4 Week T-Bill = 0.000%
By Barry Ritholtz - December 9th, 2008, 1:23PM
The results from the just reported 4 week bill auction reveals a yield of 0.000% and that is not a misprint. The auction last week yielded .04%. Year end parking of money in a safe place is likely the main focus on the part of buyers rather than any return on that money.
~~~
Why would you buy this over cash?
Because you think its going higher — and the yield is going negative.
Its the greater fool trade . . . .
December 9th, 2008 at 1:31 pm
Barry, I see a major disconnect…people are willing to take negative real return to get safety…yet Dow is down 150 and put/call for today is at .75??? Either the put/call is a misprint (I see no eveidence for this), or stock investors are WAAAAAY to complacent versus bond investors. I’ll bet on bond investors every time…this could explode any time.
December 9th, 2008 at 1:37 pm
Steve, are you saying the bond crowd is more fearful than the stock crowd? But isn’t this just saying they are seeking less risk – which is always true? Or am I misreading you entirely.
December 9th, 2008 at 1:39 pm
Steve Barry @ 1:31
Other divergences: USD/JPY versus SPX, and crude oil versus SPX
December 9th, 2008 at 1:46 pm
@Gregh:
I’m saying the bond market is at all-time high risk averse levels…not by what anybody is saying, but what they are doing. Conversely, stock market 10 day put/call is at .88, yearly lows after a low volume rally, and today alone .75 is an amazing complacent print with the Dow down 160. It makes no sense. The stock market or bond market has it VERY wrong…I’ll bet the stock market has it wrong anytime.
December 9th, 2008 at 1:50 pm
Not to worry. Bloomberg says the only reason we aren’t buying cars is that our “confidence has been shaken”. So it must be the bond market that has it wrong
December 9th, 2008 at 1:51 pm
Can someone also tell me why, with rate collapsing, muni funds are tanking everyday?
December 9th, 2008 at 1:52 pm
could just be the bottom forming, steve. doesn’t seem like a disconnect when viewed from that angle.
December 9th, 2008 at 1:54 pm
Muni’s default, Treasuries don’t?
December 9th, 2008 at 1:55 pm
It is quite simple, really. Given that long-term real stock market returns for this post-2000 era are around zero, and the risk premium certainly cannot be zero, then the risk-free rate must be negative in real terms.
December 9th, 2008 at 1:55 pm
@rww:
muni prices are pricing some severe defaults, no? when was our last municipal default? 1994?
appears to me to be people are scared and averting fixed income risk at all costs.
December 9th, 2008 at 1:55 pm
And this just in… ( MINUS 0.01%!!!!! )Treasuries rose, pushing yields on the three-month bill to minus 0.01 percent, as U.S. stocks declined amid concern that the recession will deepen.
December 9th, 2008 at 1:56 pm
Agreed that there is a large disconnect in the short and medium term views of the bond and equity markets but there are a lot of cross currents pulling in different directions. Based on the fact that bonds yield zero and (formerly) quality equities yield 4%+, you would think that the equities would be significantly higher at this point (maybe 1,000 – 1,100 range). My sense is that the smart money truly is on the sidelines for the most part and not chasing any yield and the only thing holding up the markets are long only institutional and bottom callers.
Def’n setting up for new lows below 741 in the coming weeks.
December 9th, 2008 at 1:57 pm
yeah, these triple tax free muni funds are safe
http://finance.yahoo.com/echarts?s=RMUBX#chart5:symbol=rmubx;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
December 9th, 2008 at 1:59 pm
The “governator” wouldn’t default, would he?
December 9th, 2008 at 2:09 pm
the vix is a perfect hindsight indicator, but at least for today, let’s see if it can clear 60… then i imagine we’d see another equity selling spree…
December 9th, 2008 at 2:11 pm
Short Man,
no kidding re: Stox, the Font of the Perpetual Bid, Floweth, still..
SB,
re: munis, we’re going to see serious financial problems throughout that land..
December 9th, 2008 at 2:15 pm
Groundhog Day. Stuck in a predictable trading range. Until we break out either way, I imagine this cycle will repeat itself over and over again. For anyone on the right side of the wave (which I admittedly have not always been), it’s a great trading environment.
December 9th, 2008 at 2:16 pm
It seems clear that the fed is buying treasuries heavily, up and down the entire curve. Is the fed the elephant here? Isn’t this another policy tool to incentivize risk and deincentivize a “risk free” return?
