CFR: When the Fed Stops Monetizing US Sovereign Debt...

The people at the Council on Foreign Relations speculate that US interest rates on Treasury debt will be increasing around the end of the first quarter if the Fed discountinues its monetization of mortgage debt.

As the Fed has essentially purchased ALL new US Treasury issuance since 2009, that seems to be a reasonable bet.

"The Federal Reserve plans to stop buying securities issued by government housing loan agencies Fannie Mae and Freddie Mac by the end of the first quarter.

This is not only likely to push up mortgage rates; Treasury rates should rise as well. Throughout 2009, the private sector sold a portion of their agency holdings to the Fed and used those funds to buy Treasurys.

Once the Fed’s agency purchases stop, this private sector portfolio shift will end, removing a major source of demand in the Treasury market.

As the chart shows, since the start of 2009 the Fed has bought or financed the entire increase in Treasury issuance. As Fed purchases slow and Treasury issuance continues at a high level, interest rates will have to move up to attract new buyers."

Non Farm Payrolls Benchmark Revision and the Unemployment Rate as Cruel Farce

Well, we forecast the headline number exactly, with a loss of 20,000 jobs. No credit taken, it was as much a judgement call (aka SWAG) as any product of careful measurement.

As you may have heard, the Bureau of Labor Statistics did a benchmark revision. This is Washington speak for 'revised the numbers as far back as anyone might care to remember to give ourselves more wiggle room.'

The benchmark is a product of the Bernays Factor, that measure of public gullibility which permits obviously contrived government statistics to be taken seriously.

Did you react to the positive jobs trend initially announced in September - October 2009? Oops, it was really a greater loss than expected, and not a gain at all. One can only suspect that in a few years this whole recovery could be revised away without so much as a bureaucratic blush.

Here is a picture comparing the old and new headline numbers.



The change is pervasive. One item of note is the taking of more job losses in the earlier years, setting up a stable base for potential job gains in the present, without embarrassing oneself by getting out of synchronization with the actual growth of the civilian population. There will be more 'truing up' of the numbers in the future.


Unemployment Rate as Cruel Farce

Regarding that 'surprise drop' in unemployment to 9.7%, this is the result of people falling off the unemployment benefits radar, and becoming discouraged. It is essentially meaningless, if not downright misleading.

One may as well solve an unemployment problem by shipping people to Australia. Well, that does have some historical precedent. Hard to tell who has gotten the better deal on that one, at least over the long run.

A better measure of unemployment is the Labor Force Participation Rate, which provides information about the total number of people employed as a percent of the population, without benefit of official banishment.



That number continued its downtrend from 64.9% in November to 64.7% in January, with a slight uptick from December's low of 64.6%.

Here is a chart from the good folks at Calculated Risk that shows the employment situation in context with other post World War II recessions.



"Recession" hardly does it justice, does it?

Proprietary Trading and Credit Default Swaps - Mission (Not) Accomplished

Here's why the Volcker Rule ran into a brick wall of Senatorial gravitas and pusillanimous punditry.

Give up prop trading AND banking status? The mutant Zombie Banks would not allow it.

Who needs insured deposits? What a bother. Its the Treasury guaranteed bonds and Discount Window access that count. When you are levering up Other People's Money you want it in bulk and wholesale, not retail.

Goldman is no surprise, because they are nothing but a hedge fund with the right connections and a rolodex full of Senators. But JPM bears watching, since they are at least nominally a bank, and Too Big Not To Leave a Mark (TBNTLM).

Prop trading - why lend when you can play at the tables?



Well, at least we have the Credit Default Swaps situation covered with the bailout of AIG, right?

Well, maybe not.... Two trillion down, but thirteen trillion to go.

I can see why the Fed completely failed to notice this little trend change in its banking oversight.



If the markets turn significantly lower, and the banks' balance sheets start wobbling again, and threaten to crash the system, or else, perhaps Obama can send young Tim up to the Congress with another scribbled request for a trillion dollar bailout. I can hear the sound of knives being drawn as he walks in the door...

