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The Correlations Are Failing
July 18th, 2011 | 
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As I write this the DOW is down 178, the S&P is down 19, and the Nasdaq 100 is down 32, all well more than 1%. In addition volume is more than 10:1 down on the NYSE and about 8:1 on the Nasdaq.
It’s a bloody day in the markets.
But one problem is apparent – the TNX, or 10 year Treasury bond interest rate, is actually up about 0.2% on the day, and the 30 year is up 1% in yield.
They shouldn’t be.
When investors get nervous about stocks, they usually flow to bonds. Today, they’re not. They’re buying Gold instead which is up just under 1%, or silver, which is up 3.2%, both on the day.
These correlations have been solid for a long time. Now they’re failing. This failure is telling you something – that our Congress and President had better get their heads out in the daylight instead of up their respective asses, and they better do it soon.
Oh sure, we’re not seeing the sort of out-of-control ramp in government bond rates that Italy has seen the last few weeks.
Yet.
But remember the 1930s. A bank called Creditanstalt turned what was a nasty stock market crash and credit contraction into a global Depression.
Regulators then, as now, ignored the crash’s warnings and refused to force those who were not properly capitalized to close. They allowed people to double into bad bets. Those bad bets compounded, and when the economy started to slip for real, instead of just on paper, the leverage they were carrying, both that which everyone knew about and that which people did not, ultimately blew them up.
Now we have a “little bank” in Italy that is teetering on the same edge – Unicredit. It is too big to bail out – it holds hundreds of billions in liabilities. There’s no money available to bail them out and the time to resolve them, as with our banks, was two and three years ago.
The risks are extremely high here folks. I know many have laughed at my warnings for the last three years and have hooted and hollered as the stock market “recovered”, buoyed by yet more cheap money. But during this the coverage of government debt with employment has not recovered at all – in fact, it’s worse now by far than it was in 2008.
So now what’s available in terms of policy tools? There’s no funds available to bail people out, and a bank of that size isn’t able to be bailed out anyway in reality – all you can do is lie and hope people believe it. But the market is calling all the bluffs now, one after another.
Remember 2008? Buffet was going to buy the world. Then it was Korea’s Development Bank. Both, and many more yarns that were spun, were lies. Those who believed got skinned alive in the collapse that followed.
If you think it can’t happen again, you’re wrong. It both can and will, and nobody will be held to account for the lies they tell, just as they weren’t the last time.
Our government isn’t helping. We should have taken all the big banks into receivership and went through every one of their alleged “assets” in 2008, forcing them to prove by independent valuation that they were holding them at reasonable valuations and that their “credit insurance” was backed by someone with 100% of the actual cash required to pay. We didn’t, because Paulson and Geithner both knew that under such a standard not one of the big banks would survive.
So instead of forcing bondholders to eat it, which is what should have happened, they rolled the dice. They bet that there would not be another Creditanstalt.
This is now looking like a bet they are going to lose.
Posted in 10 Year Treasury, Bad loans, Bailout, bailouts, Balance Sheet, Banks, Debt, default, Defaults, Deficits, Depression, Derivatives, Dow Jones Industrial Average, Economic Crisis, Economy, Financial System, Government, Italy, lending, Leverage, S&P 500, Stock Market, Unicredit | 
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Is This Why Bill Gross Dumped Treasuries?
A couple of revealing charts from the Fed’s Flow of Funds data. Both show net flows into Treasuries by creditor type and the Federal Government’s borrowing during each quarter. Note, the quarterly data is annualized.
The first chart illustrates how QE2 flushed domestics out of Treasuries and effectively funded 63 percent of the budget deficit in Q4. The Treasury is prohibited from directly selling bonds to the central bank, but effectively finances the government through POMO.
Given that a large portion of the Rest of World category are central banks recycling BOP surpluses, it’s likely that 90 percent of the U.S. budget deficit in Q4 was funded by central banks. You think this may have anything to do with what’s happening in the commodity markets? That is, the central banks’ printing presses providing the fuel for speculators?