Fine, you guys want risk free? Here’s 0.000%, bitches. Call me Mr. Matsushita.
December 9th, 2008 at 2:16 pm
@Mann: I’m out of sync and it stinks. Steve Barry, I greatly admire your discipline
December 9th, 2008 at 2:17 pm
Parking… or deflation expectations. The notion that there is a zero bound is incorrect; in a deflationary environment a zero return is a net positive.
December 9th, 2008 at 2:20 pm
@Steve Barry:
I love your posts and you are the expert, while I am just a hobbiest at investing…but you and I both know that you can outthink the market…frankly, if I had done what you did with QID, I’d have sold at least part of it, and played with the house’s money….
Love a guy who understands why he is doing what he is doing, though. There are very few people around now who understand delayed gratification, and your postponing your payday has been very interesting to watch…
The very best of luck..
December 9th, 2008 at 2:23 pm
I smell a non-linear event coming to equities
December 9th, 2008 at 2:25 pm
@Steve Barry: I’ve gotten some of your conviction regarding SRS and am sticking with it until I see conditions change to warrant a change in my approach.
December 9th, 2008 at 2:26 pm
On a related note, can someone explain to me what the advantage of buying a 0% return treasury is, over holding cash? The only possible advantage I can think of is that you could subsequently sell it to a higher bidder. Talk about a pure paper bubble eh?
What is the fed’s game here — what purpose does a treasury bubble serve?
Transfer wealth to banks in an unofficial way?
blankReginald
December 9th, 2008 at 2:28 pm
Yeah — you think its going higher and the yield is going negative.
Its the greater fool trade . . . .
December 9th, 2008 at 2:28 pm
Bruce N,
Thanks…as you may imagine, my views have formed over the last 15 years…a wild ride. As with most current bears, I took my lumps from 2006-2007. I am still angry about it and no degree of market gyration can shake me. I’ve been home sick for a few days, so I noticed this amazing disconnect today. Tomorrow, I won’t even be watching the market during the day.
December 9th, 2008 at 2:29 pm
wally:
“in a deflationary environment a zero return is a net positive”
—
Right but cash is already a zero return. AH… I think I’ve answered by own question… where you going to keep that cash over $250k — a bank? Treasuries guarantee repayment. Gotchya.
December 9th, 2008 at 2:31 pm
BlankReg, you are making excellent points and i appreciate the way you answer your own questions : )
to tell you the truth, i’d rather the spx fill the gap at 880 today, and get it over with. of course, that’s the optimistic scenario…
December 9th, 2008 at 2:31 pm
Steve Barry:
I’ve got some questions about volume and Put/Call ratio analysis that you’re looking at.
The obvious observation is that hundreds of billions, if not Trillions, of dollars have flooded out of equities, commodities, corporate/muni bonds and into U.S. bonds/notes. I get the sense that big hedge funds have just completely exited the scene until the end of the year. So, in that kind of scenario, do you think things like volume indicators and put/call ratios are going to mean much? If the “market” is simply void of large participants/money, then won’t that have an affect on traditional metrics? I don’t know the answer. But, I would suggest that the average large investor is underinvested in stocks/commodities and WAY overinvested in U.S. bonds/Cash. I think that’s the scenario that will drive equities higher over the next several weeks. As you know…markets follow the path of greatest pain for most investors.
In the short run, there’s a little intra-day head & shoulders activated on the SP500 that targets 870. The 50% retrace comes in at 868. I’m expecting some good support at 868-870. I’m flat right now but will buy in that zone.
Regards,
AT
December 9th, 2008 at 2:36 pm
Here’s my analogy:
Bondholders are deepening their bunkers and stocking up on rations as they prepare for the nuclear armageddon while stockholders are applying suntan lotion and speculating what superpowers they may obtain from the high dose radiation.
My two cent prediction is that if we are to get another cliff drop before year-end it will be by mid-week next week prior to options expiration (with resulting partial bounce on Friday).
December 9th, 2008 at 2:37 pm
AT, i’d even bet the buying comes in before 880, but we’ll see. and then, there is tomorrow. have you heard about that crazy mike bolser saying the IMF will be dumping gold on are around tomorrow? I gather that prechter is quite into this theory… they also say bolser is short gold…
December 9th, 2008 at 2:37 pm
Karen, thanks, I like to think out loud (in type).
