Tuesday, April 28, 2009

Ben's Dilemma

Good Evening Folks

Sorry I am a little late tonight. I had a lot of business to attend too.

Hmmmm........Tomorrow is going to be VERY interesting. We have the Fed statement tomorrow and the bond market officially turned up the heat on Bennie today.

Check out the 10-year:

My Take:

Whoa! I wouldn't want to be in Ben's shoes tomorrow. As you can see above, the traders in the bond market sent a message today to the Fed by taking yields above 3% intraday before closing at 3% which is where we were when the QE began.

The question now becomes this: What do Ben and the Fed announce tomorrow in response to the 10 year moving back up to 3% despite the Fed's treasury purchasing via QE? Do they announce another spending binge on treasuries? If they don't do yields then start to fly higher? Chicago wants to know and I do too.

This is a huge game of chicken ladies and gentleman. In case you missed this last night check out the Fed's spending plans for the 2nd quarter:

"WASHINGTON, April 27 (Reuters) - The U.S. Treasury Department said on Monday it expects to borrow $361 billion of marketable debt in the April-June quarter, up $196 billion from earlier estimates, as government spending soars in the deepest and longest recession in decades.

The amount is a record for the quarter, in which borrowing usually diminishes because most Americans' annual income taxes are filed by April 15.

Borrowing needs include $200 billion to support Federal Reserve liquidity programs aimed at reviving lending after the housing market crash and surge in credit defaults.

The previous record borrowing for the April-June quarter is $60 billion in 2003.The Treasury cited weak revenues and greater spending to support economic recovery programs as among reasons for greater borrowing needs.

The Treasury said it expects to borrow $515 billion of marketable debt in the July-September quarter. In the January quarter it borrowed $481 billion, slightly less than earlier estimates."

Take continued:

Gee, do you think a six fold increase in spending versus the previous record in the second quarter by the Fed has gotten the traders in the bond market a little nervous?

The Ponzi spending game can't last forever folks and the bond market will put a stop to it when they believe enough is enough. Ben has been given a little slack as a result of the bad economy, but there is a point at which this game ends.

So here we are the eve before the Fed speaks. This sets up for a seriously dramatic day tomorrow. What does Ben do? My guess is he announces another debt purchase via QE. My thought here is if he doesn't the bond market is going to shove it up his behind by pushing yields through the roof.

Ben can't afford to allow this because the housing game blows up if lending rates get out of control. He also realizes his resources are limited so he might be hesitant to go on a Treasury spending binge. He knows he can't continue these antics without printing and creating serious inflation.

Either way the way I see it now he is pretty much screwed. I mean look at how out of control the spending has gotten!:


Houston I think we have a problem!

This is simply asinine. Who do you think has to pay for this? Look at your children and you will see the answer. We are destroying the futures of our younger generation by attempting to bailout a bunch of greedy bankers in an attempt to reflate a debt bubble that is impossible to blow back up.

The Fed is very crafty when it comes to creating an image of having unlimited power and resources. This image of invincibility is what will become their downfall.

At this point, they have pretty much put a guarantee beneath our whole financial system. The reality here is the Fed is as mortal as we are. They can only spend what they can finance via treasury purchases. Anything else beyond this is pure printing.

Always keep this in mind, the actual spending by the Fed has been dwarfed by what they have guaranteed. Remember: Guaranteeing something is easy. Any fool can guarantee anything. How many late night guarantees do you see on infomercials each night? Its easy and its also free!

Having the resources to back it up is another matter. If the Fed had to actually back up everything they have promised they would be toast.. Argentina anyone?

Bottom Line:

Lets see what Ben does tomorrow. The market has been quiet the last few days but I believe things could really heat up tomorrow. Chicago officially called out the Fed today by taking yields on the 10 year to 3.02%.

The Fed is rapidly being put in between a rock and a hard place. They are spending record amounts of money at a time in which tax receipts are plummeting. The math doesn't work here folks. The problem Ben has is the math always wins because its never wrong.

This debt bubble will collapse. Its only a matter of when not if at this point.


Check out this great piece on housing below. Is high end housing the new subprime? This appears to be the next leg down in housing.

Lets see what Bennie does tomorrow.



johndaniels said...

"marketable debt"

what % of that is defaulted and unpayable (i.e. swept under the caprpet) like derivatives cover up?

have to think defaulted debt is mixed with current debt, much like a digital inflation effect thats wont be expressed in the real markets; just the digital ones.

trying to think what happens if these credit instruments remain illiquid and therefore deteriorate.. means continued deflation in debt based assets like stocks and real estate and true values remain constant... even with rpice manipulation.

IMHO this means acquire real assets when the prices are pushed downward, because the true value of real assets is not REALLY deflating.

johndaniels said...

r\"real asset" being defined as assets not tied to the leverage system. that moveable and concealabler items of value to the common and industrial populace. based on current circumstances and prices right now im bullish on silver, palladium, and chinese yuan in a bank account.

Jeff said...


Nice bets. China should fare much better than the US

Be careful with the metals here.

We are sitting on critical support levels in gold. Some analysts are calling for a $60-100 drop from here if we don't hold.

As long as deflation persists gold is going to have trouble. If the Fed does something crazy it could be a huge winner.

Thats too much risk on either side for me right now. Silver is the best metal play becuase people in the real economy can still afford it.

I currently sit short QQQQ's, SDS, and treasuries via TBT. I have scaled into all of these positions over the last few weeks. All of them are small.

I haven't discussed my positions on here too much lately because the chop around 8000 on the DOW has really made it difficult.

The uptrend is still intact but I think its showing signs of rolling over the past week or so.

Ben will probably bend me over on TBT with a QE but I don't care. Yields long term will only move higher.

Jeff said...


Here is a nice read on the metals today from Bloomberg:


flipdippy said...

Why does Ben need to do anything?

GDP down 6.1%, and 6 of the 19 banks in the stress test need capital, DJ up 1.5% as I type.

What, me worry?

johndaniels said...

i know your looking for excuses to bag gold, but didnt mention gold; i said beaten down industrial metals.

Jeff said...


Away today. Did you see Treasury yields after Ben did nothing?

Thats why he had to say something. Don't get me wrong this is the prudent/proper decision by the Fed.

AS I said yeterday. The Fed's in a box and there is no way out.

Post up around 6

Jeff said...


I hear ya man.

I am not dissing gold. Its just too violent for me right now.

I always appreciate your input and thoughts. I am actually getting ready to dip into SLV after thinking about what you said yeterday.