Thursday, November 20, 2008

Treasury Yields Plummet to 50 Year Lows as Depression Fears Deepen

Good Evening Folks!

I must admit that I found myself very depressed today as I watched the market unravel right before my very eyes. The markets fell another whopping 5-6% today as investors in droves continued to run away from the stock market and pile into treasuries. Short term treasuries are now offering yields of less than 1% folks.

Take a look at this Reuters article on the flocking to treasuries:

"* Treasury bond prices soar on depression fears

* Ten-year yield hits 50 year low, 2-year yield record low

* Thirty-year yield nears 3.5 percent (Updates prices, adds fresh quotes, changes byline)

By John Parry

NEW YORK, Nov 20 (Reuters) - U.S. Treasury debt prices raced higher on Thursday, sending benchmark 10-year yields down to a five-decade low, as recession fears pummeled stock markets and intensified a rush to the safety of bonds and cash.

The fall of longer-dated note and bond yields to five decade lows marked a new extreme of risk aversion among investors, many of whom have not experienced such tumultuous financial market turmoil in their lifetimes. Many analysts are now starting to worry there is at least an outside chance of a depression, not just a recession.

"You have fear in the market that you haven't had since the 1930s," said Bryan Taylor, chief economist with Global Financial Data in Los Angeles.

The 10-year note's price rose nearly three full points, pushing its yield down to 3.03 percent, the lowest level since 1958 according to Reuters data and Global Financial Data.

The 30-year Treasury bond surged more than three points in price with its yield dropping to 3.61 percent, a level not seen in 50 years, according to Global Financial Data.

The stampede into lower-risk assets from stocks pushed ultra-short bill rates toward zero percent. It also drove the two-year Treasury note yield to below the Federal Reserve's 1.00 percent benchmark target rate for overnight funds, suggesting bond investors are betting the central bank will keep interest rates very low for a sustained period."

Quick Take:

Unprecedented times folks. You know investors are scared when they are willing to make almost zero interest on their money in return for the safety of treasuries. I have seen nothing like this in my investment career. I am pretty much speechless at this point. We are witnessing fear not seen since the 1930's.

So how did we get here?

My Take:

Its pretty simple folks. We borrowed too much. As you can see above, our private debt versus GDP is higher than at any time in our history. This debt bubble dwarfs the 1929 debt bubble by about 30%.

The euphoria of the housing bubble took lending to a new level. Lending standards deteriorated to the point where anyone with a pulse could get a loan. The lack of regulation then created an environment where fraud was able to thrive at an unprecedented scale.

This throwing of money out of helicopters built up our debt load to the point where it simply cannot be paid back. As a result, consumers are defaulting right and left on everything from mortgages to credit cards. The banks are now all insolvent.

The price action on financials has been terrifying to watch. Once Paulson said the TARP was not going to be used on buying this debt, every bank is beginning to be priced like its worthless. I mean look at Goldman Sachs stock price this week. Gee, do you think this might be because they have $73 billion in level 3 assets that Paulson has just announced that he is not buying? This stock should be a zero folks. So should almost every other bank in the country.

What Paulson is slowly realizing is he doesn't have the coin to bailout the whole economy. Look at the char above. We have borrowed 3x our GDP! That $350 billion left in the TARP is a drop in the pan versus what is needed to get us out of this mess.

I am starting to believe that we could possibly see a scenario where the DOW eventually drops down into the 3-4000k area. The NASDAQ fell 80% in tech bubble crash so why can't this market do the same? This crisis is much worse than the tech bubble.

Everyone thinks this just can't possibly happen because our economy is much more sophistacted and innovative now. I say why not? It appears our financial innovation was nothing but a mirage! This debt bubble is bigger than 1929 where we ended up dropping 90% from the highs so to expect that its different this time sounds pretty stupid.

I would like to think that better policymaking prevents us from this type of drop, but I gotta tell you folks: I am starting to lose faith in this thinking as I watch the Fed and Treasury run around in a complete panic. They seem to be rewriting the rules as they go. The TARP in one month has completely morphed from what is was supposed to originally supposed to be. It looks like it had a sex change its so different! In my eyes it appears these two clowns seem to be just just throwing a bunch of spaghetti at the wall and hoping something sticks and works

Lets just hope we avoid a repeat of 1929.

Bottom Line:

The sad reality here is the government is slowly realizing they need to start saying "no" to failed companies and let them go BK. They must begin to start spending their money more prudently and pick and choose their battles because time and money are running out. Notice how there was no Big 3 auto bailout today? I predict you are going to see a string of bank failures and mergers over the coming months because as smaller banks are shunned from access to the TARP.

