FedUpUSA

Archive for August 16th, 2010

Treasury bears have been waiting a long time for China to start selling treasuries. It finally happened (not that two months is that much of a trend). Nonetheless, treasury bears got their wish. The result was not what they expected but it is what I expected: US demand picked up.

Please consider U.S. 10-Year Yield Drops to 16-Month Low, Narrows Yield Curve

Treasury 10-year note yields fell to their lowest level in more than 16 months as reports showed manufacturing in the New York region expanded less than forecast and foreign purchases of U.S. government debt climbed.

Two-year note yields dropped to a record low as the Federal Reserve prepared to buy Treasuries tomorrow as part of its plan to spur the slowing economy by keeping borrowing costs low. The difference between yields on 2- and 10-year note yields narrowed for a third day to the flattest yield curve since April 2009. A report from the National Association of Home Builders/Wells Fargo showed builders unexpectedly turned pessimistic.

Do Economists Ever Expect Bad News?

Economists’ consensus forecast for unemployment, GDP, interest rates, consumer spending, manufacturing and darn near everything else has been far too optimistic for years. What it takes for them to realize things are not going well and are likely to continue to not go well remains a mystery.

“We are heading back to a weaker economy,” said Theodore Ake, head of Treasury trading at Societe Generale in New York. “It feels like a recession, even though we are not in one. We are creating another bubble, but it won’t burst for one to two- years.”

Recession or Depression?

Given that the NBER never declared the end to the recession that started in 2007, how does Ake (or anyone) know we are not in a recession?

The proper question is not “Are we in a recession?” but rather “Is this a recession or a depression?” I think we are in a depression.

The difference between yields on 2- and 10-year notes narrowed to 2.09 percentage points. The so-called yield curve typically flattens when investors anticipate a slowdown. It widens when investors anticipate a recovery because they demand more compensation for the risk that growth will spark inflation.

Global demand for long-term U.S. financial assets rose in June from a month earlier as investors abroad bought Treasuries and agency debt and sold stocks, the Treasury Department reported today in Washington. Net buying of long-term equities, notes and bonds totaled $44.4 billion for the month, compared with net purchases of $35.3 billion in May.

The report also showed China’s holdings of long-term Treasuries fell for the first time in 15 months to $839.7 billion, a 2.5 percent drop. Its overall Treasury position declined for a second month to $843.7 billion, the lowest since May 2009. The decline represents the first year-over-year decline in China’s Treasury holdings since 2001. The holdings peaked in July 2009 at $939.9 billion.

“June represents a relatively weak month of debt buying,” David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut, wrote in a note to clients today. “What is notable is China’s selling of coupons.”

Notable Happenings

The notable happening is not China’s selling of treasuries. That selling is perhaps an outlier, a random fluctuation, or more likely a direct result of increased US demand.

Rather the notable happening is the massive rally in treasuries in spite of Chinese selling.

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Fed said Aug. 10. It announced it will invest the principal payments from its holdings of mortgage-backed securities into longer-term Treasury securities in the same statement.

Manipulation? Of Course!

No doubt treasury bears will look at that paragraph and scream “We Waz Robbed”. The reality is …

1. Fed cannot change the trend; The Fed can only goose the trend or slow it down.
2. The economy was clearly weakening.
3. It was pretty clear the Fed would resort to these tactics when the economy weakened.

Thus, there was no reason to be shorting treasuries, and there still isn’t.

Massive Treasury Rally Continues

The above chart courtesy of Bloomberg.

Once again the rally is across the board with the longer dated treasuries gaining the most. Note that 7-year treasuries are below 2%!

Yield Curve May 2008 to Present

click on chart for sharper image.

For about a month the long bond yield was on a shelf of support at or near 4%. It has been on a tear since then, with yields dropping the most of any spot on the curve.

This is not bullish for equities, nor is it a “deflation scare”.

