- But for the mysterious ‘direct bidders’ (or buyers), this was a failed 30 year auction. Yes, someone stepped up to prevent this auction failure. For all intent and purpose, Rick Santelli was right: it was an auction failure. This event is humongous in its implications. It is time to run and hide! Take cover, abandon paper assets and go to hard asset like precious metals. It is simply too difficult to predict the ramifications. Graham Summers explains:
While most of the investment world focuses on the various ”senior officials” (none of whom seem to have actual names or positions) commenting on whether Greece will or will not be bailed out/ receive an emergency loan/ offered moral support, etc, a far more significant debt story is emerging in the US.
On Wednesday the US offered $16 billion worth of 30-year Treasuries (US debt that will mature in 30 years). Before we get into the details of how much of a disaster the auction was we’re going to do a brief review of how US debt issuances work.
US Debt is issued by the US Treasury. You can bid as much as 30 days in advance of a debt auction. When the auction actually takes place investors can buy directly (Direct Buyers) by buying Treasuries themselves OR they can buy indirectly (Indirect Buyers) by using a Primary Dealer: one of 18 Banks and Securities Brokers who do business directly with the US Federal Reserve Bank of NY and so HAVE to buy Treasuries at auctions to insure liquidity. Direct buyers buy “off the radar” meaning you cannot track who the buyer is.
If an investor buys indirectly, he or she has to notify the Primary Dealer of his/her intentions in advance. This might sound a bit like showing your hand while playing poker. And it is. The only reason to go through a Primary Dealer (make an Indirect Purchase) is because you want to buy a sizable load of Treasuries (remember, Primary Dealers have a special relationship with the Fed and so can insure you get the amount you require).
Historically, Foreign Governments (China, Japan, etc) have made up the majority of Treasury purchases. Because of this, the Indirect Buyer purchases are typically thought to represent just how demand Foreign Governments have for US debt. I realize this sounds complicated so simply think of it this way:
1. Direct Buyers: folks who buy straight from the Treasury, typically comprising a minor stake in US debt purchases
2. Indirect Buyers: folks who buy LARGE chunks of US debt, typically Foreign Governments
3. Primary Dealers: banks that HAVE to buy US debt to insure an auction doesn’t fail. You don’t want to see a lot of Primary Dealer purchases as this means that those who can CHOOSE to buy US debt DON’T want to.
On Wednesday, February 10 2010, the US Treasury issued $16 billion in 30-year Treasuries. Here are the buyer data points:
Buyer Purchase Amount (%) Primary Dealers 47% Direct Buyers 24% (A RECORD) Indirect Buyers 28%
First of all, we see Direct Buyers hit a RECORD percentage of purchases. This is extremely bizarre and somewhat disconcerting given that we have no way of know who these buyers are. For all we know they could be the Federal Reserve itself or other US-Government entities buying “off the radar.”
Indeed, on that note we know that the US Federal Reserve accounted for 11% of the total purchases. Folks, you’re not dealing with a healthy debt auction when the Fed accounts for 10% of purchases.
However, far, FAR more worrisome is the pathetic Indirect Buyer takedown: 28%. Historically this number has been more around 40% (Tyler at ZeroHedge notes that the average Indirect purchase of the last four long-term Treasury auctions was 39.9%). To see such a MASSIVE drop off in Indirect Buyers (40% down to 28%) is a MAJOR warning sign that Foreign Governments are no longer willing to buy long-term US debt.
This auction was a very small step away from a failed auction. To see Primary Dealers buying so much (remember they HAVE to buy it) and Indirect Buyers so little, only confirms what I’ve been saying for months, that the US is entering a Debt Spiral: a situation in which it must issue more and more debt (while rolling over trillions of old debt) at the very time that fewer and fewer investors are willing to lend to the US for any lengthy period of time (more than ten years).
Folks, forget Greece, the US has its own debt problems. And they’re MAJOR. The fact that stocks RALLIED on this news tells you how disconnected stocks are from reality. The Debt Spiral has started and is now accelerating. It’s only a matter of time before it becomes a full-fledged Crisis. And this one will make 2008 look like a cakewalk.
- See also:
Rick Santelli: 30 Year Long Bond Auction Failure!