From a trading perspective I lightened up on some shorts. I sold my SDS. I have no idea how long this selloff is going to continue but I do know it can't hurt to take some profits! We are in uncharted territory from a trading perspective IMO. I really can't tell you where we go from here with any confidence. This selloff has been breathtaking. Keep your positions small and hope for the best. This country needs it.

Dell came out with some decent earnings so perhaps we get a little rally tomorrow. At this point, I am ready to see some green folks. I am genuinely fearful that we are heading into a Great Depression. If the credit market are beginning to price a dpresion in than you need to as well. I have always said that the smartest traders in the world are in the credit markets.

This means you must begin to prepare yourself for a severe downturn. I suggest that you pay off as much of your debts as possible, and increase your savings dramatically. Keep some cash on hand at home. It doesn't have to be your life savings. Just make sure its enough to get you through a month or so. Any big expenditures should be put off if they are not necessary. That plasma screen TV will be there next year!

If your employer is downsizing and you feel vulnerable, its time to polish up your resume. Be proactive and prepare to hunker down. This is going to be the worst economy that you will ever live through.

The credit markets have acted like they have seen a ghost the last couple of days. If they are nervous, you should be too.

Stay Tuned


opportunistic said...

I would not have been surprised if this happened last summer, the writing was on the wall. But, everytime a piece of bad news came out it "wasn't as bad as we thought it was going to be." There was so much hope in the market from Bear Stearns through the October crash and back up to Obama's election that reality simply could not take hold.

Now reality is here and the denial and bandaids of the past 9 months have made this much worse than it had to be.

I do believe that if, as a country, we can provide food, shelter, energy and TV for our people we will come out of this thing better off, especially considering the excesses of the past couple decades.

Unfortunately too many people feel entitled to their excesses and the resistance to the truth (see Mar'08-Nov'08) may make recovery harder than it needs to be.

That being said I did well on shorts from O'bama's election thru Tuesday, and of course I sold too early, once again. I hope my money is worth something when I'm forced to spend it.

Thanks again Jeff.

johndaniels said...

gold proved today its a hedge safe haven alright...against everything. It the only stable market out there now. Not precious metals, gold only.

johndaniels said...

"Holy justice demands that the enslaved become the masters. This cannot be cast away at will, to preserve the vestiges of power. Once the season is at hand, the end of all great powers comes to pass...and the great 'order of things' intervenes to set those in power to ruin."

j daniels.

Jeff said...


Yur welcome.

Well Said!

I totally agree. I think the entitlement mentality that has dominated our culture will change when this is all said and done.

Hopefully people become more repectful to one another and we can beome a more caring society. We don't need anymore Paris Hiltons in the world.

I am glad you scalped a few trades after the Obama election. That was a nice sharp correction over those few days.

I am sick about dumping SRS at 160..Its in the $250's! SKF is up there too. Unbelieveable.

Jeff said...


Gold did hold up well today. Shorting here is starting to get dangerous in my view because I feel we are bound to retrace here shortly. Maybe this will push some more investors over to gold.

You sure as hell can't make jack in treasuries right now!

I wouldn't be surprised to see an Obama "hope" rally here at some point.

johndaniels said...

i see futures up a under 5 bucks? BAC @ 11 n change? hmmm. what an opportunity! what a dream to see these huge bank collapse under their own greed

eeny meeny miney mo...which ones bank rupt to-mor-row.

Jeff said...


I am so tempted to short the hole on Goldman. I think these bastards are a zero.

They are a golden boy for the government so I just can't do it. Kicking myself because I was thinking of doing this when the stock was at 94.

There will be other opportunities!

Jeff said...


Good call on Citi!

Check this out. Its looks like they are going to be broken up and sold:

"SAN FRANCISCO (MarketWatch) -- Citigroup Inc. is considering auctioning off parts of the firm or selling the company outright, according to a media report late Thursday. The online edition of The Wall Street Journal, citing unnamed sources, reported that Citigroup (C:Citigroup, Inc
News, chart, profile, more
Last: 4.71-1.69-26.41%

4:01pm 11/20/2008

Delayed quote dataAdd to portfolio
Create alertInsider
Sponsored by:
C 4.71, -1.69, -26.4%) executives are in preliminary stages of discussing a possible sale. The report said that the company's management is still insisting that it has ample capital and a sound strategic direction, though its shares fell a further 26% Thursday."

Dot Papers said...

A great and intellectual post.