KEEP THE FAITH! We are entering dangerous waters!

[Atash Hagmahani]

I know that most of my site members are the type that take action rather than panic, so please excuse what sounds like hyperbole. I am deeply concerned about the bond market.

The Germans are panicking:

http://online.wsj.com/article/SB124398546796379239.html

Ms. Merkel also said the ECB "bowed somewhat to international pressure" when it said last month it plans to buy €60 billion ($85 billion) in corporate bonds -- a move that is modest in comparison to asset-buying by its counterparts, the U.S. Federal Reserve and the Bank of England. Details are to be unveiled by the ECB's president, Jean-Claude Trichet, Thursday.

The public criticism is unusual -- and not only because German politicians rarely talk harshly about central banks in public. When politicians around the world do criticize their central banks, they almost always gripe that they are too tightfisted.

Tightfisted?!

The conservative German leader's comments came as Europe's statistical agency reported that unemployment in the 16 countries that share the euro rose to 9.2% in April -- the highest level since September 1999 and still below the 11.5% that the European Commission forecasts for 2010.

However, the economic straits of countries within the euro zone vary widely. Germany's unemployment rate of 7.7%, for instance, contrasts with 18.8% in Spain, where a collapse in the construction industry that was driving the economy has pushed unemployment to the highest in the euro zone.

It isn't clear what triggered Ms. Merkel's remarks, which came in a prepared speech.

She was ordered to make the speech by someone high up in the German financial system that fears what will happen to Germany if it does not decouple from financial disasters elsewhere.

I suspect the rumors that they want their gold are true (whether they get it or not is another issue).

Reassuring the creditors that the check is in the mail!:

http://www.bworldonline.com/BW060409/content.php?id=022

TOKYO/SEOUL — Asia’s richest central banks would shrug off losses from a US sovereign credit rating downgrade and continue to buy Treasuries to keep markets stable, officials and others with direct knowledge of policy making say.

The sources, in separate interviews with Reuters, said a ratings cut would not cause China, Japan, India and South Korea to change their reserve policies, at least in part because there are no alternatives to the liquidity afforded by the dollar.

A US rating cut would weaken the dollar and could wreak havoc on investments around the world benchmarked against Treasuries.

EH? A rating downgrade means that you write off some of the value of your bonds, because they can't sell for the same price they did with a higher rating once their rating is downgraded.

Notice that the "sources" are anonymous! Reuters talked down the price of gold with this hit piece.

Economic Policy Journal has a different opinion:

http://www.economicpolicyjournal.com/2009/05/big-collapse-could-be-very-near.html

 

The Big Collapse Could Be Very Near

The Federal Reserve appears to be increasingly nervous about the long term bond market. This is serious. How panicked are they? After leaking a story on Friday, they are back at it on Sunday.

The Federal Reserve leaked to CNBC's Steve Liesman on Friday that they weren't targeting long rates. Why such a leak? Probably because the Fed did not want to appear impotent in controlling the long rate. So they put out the word through Liesman that they weren't targetting the long rate. Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?

The Fed can of course print money to buy up every Treasury bond in existence, but the inflationary ramifications would be Zimbabwe like, and crush the dollar on international currency markets. Are we near the phase where all hell breaks loose? I have never even answered, maybe, to this question before. It's always been, "no." Now it's maybe.

What really has me spooked is another article out this afternoon (on a Sunday) that Drudge has even picked up. It's a Reuters story by Alister Bull. The headline: Federal Reserve puzzled by yield curve steepening.

Translation, the Fed doesn't know what is going on, but they are really scared.

How about a $1trillion quarterly monetization?

http://www.financialsense.com/fsu/editorials/willie/2009/0602.html

The trip to China by USDept Treasury Secy Geithner should be viewed as a key reassurance to these important creditors, later to be viewed as a betrayal. The Chinese audience responded with loud laughter when Geithner assured them that their $2 trillion in savings was safe and secure.
...
The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in failed auctions, crushing losses by the primary dealers, and their possible disappearance. Remember what happened to private equity firms stuck with their own stock and bond inventory? They went bust. That is precisely the risk to these bond dealers.
...
PURE MONETIZATION WILL SOON BE A REGULAR QUARTERLY PROMISE. IF NOT, THEN A USTBOND DEFAULT THREAT LOOMS NEAR ON THE HORIZON, OR A POWERFUL SUDDEN STOCK MARKET COLLAPSE WILL ENSUE.

OK, DOES EVERYBODY UNDERSTAND WHAT IS HAPPENING? US government debt is avalanching so fast, that either the Federal Reserve "monetizes it" (creates new money to buy it), which is highly inflationary and provokes bond-selling (rising interest rates), or the government is UNABLE to roll over that debt (borrow new money to pay back existing debt coming due).

When bonds are sold, INTEREST RATES GO UP. Bonds and interest always go opposite directions, because the one or the other happening is equivalent--if you sell bonds, you say that the interest rate isn't high enough for you, and the buyer gets a discount that is the equivalent of a higher interest rate.