Looks like you might get your 880 test
December 9th, 2008 at 2:38 pm
AT:
The only thing I am 100% sure of is that the level of debt to GDP cannot be sustained at current levels and its correction to normalcy will be excruciatingly painful. I’m pretty sure hedge funds are in dire straits, as they are too feeble to even short the market now…that’s why short interest levels are so low historically. A better time to be short has never existed in the history of markets, if you are willing to ride out bear market rallies. I sometimes will quote put/calls to give people good entry points…but I am not trading myself.
December 9th, 2008 at 2:40 pm
looks like “everyone” is using the same numbers… 887 minimum today, easy 880 possible for a gapfill, or undercut to 870…
December 9th, 2008 at 2:40 pm
It would seem that with FF trading at zero and short-tern treauries at zero that the only conclusion is that deflation is not the risk going forward – it is already here – and much faster than most thought possible.
December 9th, 2008 at 2:42 pm
oh, and I definitely side with AT on this, “I get the sense that big hedge funds have just completely exited the scene until the end of the year.”
good citadel article at 1440wallstreet.
http://www.1440wallstreet.com/index.php/site/comments/ken_griffin_lightens_up/
December 9th, 2008 at 2:42 pm
@karen.
I try to not follow the “news” too closely as it interferes with the technical view. I watch CNBC merely for entertainment and “sentiment.”
In re: Gold. I don’t like gold. I think if commodities and equities take off Gold will be sort of a laggard. The wave count and picture on gold looks MUCH differently than any other market. It’s definitely it’s own animal this point.
December 9th, 2008 at 2:44 pm
Buy gold miners when the deflation runs its course…they won’t be able to get the gold out fast enough and the cost to do so will be very low.
December 9th, 2008 at 2:45 pm
Steve Barry:
Isnt the fed just going to monitize the shit out of everything? Inflate out of all the bad debts, bad paper, noncollectable contracts, spaghetti-string counterparty obligations, collapsing assets….. wipe it all down to $0.50 on the dollar and force everyone to begin taking risk again.
December 9th, 2008 at 2:47 pm
I’m curious whether anyone remains in the inflation camp? I’ve just started eyeballing inverse gov bond funds TBT or maybe RYJUX/RRPIX since I’m leary of ultra funds. At some point all these people parking their cash are going to want out of their T-Bills either because they think they’ll make money on it or are freaking out and heading for yen or Swiss francs or gold or guns n’ ammo. Or is it just way too early deflation is going to start to get really crazy.
December 9th, 2008 at 2:50 pm
NiNM, not that it counts for much but i’m firmly in the inflation camp. you want to know where the money has flowed at the moment? in bonds, obviously. it’ll come out soon… after january 1, i guess.
December 9th, 2008 at 2:51 pm
Blankreg:
I think the debt deflation will be a black hole sucking all their liquidity pumping right down the drain. “Pushing on a string” they call it.
December 9th, 2008 at 2:54 pm
My money (literally) is on the central banks succeeding in reducing the value of cash to such an extent — incentivizing risk — that the culture of risk taking will survive. The danger of deflation (or… spectre of deflation, if you will) is that it is a symptom of a culture of hording and risk aversion.
…right?
blankReginald
December 9th, 2008 at 2:54 pm
“I see a major disconnect…people are willing to take negative real return to get safety”
@ Steve Barry,
What do you conclude is the inflation rate at the moment? If it is less than zero, then real return is still positive.
Mish Shedlock had an interesting post the other day substituting Case-Shiller figures for Owner’s Equivalent Rent and it showed inflation already around 1% – and the information used was not the most current.
If this weren’t a true deflation, I would expect the money would be pouring into real, tangible assets such as hard commodities and oil.
December 9th, 2008 at 2:56 pm
SB: Yeah, I gotchya. I do not have a good concept of the magnitude of the debt-hole. I guess I’m thinking it’s no more than several trillion. How can I get a better understanding of it?
December 9th, 2008 at 2:57 pm
Steve Barry Says:
December 9th, 2008 at 2:23 pm
I smell a non-linear event coming to equities
SB,
as you know, “non-linearity is the new volatility”
and: “The only thing I am 100% sure of is that the level of debt to GDP cannot be sustained at current levels and its correction to normalcy will be excruciatingly painful.”
forget about worrying over ‘toes in the water’, we’ve Fractal Arms that’ll be hitting the Floor..
and, SB, I, very much, appreciate the lucidity of your writing, it, well, recommends you.
