Posted on 03/22/2011 6:51:34 AM PDT by SeekAndFind
The wisest and most successful bond investor of all time, Bill Gross, has dumped his bond fund’s $150 billion investment in U.S. bonds. One should not ignore the importance of this event. The largest bond fund in America no longer believes that Treasury bonds are a good investment. Moreover, Gross is not alone. Blackrock, the world’s largest money manager, is now underweighting Treasuries overall and reducing the duration of the bonds it still holds. That means they are dumping their long-term bonds, which are the most sensitive to interest-rate changes, in favor of Treasury instruments that mature in a year or less. Other bond funds, such as the $20 billion Loomis Sayles funds, are also forgoing Treasuries in favor of high-yield corporate bonds. Virtually everywhere you look, from great investors such as Warren Buffett to insurance companies such as Allstate, everyone is dumping their long-term U.S. debt and either buying debt that matures in less than a year or moving their money elsewhere.
So who is still buying U.S. debt? According to Bill Gross, the “old reliables” — China, Japan, and OPEC — are still in the market for 30 percent of all new debt. The rest, however, is being purchased by the Federal Reserve. There is no one in else in the market. For the first time ever, Americans are refusing to purchase their own country’s debt.
Gross estimates that the “old reliables” are still good for $500 billion a year in purchases, and will be for some time in the future. This is pretty much the amount they’ve had to buy in the past to rebalance capital flows distorted by the U.S. trade deficit. Gross, however, may be wrong this time. Japan, needing to finance its reconstruction, is much likelier to be a net seller of U.S. debt, while China’s economy is slowing and actually ran a trade deficit in the last quarter. That leaves only one buyer of consequence — the Federal Reserve.
Researchers at Gross’s firm, PIMCO, estimate that in the last quarter, the Fed purchased 70 percent of all new Treasury debt. This is a disaster in the making. By printing new money to buy debt, the Fed is both holding interest rates artificially low and flooding the world with dollars. Fed purchases have lowered rates to the point where there was no room for further decreases. With no more upside potential to holding debt, investors are fleeing on the assumption that the Fed will soon exit the market, causing rates to rise dramatically. Such a rate rise lowers the value of all current U.S. debt: Who will pay $1,000 for a bond paying 3 percent when she can get one paying 5 percent? Anyone who wants to sell a $1,000 bond they already own is therefore forced to lower the price if they wish to attract buyers. No one holding any of the almost $10 trillion in U.S. public debt is getting much sleep these days.
When the Fed’s $600 billion QE2 buying spree ends, there will not be enough buyers left to purchase the $1.4 trillion in debt the administration has built into this year’s budget, at least not at current interest rates. Gross believes interest rates have to rise approximately 1.5 percent (150 basis points) to attract sufficient buyers. This may be optimistic.
The Fed is not only looking to stop buying new debt, it also wants to get rid of the nearly $1.3 trillion currently on its balance sheet. Absorbing $1.4 trillion in new debt, rolling over maturing debt, and simultaneously purchasing debt the Fed bought during its quantitative-easing forays is a lot to ask of the market.
Moreover, there is a real risk that bondholders who see the value of their assets fall will stampede for the doors. There are already signs that the smart money is looking for just such an event. Short sellers — those betting on a bond sell-off — pumped over three-quarters of a billion dollars into short positions in just the last quarter. This compares with a negative flow of short funds in the same period last year. If the short sellers are right, and there is a stampede, all bets are off. The bond-market bubble that the Fed’s purchases created will explode, likely setting off a renewed financial crisis.
Come June, the Fed will be in a bind of its own making. If it stops pumping money into the system, interest rates will increase, and not just on Treasury bonds. Mortgage rates will rise and business credit will become more costly. The recovery could be strangled in its infancy. If it keeps on buying bonds, however, it risks never being able to wean the markets off the equivalent of monetary crack. Worse, the flood of dollars will continue to drive down the value of the dollar, raise commodity prices, and propel global inflation.
There are already signs that inflation, while still subdued in the United States, is looking to break out. It has begun wrecking havoc through many areas of the globe, for example providing the catalyst for much of the upheaval in the Middle East. And when it strikes here, the Fed will be out of options. It will have to turn off the money pumps, raise interest rates, and batten down the financial hatches. The resulting recession will be long and nasty.
It is time to face facts. Spending is so out of control that Treasuries are no longer a safe haven for investors. The markets are saturated with U.S. debt and increasingly unwilling to absorb more. There is only one way out of this mess — cut spending, fast and deep.
Given that the Congressional Budget Office last week stated that the administration’s budget would raise the debt by $2.3 trillion more than the White House Budget Office claims, these cuts are going to hurt. They will probably hurt a lot. That is the cost of fending off a true catastrophe.
— Jim Lacey is the professor of strategic studies at the Marine Corps War College and the author of the forthcoming book The First Clash. The views in this article are the author’s own and do not in any way represent the views or positions of the Department of Defense or any of its members.