This IS deflation at work. After a respite in 2009, the US is back in deflation. Those pointing at prices, the CPI, and other such things do not understand what deflation is, nor do they understand what is important.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Seriously.  This tripe is so bereft of logic and actual mental acuity that it is unworthy of graduation from elementary school:

About that math: Legally, Social Security has its own, dedicated funding, via the payroll tax (“FICA” on your pay statement). But it’s also part of the broader federal budget. This dual accounting means that there are two ways Social Security could face financial problems. First, that dedicated funding could prove inadequate, forcing the program either to cut benefits or to turn to Congress for aid. Second, Social Security costs could prove unsupportable for the federal budget as a whole.

Baloney.  This is called fraud in the private-sector.  First, there is no dedicated funding.  Second, all the money taken in over the years was not “invested”, it was spent.

Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund.

That so-called “trust fund” is a fraud.  It does not exist.

Here’s what actually happens (and Krugman knows this, which makes him a damned liar besides):

• Your tax dollars go to Treasury.

• Treasury keeps them and issues “special” Treasury bonds to the Social Security “trust fund.”

• Treasury counts these tax receipts against the federal deficit, making it look (much, until the last year) smaller than it really is.

Note the slight-of-hand here.  Social Security gets an alleged “bond” but they can’t sell it to anyone but the Treasury.  That is, legally it is an IOU, not a bond.  A bond can be marketed in the open market to anyone who is willing to buy, for whatever they’re willing to pay.  These are unmarketable (intentionally) and thus can only be redeemed in one place – at Treasury.

The problem is that Treasury spent the money and thus doesn’t have anything with which to redeem the IOUs!

So in order to redeem these alleged “bonds” Treasury will have to sell more bonds – this time to the general public (foreign governments, people, etc) who have actual capital surplus, because Treasury doesn’t – it blew that surplus on social spending programs right here and now.

This is similar to you coming to me with $100,000 and I “promise” to hold on to it for you and keep it “safe.”  I give you a promissory note to this effect.  But I never hold the funds – I immediately go blow them on hookers, coke and limousines.  You now have a bunch of IOUs, and I have no money.

Now perhaps I can manage to sell someone else some bonds when you come to redeem those IOUs.  Perhaps.  But what is unmistakable and true is that the money you allegedly “deposited” with me was immediately dissipated, not invested, saved, held or secured.

This little scheme seems to work just fine provided that each year the Social Security system takes in more than it spends on benefits – that is, so long as the file cabinet full of IOUs continues to get bigger.  Treasury gets the appearance of “Free Money”, Social Security is able to pay benefits, nobody’s the wiser.

But it’s a scam, because in point of fact the so-called “Special Bonds” are nothing more than a bare promise to pay and the asset against which they were issued (tax receipts) was instantly dissipated!

So what happens when Social Security starts to eat into that so-called “trust fund”?  Immediately, Treasury needs to sell more debt.  Ok, that sounds reasonable – but on what terms – that is, at what interest rate – will Treasury have to pay in order to sell that debt?

If you surmise that there’s every possibility that we’ll face a “Greece” moment long before 2037, you’re correct.  In fact, we could face that as soon as three or four years from now.

It is this that the Commission folks are worried about, and with good cause.  As we have repeatedly seen these sorts of fraudulent accounting schemes are both extremely common in government and work really well right up until they collapse – and when they collapse they tend to do so without any warning at all.

What’s really going on here? Conservatives hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution.

What’s really going on here is that LIEberals have run this scam for 50 years and accumulated a bunch of IOUs that have absolutely no capital behind them, since they have already SPENT the capital on their other fairy-tale projects which have, in turn, failed to produce to claimed and expected increase in Treasury cashflows.

And neither wing of the anti-Social-Security coalition seems to know or care about the hardship its favorite proposals would cause.

The hardship was created by stealing the Social Security tax receipts and lying about the so-called “Trust Fund.”  Everyone involved in that, including those in the LIEberal media, ought to be brought up on charges and jailed.

Those who believe that there is an actual “Social Security Trust Fund” are either lying or have an IQ smaller than their shoe size.

Either way, listening to them and believing this tripe, if you’re expecting to actually receive Social Security and structure your life around that belief, is a great way to wind up destitute, homeless, hungry and cold.

The Market-Ticker