Wednesday, February 3, 2010

Has the World Lost It's Appetite for US Treasuries?

After looking at today's 21 day treasury auction, you have to wonder:


My Take:

As you can see above, despite a strong BTC, the number of indirect bidders in today's auction was ZERO! Indirect bidders are mainly composed of the central banks of the world while the primary dealers are made up of the banksters like Goldman Sachs and Morgan Stanley.

Now I realize this is just small short end treasury auction, but one has to wonder if the world is sending a message by passing. Whats also interesting here is this zero participation of indirect bidders occurred on the same day that Obama came out and blasted the Chinese for manipulating their currency. Coincidence? Perhaps.

What I find a bit humorous is the strong bid to cover of over 5.9-1. Did the primary dealers think they could pull the wool over our eyes with a high BTC hoping we wouldn't notice the fact that the world passed on the entire auction? Nice try guys!

The Bottom Line:

As this crisis deepens I can't help but get worried about protectionism down the line. As the world economies continue to spiral downward, the pressure on the worlds governments to create jobs at home will begin to feel like an elephant sitting on their chests.

After the Massachusetts election Obama finally got the message from the voters about jobs: Start helping Main St. and forget about Wall St or you will lose your elected position!

The same message will be sent to politicians in countries all around the world. As a result, the world's central governments will be forced to cave and spend more resources at home leaving them less money to buy US treasuries.

Making matters worse for the bond market is the $3.8 trillion dollar budget that Obama announced earlier in the week. Folks, we simply cannot afford to carry deficits like this and the world is seriously getting worried about our Ponzi spending.

We MUST start cutting spending right now or this economy is toast. The pundits on CNBC will tell you that a pullback in spending could ruin the recovery and threaten our economy. Plug your ears when you hear this bull****. The REAL threat to this economy over the long term is funding trillion dollar deficits with a shrinking tax base.

Like any corporation: When you spend more then you take in over time you eventually declare bankruptcy. Our country is no different. The Fed will use its smoke and mirrors to tell you this isn't the case but history tells us otherwise. The last time the debt vs. GDP ratio got this bubbly was in the 1930's when the stock market and the bond market eventually collapsed just like the tech bubble did when the bubble burst.

The Fed is trying to tell us that their actions brought the economy back from the abyss when in reality they just kicked the can down the road. You cannot reflate a housing bubble. The Fed/Treasury has spent trillions of dollars trying to do so and housing prices are still dropping! Once bubbles burst they never "come back".

Saying that you saved the economy by spending money that you didn't have is along the same general lines of thought that we heard from the Realtors when they told us "Real Estate ALWAYS goes up!". The reality is this is a bunch of bull. It's a complete mirage!

The Fed has simply replaced the consumer as the buyer of over inflated assets. The problem is they are running out of cash as the catastrophic economic effects of rising unemployment and further foreclosures slowly tightens the financial noose around its neck. The plan(for now) is for the Fed to stop buying MBS in March and hand it over to the private sector.

All I can say to that is HA! Do they really think the private sector is going to step in and buy this garbage at inflated prices? Think again, Wall street might be filled with crooks but they are quite knowledgeable when it comes to buying assets at the right price. I expect a one hundred basis point move in mortgage rates once the Fed leaves the market.

Once this happens, and these asset values are marked closer to market by the private sector, we will be in for one hell of a ride in the stock market. I suspect the Fed will be back buying MBS if things get out of hand but by then you have to wonder will it be too late?

In terms of the economy, things are not getting better out there. ADP reported that we lost another 22,000 jobs last month. What scares me about this number is the fact that the economy is still losing jobs from what would historically be considered to be extremely low levels of employment.

My question to the bulls: How can the economy be in "a recovery" when we can't grow jobs with a U6 unemployment rate of over 17%? Let me help you answer that: There is no recovery!

When it comes to the stock market I have pretty much been staying away. We seem to have hit a ceiling around the 1100 S&P/DOW 10,500 level. The momo to get here is lost. However, despite a small sell off last week, the sellers/shorts haven't really entered into the market on the flipside. As a result, the market looks pretty much directionless as it waits for more data.

Remember, the market usually tends to looks out 6 months ahead and right now the future seems very much in doubt. The bond market(which is a much more sophisticated group of investors) might have made their minds up today about where we are 6 months from now and it doesn't look good. Treasuries, despite a falling stock market, are selling off hard following the zero participation by the indirect bidders.

If the world walks away from treasuries the economy is toast folks. Keep an eye on the bond market in coming months.

Disclosure: Short treasuries in longer term accounts. Long GLD and SLV.

25 comments:

getyourselfconnected said...

Hey Jeff!

Got your message and wrote back.

Bulls will argue that this sale was so short in duration it does not count, but as you noted the ZERO from indirects is big. Nice yield too, 0.01% for 21 days.

The jobs revision coming friday will be a non event as well; no jobs = no inflation!

So many non events and so little time!

jeff said...

Get

Yeah I ususally don't talk much about the short end of the yield curve but the fact there were zero bidders was disturbing to me.

The short end is also where the foreign central banks have been recently buying because they don't like the risks we are taking when it comes to inflation.

This is a pretty startling development in my view but like you said its only one short end auction.

I can't wait to see the long end sales next week. I think there is a 10 auction and a 30 year auction if I am not mistaken.

getyourselfconnected said...

Jeff,
Your post brought down the markets today! Admit it: your long abscence was in fact a paid leave by Goldman Sachs so the markets could rise! Just be honest.

Jeff said...

Get

LOL

I guess I am a sell signal!

Interesting day eh?

Lewis and his Bof A banksters are going down and my guess is they will take Bernanke and Paulson down with them!

getyourselfconnected said...

I buy the Jeff rumor and sell the news myself.

CT-Hilltopper said...

Any truth to the rumor that Jeff is considering changing the name of his blog to "The Bond Vigilante Time Bomb"?

;-)

Anonymous said...

Some $400 mill was tendered by indirect bidders, but none was accepted. Does this mean anything?

Jeff said...

CT

Hehe

Yeah thats where I am focused right now.

Nasty sell off today. I am curious to see if we hold DOW 10,000 tomorrow.

If we don't you will need to throw those DOW 10,000 2.0 hats away:)

On the serious side it is an important level psychologically. Tomorrow should be fun to watch.

Jeff said...

Anon

Hard to say.

There is so much manipulation going on.

Banks are hoarding cash rather then lending so the demand for short term lending is there in the US.

We saw some failed bond auctions oversees. Spain , Greece, and Portugal all seem to be on the brink of collapse.

This is triggering the dollar rally and sell off in gold.

Its the old "were screwed but they are screwed worse theory".

That being said, I think both of them are screwed! It's a race to the bottom with currencies.

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