December 9th, 2008 at 2:57 pm
Commercial real estate bust party just starting……
http://calculatedrisk.blogspot.com/
December 9th, 2008 at 2:57 pm
In short, look at general growth they are about to blow up, They have till friday. then the bond holders are screwed. Maybe everyone is hiding. As for the stock market, they are tired of the down. Everyone says we have priced in the bottom, the worse is over. Niether are right. The time is not right for end.
Sorry.
December 9th, 2008 at 3:01 pm
I’ll just say this…
at the bottom of the asian financial crisis the euroyen traded at a negative yield for 2 days…. that was it, the bottom… you know what happened next.
December 9th, 2008 at 3:02 pm
Thanks Mark
Blankreg…I’ll update you on 12/11, when the Fed releases Total Credit as of 9/30/08. As of 6/30, Total Credit was 51 trillion on a GDP of 14.3 Trillion or 357% of GDP. The previous all-time high was 260% during the New Deal of the 1930s, but that returned to 170% by 1940.
December 9th, 2008 at 3:06 pm
SB, thanks. For my own understanding: would I be correct to say that the Total Credit figure is not “netted,” that is, some portion of that figure is composed of offsetting obligations?
December 9th, 2008 at 3:06 pm
wow.
December 9th, 2008 at 3:07 pm
Steve Barry @ 2:38 “
“I’m pretty sure hedge funds are in dire straits, as they are too feeble to even short the market now…”
Bernie Schaeffer was on NBR recently. He had a brief comment on this subject:
KANGAS: Right, now on your last visit with us in late-May with the Dow in the 12,600 range, you saw signs like high levels of short interest rate, investor pessimism and negative magazine cover stories, all of these things supposed to be signs of bullishness, but it didn’t turn out that way at all, did it?
SCHAEFFER: It wasn’t a good period for contrarianism. But I would say the most important factor there was the big short interest was really a sign of the hedge fund bubble in disguise. Because basically hedge funds had big short positions but they had much bigger positions on the long side. So they liquidated their shorts, but provided some support, but the long liquidation to de-leveraging is what did the market in.
transcript: http://www.pbs.org/nbr/site/onair/transcripts/081128d/
December 9th, 2008 at 3:08 pm
Steve Saville makes a great point in this article http://www.safehaven.com/article-12043.htm
an excerpt:
The recent plunge in the T-Bond yield to only 3.2% prompts the question: is the bond market discounting deflation?
Before attempting to answer the above question we’ll put forward another question: what was the oil market discounting when it was pricing oil at more than $140 per barrel just 5 months ago?
The reason for asking the second question is to make the point that market prices do not necessarily contain accurate information about the future.
December 9th, 2008 at 3:09 pm
Blank…here is the report…check every line item for yourself
http://www.federalreserve.gov/releases/z1/Current/accessible/l1.htm
December 9th, 2008 at 3:10 pm
Winston,
inflation is probably still positive right now…someone just told me his monthly healthcare insurance just went from 1025 to 1280 a month.
December 9th, 2008 at 3:12 pm
@SB: Don’t forget about food prices. Don’t think they’ve come down at all based on our grocery bills.
December 9th, 2008 at 3:13 pm
Ben would sell his soul for some wage inflation here but that may be the only inflation he doesn’t get
December 9th, 2008 at 3:14 pm
Karen:
I think China hoarded oil and other commodities for the olympics
December 9th, 2008 at 3:18 pm
I’d love to have a live show, where I talk over what they say on CNBC and mock it for what it is…would be a riot, but I would likely get sued.
December 9th, 2008 at 3:21 pm
Let’s say the Fed is trying to get bond investors (usually more conservative than equity investors) out of treasuries into riskier assets. Why would they? The bad investments are still out there. Governement is not letting the cleanup occur. The stock market still reflects the misallocation of capital. Layoffs are intensifying, corporate credit defaults are only now starting… why would I buy equity when the corporate bond could default.
Look, deflation or not, I’m not putting my money in companies whose stock price still somehow reflect the old business model.
December 9th, 2008 at 3:21 pm
@SB: Could be a little like the old “Mystery Science Theater” if anyone remembers that show.
December 9th, 2008 at 3:23 pm
Is it possible that the Governor of Illinois had no dealings with the former Senator from Illinois? probably not…I hope B.O. is squeaky clean in this.
