Bond bubble fears and why I took the biggest bet of my life [Telegraph]

If the bond bubble bursts, many pension savers will suffer

Last month I took the biggest bet of my life and, without wishing to overstate the downside, put 26 years’ savings at risk. Contrary to the conventional wisdom that people should raise their exposure to supposedly low-risk bonds and reduce shareholdings as they get older, I did the opposite and sold all the bonds in my company pension to buy shares.

That might be regarded as a recklessly risky thing to do for several reasons. First, bonds – a form of IOU issued by countries and companies – provide investors with a promise to pay income and repay their capital at fixed dates in the future, whereas shares give no guarantees at all.

Second, bonds have delivered higher total returns than shares for more than 20 years now. Third, bonds issued by the British Government, sometimes called gilts, are the basis of the annuities that most “defined contribution” or “money purchase” pensioners use to fund retirement.

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US Debt – Visualized in physical $100 bills

Treasury borrowed $24 billion in one day after Thanksgiving [RT]

(AFP Photo / Noel Celis)

(AFP Photo / Noel Celis)

The US Treasury raised the national debt by more than $24 billion on the day after Thanksgiving, increasing it to the alarming rate of about $211.69 per US household and bringing it to the highest level in history.

Topping off at $16.3 trillion, Friday’s debt was the highest on US record. The numbers skyrocketed after the Treasury Department took the day off on Thanksgiving, holding off on borrowing for just one day. But while Americans stayed home to say thanks and celebrate their annual feast, the economy grew worse overnight, CNS News reported.

On Black Friday, while shoppers were still digesting their big Thanksgiving meals, the voracious federal government scarfed down second, third, and fourth helpings of debt,” wrote John Hayward of Human Events.

When President Barack Obama first took office in 2009, the national debt was $10.6 trillion. Throughout the course of his presidency, it has increased by $5.7 trillion – the equivalent of nearly $50,000 per household.

During a 60 Minutes interview two months ago, the president responded to the alarming numbers, claiming that most of the debt was out of his control.

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2012 Is The Tipping Point – Results Are In, Bankers Lost [goldsilverworlds]


It is highly unlikely the Mayan predictions of the end of the world referred to the bankers’ world of credit and debt. Nonetheless, with only one month remaining until December 21, 2012—the end date of the Mayan 5,125 year Mesoamerican calendar—the concomitant end of the bankers’ 300 year ponzi-scheme of credit and debt should not be dismissed as mere coincidence.

The world has entered a paradigm shift of immense proportions; and the collapse of the bankers’ economic world is a part of that shift. The bankers’ credit fueled a 300-year global expansion which transformed the world. The bankers’ credit, however, has now become debt which increasingly cannot be repaid.

Economics is not rocket science although the arcane algorithms used by Wall Street banks to predict capital markets imply that intended conclusion. Modern economics, i.e. capitalism, is merely the current iteration of the supply and demand dynamic distorted by 300 years of credit and debt—a distortion that’s now about to end.


debt vs credit capitalist gold silver experts

Prior to capitalism, the underlying economic dynamic was supply and demand. However, in economies fueled by the bankers’ debt-based banknotes, the relationship between credit and debt becomes equally, if not more, important than supply and demand.


After gold was removed from the global monetary system in 1971 and after initial inflationary concerns were addressed in 1980, embedded constraints on monetary and credit growth no longer existed. The attendant rise in debt is noteworthy—as will be the consequences.

debt levels 1925 2012 gold silver experts


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Prison of Debt Paralyzes West [Spiegel]

In the midst of this confusing crisis, which has already lasted more than five years, former German Chancellor Helmut Schmidt addressed the question of who had “gotten almost the entire world into so much trouble.” The longer the search for answers lasted, the more disconcerting the questions arising from the answers became. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? Is it possible that we are waiting for the world to conform to our worldview once again, but that it would be smarter to adjust our worldview to conform to the world? Is it possible that financial markets will never become servants of the markets for goods again? Is it possible that Western countries can no longer get rid of their debt, because democracies can’t manage money? And is it possible that even Helmut Schmidt ought to be saying to himself: I too am responsible for getting the world into a fix?