Rising interest rates cause debt accumulation to accelerate! And what happens to the housing market when interest rates go UP not down? How about cost to roll over business debt? Bankroll new projects? See where this is going?

Unemployment is still rising as predicted:

http://online.wsj.com/article_email/SB124403132950181113-lMyQjAxMDI5NDA0MzAwMzMxWj.html

Private sector jobs in the U.S. fell by 532,000 slots in May, according to a national employment report published Wednesday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.
...
The ADP survey tallies only private-sector jobs while the U.S. Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers. Economists surveyed by Dow Jones Newswires expect that the BLS will report May job cuts totaling 525,000, on top of a 539,000 loss in April. The May unemployment rate is projected to rise to 9.2%.

PR is being planted to get folks to buy bonds (don't!):

http://seattletimes.nwsource.com/html/businesstechnology/2009292654_stoxcenter03.html

Desperate government continues looking for ways to raise taxes, on the theory that it will reduce deficit and is "anti-inflationary".
    

Source: Associated Press

WASHINGTON – President Barack Obama is leaving the door open to taxing health care benefits, something he campaigned hard against while running for president. Senate Finance Committee Chairman Max Baucus, D-Mont., raised the issue with Obama during a private meeting Tuesday with the president and other Democratic senators and later reported the president's response: "It's on the table. It's an option."

The federal government would reap about $250 billion a year if it treated health care benefits given to employees like wages and taxed them.

[offdalip]

looky looky how much the interest rate on the ten year treasury bond has gone up since mid-march:

http://stockcharts.com/h-sc/ui?s=%24TNX

[Atash Hagmahani]

I haven't been watching mortgage rates (no reason to--prices on investment-quality real estate still too high in my part of the country compared to the rent I could get out of them), but if 10-year rates are going up, that implies that so are mortgage interest rates.

That implies that the housing bubble is still in trouble.

That implies the continued toppling over of all the dominoes related to housing.

[Atash Hagmahani]

Here we go: not all that high, but creeping up:

http://finance.yahoo.com/news/Mortgage-rates-above-5-pct-apf-15439335.html;_ylt=Asm4E549UZHgLDtHuj8KQ4.7YWsA?sec=topStories&pos=1&asset=&ccode=

WASHINGTON (AP) -- Rates on 30-year home loans surged above 5 percent for the first time in nearly three months this week as investors pushed up rates on long-term government debt, which is closely tied to mortgage rates.

Mortgage finance giant Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages rose to 5.29 percent this week, from an average of 4.91 percent a week earlier. It was the highest weekly average in nearly six months.

Mortgage rates "caught up to the recent rise in long-term bond yields this week," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

The jump in rates came after the yield on the benchmark 10-year Treasury note, a barometer for interest rates on mortgages and other loans, jumped last week to a six-month high of 3.75 percent

[Atash Hagmahani]

BTW, offdalip, thanks for posting that link.

Bernanke is now PUBLICALLY ADMITTING concern over the budget deficit:

http://www.bloomberg.com/apps/news?pid=20601087&sid=agmj05AcqWHo&refer=worldwide

Dr. Gary North thinks that there is a real risk that the Fed could force the Treasury to default. How? By refusing to monetize new debt. Why? In order to save the system. The Fed belongs ultimately to the bankers, not the politicians.

Then the US government would be bankrupt. Not necessarily a bad thing as its spending is clearly out-of-control. However, the dominoes would keep falling: pension funds and insurance funds would go insolvent as US bonds crash.

[offdalip]

What I was trying to imply............


is that the fed funds rate are still at historical lows>>>>>>>>>> 0-0.25%

While

the ten year bond rate has climbed from less than 2.4% to almost 3.7% in like a 2month period.

quite a disconnect. ( they usually move in tandom )

The fed has lost control of the long end of the yield curve.............

I hope they don't resort to buying more of the treasury's long bonds ,,,,, it'll only bloat their balance sheet even more

but I suspect bernanke's speech was just for show

the dollar, oil , gold etc are all back were they were before his speech......

[Atash Hagmahani]

The fed has lost control of the long end of the yield curve.............

I'm not sure they ever OFFICIALLY have control of the long end. If they buy long-dated securities and everyone else knows what they are doing, then everyone should be selling the dollar. So, while they probably really do monetize long-dated debt, they don't normally admit it.

What gets interesting is when they give up on trying to control the short end. Then banks which borrow short and lend long, are trapped.

[opsec]

Any guesses as to when the bond market will implode?

[offdalip]

It is Hssssssssssssssing   slowly right now as the treasury bubble unwinds....

It could turn into a POP! if any one of the major players suddenly decides they want to jump ship before anybody else....


Then everybody will exit en masse

[Atash Hagmahani]

Opsec, to answer your question, "I don't know", but probably in LESS THAN A YEAR, since we've got a bunch of mortgage resets coming up by then. It's like a house of cards, where disturbing one cards brings the whole thing down. Interest rates SHOULD be higher than they are, if for no other reason (I mean, other than gigantic inflation) than for "risk premiums".