December 9th, 2008 at 3:25 pm
I see a bubble in gold, a bubble in cash and a bubble in treasuries. My guess is that the bubble in treasuries is going to be the one that burst first. Then either the two other bubbles get a massive boast or we get the mother of all bear market rallies.
December 9th, 2008 at 3:28 pm
@Mann:
MST3000…yes..could proably keep the same name and apply to CNBC.
December 9th, 2008 at 3:29 pm
@SB: That would be a brilliant show. Guess there’s no way you wouldn’t get sued though…….
December 9th, 2008 at 3:31 pm
@Mark E Hoffer
Another thing most people aren’t considering about state revenue…many states made a fortune on gasoline taxes, based on a percentage of total sale…ooops
December 9th, 2008 at 3:32 pm
“NiNM, not that it counts for much but i’m firmly in the inflation camp. you want to know where the money has flowed at the moment? in bonds, obviously. it’ll come out soon…”
@Karen,
If it comes out of bonds and goes into equities, it is not truly inflationary….just the Peter paying Paul syndome…..right? Equities up, bonds down.
For a true inflationary pressure, the Fed has to monetize, i.e. buy assets with freshly created cash. Print dollars, so to speak.
But, on the other side of the “inflate” fence is the rest of the world, who wouldn’t look too kindly at the propects of the value of their dollar holdings being cut in half. I doubt they would sit by idly and let the U.S. rulers do whatever they wish to the dollar’s value.
Finally, both inflation and deflation are at first psychological events – even a massive monetizing campaign would have no immediate effect if the cash were horded and used to pay down existing debt. (See Japan for example.)
Deflation is extremely difficult to stop once it starts – that, I believe, is what the bond market is confirming for us.
December 9th, 2008 at 3:39 pm
Winston Munn – ” I doubt they would sit by idly and let the U.S. rulers do whatever they wish to the dollar’s value
“They” is largely China and to a much diminished extent, the GCC countries. Both are essentially part of the USD block, and aren’t likely all that concerned about a diminished non-block value of the USD for now. At present, I suspect their main concern is in preventing an implosion in export volumes from fueling domestic unrest.
December 9th, 2008 at 3:41 pm
The bond market is only confirming that institutions prefer “cash” right now. Institutional money market funds have grown from 100 billion to 2.28 trillion in the last month. The Fed may go into print mode by buying the long bond, but it’s hardly necessary with the dollars currently in the system… there are a lot of thick mattresses in the world right now.
December 9th, 2008 at 3:44 pm
“The danger of deflation is that it is a symptom of a culture of hording and risk aversion”
Not necessarily. If the GNP of the last few years was really artificially inflated by the credit bubble (and it certainly was), then we have simply pulled back to ‘normal’ times and the lower rates of consumption will continue forward from here. The ‘demand destruction’ is really a simple demand rebalancing; we are just at a new equilibrium. There are elements of hoarding or risk aversion, but there is also the destruction of unreasonable expectations.
December 9th, 2008 at 3:47 pm
If I were Chinese leadership, I would do every thing in my power to get the dollar devalued to keep export volume up and avoid being shot for having taken the country down the ruinous road to capitalism. China is really screwed.
December 9th, 2008 at 3:50 pm
SB,
I’m getting the impression, from these guys: http://www.api.org/statistics/fueltaxes/
that the State fuel taxes are a cpg, cents per gallon, phenomenom..
Royalties, though, would be, quite, the different matter, though, not as far-reaching..
Prob, yet another Reason Cali.S.S.A. is sucking, budgetary, wind..
December 9th, 2008 at 4:00 pm
yo, but hang on, certainly lower fuel consumption, as we’ve seen, would decrease their tax rev.s..nice point
December 9th, 2008 at 4:13 pm
econ 101….
a debt bubble always leads to an asset bubble (see LBO bubble, housing bubble, dot.com vendor financing bubble)…..
so what will the govt be doing with all this $?
December 9th, 2008 at 4:13 pm
@Mark…good point…excise tax is per gallon, but sales tax is %…so in NYS, at $4 gas, state got .32 per gallon, now getting .16 per gallon roughly…plus the hit on lower consumption.
December 9th, 2008 at 4:23 pm
Exporting countries do not want a devalued dollar – they will support treasuries as long as they have oil in the ground, shoes to make, or shiny new cars to sell.
December 9th, 2008 at 4:31 pm
Thanks for that link Steve. Unbelievable…I’ve been aware of what I call the Scariest Chart in the World for at least six months. You just have to always keep it there in the back of your mind.