The most romantic Hollywood movie about the financial crisis isn’t “Wall Street” or “Margin Call,” but the 1995 film “Die Hard: With a Vengeance.” In the film, an officer with the East German intelligence agency, the Stasi, steals the gold reserves of the Western world from the basement of the Federal Reserve Bank of New York and supposedly sinks them into the Hudson River. Bruce Willis hunts down the culprit and rescues the 550,000 bars of gold, which, until the early 1970s, were essentially the foundation on which confidence in all the currencies of the Western world was built.


Photo Gallery: The Debt Bomb


Creating Money out of Thin Air

Until 1971, gold was the benchmark of the US dollar, with one ounce of pure gold corresponding to $35, and the dollar was the fixed benchmark of all Western currencies. But when the United States began to need more and more dollars for the Vietnam War, and the global economy grew so quickly that using gold as a benchmark became a constraint, countries abandoned the system of fixed exchange rates. A new phase of the global economy began, and two processes were set in motion: the liberation of the financial markets from limited money supplies, which was mostly beneficial; and the liberation of countries from limited revenues, which was mostly detrimental. This money bubble continued to inflate for four decades, as central banks were able to create money out of thin air, banks were able to provide seemingly unlimited credit, and consumers and governments were able to go into debt without restraint.


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‘U.S. Per Person Debt Now 35 Percent Higher than that of Greece’

A chart from the Republican side of the Senate Budget Committee shows that “U.S. Per Person Debt [Is] Now 35 Percent Higher than that of Greece.”

“According to estimates from the International Monetary Fund, America’s total government debt will be $16.8 trillion by the end of the calendar year, compared to $441 billion for Greece,” the Republican side of the Senate Budget Committee explains. “On a per person basis, that means U.S. debt is $53,400 for every man, woman, and child, compared to $39,400 for every man, woman, and child in Greece. The disparity between per capita debt in the U.S. and Greece has grown 40 percent (roughly $8,400) since 2011. Now, U.S. per person debt is 35 percent higher than that of Greece, and is also higher than per capita debt in Portugal, Italy, or Spain (which together with Greece make up the so-called PIGS countries).”


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Gold Soars, Futures Plunge As Free Reign For Bernanke Appears Assured [Zerohedge]

S&P futures are now unchanged from Monday’s close – having lost 14 points from the close and over 18 from the highs. Meanwhile, gold is soaring and the USD is being sold. It would appear that as the odds of an Obama victory rises that the fiscal cliff reality becomes even more critical BUT given Bernanke’s four-more-years, they have no need to do anything about it since he will just monetize away… Gold realizes its the ‘stock’ and equities have already priced in the ‘flow’ but forgot to price in the fiscal cliff (as we have noted)… We assume Schumer will be on the phone first thing in the morning demanding moar doing his job…

S&P 500 are plunging… (moar Bernanke trumped by moar Fiscal Cliff reality!!)


and gold is soaring (moar Bernanke) – catching and surpassing stocks…

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Voluntary Servitude Begins With A Debt [aheadoftheherd]

As a general rule, the most successful man in life is the man who has the best information 

Should we leave the creation of new money in the hands of bankers or place its creation solely with our government? 

“The financial system used by all national economies worldwide is actually founded upon debt. To be direct and precise, modern money is created in parallel with debt…

The creation and supply of money is now left almost entirely to banks and other lending institutions. Most people imagine that if they borrow from a bank, they are borrowing other people’s money. In fact, when banks and building societies make any loan, they create new money. Money loaned by a bank is not a loan of pre-existent money; money loaned by a bank is additional money created. The stream of money generated by people, businesses and governments constantly borrowing from banks and other lending institutions is relied upon to supply the economy as a whole. Thus the supply of money depends upon people going into debt, and the level of debt within an economy is no more than a measure of the amount of money that has been created.” Michael Rowbotham, ‘The Grip of Death’

US Federal Reserve – the Fed

On the night of November 22, 1910 a delegation of the nation’s leading financiers, led by Senator Nelson Aldrich, left New Jersey for a very secret ten day meeting on Jekyll Island, Georgia.

