Well, my point was somebody's got to buy this crap (then soaring long term treasuries). And buy it they did. At the behest of Larry Summers, Ben Bernanke, the financial media and the full faith and credit of the United States of America. How are those compliant, convention-worshiping investors feeling right about now?From NFTRH12, dated December 20, 2008:
Act of Desperation
The monetization of unserviceable debt has been in the Fed’s toolbox all along. Academic wunderkind Ben Bernanke has used many conventional interest rate and liquidity tools, but with the recent announcement that the Fed will buy long-term US Treasury bonds, he is opening the door to the nuclear option. This tool actually resides not in the toolbox but in a separate room, locked in a titanium-nickel composite alloy vault accessible by a secret algorithm code. From the Fed’s most recent monetary policy release on December 16:
“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”
This was of course, dictated by the t-bill market and is US Dollar non-supportive. But with Japan and the rest of the industrialized world falling right in line with this theme, it is truly going to be a race to the bottom for global currencies, not just the USD. I believe that people who focus grimly on the US Dollar are misallocating their energies. Given its heretofore status as ‘world reserve currency’ the Dollar is an important linchpin in the unraveling mess, but is by no means the only culprit in the global debt paper bubble now unwinding. In fact, it could be argued that the primary fundamental underpinning of the Dollar is the enormous albeit misguided demand for US Treasuries as the deflationary backdrop begins to take root.
As I listen to media commentators dissect Fed policy, the auto bailouts, the bank bailouts and speculate on all manner of would-be welfare to come from the new US administration and its new New Deal, I cannot help but think about how the entire outmoded apparatus is trying to pretend this is normal or at least readily subject to standard analysis. What I am trying to say is that we are down the rabbit hole, in Wonderland. This is abnormal, asymmetrical and just plain off the charts. Standard methods of quantifying an insane financial system will work against the masses that fall for it – yet again.
The Fed is talking about buying up unproductive legacy (debt) to stave off economic devastation, and that may be the only option now. But the same talking heads – the ones that never saw this coming – expert in their dissection of what is wrong and how to fix it, do not look ahead. They do not see, nor evidently care about the big picture.
Pictured above is the iShares long term treasury bond fund, TLT [chart not available for this excerpt]. Under the current shroud of deflation, Mr. Bernanke infers that the Fed will buy up the long term debt of a chronic and hopeless inflator and of course that is the green light for the next mania, for the frightened herds to come piling in. It’s deflation after all and in a deflation you own treasuries. Everyone knows that, especially now. “No matter that treasury bonds are over bought, at least we know we’ll get our ‘money’ back one day” says the compliant herd.
I am not here to bash treasuries. As you may know I have kept all cash equivalent funds in treasury money markets, t-bills and short term treasuries for years. I have done so because it is the safest haven from domino defaults that I have viewed as likely for years. Just this week however, with the manic chart above in mind, I have begun to scale into its ultra-short cousin, TBT. We will call this a little hedge on the t-bills and short term treasuries I continue to hold.
But the story here is one of cattle being branded, tended and herded toward that big, ominous looking building over there with the strange and terrible noises emanating from it. Fighting the Fed is a dangerous game in the short term and this mania has got some heavy hitters as sponsors. But what I see here is an instant market created for long dated treasuries by Bernanke’s jawbone and a disastrous economic backdrop that is going to get worse before it gets better.
Yes, buying long term treasuries is safe if you define safety as getting your money back with a little ‘income’ to boot. But in the big picture, it is the value of said money that is in question. As a nation, the US is committing to make whole $Trillions upon $Trillions in un-payable liabilities. This is being done by willing money into existence by various methods, with the treasury market front and center. The US is trading upon its rapidly disintegrating reputation. It’s debt is non-productive and its market carries on as long as the masses are willing to suspend reality and maintain confidence in the system.
The herd buys long bonds and does what it is supposed to do. Better (for we who would prepare for a whopper of an inflation problem to come) they do this in compliance with convention than after being compelled by government (IRA filled with 30, 60 or 100 year bonds anyone?) in the name of national interest. There is no patsy like a subservient, pliable patsy. People who are compelled into certain actions may tend to get a bit revolutionary, and we cannot have that, now can we?
That is why we are here, looking not for riches and joy, but rather for relative protection from the fate that awaits the vast herds now once again being led by carrots they don’t even understand.