I’ve been buying gold miners recently and they are doing pretty well for me. I’m a bit worried though since I’ve got a reasonable profit, should I sell before Xmas when i go on holiday. If we see another defaltionary shudder, ie crash, they will be taken down too I should think.
December 9th, 2008 at 4:42 pm
The logic of greater fool makes no sense to me but what does these days? The only reason to part with cash would if you have for some reason (fund rules) that force you to part with cash and there is a lack of trust into anything else but treasuries.
December 9th, 2008 at 5:13 pm
@Winston: I agree with you about the exporters’ appetite for treasuries. They should happily gobble up whatever we have to sell. But I don’t see consumption resuming in a deflationary environment. Hence my thinking that a devaluation is preferable to exporters.
December 9th, 2008 at 5:27 pm
@rww,
This is good thinking on the bond “bubble”. Explains much better what I am trying to say.
http://dharmajoint.blogspot.com/
December 9th, 2008 at 5:30 pm
well with all the hedge fund being forced out of their current plays and going to t-bills, and the Lehman bankruptcy forcing t-bill purchases (as i understand it) what will happen? I understand the dollar in my pocket is backed by the fed. But if the t-bill is backed by the U.S.’s assets (is that right?) and the everyone is fleeing to the t-bill and then the government is buying bad assets from companies who are using the money to buy t-bills, isn’t this a big loop? The fed can, and obviously, just print more money but what about the treasury.
* Most of these thoughts are from Calculated risk. The more I try to understand this the more I realize I am confused.
December 9th, 2008 at 5:30 pm
0%. Looks good to me. It shows WS is in pure panic mode.
December 9th, 2008 at 5:40 pm
The action in Treasuries makes perfect sense…if you have million of dollars that you are fond of, believe that hyperinflation is an impossibility, and expect a massive cascade of business bankruptcies going forward. Furthermore, our hypothetical treasury buyer doesn’t trust any other govt financial insurance program. The FDIC can drop the ball, money market guarantees can be shifted around like chess pieces, but reneging on t-bills would only occur in the event of sovereign default by the US.
I think we get a bankruptcy cascade.
Also, since dollars will eventually get diluted, the next bubble after treasuries can only be in gold.
December 9th, 2008 at 5:52 pm
texasradio:
But realistically, if you the the FDIC “defaults”..don’t you think that this amounts to a soverign default by the US? To me, at least, CD’s have the equivalent risk of treasuries…were the FDIC to default, game over, I think..
December 9th, 2008 at 5:54 pm
think, not the…
December 9th, 2008 at 6:09 pm
barry – i strongly disagree that this is a “greater fool theory” trade… i can’t come up with a logical explanation though, other than that people buying these T-bills have massive amounts of money they need to park without risk… i don’t see why they don’t buy 60 day CD’s at 2.5%, with the same insurance from the government.
December 9th, 2008 at 6:14 pm
The US treasury can issue trillions more bonds, bills.
The yield represents world wide hunger for US debt.
Why produce anything if you can borrow money for free ??
December 9th, 2008 at 6:19 pm
SB,
here’s an art. from 5/006 talking about the reverse of what you’re pointing out
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2006/05/11/MNGR8IPK9C1.DTL
SALES TAX ON GASOLINE A BONANZA FOR STATE
Local governments also are big gainers as price at the pump continues to rise
Matthew Yi, Chronicle Staff Writer
Thursday, May 11, 2006
for my own account, I’ve long known about the Excise Taxes on our fair Distillate, but never thought about there, also, being Sales Taxes–since they’re not tacked on, in a separate line-item, like they are @ The State Store–yes, The Bottle Shoppe, our Stadt still runs the distro of Distilled y Fermented ‘Spirits’..
December 9th, 2008 at 7:22 pm
@TexasRadio,
“Find the premise which is false and bet against it”- George Soros
I believe you are right. Another claim I hear is that deleveraging is causing cash to be parked in treasuries for safety. That doesn’t make a lot of sense to me.
Deleveraging means reducing debt. Debt is being paid off by selling assets – assets are not being sold in order to buy 0% Treasuries. No one is silly enough to borrow at a even 1% to buy a 0% treasury note. It makes no sense.
What makes sense is exporters attempting to prop the dollar – China, Bank of Japan, and OPEC nations all beleive they have strong reasons for a relatively strong dollar. It is bad policy and won’t work in the long run, but that doesn’t mean they aren’t still trying.
