Sunday, December 12, 2010

10 Year Treasury Dump Continues

Well it didn't take the bond vigilante's long to get started this week:

Let's try and put this dump into perspective from a longer term basis:

My Take:

The Fed made it's QE announcement on November 3rd.  As you can see above, the bond market has been done nothing but sell treasuries since.

This is no longer a short term knee jerk reaction folks.  This is a trend, and it sends a message to Ben that he doesn't control rates in the bond market: Credit traders do! 

If this continues and the 10 year heads for 4% it's going to get real ugly in a hurry.  What the bond market is telling the Fed that their plan cannot work.  You can't finance yourself by printing money.  This is an end game not a solution and the bond market knows it. 

This situation could rapidly spiral out of control.  We all saw how fast the PIIGS got murdered.  Don't think it can't happen here.  We are pulling the same stunts so why should we expect different results?

The Telegraph had an article that was quite frightening tonight about the dire European debt crisis:

" There will be no Eurobond, no increases in the EU’s €440bn (£368bn) rescue fund, and no mass purchases of Spanish and Italian bonds by the ECB. Nothing. The system is politically and constitutionally paralysed. Spain and Portugal will be left nakedly exposed before their funding crunch in January

What the German people are being asked to do is to surrender fiscal sovereignty and pay open-ended transfers to Southern Europe, taking on a burden up to six times reunification with East Germany.

“If we pool the debts of the countries in the south-west periphery of Europe, we are blighting our children’s future: the debt levels are astronomic,” said Hans-Werner Sinn, head of Germany IFO institute.

The ECB has postponed its threat to pull away the lending props beneath the banking systems of the PIGS. Beyond that it has limited itself to tactical strikes in the small illiquid debt markets of Ireland and Portugal, buying enough bonds to ram down yields and burn a few hedge funds.

The effect has faded within days. It had little impact on Spanish and Italian bonds in any case. Spanish 10-year yields reached 5.45pc last week, far above 5pc level where compound arithmetic comes into play.

Credit Agricole said last week that it would hold back at next week’s auction of Spanish debt because it is not yet clear whether the ECB will back-stop the country. “The risk is simply too large for our appetite,” it said

“Leaders grudgingly do what is needed to prevent disaster at the last minute before it is too late, and the next minute they go back to the behaviour that brought them against the wall in the first place. The eurozone is in bad need of a psychiatrist,” he wrote at VoxEU

Did it not lock in chronic imbalances between North and South? Has it not left victim states trapped in debt deflation or slumps which have gone too far to respond an austerity cure, and from which there seems to be no escape on terms acceptable to Germany?

Should we blame the current hapless leaders, or the guilty men of Maastricht who created this doomsday machine? If the project itself is rotten, surely what the eurozone needs most is an undertaker."

The Bottom Line

Translation?  Germany is going to tell the PIIGS to piss off in order to save itself. 
Further down in the article you can see that Spain delayed a bond auction.

The fiscal situation of the western economies is now beyond absurd.  The only answer the elites have is to continue throwing money at the debt bubble in hopes they can kick the can a little further down the road because they realize the alternative is gruesome austerity that would surely end with social chaos and wars. 

The problem here is solvency, and it's going to hit the PIIGS in 2011.  Spain has about 6 months of cash left, and it appears that  Germany is ready to "walk away" as it logically decides to save itself versus going under with the rest of Southern Europe.

Can you blame them?  I would do the exact same thing.

What the stock market refuses to understand is that this crisis is systemic versus individual.

People are not feeling pain yet because the government keeps sending out handouts in the form of employment benefits and welfare.  We are seeing other forms of stimulus as well:  Many homeowners are deciding to stimulate themselves(ok, get your mind out of the gutter, you know what I mean) by deciding to stop paying the mortgage knowing that it will take 2 years or more to get evicted.

This gives many families an extra few grand to "play with" every month.   Unfortunately, most Americans are too retarded to realize that they should be socking away the money instead of spending it on vacations and flatscreen TV's.

What will end up making this financial crisis different is it will be the governments that go broke before the sheeple.  The people will then be next as the government scrambles to pay the bills.  The "free money" checks will stop getting mailed and the public sector will me massively slashed in a dramatic attempt to save the system. 

Party on America because this is going to be the last one you will see for awhile if ever.

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