Treasuries: High Prices & Infinite supply. Bubble? Buying Panic? Imminent Crash

[Mike]

http://wallstreetexaminer.com/podcasts/rf82310.mp3

This podcast is not just the free preview.  It is the full blown cast.  Lee Adler and Russ Winters dance all around the pertinent issues regarding Treasuries.

Treasury dropped a little bomb: $25 billion cash management bill was due.  But decided to hit the market with an extra $10 billion, bringing this sales total to $35 billion!!!

Lee Adler maintains that a 'buying panic' most accurately describes high treasury prices.
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About 10% of the population have more than $200k in liquid cash.  Due to low interest rates, these people are paying off their mortgages as 'the best safe investment.'  This has surprised the FED, who had been worrying about what to do with their Mortgage Backed Securities: Problem solved by early repayments!

However I (mike here) wonder if it isn't really more the case of a mortgage backed security losing its high quality underpinning.  And the remaining mortgages backing the MBS being of lower quality.
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Russ Winters noted the strange purchasers of Treasuries, i.e. UK! Caribbean!  (as have members of this board, I think Atash)
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Russ has been short Treasuries.  Lee Adler razzed him last week about that.  And last week Russ defended his short as the most comfortable trades he has ever made.... and wishes he would REALLY go short, but he is not using other peoples money.  lol
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Russ Winters references charts in his Professional Edition that demonstrate the market is front-running the FED, and comments that the FED is surprised and never gets the 'front running concept'.
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Russ Winters says, 'There will be a panic all right, when the credit rating of the US Treasury collapses.'  There is a huge supply of treasuries.

Lee Adler: That is a very good point.

Winters: This week there will be a lot of numbers making big misses.  like new home sales.

Winters: If the treasuries don't react to these bad numbers, that will be my cue.

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In short, a very good podcast, and a very rare opportunity to hear it while it is still current.... at a time when the apparently stable market might not be quite so stable.

Lee Adler says he may discontinue podcasts because the listenership does not justify it.  I don't pay for anything, but I might just pay for this podcast subscripton;
http://www.capitalstool.com/forums/index.php?showtopic=10444&st=45

[wander]

So what does this all mean? I don't understand.

[Atash Hagmahani]

Wander, I don't know what will happen to the bond market, but I'll summarize briefly what the issues are:

* China has stopped buying, and most other countries have curtailed purchases, and a great deal of debt must be rolled over (new bonds issued to replace old bonds that are maturing). THERE IS A LOT MORE DEBT IN THE PIPELINE.
* This means that bond prices should be FALLING not rising.
* But "somebody" is buying up all this debt. The UK, the Carribean, and "household" (the "fudge factor" category) have all stepped up to the plate and bought up all this debt. Some people suspect fraud.
* Now, it IS true that the stock market is in a downtrend if not a full-blown bear market. Some investors might be selling stocks and buying bonds.
* the bond market is around 20 times or so bigger than the stock market.

Now, to explain the stakes:

If the bond market does crash, interest rates go up. Bonds down, interest rates up. They move in opposite directions. Saying one is the equivalent of saying the other.

If interest rates go up, debt accumulates faster. More likely, what happens is that a great many corporations, and perhaps states and municipalities, go bankrupt for lack of being able to roll over their debt.

If the government is secretly monetizing some of its debt, then that will eventually cause runaway inflation, which could go "hyper".

[Mike]

Great post, Atash.  It was an excellent summary of where we are.

The inflation - deflation question is crucial if one has any significant savings or debt.  If there is going to be inflation, one should want debt.  If there is deflation, one should want cash.

The question really isn't as simple as 'printing,' or 'thin air,' or 'gold.'

Most disturbing to me is the rampant belief in inflation, in Keynes, in The Fed, in Printing, in the Efficient Market Hypothesis, in Omniscience, & in Omnipotence.  Most of that stuff is only important because everyone else believes it.

Special attention needs to be paid to the geometric characteristics of Fractional Reserve Banking and the fact that most of the world's debt is denominated in dollars.

[opsec]

I just had a thought. If most of the world's debt is denominated in dollars and the dollars goes to zero value, how does the world resolve it's debt? If it can't use a unit of money, then they can't trade. That only leaves war as the means for nations to obtain the material resources they need. Any merit to this line of thought?

[offdalip]

I just had a thought. If most of the world's debt is denominated in dollars and the dollars goes to zero value, how does the world resolve it's debt?

simple, whatever the contract says.

i.e. if corporation x or bondholder y says the buyer or buyee of their services or debt must pay or be paid in dollars , then the transaction must occur in dollars.
no matter if the dollar hyperinflates or gets stronger. no ifs ands or buts

[Mike]

Special attention needs to be paid to the geometric characteristics of Fractional Reserve Banking and the fact that most of the world's debt is denominated in dollars.

Because of Fractional Reserve Banking (mostly) & other things, over the last 100 years the $1.00 has gone to $ .05, or something closer to zero than one.

 This has pushed asset prices up.
 --> a lot more dollars chasing only-a-few-more-goods.

In my view the risk and reconciliation isn't the $.05 dollar going to zero, it is the evaporation of the $.95 debt acting as dollars.  With the disappearance of debt (acting as dollars) the reconciliation is un-payable debt.

A lot of asset prices could fall to 1900s levels.

[offdalip]

A lot of asset prices could fall to 1900s levels.

I agree that the debt will evaporate (default), but there will still be no CONfidence in the currency (hyperinflation) and too
much of it (helicopter Ben)