Right now at real interst rates of 0%, the Fed is in the liquidity trap. Dollars and Treasuries are indistiguishable from each other. I’m thinking out loud here, but it seems the corollary of the liquidity trap is that it would allow currency intervention to be done in the treasury market, thus masking its purpose?
As evidence for this scenario, FCBs for the last 2-3 months have been dumping agency paper hand over fist and increasing their treasury holdings.
December 9th, 2008 at 7:31 pm
Im with Steve. Equity investors are in the twilight zone. The markets could absolutely crash around the world. There is no reason to be long equities at all.
December 9th, 2008 at 7:47 pm
What of a conversation inside the dark box matters when a bright light outside the box plainly reveals that, everything about this financial system is bankrupt? The game of “make believe” passing for reality sees money flying into Treasuries and comes up with all kinds of fantasies explaining the phenomena … if only to ignore the truth of how our thorough, indisputable bankruptcy makes us extraordinarily ripe for but the next phase of manufactured crisis taking us right up to the doorstep of world war. The media machine — uncritical liars, mind-bending cowards — desperate for relevancy restoring their capacity as purveyors of trash, stand ready to take up the sword, if only because bills are piling up and there’s hell to pay.
Up or down, soon enough the market’s relevancy will not matter much. What will is if, amidst the carnage, Jay Leno still will be able to make us laugh…
December 9th, 2008 at 7:55 pm
And I had assumed all along the Fed actually wanted a steep yield curve to allow what remains of the banking system to rediscover banking and rebuild balance sheets and re-establish a financial system?
December 9th, 2008 at 8:17 pm
RiskAverseAlert
I understand that I know very little, but are we really at “get your guns and ammo?” Normatively speaking we may not produce much but we have a wealth of human capital that I imagine (pray) will be able to adapt. Don’t we at least have the resources to adapt to this(ie human capital)? I guess the question is how scared should I be? The more I learn the more frightened I become.
At what point does this become more of a social problem? People seem to be acting like everything is A okay, yet are we just the elephant that fell off the cliff enjoying the ride down not realizing that splat is coming? If so, what policy decisions need to happen to fix it? It seems that DEBT is the key to this whole thing, and the unbridled use of it, so in debt must be the answer right?
Steve Barry along with others helped me understand this, but if too much debt, or debt backed by insufficient collateral is the true cause, then why has this all started to crumble around the MBS? It seems as though the MBS were a way to issue collateral that isn’t really worth its stated value, but then shouldn’t this forthcoming recession just bring us back to pre-MBS/CDS days ?
btw – I have heard DOW 7,470 is the magic number; if we go below that then it is guns and ammo time.
December 9th, 2008 at 8:25 pm
I left out a sentence that I would like to go back and add. Third paragraph second sentence should be:
“wouldn’t this all have unwound anyway even without the MBS/CDS problems?”
December 9th, 2008 at 9:05 pm
Come on, people. It’s simple. The end of year debt rollover is coming and there are no takers. A large fraction of bond investors can’t buy equities – so for these guys it is corpies, munis, emerging market debt or govies. The corporate bond market is deteriorating this week and so are munis and EM, so the guys are just parking the bus until there is clarity. At some point you can get short Treasuries but not just yet.
I am with AT on the 870 support level for tomorrow. We start down tomorrow and bounce. Commodities are vulnerable here if we get another set of deflationary PPI/CPI data.
I do like SRS here and have been on it since Monday. SKF may have had its day but the REITs are going down the tubes in a big way, and poor retail numbers will lead to a sell-off in RTH and URE. I listened to Jim Chanos this morning and I am starting to like RXD for the New Year.
Remember the chaos at the end of September. Steve Barry may be right about this – the bond market is starting to tell us something, that when the Santa rally is over, we are in for a little bit of a drubbing. Jan and Feb may see TWICE the hedge trimming we saw in October. I am not going to be long anything much after December 26.
December 9th, 2008 at 9:10 pm
“Steve Barry Says:
December 9th, 2008 at 3:31 pm
Another thing most people aren’t considering about state revenue…many states made a fortune on gasoline taxes, based on a percentage of total sale…ooops”
AND property and sales taxes. Munis are toast. Cali the first state to default, followed closely by NYC once the financial sector finishes it’s bust.
December 9th, 2008 at 9:14 pm
“wouldn’t this all have unwound anyway even without the MBS/CDS problems?” It would not have wound up in the first place without MBS/CDS. No way Cali housing gets above 7X median income without them.
