Bill H:
You Lose!
To all; I hear a giant sucking sound, not the one Ross Perot heard all those years ago but the one coming out of the government bond market. The Treasury market is sucking up all kinds of capital as investors are pushing rates close to 0%. What we are watching is an enormous flight to quality by investors willing to lock in a rate so low that they are guaranteeing they will end up with a loss of purchasing power after inflation. The 10 yr bond is under 3% while the 30 year is barely above this level.
What a complete joke this is, who in their right mind would tie up money for 30 years at a rate of 3%? Add to this, they are lending the money to an entity that has mathematically over borrowed to the point of putting themselves on the doorstep of bankruptcy. With the amount of debt outstanding, the US government can in no way pay this debt back in current Dollars. The only option will be to devalue in order to make payment. The current situation is certainly dicey as the only way the system holds together is through the confidence of foreigners. Should this confidence even slightly falter from here, the entire Ponzi scheme will be up. The Fed will have no other choice than to purchase every bill, note, and bond the Treasury can crank out. No this is not a “flight to quality”, it is a kamikaze suicide mission if I ever saw one! Investors can’t get in fast enough today, tomorrow and believe me tomorrow is coming, they WON’T BE ABLE TO GET OUT, PERIOD! Who will they sell to? We all know the answer, the Fed. The Fed will be the buyer of last resort within the Treasury market. My how times have changed, when I went to school the Fed was the lender of last resort for the banks, the thought of the Fed being the only buyer for Treasuries was unimaginable.
Back in March when Bear Stearns fell, I wrote to everyone and put out a crash alert. Debate this or no, we HAVE crashed as stock markets globally have dropped anywhere from 30-80%, commodities are down 25-90%, and debt securities excluding [the bubble of all bubbles] Treasuries are down between 10-100%. Now comes the moment of truth for the entire world. What comes next is the crash in sovereign debt, what I mean here is that countries will begin to default. Whether it be from non payment or not being able to access the credit markets makes no difference, a default is a default. The CDS spreads for the sovereign debt markets has begun to rise markedly in just the past several weeks, the US in particular. I believe that the “next crash” will be sovereign debt and their associated fiat currencies, this “crash” will be what separates MONEY from CURRENCY. “Currency” is a medium of exchange and “temporary” store of value, while “money” is first a store of value and second a medium of exchange. This distinction will shortly become apparent for anyone with a pulse as every currency on the planet will be affected.
As for the “Credit Default Swaps”, or CDS market, I must chuckle out loud. Here is a market that bets on the likelihood of an entity going bust and defaulting. We have seen this market rev up and blow out spreads in company after company, and within days the government comes to the rescue with a bailout so the “default trigger” doesn’t get pulled. However, recently the amount of bets on a U.S. default has increased and the default rates have begun to increase. Here is the part that I don’t get, I don’t think the market participants do either otherwise they wouldn’t be playing. OK, so I bet on a US default with $100,000 today, things get worse from here and the Treasury has a couple of failed auctions and the Fed is the only buyer present and this action triggers a global panic. Either the Fed monetizes hundreds of $ trillions, or the auction actually fails and the US defaults on payments triggering the CDS payment. Now here is the part I don’t get, if you bet on a default and win, HOW DO YOU GET PAID??? No, really think about this for a moment. How do you get paid? I don’t think you do get paid. If the other side of the trade still actually has the $10 million to pay you, what are the actual dollars worth anyway? ZERO!!! Do the math, the Fed prints Bazillions so the Treasury has a buyer, or the Treasury defaults and the Fed prints Bazillions, either way the Dollar will collapse and disappear as every other unbacked fiat currency has before it.
The CDS market is hilarious, in the end, either you lose or you lose, there can’t be a winner when the game ends. Either the government doesn’t default and you lose, or they do default and the other side of the trade goes bankrupt and since the government is bankrupt the Dollar goes without value anyway. So if you win and the other side of the trade is bankrupt, you don’t get paid, if the other side of the trade isn’t bankrupt you get paid in a currency that is worth nothing. Either way you end up with nothing and end up not getting paid. Such a deal! So this is what the computer geeks that created this market came up with. A market where no matter what happens, YOU LOSE! Regards, Bill H
More from Bill…
To all; Well, I guess we are all saved! The autos will get their bailout and President elect Obama has a $500 billion plan to rebuild roads, bridges, and schools. This will certainly do the trick right? Forget all the past “bailouts”, they were puny, this will be the one that saves everything and we can go back to business as usual without delay. What a joke. The markets bounce and CNBC puts on the “yeah rah rah” mode because Congress will give enough capital for the autos to survive maybe another 60-90 days and Mr. Obama tells us he will spend another half a trillion $s that we don’t have and haven’t had for years. They [Washington] just don’t get it.
For Washington this is business as usual, for anyone with even a squirrel’s brain this is absolute lunacy. Washington could not have done a better job bankrupting the Treasury even if that was their primary goal, and the saddest thing of all is the “observer/cheerleader” status that American citizens are taking. This is like a doctor telling you that you have cancer and need to have 27 body parts and organs removed to be cured. He tells you that after the operations you will be fine and lead the same life you would have without contracting cancer nor having the operations. He tells you not to worry about paying for the operation, your family can pay for it long after your dead. It’s all good, right?
The way I see it, we will hit an inflection point very soon that will be mistaken by no one. This will be a shot heard ’round the world that even pre schoolers will hear, feel, and understand. This inflection point will sound like a door slamming and in fact it will be, it will be the door to the credit markets that the U.S. Treasury has taken for granted and abused for so many years. The Treasury will be shut out and domestic interest rate will begin to shoot skyward. The old saying goes “they don’t ring a bell at the top nor the bottom”, don’t believe it because when this bell rings any semblance of “business as usual” will be gone forever.
Can it possibly get any more stupid than it already is? No really, go back 40 years, or even 10 years, if you read today’s headlines back then, you would surely think it was a prank. You would not think it even remotely possible that people could have been so numbed and dumbed down to ever let today’s’current circumstances happen. George Orwell must have read a 2008 Wall Street Journal before writing his science fiction novel “1984″. Maybe it wasn’t fiction after all? Regards, Bill H.
TOCOM
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