- The Germans and French are screwed. Even if they opt to bailout the PIGS, I doubt it will be a one time deal. The European economy is not doing well. There are too any hotspots to put out in the global economy for optimism in the near future. Damn if they do, damn if they don’t. There is no easy road out of this coming calamity. All roads lead to economic, financial and monetary crisis! My gut feeling is: they will abandon all good financial sense and go for printing money out of thin air (QE) big time. Politically, it is the least costly alternative. Just inflate their way out of the problem! Bloomberg reports:
PIGS Exposure Explains ‘Shotgun Greek Wedding’: Chart of Day
German and French banks’ “enormous” exposure to Portugal, Ireland, Greece and Spain explains why Europe’s biggest economies are moving to rescue their southern neighbors, Societe General SA said today in a report titled “Shotgun Greek Wedding.”
The CHART OF THE DAY shows how much money German, French, Swiss and U.K. banks have at stake in the so-called PIGS countries. Banks in Germany and France alone have a combined exposure of $119 billion to Greece and $909 billion to the four countries, according to data from the Bank for International Settlements. Overall, European banks have $253 billion in Greece and $2.1 trillion in the so-called PIGS.
“The exposure is enormous,” said Klaus Baader, co-chief European economist at Societe Generale in London. “The crisis in Greece isn’t Greece’s problem alone but a concrete problem for Europe’s whole banking sector. That explains the interest of finance ministers in stabilizing the situation.”
Leaders from the 16-nation euro area said today they have agreed to act if necessary to help Greece reduce its budget deficit and safeguard financial stability in the region. Debt- stricken Greece is struggling to convince investors it is able to reduce its deficit from 12.7 percent of gross domestic product, sparking turmoil on financial markets.
Spain, Portugal and Ireland, also suffering from gaping deficits after the worst recession since World War II, have been sucked into the swirl of widening bond spreads and soaring credit default swaps. The premium investors demand to hold 10- year bonds of the so-called PIGS countries instead of benchmark German bunds, and the cost of insuring against default, have surged this year. “The countries’ situations put the finances of fiscally stronger countries in jeopardy,” Baader said. “That’s one reason why the tone changed.”
- When the sheeple realize that fiat currencies are simply a confidence game, they will run to gold and silver. The Vietnamese people are coming to this realization this past 1 year. This week the Vietnamese Dong was devalued again. The Vietnamese people are bidding up the price of gold locally so much so that the local price is at a US$17/- premium over Comex-LBMA prices. Mark my words, what is happening in Vietnam and Zimbabwe will be replicated throughout the world. Fiat currencies are worth just the paper they are printed on. Fiat currencies are in a race to the bottom against hard assets like gold and silver! Commodity Online reports:
Gold Prices will climb to $5,000 within two years due to US dollar weakness and significant buying by players in the hedge fund industry looking to preserve the value of their funds. That is the opinion of New Zealand market trading expert Welles Wilder, who has previously been highlighted by publications such as Forbes and Barron’s for his skill in the markets, stuff.co.nz reports.
His belief was revealed by another local trader Oli Hille, who trades in New Zealand’s currency markets, and is currently writing a book, which is to be titled Creating the Perfect Lifestyle. Mr Hille told the news provider: “He implies his call is based on the US dollar becoming weaker and weaker and basically falling out of bed.”
The trader learnt of Mr Wilder’s opinion on Gold Prices while interviewing him for the book, which also includes an interview with New Zealand’s prime minister John Key. It appears there is a lot of bullish sentiment on Buying Gold outside of the US, with British miner Scotgold Resources’ chief executive Chris Sangster telling the Daily Record: “We see the Gold Price staying high in the long term.”
- Don’t forget gold’s buddy: silver. Silver has even better fundamentals than gold!
- Greece is but 2-3% of the Eurozone’s GDP, about US$340B. This is peanuts compared with many bankrupt states of America. The Big One is the sovereign debt default of America. Because the USD is the world reserve currency, the ramifications will be felt worldwide. No two ways about it: it will be a financial nuclear detonation when America collapses! Professor Ferguson opines:
It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the Western world. Its ramifications are far more profound than most investors currently appreciate.
There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bailout of the Greek government by the European Union, other member states, or the European Central Bank (Articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is “seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control,” but at this point nobody wants to pretend that Greece’s yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.
That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history — reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government’s debt; or (most likely, as signalled by German officials on Wednesday) some kind of bailout led by Berlin. Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain, and possibly others, it may take much horse-trading before one can be reached.
Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.
What we in the Western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy — zero interest rates plus quantitative easing — did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect
For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven.” US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.
Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.