Furthermore, we ask: who is going to finance the U.S. budget deficit when QE2 ends, especially at a sub 3.50 percent 10-year Treasury rate? Bill Gross knows!
(click here if charts are not observable)
Posted in 10 Year Treasury, Banks, Bill Gross, Commodities, commodity prices, Debt, Economic Crisis, Economy, Federal Reserve, Financial System, Government, Money, QE, QE-2, quantitative easing, Speculation, Treasury Bonds, Treasury Department | 
Tags: Budget Deficit, Monetary Policy, PIMCO, US Treasuries |
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I'll Fight The Fed
Those who say “don’t” are delusional fools. Witness the following chart:
10 Year Treasury Bond Yield
So the 10 year Bond has gone from 2.33% to 3.7% in less than four months. 30 year mortgage money, no points, has gone from about 4% to just over 5% (no junk fees) in the same time.
This is an immediate 11% reduction in the implied value of every home in America, and it is exactly the opposite of what Bernanke said he was going to do.
Here’s the math; don’t believe me, get out your HP12c and run it yourself.
$100,000 borrowed, 30 years, 4% interest rate = $475.83 P&I.
Same P&I, 30 years, 5% interest rate borrows only $89,007.56.
That’s an 11% loss of value and since 90% of the buyers purchase a payment in the housing market, not a price, this is an immediate 11% deflation in home values.
Now if I’m not supposed to “fight the Fed” then I should have believed that Bernanke’s policies were going to support home values. That they would keep mortgage rates low. And that the 4% 30 year money would become a benchmark for the intermediate term, allowing me to buy this coming spring.
This is what he stated he was not only capable of doing, but would do.
None of that happened. Instead, what occurred is that Bernanke has lost control of the long end of the curve even though he explicitly stated that he could control it prior to initiating QE2.
He was wrong. Again. The same thing happened during QE1. And yet you have had every fawner in the universe falling over themselves licking his shoes.
What they should be doing is kicking his ass from here to Toledo.
Of course that would require intellectual honesty. That you will not find among the media.
So what’s likely here? Well, pick one – if rates continue to back up, and they will if QE2 continues, housing will continue to get hosed. At 6% we’ll be looking at a housing value loss of an additional 20% from November’s numbers and of course if it keeps going…. The other alternative? Yank liquidity and watch the corporate leverage index come back to earth from it’s current level of 12.
“Earth”, incidentally, is somewhere between 2 and 4. You do the math on that one.
Housing recovery? Not a snowball’s chance in Hell so long as the money printing continues.
How do you like the steel trap you set for yourself Ben? You’re such a stupid bastard you not only constructed the damn thing while standing inside it but you welded the door closed with the last of the oxy-acetylene supply!
Posted in 10 Year Treasury, Banks, Ben Bernanke, Debt, Economic Crisis, Economy, Federal Reserve, Financial System, Government, QE, QE-2, quantitative easing, Treasuries, Treasury Bonds, US Treasury |
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Paging Mr. Bond…. Oh Darn, It's BondZilla!
Hoh, hoh…. they say he’s got to go go go BondZilla!
But Ben, you said this wouldn’t happen! You said you had it all under control. That rates on the long end would go down, not up….
Never mind that there was never a bit of evidence you were doing anything other than either lying or “wishcasting” – pick one.
Why? Because the last time Bernanke did “QE”, the so-called “QE1″ (now), bond rates actually went up, not down, and now it’s happening again.
Surprised?
I’m not.
At all.
Why not? Because there is no exit plan, Bernanke knows it, he’s lying, and the market has figured it out.
Here’s the problem in the main. Bernanke’s only tool to “tighten” monetary policy means selling bonds into the market and taking in cash from the system.
But what happens if he holds bonds that have all gone down in value? He gets screwed, that’s what. In an extreme case The Fed could go “bankrupt.” Bernanke will avoid this, of course, and he can – but only by not soaking up that liquidity – that is, allowing the cash he printed to remain in the system while the rotting bonds he bought are “absorbed” by The Fed.
