Posted on 04/08/2010 11:15:18 AM PDT by Cheap_Hessian
In an interview with Bloomberg's Tom Keene, Richard Clarida of PIMCO has pretty much sealed the fate of Greece: "I don’t think that [7%] would be an attractive enough yield. Greece is sort of like the Titanic. Eighteen things went wrong, and when they go wrong at once it’s problematic." Of course, with this kind of rhetoric the 10 Year will be trading at 8% tomorrow, followed up by Clarida saying not even 9% would be attractive, and so forth. When you have the world's largest bond fund say it is not touching Greece with a ten foot pole essentially no matter what the yield, you get an idea of why Greek 1 Year CDS is trading 600/700. In the meantime, stocks continue to be blissfully unaware of what the surge in the dollar will mean to Obama's export-led US manufacturing utopia. Oh well, at least we can continue to export "advanced" Wall Street services to Greece (and most other European peripheral countries) post default, courtesy of every domestic restructuring firm which is currently brushing up the "sovereign reorganization" tombstone pages in its pitchbooks.
(Excerpt) Read more at zerohedge.com ...
Since the smash itself in the 3rd quarter of 2008, the Fed did add about $400 billion to its treasury holdings, which simply rebought the bonds it had sold into the open market during the course of 2008 as it extending loans to the banking system. And it hasn't added anything to its treasury holdings in the last six months.
Moreover, its entire balance sheet is less than 6% larger than it was on November 20, 2008, about a year and a half ago. It has bought gobs of mortgage securities over that period but those purchases were funded by the repayments flowing back to it of all the emergency credits it extended during the crash itself, in the short span from mid September to mid Novemember of 2008.
The Fed's actions in easing and the massive fiscal swing (taxes $400 billion lower per year, benefit payments that much higher, plus additional deficit spending etc) stopped the drop in personal and corporate incomes in about six months, and both incomes and consumption expenditure in the private economy have recovered to pre crash levels as a direct result. And an entirely predictable, and predicted, one. By me among others, here among other places.
The expansion is now self sustaining and there is no prospect whatever of renewed recession. Deleveraging will however continue for some time, unemployment will remain at elevated levels, dropping gradually, etc. All the perfectly ordinary consequences of the combined business and financial cycles at this stage.
Who is loaning money to the government? Every financial institution on the planet. They are all simultaneously trying to reduce their credit risk and they sure as hell don't want to lend it to homebuyers or to Greece...
Within the context of US bonds, I tend to agree with you, although I would add .5% to your numbers. I think the comment, however, was made in the context of Greece gov’t bonds, where rates are already over 7.5%. PIMCO’s advisor is saying he won’t buy them until rates go higher.
My comment was instead directed at the endless refrain that US and global rates "must" soar, based on nothing more than investors not liking them, hating the fact that government credit is as sound as it actually is, and wishing rates were higher and governments hated.
Which remains ideological nonsense...
The Fed has been monetizing the debt like mad, we’re in danger of heading into a Japanese style liquidity trap, and a “jobless recovery” is a bullshit recovery.
I got it. I agree with your assessment. There are other market forces, such as people bailing out of European debt and looking at treasuries. Also, investment cash is a commodity, there is plenty of it right now, so there is no need to pay a large interest rate.
total Fed balance sheet, latest, April 7, 2010 - $2289.8 billion
total Fed balance sheet right after the crash, November 20, 2008 - $2178.9 billion
net change $110.9 billion or about 5%
The Fed has not been monetizing the federal debt. It greatly expanded its total sheet in the period September 2008 to November 2008 by extending over $1.1 trillion in loans to the private banking system, and since April of 2009, a year ago now, it has been repaid practically all of that emergency lending. It has parked all the fund flowing back to it, net, into a new position in agency mortgage backed securities, emphatically not treasuries.
The Fed has not financed the US treasury even on an emergency basis. The US treasury did not need it; it's credit has been outstanding throughout and still is. The Fed did finance the private banking system on an emergency basis, to the tune of $1 trillion, and it has already been repaid that emergency lending.
In the meantime, Fannie Mae and Freddie Mac went into receivorship, and the Fed has effectively taken on much of the new mortgage issuance they have created over the last year (only), in the ordinary course of their business. It has not expanded the money supply in doing so. It has merely prevented the huge repayment of its emergency loans, over the last year, from cutting the money supply in half.
Having a functioning banking system undoubtedly helps the US treasury place its net new debts compared to not having a functioning banking system. It also helps that the US air force has not nuked lower Manhattan. But the private financial system, US households, and international investors have financed all of the US treasury's net debt issuance on their own, and they own it.
The total net worth of the US household sector as of the latest available reports, which runs through year end 2009 and was released March 11, stands at $54.176 trillion. That includes $540 billion more in direct treasury holdings than at the end of 2007. It is also $5.65 trillion higher than the cycle low a year ago, though still $10.3 trillion below the cycle peak around October 2007.
Movements in the total asset value of the US household sector dwarf everything going on on the money side alone, or fiscal operations, or net trade and foreign investment. It's the swing in the financial cycle, in other words, that drives all of it, not the other way around. And right now, the very rich US private sector and the very large world financial sector are extremely risk averse, and are reducing their loans to riskier borrowers, and running up their loans to governments instead.
The reason for this is obvious. It wasn't the US treasury that stiffed bankers for $3 trillion in dud loans over the last 3 years. It was deadbeats on mainstreet, and overleveraged and thereby failing private companies on Wall Street. The treasury paid on the nail and its credit is sky high. You do not have to like government or think it should have a large role in our economy or our markets to notice this.
The plain fact is, it does and markets know it and they prefer not to get taken to the cleaners by private sector deadbeats. And your ideological morality tales about how everyone in the private sector is a virtuous yeoman with a heart of gold or an enterprising clever businessman, while everyone in government is a thief and a rogue, do not cut it, when private deadbeats default of $3 trillion and walk away, while the government not only pays its own debts on the nail but picks up many of theirs as well.
The US treasury's credit is in no danger from your ideological hatreds, or anything else for that matter. But your contact with financial reality is another story...
Xactly...
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