Credit Market Crisis: Round 2 Tomorrow!

Whoa! What a day.

I already went over the auction result's today so lets see how the 10 year finished trading:

My Take:

As you can see, the 10 year actually crossed 4% before pulling back a bit later in the day. It will be interesting to see if it can clearly break through the 4% level tomorrow following the 30 year bond auction results at 1pm.

Folks, today was only round one. Tomorrow's 30 year auction should be even more interesting because its even less appealing to FCB's. The 30 year sits on the longest end of the yield curve.

Jim Grant: Inflation/Is The Fed Insolvent?

So why are the FCB's so afraid of the 30 year? Because of inflation! You are screwed as a bondholder if inflation soars at double digits when your bond only pays you 4.5% like the 30 year does. It's basically a guaranteed loss on your investment.

Please take a listen to Jim Grant below. This is a must watch in my view. Jim is a major player in the bond market and his newsletter is read by the best and the brightest on Wall St.

My favorite line in this video comes after he is asked what we should do with the bank's toxic assets. Jim quoted a classic line from an anonymous bond trader: "There are no bad bonds only bad bond prices".

I have been screaming about this all along. We must let these "toxic" assets go to auction and sell for whatever people are willing to pay for them. If the bid is .10 on the dollar then that's what they are worth! These assets aren't toxic! They are simply overpriced!

If a bank goes BK as a result of taking a bath on selling their bad assets at market prices then so be it. They shouldn't have taken so much risk!

Jim also proposes that if he were a regulator, he would shut down the Fed because he believes it's insolvent when you look at The Fed's capital versus its balance sheet. Pretty shocking stuff.

Anyway enjoy Jim. This is a classic:

Bottom Line:

Jim's video made me think a lot about where we are. One thing Mr. Grant notes is that the M2 money supply is growing at a 9% annual rate. Jim believes this is one big giant monetary experiment that's being conducted by the Fed. He worries that there our government has simply too many dollars!

The fallout from such an oversupply of money of course is inflation. Demand or no demand inflation will occur if you create too many dollars. Example? Uhhh...Zimbabwe? There is no demand over there because the whole country practically lives below the poverty level!

Theoretically, lack of demand and limited wages should have resulted in deflation. However, this is only true as long as the FCB that is reacting to the crisis doesn't attempt to fix the problem by printing money. Zimbabwe went the printing route and we all see how that worked out. This is why a USA deflationiory death spiral isn't a lock. Ben is dramitacally increasing the money supply!

How the Fed reacts from here will determine whether or not we see inflation or deflation down the road. I still think we will see a bout of deflation followed by an inflationary crisis.

I mean Christ how can it not end with inflation?: Where are all of these dollars going to go? What assets are they going to chase? How can we all afford to live if it chases bare necessities like oil at a time in which all of our own personal wages and access to money is shrinking? I'm telling you folks this is a frickin nightmare when you really think about it.

That being said, the market still found a way to hang in there today. Will a bad 30 year auction finally tip us into a badly needed stock correction? Time will tell. At this point it really doesn't matter because the credit market is telling you things are not well. The equity idiots simply have their ears plugged and refuse to listen.

The bond market is extremely nervous as they relentlesly continue to sell off ttreasuries. This cannot be ignored by equities forever. Without the ability to borrow cheap money, these bloated assets MUST collapse down in price to affordable levels before we can clear the debt and move on. When it does its going to be extremely painful for the Fed, the stock market, and our economy.

Things in my view keep getting worse and worse. Hang On!

Lets see what happens tomorrow!