For many years, interest rates were kept artificially low, using something called a "credit default swap" (CDS), which is basically insurance against bond defaults. What was going on, was that the financial markets were selling bonds rated too optimistically, with interest rates too low for the risk of default, and reassuring buyers that they were "insured". But the parties underwriting the "insurance" were never required to prove that they actually had the means to insure the bonds.

They didn't. They were just collecting the premiums; it was "free money".

All I can say is watch the bond markets (falling bonds, rising interest rates), which, unlike unemployment statistics, don't lie. You can't lie about the price you're charging for bonds. Watch the 10 year rate and the corresponding mortgage rates, because those will impact the housing market.

The currency markets are clearly rigged; somewhat ignore them. However, Jim Rogers is probably correct that at some point they "lose control" and you have a major "currency crisis". You might not have any warning before it hits the 6 o'clock news, other than the bond market plunging.

We should probably post and "sticky" links to key real economic indicators.

It could turn into a POP! if any one of the major players suddenly decides they want to jump ship before anybody else....

Here is a list of major players, courtesy Dr. North and the Fed:

http://www.newyorkfed.org/markets/pridealers_current.html

Memorandum to all Primary Dealers and Recipients of the Weekly Press Release on Dealer Positions and Transactions

The latest list reflects the following changes:

    * Effective April 1, 2009, Greenwich Capital Markets, Inc. changed its name to RBS Securities Inc.

List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
RBS Securities Inc.
UBS Securities LLC.

NOTE: This list has been compiled and made available for statistical purposes only and has no significance with respect to other relationships between dealers and the Federal Reserve Bank of New York. Qualification for the reporting list is based on the achievement and maintenance of the standards outlined in the Federal Reserve Bank of New York's memorandum of January 22, 1992.

Government Securities Dealers Statistics Unit Federal Reserve Bank of New York
April 1, 2009

Dr. North points out that about half of them are foreign. And two long-standing dealers (Lehman, Bear Stearns) already capitulated.

Dr. North by the way is taking the Jim Willie PhD editorial very seriously. He doesn't see any logical errors in the reasoning. I was distracted by the strong language, but maybe the guy was just trying to get our attention. In any case, I was already concerned by similar warnings from unrelated sources.

[opsec]

We should probably post and "sticky" links to key real economic indicators.

I second the motion.

[offdalip]

Up up up with interest rates! 


http://finance.yahoo.com/news/Stocks-fall-after-weak-apf-15491093.html?sec=topStories&pos=main&asset=&ccode=

Stocks fall after weak auction of 10-year notes
Stocks fall as weak 10-year note auction raises worries about inflation, interest rates
Madlen Read, AP Business Writer
On Wednesday June 10, 2009, 1:19 pm EDT
       Buzz up! Print NEW YORK (AP) -- A weak auction of Treasury notes is putting the pressure on both stocks and bonds.

The Dow Jones industrial average fell about 65 points Wednesday after the government sold $19 billion in 10-year Treasury notes. The government had to lure buyers with a higher yield than the market anticipated.

The 10-year note's yield, which is closely tied to interest rates on mortgages and other consumer loans, jumped to 3.99 percent, a new high for the year.

Investors are concerned the government's debt load will become untenable, leading to higher inflation and soaring interest rates. Rising rates could hamper the economy's recovery.

By early afternoon, the Dow fell 64.17, or 0.7 percent, to 8,698.89. The Standard & Poor's 500 index fell 8.42, or 0.9 percent, at 934.01. The Nasdaq composite index fell 20.86, or 1.1 percent, to 1,839.27.

The major stock indexes had been modestly lower ahead of the auction after oil touched a new high for 2009 above $71 a barrel.

Higher commodity prices have been boosting energy and materials stocks, and raising hopes that economic activity is improving. But they have also been raising worries about inflation, which could potentially crimp consumer demand.

Trading was also cautious ahead of the Federal Reserve's report on regional economies around the country. The data is scheduled for release at 2 p.m. Eastern time.

The Dow has been waffling around 8,700 this month, just below where it started the year, after its massive three-month-long rebound from 12-year lows reached in early March.

It's a good sign the market has been largely holding up after its rally, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. But "we're going to need to have more positive news on the economic front to make another push higher."

[Atash Hagmahani]

Rising interest rates are themselves inflationary. It's a feedback loop: debt is rolled over at higher interest rates, requiring more money to either pay it--or not! Both happen at the same time, so you get both inflation and debt repudiation.

A lot of short-term debt will need to be rolled over...at rising rates..and a lot of debt overall is short-term.

Oddly the dollar "strengthened" (Reuters) despite the falling bonds denominated in it...hmm...and gold took a small hit.

[The Future]

Get out of US stocks if anyone is in them still.  Come October maybe, go long stocks in South America, Asia. 

[hancocs]

What about 401k's cash them out if you can????