Wednesday, June 17, 2009

Bonds, The Dollar, and Jobs Oh My!

Stocks rose sightly today on continued light volume. The low volume is ominous considering tomorrow is options expiration. Today would usually be a high volume day expecially in the options market. This tells you that many are simply avoiding the market and specifically options altogether.

Fed announces $165 billion in bond auctions next week

Folks, this is getting ridiculous. Get ready for another bond watch like we had last week. The auctions will once again be the focus of the markets. This should further pressure te dollar and push bond yields higher. Yields soared up to over 3.8% on the 10 year on the auction announcement.

BTW, if we continued this rate of auctions over the course of a year, it would represent an $8 trillion annualized pace. The music WILL stop very quickly if Ben continues to pull this crap.

Deflationist's Beware

As the Fed continues to sell treasuries at this ridiculous pace, inflation MUST be respected.

Take a look at the inflation chart below that compares the pricing of our current crisis(red) and compares it to our previous recession's and The Great Depression:

My Take:

As you can see above, the deflationary pricing collapse seen during The Great Depression had already started at this point during the 1930's.

Currently, we are not seeing much evidence that we are headed down the same path. In fact, prices have continued to increase throughout this crisis.

This is a different animal then the 1930's and Japan because the policy response from the Fed has been MUCH more rapid and aggressive in terms of fighting deflation.

If the Fed does not stop spending, and we have no reason to believe that they intend to given the $165 billion treasury auction announcement today, the dollar is at SERIOUS risk.

Go back to the late '70's and look at Carter/Volker's battle with inflation to see what happened the last time we saw an environment like this where we carried massive deficits.

This eventually created a currency crisis and commodities fluctuacted alover this place. $50 moves in gold up or down were common.

The reason you saw this during this period was due to several FCB panics between inflation and deflation.

The panics this go around could be even worse because this crisis is larger and much more unpredictable. Geithner even admitted today that he has no idea how this all plays out. Makin things even worse this go around is we now have much larger speculator's that can exacerbate pricing panics.

Bottom line here is deflation is probable, but don't bet the house on it! The treasury sales eventually will put a beat down on the dollar. This puts a risk of a currency collapse on the table. Own something hard as a hedge to protect your wealth. If the dollar collapses you would lose everything if your assets are all in dollars.

I see a lot of over confidence in deflation on many message boards and blogs.

History has shown us that it's not that easy. IMO, we will see both deflationary and inflationary panics as we work through this crisis. I plan on protecting myself against both.

Jobs, Jobs, Jobs!

Bottom Line:

The last chart just puts into perspective how historic this unemployment collapse is. More of the population is now unemployed than at any time since The Great Depression. Even scarier, we are still losing them. Who knows what the final number will be. Green Shoots my ***!

Be careful tomorrow, we have an options expiration triple witching hour! Stocks could be all over the place tomorrow.

The focus is back on he credit markets next week folks!

I may have something small up tomorrow. I am going away for the weekend.




EDC said...


We don't have a monetary based currency system it is a credit based currency system.

"every credit boom ends in a credit bust". Von Mises

The most worthless currency on the nation is the US Dollar however it will be the most valuable currency. I hate to dispute you recent post but if government bond rates go up. The FED will have no choice but to pull liquidity out of the system to keep long end rates down. When liquidity is pulled, guess what, FIRESALE because everything must go just like October and November when spreads blew out, stocks collapse and what happend? gov bonds went up. The only problem with this merry-go-round is that government bonds won't catch the bid that they will expect.

Inflation is not high rates, that is the biggest misconception out there. The dollar already crashed over 8 years. It won't go lower, it will go higher, much higher but no insanely high. Eventually it will bust but we are at a cross roads right now and both lead to deflation.

the fed if they should not to pull liquidity out of the system will try to keep our 251ks up (markets) and allow the slosh liquidity to run its course by keeping the alphabet soup programs going at the cost of long end financing rates going higher to where there is no benefit to the broad based economy. (short term rates are going nowhere). This will lead to deflation because there will be no incentive to borrow for a long time at high rates. We started with little debt at high rates and over the course of 30 years we added debt and lowered rates to maintain the servicing. Hence no additional credit being able to chase a bid in prices. Corporations can barely make profits with LOW long term rates so how can they make profits at higher rates? can we say more layoffs? or cut backs in CAPx.

other option, is Ben pulls in the rains on the alphabet soup programs or tries to do it with finesse, little by little. Well if they, they banks can't swap trash for cash to speculate, liquid dollars are leaving the system and less velocity is chasing goods and services as it piles into what is safe as risk trade is off. wall-a we have a FIRESALE, capital across the globe is imbalanced and we have a replay of last fall.

The Audit the FED bill is got them scared which is why they are trying to increase they powers now with rush legislation. I believe the rush will die and the FED audit will gain more and more strength.

we are at a paradox and eventually the paradigm will shift. Something big will happen in the next few years because all of this is new to the last two generations. We will see shifts in social mood, politics and even economic theories. Just like the 30s.

Think about this, if my barber is telling me about how much inflation is coming.... well I can remember when a cab driver tried giving me a stock tip or when the shoe shine boy was giving Kennedy a stock tip.

Risk trade is done very soon and we will see fear very soon.

China is done buying copper so much for green shoots. The ironic part of that is they stored it all! So they drove up the market and bought at higher prices.

There is no credit out there, society will go to cash.

Keep in mind this, after deflation is major inflation.... the question is this... does the major inflation result in higher prices than today?
I don't think houses will go up, equities won't, bonds won't. commodities... maybe but again if there are no productive drivers such as jobs it makes it doubtful... sure the currency could be worth less but even when that happens... we get less demand for oil and crap. Crap is discretionary so that means, yes they won't sell as many iphones which means less... jobs.

Best to stay balanced and be prepared for anything but i'd guess more money on deflation because inflation can't be sustainable in a society that is over saturated with debt. Besides the whole society is thinking inflation.

They also thought or still do that we have green shoots.

Jeff said...


Good luck. Respectfully sold to you.

Is the FED pulling liquidity as they prepare to sell $165 billion in bonds?



Firesales lead to a collapsing currency. The Fed is obsessed with preventing deflation.

History tells us that the Fed has ALWAYS pulled liquidity too late.

The Fed audit is a joke.

Demand and currency issues make it different to analyze.

I wish you the best and I hope you are not too married to your thesis.

My biggest trading mistakes have come when I am "sure" how things will play out.