The market knows this. It also knows that the duration of his holdings has gone up a lot and that he cannot pull enough liquidity via short-term roll-off to matter – that is, despite his claim of being “100% confident” he cannot tighten policy – not now and not for many years.
The market thus sees risk – that if the economy improves you get inflation, and lots of it, as Bernanke can’t do anything about it. If the economy doesn’t improve then the only way for the government to continue spending like crazy, which it clearly is going to do, is to continue to devalue the currency, which means interest rates go up too as commodities will continue to skyrocket (priced in dollars) and this will destroy the tax base upon which government funding rests from the bottom up.
I talk a lot about the tax base, which is best-represented as the labor participation rate. It sucks, it is not improving, and it cannot improve so long as commodity prices continue to ramp and the currency devaluation continues:
This was the prime error made during The Depression. Contrary to Bernanke’s claims of being “a student” of The Depression he’s really the Fool-in-Chief of that time. FDR’s devaluation of the currency trashed the tax base and guaranteed sky-high unemployment for the same reason it’s happening now – devaluation of the currency destroys the finances of the middle class and below as their spending on essential commodities (food, fuel, clothing) is not only more-or-less fixed in volume (which means their cost to those people ramps as price rises) but as a percentage of income this expenditure is much higher than it is for upper-income earners.
That in turn suppresses entry-level and lower-wage jobs, which holds down the labor participation rate. And it is that labor participation rate that drives the ability of government to collect taxes – you can only tax someone who has income, and only people pay taxes – all attempts to tax any other entity, such as corporations, are simply passed through to people.
It is not a coincidence that after stabilizing this chart took a major second leg down when Bernanke initiated QE1 – April of 2009. It is also not a coincidence that it began to recover when QE1 ended around the beginning of 2010 nor that when Bernanke started to threaten QE2, in the summer of 2010, that it weakened again and continues to weaken.
This is the precise dynamic that played out in the 1930s and Bernanke is causing it, not reacting to it.
Yesterday afternoon Obama made reference to Mitch McConnell and he “not being willing to threaten the sovereign credit of the United States.”
Mr. President, you, in re-nominating Bernanke and not putting a stop to both the outrageous deficit spending and allowing Bernanke to back himself into this corner without removing him, have destroyed the sovereign credit of the United States.
You may not recognize it yet, and neither has the market in the main, but I assure you that recognition will come, and precisely where the “tipping point” happens to be where you no longer have any meaningful degree of control over the situation is not determinable in advance.
And before you start spouting off about how smart you and Bernanke are, remember that neither Iceland, Greece or Ireland knew where that tipping point was in advance either.
Posted in 10 Year Treasury, Ben Bernanke, Debt, Economic Crisis, Economy, Federal Reserve, Financial System, Government, Money, Sovereign Debt, Treasury Bonds, US Treasury, Vigilantes |
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Retiree Annuities May Be Promoted by Obama Aides – In Other Words, There's No One Left To Buy Treasuries And Fund Our Deficit Except YOU
This morning we got this from Bloomberg:
Retiree Annuities May Be Promoted by Obama Aides (Update2)
By Theo Francis
To contact the reporter on this story: Theo Francis in Washington at tfrancis14@bloomberg.net.
Jan. 8 (Bloomberg) — The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.
The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.
Annuities generally guarantee income until the retiree’s death, and often that of a surviving spouse as well. They are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year, David Certner, legislative counsel for AARP, said in an interview.
“There’s a real desire on a lot of people’s parts to try to encourage something other than just rolling over a lump sum, to make sure this money will actually last a lifetime,” said Certner, legislative counsel for Washington-based AARP, the biggest U.S. advocacy group for retirees.
Promoting annuities may benefit companies that provide them through employers, including ING Groep NV and Prudential Financial Inc., or sell them directly to individuals, such as American International Group Inc., the insurer that has received $182.3 billion in government aid.
Balances Fall
The average 401(k) fund balance dropped 31 percent to $47,500 at the end of March 2009 from $69,200 at the end of 2007, according to a Fidelity Investments review of 11 million accounts it manages. The Standard & Poor’s 500 Index tumbled 46 percent in that period. The average balance of the Fidelity accounts recovered to $60,700 as of last Sept. 30 as the stock market rebounded.
