Skip to comments.The Last Ponzi Game
Posted on 12/17/2011 12:49:59 PM PST by Razzz42
A heavy Treasury auction schedule with a big settlement on Thursday was enough to contribute to keeping stock prices (SPX) in check this week, but not to knock down Treasuries. Demand for US Government paper is so great it simply engulfs even heavier than expected levels of new supply. The massive capital flight out of Europe is now confined to the only game in town, the US Treasury market, the last great Ponzi game still operating.
This wont end well, but it wont end until it ends, and the technical signals suggest that it wont happen in the short run. Yields appear to be still headed lower, and thats bad news for stocks given the recent correlation between lower yields and lower stock prices. As Ive illustrated in the accompanying Fed Reports, there isnt enough liquidity to power both markets toward higher prices simultaneously. Its either one or the other. Eventually I expect a shortage of liquidity to negatively impact both markets, but were not there yet.
Withholding tax collections remain weak and the government continues to need to raise substantially more cash than the TBAC had estimated it would need. That means that the economy is significantly weaker than government forecasters had foreseen just 6 weeks ago when these estimates were issued. The clues were available in the data at that time and I correctly guessed that the auctions would begin to balloon in size. Normally this would be problematic for the markets, but not in the current environment.
At the same time, foreign central bank purchases of Treasures have fallen off a cliff. Again, that would normally be extremely problematic. But it just doesnt matter because panicked institutions fleeing Europe are like the Coneheads consuming mass quantities of all available US Treasury paper. In fact, the demand is overwhelming the massive supply. Tidal waves of panic capital flight have been flooding into the Treasury market in never before seen amounts, both in terms of the indirect bid and the bid by Primary Dealers, of whom 1/3 are European banks.
The panic buying has been concentrated in the 4 week bill, but there was also a jump in the bid for longer term paper, particularly the 10 year note (TNX) this week. The 4 week bills are where the real panic is. This is short term cash looking for a safe place to park. At the same time the increase in nervous buying is pushing out on the curve enough to continue to push yields down for a while longer. Its also pushing the dollar higher. The dollar (DXY) faces a critical test at 82.
Aside: In my neck of the woods in San Diego, price of gas continues to crash down for about the last 30 days. Now $3.41, inexpensive for here.
Got gas at Costco here in Oregon for $3.12....lowest it’s been in at least 2-3 years
I’m a bit weak on my bond knowledge - but if there is high demand for bonds then I assume the price goes up and therefore the rate of the bonds go down. I would hope that the govt is taking this opportunity to recall older bonds with higher interest rates and replacing them by selling new bonds at lower interest rates....but for some reason I doubt this is happening.
Yes, that is pretty much how it works price wise. If I remember right, the government took long term ex. 10yr bonds and converted them to short term ex. 2yr then converted those recently back to 10yr., each time getting lower interest to pay out. Since everything is a big secret, it is hard to tell what is really going on or what they have really done but it’s all mute like rearranging the deck chairs on the Titanic. Just kicking the debt can down the road past the next elections because there is no way possible to ever pay down the outstanding debt(s) coming due in the near future.
With bonds, the higher the demand, the higher the price, and the lower the yield.
One of the problems we are facing is that Clinton rolled up the debt...financing short term expenses with long term debt. It’s like taking a refi on your home, moving from a ten year mortgage back to a thirty year. It increases your cash flow, which is ok. But, they continued to spend and finance through intermediate bonds as well.
Well, it worked well in the short term....but now all of the little chickies are coming home to roost.
If you are remembering the days of Perot, he warned about exactly this.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.