December 9th, 2008 at 10:21 pm
Mr. Blutarsky, 0.0
December 9th, 2008 at 10:42 pm
Blackhalo,
I’ve been looking at this -> http://www.comstockfunds.com/files/NLPP00000/292.pdf and this graph does not tell the story the way you suggest. Maybe without the CDS/MBS fiasco we would be at 4x (housing above median income) in Cali, but looking at the chart, it doesn’t seem like we were about curb our debt appetite either way. The story I keep trying to spin is that this all started with AGspan lowering the fed funds rate, causing fund managers to look for higher yields, leading to MBS and bad lending followed by CDS and the decision (lack of understanding) to allow something called a swap to not be regulated like any other insurance/hedging instrument. But the chart suggests we’ve been in trouble for a while. So the story does not start with lowering the Fed Fund rate, that seems to be the middle part. I guess the story has to begin somewhere around 82 when we started eating debt breakfast lunch and dinner. Could the whole Ayn Rand inspired “self regulating markets” just be a compounding factor and not the true story?
December 9th, 2008 at 10:50 pm
I think it’s a combination of Winston’s theory about currency manipulation:
Many in the Chinese government are desperate to keep their exports up, thinking that they can export their way out of trouble.
http://mpettis.com/2008/12/china%E2%80%99s-exports-contacted-in-november/
Thus, they will try to keep the dollar up relative to the yuan. And they have lots of $’s.
And, the other half of the story is that the FDIC guarantee is only good to 250k. If you have 10’s of millions, how many banks do you need to keep it below the limit?
December 10th, 2008 at 12:39 am
The bid-to-cover on this auction was 4.2 – an awfully high number but there are paydowns this week and low treasury supply so that may have had a lot to do with it.
December 10th, 2008 at 2:08 am
@Leftback
If something called an “end of year debt rollover” is occurring, how can the funds associated with an annual event be “parked” pending “clarity”? As long as the govt is playing market whack-a-problem with multi-billion dollar hammers, it will be clear that return of principal is a totally acceptable investment goal.
Haven’t run it through any computerized grist mills, but SRS is intuitively appealing at this time. Which is why I bought some.
@WM
I think the deleveraging is effectively forced; perhaps the party which ends up with whatever is left buys t-bills. No idea about the “who” of it. But dollar bears are an endangered species, for now.
@SB
I’m not buying all this xmas rally talk.
@WM
A low treasury supply? If that’s the case, I’m sure they’ll be plenty more available soon.
December 10th, 2008 at 6:09 am
Equity bears overplaying their hand here?
December 10th, 2008 at 1:18 pm
It is seems obvious once stated, but I like what Winston Munn said:
“December 9th, 2008 at 7:22 pm
Dollars and Treasuries are indistiguishable from each other. “
December 10th, 2008 at 2:30 pm
Heres a link to an article in the economist which hints at the problems to come:
http://www.economist.com/research/articlesbysubject/displaystory.cfm?subjectid=2512631&story_id=12700894
“Paradoxically, the real problem for governments may only occur if they manage to revive their economies. At that point, deflation worries will disappear and investors will switch to riskier assets. Given the deficits in both Britain and America, it seems unlikely that any cyclical rebound will be strong enough to bring the budget back to balance. In 2010 or 2011, issuing government bonds may prove a much harder (and more expensive) task.”
December 10th, 2008 at 6:48 pm
Fact Set (I think)
1. Fed/Treas. money flooding is not working–no one still wants to lend.
2. Fed interest rate cuts are irrelevant–market has already priced Treasury paper to yield zero.
3. Fed/Treas. handouts aren’t causing lending to happen–receiving companies use the money for cash reserves (deleveraging), paying off gambling debts on CDS, bonuses, dividends, retention payments to executives.
Theory: No one with money believes anything or any representation. They are hunkering down and not being a lender. They have sought refuge in the mattress (zero percent yield at least means return OF principal). Why? No one can see any counterparties’ true risk position, and indeed it is unknowable in the current environment, because any counterparty could be upset by their counterparty. It’s a hall of mirrors.
Solution: All this bogus gambling paper needs some sunshine on it. Force it all to the surface by law. Let’s see what everybody is holding. Whatever the answer is, however uncomfortable it is–that is the way forward. Everyone needs to see what is what, and who is holding what.
4.