:


This guy Buzzsaw97 over at tickerforum has interesting things to say about Karl... (http://www.tickerforum.org/cgi-ticker/akcs-www?post=28171&page=7) ... You guys trash EJ, then he comes on here to defend himself, then you just give him **** because he doesn't day trade with his home equity the way you do. You would rather take "DOW 4000" Kunstler's side of things. Very well, I am going to take itulip's advice and opt for a graceful exit. Wisdom is vindicated by all her children, but so far I have only seen the loudmouth fool and his folly on this forum. Pearls before swine. Gentlemen, I bid you good night and good luck.

GRG55
03-14-08, 05:27 AM
This guy Buzzsaw97 over at tickerforum has interesting things to say about Karl... (http://www.tickerforum.org/cgi-ticker/akcs-www?post=28171&page=7)
You guys trash EJ, then he comes on here to defend himself, then you just give him **** because he doesn't day trade with his home equity the way you do. You would rather take "DOW 4000" Kunstler's side of things. Very well, I am going to take itulip's advice and opt for a graceful exit. Wisdom is vindicated by all her children, but so far I have only seen the loudmouth fool and his folly on this forum. Pearls before swine. Gentlemen, I bid you good night and good luck.

Satisfying voyeuristic inclinations by surfing other financial sites while the Boss is away, FRED? :p :D


Meanwhile back at The [Great] American Bond Crisis:


Gross, SEC Fail to Break Auction-Rate Bond Paralysis



By Jeremy R. Cooke


March 14 (Bloomberg) -- Billionaires Bill Gross (http://search.bloomberg.com/search?q=Bill+Gross&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) and Wilbur Ross (http://search.bloomberg.com/search?q=Wilbur%0ARoss&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) and the U.S. Securities and Exchange Commission failed to restore confidence in the $330 billion auction-rate bond market, as borrowing costs for states and municipalities rose.



Auctions for borrowers from San Francisco to Houston were unsuccessful even after Gross, who runs the world's biggest bond fund, and Ross, who invests in distressed companies, said they were buying municipal debt...



...More than 67 percent of auctions failed this week, based on data compiled by Bloomberg...



...``I don't believe there's anyone in the auction-rate market today who if they had a choice to get financing somewhere else wouldn't be trying to get it,'' said Charles Grande (http://search.bloomberg.com/search?q=Charles+Grande&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), who manages $13 billion of municipal securities...



...Investors and securities firms such as Zurich-based UBS AG and New York-based Goldman Sachs Group Inc. and JPMorgan Chase & Co. abandoned the market as losses tied to subprime mortgages and related securities threatened bond insurers' AAA ratings...



...Municipal bonds had their worst month in 21 years in February, losing 4.6 percent, Lehman Brothers Holdings Inc. said. Top-rated, 30-year tax-exempt bonds yielded a record 59 basis points more than taxable Treasuries...



...``Things were getting more dire,'' said Elizabeth Hruby, Cleveland's debt manager. ``With variable-rate debt, you've got to be able to weather the storms, but this is fairly extreme.''


http://www.bloomberg.com/apps/news?pid=20601087&sid=a_4MBPemiAJw&refer=home

bill
03-14-08, 09:09 AM
Satisfying voyeuristic inclinations by surfing other sites while the Boss is away, FRED? :p :D

What happen to EJ and the freds?
EJ must be in <ST1:pAsia</ST1:p setting up non dollar accounts?
Thanks for all the post GRG55 keeps me reading

EJ
03-14-08, 09:44 AM
What happen to EJ and the freds?
EJ must be in <st1>:pAsia</st1>:p setting up non dollar accounts?
Thanks for all the post GRG55 keeps me reading

Hello, Bill.

Just returned from a week in NYC expanding interviews for the Doomer Hedgies piece and meeting with publishers. Chances are I'm going to write a book. Unfortunately, I've been instructed to not tell readers here what the book is about. While I don't mind other sites on the Internet borrowing iTulip ideas publishers take a distinctly different view so I can tell you little until I begin to reveal sections of the book in the subscription area as I write it.

The local NYC economy is slowing with stunning speed.

Popular NYC joke there offers a clue:

Q: What's the new status symbol on Wall Street?
A: A job.

Eric

jimmygu3
03-14-08, 11:47 AM
The difference in the caliber of poster (genuine intellectual sincerity and curiosity) between there and here is *notable*.

Tickerforum's members seem decidedly "low-rent" denizens compared to the contributors here - and a bit lost too - wandering in the desert looking for the bottom line. I am sparing in my "iTulip kudos" in order to not devalue that currency. But kudos must once again go to iTulip and it's contributors for leaving shrill blogs like Tickerforum behind.

Right on! I think the intellectual bar here is set quite high. It all comes from the top: EJ leading by example with his humble nature, razor sharp analysis, objective respect for the facts and biting intolerance for BS. The earliest members like jk, Finster, SeanO and others started a level of discourse that has attracted many more like minds, not simply more uniform opinions.

I just realized that yesterday was my iTulip 'anniversary'. It has been an incredible year of learning and debating, and I thank the entire iTulip community for that. I have honestly found that my real-life interactions have escalated to a higher intellectual level due to the caliber of minds I read and spar with here. Thanks!

Jimmy

bart
03-14-08, 01:05 PM
I asked this question several times, “what banks”.

For what it's worth, "JesseL" at http://www.geocities.com/arthurcutten/jesse.html posted this last year:

http://www.nowandfutures.com/d2/level3toequity-jesse.png

bart
03-14-08, 01:06 PM
Not only is that what they are doing, that is exactly what they said they would do.

Ka-Poom is a Rhyme not a Repeat of History - Janszen - Sept. 2006 (http://alwayson.goingon.com/permalink/post/5192)

http://www.nowandfutures.com/grins/timgrunt.wav of agreement.