There is “a tremendous amount of interest in the White House” in retirement-security initiatives, Borzi, who heads the Labor Department’s Employee Benefits Security Administration, said in an interview.
In addition to annuities, the inquiry will cover other approaches to guaranteeing income, including longevity insurance that would provide an income stream for retirees living beyond a certain age, she said.
“There’s been a fair amount of discussion in the literature taking the view that perhaps there ought to be more lifetime income,” Iwry, a senior adviser to Treasury Secretary Timothy Geithner, said in an interview.
Lump Sums
“The question is how to encourage it, and whether the government can and should be helpful in that regard,” Iwry said.
While traditional defined-benefit pensions were paid out as annuities, providing monthly payments for retirees and often their spouses, workers increasingly are taking advantage of options to receive lump-sum distributions.
Only 2 percent of 401(k) plan participants convert retirement savings into an annuity on retirement, according to a July 2009 report from the Retirement Security Project, a joint venture of Georgetown University’s Public Policy Institute and the Brookings Institution in Washington.
A survey of 149 companies released on Dec. 17 by employee- benefits consultant Watson Wyatt Worldwide, now part of Arlington, Va.-based Towers Watson & Co., suggested that about 22 percent of employers with retirement savings plans offered retirees the choice between an annuity and a lump-sum distribution.
Annuity Sellers
Government success in getting workers to move retirement assets into annuities may prove profitable for insurers that sell annuities, Anne Mathias, policy research director for Washington Research Group, a policy analysis unit of Concept Capital, said in an interview.
Retirement plans, including 401(k) accounts, held $3.6 trillion in assets at the end of the second quarter of 2009, while annuity investments of all kinds totaled about $2.3 trillion, according to figures from the Washington-based Investment Company Institute, a trade association for asset managers.
The top sellers of individual annuities in the U.S. include AIG, MetLife Inc., Hartford Financial Services Group Inc., Lincoln National Corp. and New York Life Insurance Co., according to figures from the American Council of Life Insurers for 2008. The top group-annuity sellers include ING, Prudential Financial, MetLife and Manulife Financial Corp.
Under Fire
Asset managers are concerned the government may go too far in encouraging annuities, said Mike McNamee, a spokesman for the Investment Company Institute. Seven in 10 U.S. households would object to a requirement that retirees convert part of their savings into annuities, according to a survey the group released today.
“Households’ views on policy changes revealed a preference to preserve retirement account features and flexibility,” the institute said in a report.
The institute also said annuities have received support from academic research and “it is unclear why individuals usually forego the annuity option” even when it is available. The survey didn’t ask about potential efforts by the government to encourage voluntary use of annuities.
Annuity sales to individuals have come under regulatory scrutiny in recent years over the size of sales commissions and whether some varieties are suitable for older investors.
Social Security
John Brennan, the former chairman of Vanguard Group, the Valley Forge, Pennsylvania-based mutual-fund company, criticized annuities today as often expensive and offering little inflation protection. Americans already benefit from “the best annuity in the world, which is Social Security,” Brennan said in an interview on Bloomberg Television.
AARP’s Certner said policy makers could avoid many of those pitfalls by encouraging the use of group annuities, which are bought by employers rather than individuals and often carry lower fees, or using approaches that provide retirement income without commercial annuities.
Adding lifetime income to 401(k) plans won’t be sufficient for many workers because they can’t, or don’t, save enough to live on in old age, and Social Security often proves inadequate as more than a safety net, said Karen Ferguson, director of the Pension Rights Center in Washington, D.C.
Senate Bill
“It’s a great idea, but how much are people really going to get out of it?” she said. A better approach would be to give employers incentives to revive defined-benefit pensions, which have languished as employers have focused on cheaper and more flexible 401(k) plans, Ferguson said.