Japan’s priorities sure changed since 9 days ago.
And as much as Qadaffi annoys the other arabs by his crazy drama queen behavior, we are not making friends among the arabs in OPEC by carpet bombing Qadaffi’s army, tribe, and family under the guise of enforcing a no-fly zone
You may be right. China has slacked off their $ holdings, Japan probably won’t be able to afford any more because of their disaster costs, and others, like India and EU will not have enough monetary strength to take up the slack. If the Fed becomes the only ‘buyer’ of T-bills then technically the auction has failed and we become just like Zimbabwe...............
-——They must see something...-———
Somewhere, perhaps several somewhere’s there are guys up in wonderfully decorated offices up high in a skyscraper with the same problem.
Every day their office is deluged with stacks and stacks of US$’s. If they don’t put it somewhere they can’t get in and out of the office. Not only that but even when they put it somewhere more and more keep coming.
It must be put somewhere safe. Where is the safest place for that mind boggling amount of $$$? The consensus seems to be that for the mega quantities of US $’s the only place is US Treasury bonds.
We can avoid inflation, pay off the debt, and pay for entitlements by simply backing the dollar with US oil, coal and natural gas reserves.
If t-bills were converted to anwar backed securities, the debt would be reduced dramatically.
Stock up on Spam, Mountain House, water and medicine.
It’s coming folks, and it ain’t going to be pretty.
When you see the Captain and First Mate furtively getting into the life rafts, you may want to consider how to get to the nearest landmass without benefit of the boat you are aboard.
Get the economy roaring again by scrapping the tax code entirely in favor of a flat tax or NRST. Cutting Capital Gains taxes to zero frees up TONS of investment capital that is currently sitting on the sidelines. Cutting the Corporate tax rate to zero will bring business flooding into the USA. Reduce regulation of business, like the ridiculous "Sox" regulation. Allow interstate competition between health insurance carriers to further reduce the cost of doing business. Announce an all out plan to open up all US domestic oil and gas reserves, plus the approval of 50 new thorium reactors, insuring reliable, stable, affordable energy supplies well into the 2040's. Lastly, a balanced budget amendment.
There are many other steps we could take, but those alone would go a long way towards bringing back a roaring economy which would result in massive positive cash flow to the gubmint. The key is to not let the congresscritters spend the new revenue on anything but debt.....
1) Hyperinflation
2) Inflation held constant at around 10-15%/annum
3) A deflationary depression
4) Default of the public debt
5) An executive order waiving all private debt
6) An act of Congress doing the same thing
7) Planetary thermonuclear war
” If t-bills were converted to anwar backed securities, the debt would be reduced dramatically. “
It’s probably caffiene deficiency, but I’m not following your argument —
It would seem, to my admittedly numbed mind, that if one were to convert unsecured T-Bills to secured instruments, the natural result would be to sell *more* of ‘em, which, by definition, increases the debt level.....
Time to go pour another cuppa..... ;)
I think that the message the estimable Mr. Noble is conveying, is that there are few, if any, *good* options or outcomes....
I’m afraid I must agree....
Nice list but I think the author of the article was looking for good solutions not likely outcomes of the sort you have correctly listed.
Sad to say.
No elected legislature anywhere in the world (and, in the US, including Congress and all 50 states) has reduced the public debt or eliminated any government office, bureau, program or function (without reassigning it elsewhere) since 1945.
If you think a bunch of idiots voting to choose "representatives" can accomplish this task, I think the burden of proof is on you to demonstrate that it is possible.
You forgot another solution...dump the current occupant of the White House.
You gotta flush Congress, too. 100% turnover. Leave no congresscritter standing. Congress is more culpable for this mess than all the Presidents, including Obama, combined......
I concur! :-)
The problem can be solved in several years. External debt is small in the scheme of things. Political leadership is the missing component. With leadership, people will vote for more than their pocketbook. There is a potential 2012 candidate that demonstrates that leadership.
If you think a bunch of idiots voting to choose “representatives” can accomplish this task, I think the burden of proof is on you to demonstrate that it is possible.
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Don’t get me wrong, I have very little hope that the politicians will sacrifice their careers and make the necessary cuts. My expectation is that they won’t and the American public will continue to sacrifice in order that we can keep a bunch of gutless politicians employed.
You are quite correct. Our Founders knew this day would arrive -- when our Republic is pushed to the verge of Collapse, or move into total Socialism.
The odds are near zero for our elective Representatives to do the right thing -- massively slash government and fire large numbers of parasites (i.e. govt bureaucrats) This needs to be done at all levels of government.
This most certainly will NOT happen. So this leaves only two likely options -- (1)total economic collapse (fast=currency collapse/ slow=descent into Socialist hell), or (2) another Revolution. The timing is the issue - six months, six years, 30 years. No one knows for sure. (1) is most likely.
And Herman Cain is his name!
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