The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.
Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted — as is the case in most western economies, not least the US.
Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.
But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500 billion, that implies up to $300 billion of extra interest payments — and you get up there pretty quickly with the average maturity of the debt now below 50 months.
The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue — from a tenth to a fifth to a quarter.
Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government): “How long can the world’s biggest borrower remain the world’s biggest power?”
On reflection, it is appropriate that the fiscal crisis of the West has begun in Greece, the birthplace of Western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of Western power, on the other side of the Atlantic.
- It is not pleasant to be all doom and gloom. Unfortunately, that is how the cards are stacked against the world. I try to tell it like it is. Optimism is great as long as it is not delusional. The facts on the ground say: global monetary crisis, the confidence fiat money game has just about run its course! The Daily Bell reports:
Is the Western world struggling through a bad patch? Our argument, voiced with various levels of clarity at various times, is that the West is currently living through a failure of fiat money – specifically a failure of the global anchor currency: the greenback. The dollar is on its way out not because people want it to be necessarily (though some do) but simply because it is failing as a fiat currency. Central bank fiat currencies always fail. China had a number of fiat episodes and the populace was so scarred that fiat money was reportedly even banned in the 1800s. ….
Interestingly, we can see in the above observations that fiat money first created a wonderland of progress and amusement. That’s just what fiat money has done in the West and in Japan as well. It is now happening in China. Wherever fiat money travels it brings tremendous euphoria in its wake, though only to begin with. Cities are energized with false booms. Farm children flock to the urban environment to take jobs in factories producing ephemeral goods or work at useless government jobs – that are created from tax revenues during the boom time. Initially, because fiat money inevitably has a relationship to government, much of the perfection of society is attributed to a wise, fair-minded bureaucracy. The bureaucracy, by the way, believes it.
Monetary stimulation can go on for years. In America, it’s been going on for nearly a century – which is probably the far end of what can be expected. But people can live and die under a central banking regime – which is usually a fiat regime (or ends up that way, anyway). Yes, it cannot be emphasized enough that fiat money (along with its enabler, central banking) is a foundational curse. Just as in China, it funds wars, makes the government look wonderfully efficient and even omnipotent, fools people into believing that the non-essential jobs they have are actually essential “modern” work – and sets the stage inevitably for regulatory regimes that must eventually descend into madness and ruin.
Fiat money empowers corporatism (in the modern age anyway) and distorts civilization by helping to implode agrarian republicanism. It is no coincidence that Thomas Jefferson despised central banking – and was in fact the most famous and influential agrarian republican. We can see the remnants of this sort of society in Switzerland, which has passed laws to maintain small farms. It is difficult to create a totalitarian society – even an ephemeral one – in a land of sturdy farmers. Such individuals grow their own food, have access to water and are willing to defend their land. America was a bit like Switzerland before the Civil War but is not now.
But today, dear reader, we would propose that the West, and the entire globe, is living through a fiat money collapse. Economies all over the world have been inflated to their fullest and people can buy no more useless gadgets and work at no more superfluous jobs. Too many useful endeavors have been marginalized and phony ones have been elevated. An implosion is taking place. The world is reverting to a kind of mathematical practicality. In America, car companies have shrunk because there are too many cars, and houses are not being built because there are too many houses. Banks are not doing deals because too many deals have been done. All that is working overtime are the printing presses. While the greenback is exceptionally at risk we would argue that the same thing is occurring, to a greater or lesser degree, in Europe, in Japan, and even in China – despite all the happy talk about the Chinese miracle. Here’s a famous investor on the subject of China:
Contrarian Investor Sees Economic Crash in China … James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true. Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc. As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyper-stimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent. “Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” (- New York Times)
Everywhere, major economies are having difficulty. We do not believe by the way that it is absolute serendipity. The power elite knows very well how fiat money and central banking work. Those at the top of the economic food chain readily anticipated more power falling into their laps – and ultimately facilitating a worldwide economic regime. But we have to re-emphasize that these same powerful people apparently did not take the Internet into account. This is most important.
Conclusion: By putting in place the mechanisms that guarantee endless quasi-collapses, the power elite profits inordinately. By not understanding that this time around the entire circus would be available for endless replays on the Internet, the power elite has put the system into tremendous jeopardy. Too many have run across free-market arguments on the Internet and come to believe (this time around) that the system is unfair and even impractical. Too many have witnessed and comprehended the full gamut of central banking’s apparent destructive tendencies. None of this was in the game plan, in our opinion. Yet this seeming unraveling of financial certainty has tremendous ramifications for your portfolios, dear reader. We might suggest a modicum of gold and silver as you watch various fiat money economies of the world, especially the dollar, sputter and sink.