Taleb: US Treasuries a 'No-Brainer' Short

"Investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office..."

Directionally correct we would say, but it is certainly a contrarian view today, with Treasuries and the dollar acting again as the safe havens of choice as fears of US jobs losses and Eurozone sovereign defaults frighten the markets.

Keep in mind that his time frame is '2 to 3 years.' Most punters do not realize that funds and specs hold record long positions in the dollar according to the latest Commitments of Traders Reports. Treasuries were a strong performer last year, and may be overbought relative to underlying fundamentals. But one repeatedly hears the meme "Everyone is short the dollar." And dollar debt is not a short, if one has the option of default.

But it will take the appearance of the effects of the ongoing monetization of debt by the Fed and the government agencies and Treasury programs that Taleb cites to trigger the declines in the bond and the dollar. And the euro and the pound may go first, to cushion the blow. Everything is relative, and the US banks will throw their relatives, their European cousins, under the bus if it is required to save their bonuses. The saying "he would sell his mother for an eighth" is a Wall Street proverb.

With a fiat currency regime, one always has to say, "it depends..."

And China is looking a bit bubbly as well, although the Chinese bank is acting to try and stem the speculation. It may not be enough.

Bloomberg
Taleb Says ‘Every Human’ Should Short U.S. Treasuries
February 04, 2010, 11:01 AM EST
By Michael Patterson and Cordell Eddings

Feb. 4 (Bloomberg) -- Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific. Nouriel Roubini, the New York University professor who predicted the credit crisis, also said at the conference that the U.S. dollar will weaken against Asian and “commodity” currencies such as the Brazilian real over the next two or three years.

The Fed and U.S. agencies have lent, spent or guaranteed $9.66 trillion to lift the economy from the worst recession since the Great Depression, according to data compiled by Bloomberg. Bernanke, who in December 2008 slashed the central bank’s target rate for overnight loans between banks to virtually zero, flooded the economy with more than $1 trillion in the largest monetary expansion in U.S. history.

In a short sale, an investor borrows a security and sells it, expecting to profit from a decline by repurchasing it later at a lower price.

“Dynamite in the Hands of Children”

President Barack Obama has increased the U.S. marketable debt to a record $7.27 trillion as he tries to sustain the recovery from last year’s recession. The Obama administration projects the U.S. budget deficit will rise to a record $1.6 trillion in the 2011 fiscal year.

“Deficits are like putting dynamite in the hands of children,” Taleb said in an interview with Bloomberg Television. “They can get out of control very quickly.”

Taleb argued in “The Black Swan: The Impact of the Highly Improbable” that history is littered with rare events that can’t be predicted by trends. The best-selling book came out in 2007 before the global credit crisis sparked an economic slump and $1.7 trillion of losses at banks and financial institutions.

“The problem we have in the United States, the level of debt is still very high and being converted to government debt,” Taleb said in an interview with Bloomberg Television. “We are worse-off today than we were last year. In the United States and in Europe, you have fewer people employed and a larger amount of debt.”

Credit Outlook

Moody’s Investors Service Inc. said on Feb. 2 that the U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce budget deficits projected for the next decade.

Treasuries soared during the financial crisis, gaining 14 percent in 2008, as investors sought the relative safety of U.S. government debt. They fell 3.7 percent last year, according to Bank of America Corp.’s Merrill Lynch Unit, as risk aversion eased and the Standard & Poor’s 500 Index rallied 23 percent. So far this year U.S. government debt has gained 1.17 percent.

Yields fell today on concern European countries including Greece, Portugal and Spain face difficulty financing budget deficits. The yield on the benchmark 10-year note fell 6 basis points, or 0.06 percentage point, to 3.64 percent at 10:54 a.m. in New York, according to BGCantor Market Data.

“Democracies can’t handle austerity measures very well,” Taleb added. “We’re going to have a severe problem.”