One proposal raised by Iwry as co-author of a paper while at the Retirement Security Project, before joining the administration, has reached Congress. A bill requiring employers to report 401(k) savings both as an account balance and as a stream of income based on an annuity was introduced on Dec. 3 by Senators Jeff Bingaman, a New Mexico Democrat, Johnny Isakson, a Georgia Republican, and Herb Kohl, a Wisconsin Democrat.
On CNBC this morning, Rick Santelli from the CME had this to say:
The floor is a bit abuzz. There is published reports out that I am getting from many of my sources about something the Obama administration is going to put towards a public comment period. This is very early in the process, but it goes something like this – avg Americans were hurt big during the big givebacks in their IRAs when the credit crisis pushed stocks down. So remember how IRAs are formulated, they are thinking of changing that and allowing more of an annuity scenario. Now if you think this thru what it means is instead of a bit of your paycheck going into equities every week, it will probably be going into things like Treasuries it would be a little bit lower return but it would be safer and this is very early but you want to pay attention to any new stories coming out about this annuity conversion they are going to put out for public comment.
Sue Herrera and Tyler Mathiesen comment about (a) isn’t this the wrong time to go into treasuries since folks coming on CNBS are saying it is, and (b) people can already put their IRA monies into Treasuries if they want.
Rick responds: The difference is that it is going to be something that is going to be more of a large scale program a very simple one and more of a conversion as well. Like I said early stages, but the range of opinions is “hey it is not a bad idea” to very cynical that we are worried about who is going to buy treasuries ad infinitum.
Rick’s a pretty sharp guy and most importantly, he tells the truth. So, what does this all mean? We shall translate:
US Treasury To Americans: To Prevent Treasury Market Collapse, We Will Force YOU To Buy Treasuries In Your Retirement Accounts
The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort. Business Week
In other words, Social Security Trust Fund II. As of last month Fund I is broke. Summary of 2009 Annual Reports Social Security Board of Trustees The government already stole all this money, and has not been refunding it for years. With all the deficit expenditures heaped on top of this, which have gone exponential in the last two years, Social Security ran out of money completely last year, more than 5 years ahead of the previously projected date. This means that retiree’s checks only go out through DAILY sales of Treasuries. So, if they sell them to YOU, perhaps you can fund the retirees. Heh. Talk about a Ponzi scheme that is doomed to go the way of Bernie Madoff.
Although this proposal will be presented shortly by the administration as being a ‘frugal choice,’ maybe even the ‘patriotic choice.’ And this will actually sound good to the people who were scrambling around in 2008 trying to find a safe-haven for their retirement accounts during the stock market sell-off. Indeed, historically speaking,, there has never been a safer asset class in which to be invested. The problem is, this time we aren’t talking about just a stock market (equities) crash, we’re talking about a potential crash in the Treasury market. The reality is that there is no one left to buy Treasuries and they need YOU to fund their debt. After all, China stopped buying Treasuries (funding our debt) in October 2009, but of course no one is talking about this.
Press Release: Treasury International Capital
Major Foreign Holders of Treasury Securities
You see, if they force people to buy Treasuries now, at the current price, when more and more foreigners stop buying, like China did, the price goes down as the yields (interest rate) goes up. Thus, all the people forced to buy in here will LOSE a tremendous amount of money.
Expect the procedure to look something like this:
Step 1 – Make this ‘option’ available
Step 2 – Listen to crickets
Step 3 – Crash stock market
Step 4 – We’re the government and we’re here to help. All your IRA are belong to us. Or of course, you can risk it in stocks if you want.
It’s step 5 they wont’ tell you about: Treasury market crashes, after all your money has been allocated into it. It’s exactly like herding sheep.
At this point, anyone expecting the government to be honest about their true intentions about this proposal, or anything for that matter, is woefully misguided.
Posted in 10 Year Treasury, Debt, Economic Crisis, Economy, Financial System, Treasuries, Treasury, Treasury Auction, Treasury bond sales, Treasury Bonds, Treasury debt, Treasury Department, Treasury market |
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proudly supports:
Bill Still For President
for Congress
Michigan 11th District
By Bill Still
There is only one answer for the world economic situation; monetary reform.
1. No More National Debt
2. No More Fractional Lending
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