Pastor Lindsey Williams warns us about the Illuminati elite’s plan fior 2010. This interviewed was done on 9 Feb 2010. Key points:
- USD devaluation 30%-50%
- No war with Iran for 1-1.5 years. But war is definitely planned.
- No economic recovery
- Food price increases will result in famine. Although there won’t be shortage of food.
- And many more points….
- To bailout or not to? Damn if you do, damn if you don’t. Will the Germans and French use their taxpayers’ monies to help Greece? It is a moral hazard and sets a precedent. The rest of the PIIGS will come knocking for handouts. The scenario is set for a breakup of the EMU. No amount of funds are sufficient for bailing out the PIIGS and eastern Europe. The Germans and French are better off saying Sayonara to southern Europe and going on their own. There is therefore a strong likelihood that the Euro will be broken into 2 currencies: Core Euro based around France and Germany, and a Latin Euro based around the weaker southern European countries. Bloomberg reports:
The Greek budget crisis is a symptom of imbalances that will lead to the breakup of the euro region, according to Societe Generale SA strategist Albert Edwards, and Harvard University Professor Martin Feldstein said monetary union “isn’t working” in its current form.
Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, top-ranked Edwards wrote in a report today. Feldstein, speaking on Bloomberg Radio, said a one-size-fits-all monetary policy has fueled big deficits as countries’ fiscal records differ.
The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” Edwards wrote. Even if governments “could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable breakup of the euro zone.”
The euro has slumped 9.9 percent against the dollar since November on concern countries including Greece will struggle to tame their budget deficits. The common currency and stocks in the region dropped yesterday as European leaders closed ranks to defend Greece in a plan that investors said lacked details.
The euro fell for a third day against the dollar, to $1.3626 as of 5:01 p.m. in London. Europe’s recovery almost stalled in the fourth quarter, as gross domestic product in the 16-nation euro region rose a less-than-expected 0.1 percent from the third quarter, the European Union’s statistics office in Luxembourg said today.
While the European Central Bank sets interest rates for the region’s 16 economies, the practice until now has been that each country has to steer its economy and can set its own tax and spending plans. “They have a single monetary policy and yet every country can set its own fiscal and tax policy,” Feldstein, 70, said. “There’s too much incentive for countries to run up big deficits as there’s no feedback until a crisis,” he said.
Tommaso Padoa-Schioppa, a former European Central Bank executive board member and Italian finance minister, said today there was no possibility of a partition of the euro area.
“I don’t think there is any prospect for such an event and I don’t think it makes much sense to talk about it,” he said in an interview on Bloomberg Television.
Edwards was voted second-best European strategist in the 2009 Thomson Extel survey after his then-colleague James Montier and is known for his bearish views on equities. In 1996 he angered southeast Asian governments by predicting the currency meltdown that struck the region a year later. The poll also named Societe Generale as the top economics and strategy research firm for a third straight year.
In a 1997 article, Feldstein wrote that while it is impossible to predict whether political clashes will lead to war, “it is too real a possibility to ignore in weighing the potential effects” of monetary and political union.
After a three-month long plunge in Greece’s bonds amid speculation it was facing the threat of default, the euro region’s leaders yesterday ordered the country to slash its budget deficit and warned investors they would be willing to defend the country from speculative attack if necessary.
Portuguese, Spanish Bonds
Portuguese and Spanish bonds also declined earlier this month on concern those countries may also need to cut spending. Prime Minister George Papandreou’s drive to get Greece’s ballooning budget under control is being challenged in the streets by striking schools, hospitals and airline employees.
“Unlike Japan or the U.S., Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain,” Edwards wrote. Consigning the countries in southern Europe with the weakest finances “to a prolonged period of deflation is most likely to impose too severe a test on these nations.”
The budget crisis in Greece may escalate in the way the Asian currency meltdown of 1997 paved the way for the Russian default and the collapse of Long-Term Capital Management LP in 1998, Edwards added. This is “a different chapter in the same book,” he wrote, adding that the need to tighten deficits is a “particular issue for the U.S. and U.K.” “There will be more crises to follow Greece, both inside and outside of the euro-zone.”