Idiocracy, Part Deux (for Today)

From "Redstate" we have this:

"The government debt market is where the real action is. The yield curve has been neurotically steepening and flattening as participants weigh the broadly offsetting influences on prices for governments: the steadily worsening economic news tends to support prices, and the gargantuan amounts of new issuance push the other way."

Neurotic eh?

You got half of it right.  The gargantuan new issuance.

I wouldn't exactly call this action neurotic in the 10 year Treasury Yield (in tenths of a percent)

I would instead call it the expected reaction when one tries to cram 10lbs of crap into a 5lb can.  Prices go down, yields go up.  This is simple supply and demand - nothing more or less.

If you have more supply for a given amount of demand, price goes down.  In the bond world this means yield (interest rates) go up.

The worse news is that there is only a certain amount of money in the world, and when Treasury decides to try to suck it all up to dispense to their bankster buddies it has to come from somewhere.

That "somewhere" is going to be stock prices.

I am continually astonished at how people simply don't get the basic fact that "money" - that is, real investable capital - is not infinite.  I know, it felt infinite when you could get leverage (debt) to buy anything, but those days are over.

That's why the LBO market is dead, the commercial and residential real estate speculation market is dead and Wall Street is crying in its beer over their inability to siphon off more and more of your money and turn it into yachts and mansions in The Hamptons.

The paradox here is that Treasury claims it wants low home mortgage rates and a strong economy and a strong stock market.  To get these things it believes it can sell nearly-unlimited ($2+ trillion) in debt in the form of new issue supply during this year in order to subsidize the losses of various segments in the economy from home builders to banks.

This assertion is beyond stupid and those who believe it deserve to be flensed by the media but of course doing that would mean stepping on their "advertisers" (when it comes to financial media, ala CNBS), all of whom are sell-siders hellbent and determined on selling you "mustard seeds."

The markets are of course not beholden to advertisers and will do the flensing of those who buy into this stupidity with their money in due course.

The fact of the matter is that in order to keep down rates (that is keep up prices) while at the same time issuing near-unlimited amounts of new debt Treasury and The Fed must foment a stock market crash in order to scare what capital is available into government bonds!

This was in fact done twice in the last year by The Fed, and The Fed admitted it once in their Year-End SOMA report in early 2008.  They claimed they "didn't expect" the result they got when they drained the slosh - uh huh. 

That's why on September 24th, during negotiations on the EESA/TARP, I noted a similar intentional drain in The Slosh by Bernanke and faxed the linked PDF to all 535 Congressfolk, warning them.  What did the market do?  Here's your chart - the period in question has been highlighted just in case that cliff-dive isn't obvious on its own.....

These events are not "accidents" folks.  They are a consequence of supply and demand, and in many cases, intentional manipulation.

The simple fact of the matter is that there is no such thing as unlimited capital and as such when you have extraordinary supply shoved into the market prices will fall.  To counteract this you must intentionally upset the natural balance of where that capital would go, effectively "scaring" money into your desired asset class.

The inescapable conclusion is that in order to get the sort of low yields that The Fed and Treasury want (which are necessary in order to get their desired "4%" mortgage rates) Treasury can do only one of two things:

1. Stop issuing massive amounts of debt, thereby making Treasury Bills and bonds short in supply for the given demand, thus forcing prices higher (and yields lower) OR
2. Literally scare money into Treasuries despite gargantuan supply, exploiting the view of "safety" that people have in Treasury debt.  This in turn requires intentionally fomenting a stock market crash.

If you're wondering why the stock market had its worst January on record, you need to talk to Treasury about its extraordinary issuance of debt that is crowding out money in the stock market, along with the government's scaremongering.  And if you're wondering why we had a crash in September and October, go talk to Bernanke, who intentionally drained the slosh in the system as Congress was debating the EESA bill - a quite-transparent (and successful) attempt to cause a massive stock market sell-off to support what he and Paulson wanted - $700 billion in taxpayer funds for their banker buddies and suppression of Treasury yields.

None of this is an accident and the data necessary to figure out what is happening and why is all available to anyone who cares to look and perform a bit of HONEST reporting.

Oh, and before you close the book on this ugly little chapter you might want to contemplate what happens to both the bond and stock markets if demand for our bonds were to disappear due to, oh, China for instance, deciding it didn't want to buy any more of them.