Shenandoah

by John Galt

December 28, 2009

My Chinese translation abilities are not that good, but if I’m reading that caption above correctly, they were not impressed with our debt dump this week on to the bond markets.  The auctions today are only part of the story. The reality is that there is competition for debt refinancing and it is now to the point where government largess will squeeze out or down right impair the ability of private industry and society to put their debt out for bid at competitive rates. Especially considering the total amounts the Federal Government, its corporate entities it now controls (GSEs, GM, Chrysler, AIG, C, etc.) , the states and municipalities, and of course private industry. Someone dared to speak the unspeakable at cocktail parties and polite society in this weekend’s edition of Barron’s.  Stephanie Pombay at MacroMavens was interviewed for an article (A Jolly Good Year, Barron’s December 28th edition) and her reminder at the end of the article sums up what we are up against in the next 36 months:

The numbers, Stephanie exclaims, are unbelievably big. Uncle Sam must roll over $2.5 trillion in debt during the next two years, banks worldwide have some $7 trillion due in the same stretch and commercial real estate will weigh in with another $750 billion.

Which conjures up for her a looming new “credit-bust blitz.” Gulp!

One more time for those of you slower than the average Bernanke:

$7 trillion worldwide

$750 Billion in CRE

Yet the Federal Government through its allegedly brilliant strategy of using short term financing on continuous rolls is going to attempt to roll that $2.5 trillion (with a “T”) while competing with private entities, namely the technically insolvent fiat funny money fractional reserve banking system and the CRE enterprises they have married themselves to, for a limited pool of monies unless Benron and the boys intend to re-institute Quantitative Easing on a massive scale to insure that the system does not collapse. The problem that the Federal Reserve and the anti-Inflationistas face in to 2010 is that the debt levels are unsustainable unless the United States experiences ChiCom like growth in the 9-11% range on an annualized basis each quarter for the next four years. That ain’t happenin’ boys and girls nor will we even come close. Thus the problem that the Fed and the Treasury face as they end up squaring off against each other not due to the installation of their “boy” (Geithner) but due to the blithering incompetence that the American people (ok, sheeple) and multinationals have in their ability to control and constrain the Legislative branch of government.

The United States is about to find out what happens when you have to refinance short and long term debt and the concept of “compounding” impacts the debt markets, where the first series, say a 6 month bill (remember my 1-3-6 rule) suddenly explodes from a 0.20% yield to a 4% yield (the norm) while at the same time the yield curve expands and the 2 year starts to yield 6% and the 10 year a hefty 7.5% or higher! The expansion of our national debt based on just the failure to insure lower yields or borrowing costs to refinance our expenditures is insane when you think about it.

Today’s bond auctions are no reason to have faith that things are about to improve.

That’s no such a bad result, right? Well, here’s the 3 month yield just weeks ago from ye old Trusty John Galt’s piece on the 1-3-6 rule and the dangers lurking…..

Yup.  That’s the exact same chart I used on December 14th in the article at the link above.  The “wicked” apparently has arrived with people no longer wanting to buy our paper at the lower yields. I call it “yield creep” as the Bubblevisions and Bubbleconomists call this a “healthy sign” in my opinion it is a sign that yields will creep up and rapidly as in less than 60 days we have gone from a negative yield to an auction result of 0.09% to 0.11% on the high side. That may not sound dramatic but as you dance out further on the curve, it becomes an issue as each tick costs the U.S. taxpayer more and more and ultimately might greatly impact the ability of many to refinance their homes or sell their existing one.

So just one auction does not a trend make, right? Let’s look at the 6 month auction today:

Again, no major or eye-opening event but a trend is developing. The two year auction though told the tale of the tape today:

We’ve now witnessed an almost 0.30% move in less that two weeks. What do the foreigners know that the Bubbleconomists will not admit? Perhaps it is a complete and total distrust of the United States Congress and Executive branches to reign in spending? Maybe it is the realization that the Federal Reserve will print and damned to all those who save or invest in the U.S. as long as there is no sign of economic or political unrest to threaten their throne? Or maybe it is the truth seeping out into the markets that the United States is going to have to pay a substantially higher price as we pile on program after program, stimulus after stimulus and bailout after bailout like oh, you know the UNLIMITED guarantee for Fannie Mae and Freddie Mac wheeled out after the market close on Christmas Eve while most of us were enjoying egg nog, Christmas cheer and that horribly spiked punch that I swear my cat drank and drove home like a bad kitty afterward.

The real message comes from the charts:

The 5 year and 7 year are to follow over the next two days and if anyone thinks the governors of the Federal Reserve will not be on the phones to the Primary Dealers, they are insane. There is the utmost sense of urgency to prevent a big fat FAIL like the 10 and 30 year auctions before Christmas and we are now flirting with the critical region between an outright panic move in yields to trigger a massive sell off in Treasuries as apparently Morgan Stanley is predicting. The minute we see 7.5% mortgage rates on 30 year loans we see the NRA, Obamconomists and everyone else freaking out as the proverbial “faux” housing recovery comes to a screeching halt and the next wave of defaults pile up at light speed causing further problems for the financial sector.

Oh, and that financial sector? Just look at the following charts and the duration these issues have spent under the 50 DMA and start to think what January 2010 might just look like:

Ignoring the volume of recent weeks and look at the trend. I could put up dozens of charts for banks, insurance companies, etc. which reflect a similar pattern. While the Bubblemedia announces the “Santa Claus” rally and how the “smart money” is setting up for 2010, the big banksters are not playing nice and that should be an alarming sign. Why? Because a major increase in the yields of Treasuries from the two year note upwards could destroy any hope of businesses gambling on an economic expansion and attempting to borrow money at the already absurd usury rates the banks are charging. When you start to think about this in total, it means that a collapse of some sort, either again in short term lending or in the financing of projects already approved but not yet financed could well be underway. With the amount of C&I debt and CRE debt to be rolled in 2010 it should be a reason for major concern but the Fed is acting like it is 1937 and preparing to draw liquidity out of the market. The rest of the world is just looking on in amazement and wondering just one thing:

When will Jimmy Carter apologize for enabling his younger black twin for becoming the leader of the free world?

Because this clown is spending as if America hasn’t weathered a storm, much less attempting to recover from a Cat 5 hurricane which is circling around for another strike..

God help us when it comes ashore again in 2010 with our financial levees in such horrid shape.