Aldrich had previously led the members of the National Monetary Commission on a two year banking tour of Europe. He had yet to write a report regarding the trip, nor had he yet offered any plans for banking reforms.

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The one thing nobody’s talking about… [Sovereignman]

One of the unequivocal laws of the universe is that governments tend to screw up everything they try to do. When life gives them lemonade, they make lemon laws. Even if grounded in good intentions, all they know how to do is blow other people’s money and pass destructive new regulations.

In fact, I can only think of two institutions on this planet that have a more dismal long-term track record than government. The first is whoever ends up playing the Harlem Globetrotters. The other is central banks.

Presumably, the role of a central bank is to manage a nation’s money supply in order to smooth out booms and busts, and maintain a sound currency. But one need only look as far as the European Central Bank’s short 14-year history to get a sense of this massive failure.

800px ECB balance sheet1 The one thing nobodys talking about...

The single currency is now being crushed by Himalayan mountains of debt. The ECB’s solution? Conjure hundreds of billions of euros out of thin air to buy this debt, from which they’ll most likely take a huge loss. In doing so, they enable the most indebted eurozone nations to go even deeper into debt, more conveniently, at lower interest rates.

This is like dousing yourself with gasoline before running into a burning nursing home so that you can deliver a noose to a terminal, comatose patient. It’s genius!

Yet in comparison to the ECB’s remarkable stupidity, one must truly stand in awe of the US Federal Reserve. No other organization in the history of the modern world has been such a serial failure at fulfilling its missions of (1) maximum employment and (2) stable prices.

Since the Fed’s creation nearly a century ago, the dollar has lost over 95% of its value, and the US has experienced an almost uninterrupted period of asset bubbles, market crashes, bailouts, bank runs, recessions, depressions, and other financial panics.

Unsurprisingly, there is a growing movement to End the Fed. This is a great idea, and it would be a moral victory. But the Fed is only one pathogen in a much larger monetary disease. I’ll explain–

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This week, the world’s most powerful central bankers, led by Ben Bernanke, will hook up in Jackson Hole in Wyoming for their annual chinwag. This year, Mario Draghi will not be going, as he has some urgent business to attend to in Europe. However, like no other year, the chitchat of these individuals will determine the path of a global economy which is increasingly dependent on infusions of cheap credit from central bankers.

A few months ago in this column I wrote that this would be the “year of the central bank”, and it has pretty much turned out this way.

This week we are going to take two different angles – one American and one Spanish – to try to answer the main question perplexing financial markets these days, which is: can central banks save the day, or is each round of monetary easing simply pushing the day of reckoning out further?

We will try to answer this before the expected announcement this week from the ECB about what it intends to do about buying government bonds in the months ahead and – probably more crucially – before the German constitutional court ruling on September 12, on the legality of using German money to bolster the eurozone’s stability funds.

But first let’s examine what is going on the US and what Ben Bernanke is expected to announce, or at least hint at, in his Jackson Hole speech.
The economic news in the US is at best patchy. Second quarter GDP growth was upwards, but it is nowhere near as robust as it has been in previous recoveries. Unemployment is still far too high, and America is deleveraging at a ferocious rate, paying back debt which was built up in the Noughties boom.
While the private sector is deleveraging, the public sector is taking on more and more debt. This is quite normal because, after all, if we are all saving, who is going to do the spending? However, the figures for US debt build-up are quite startling and are worth having a look at.

Last week, US federal debt rose to over $16 trillion. Last year the figure was $15 trillion. It took 200 years to accumulate federal debt of $15 trillion, it took less than nine months to add another $1 trillion.

As Bill Bonner of the Daily Reckoning blog points out: “The average interest rate paid on this debt is only 2.13 per cent. At that low rate, the cost is only about $340 billion in interest payments. Were the interest rate to double to a more normal 4.26 per cent, the total interest cost alone would be closing in on the Pentagon budget.

“Without putting too fine a point on it, debt – much of it in foreign hands – is growing at about an 8 per cent annual rate. GDP is growing at a 1.7 per cent annual rate. For every dollar of extra output, debt increases more than $4. Official debt is growing more than four times faster than the economy that is meant to sustain it”.”


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Some clear thinking on the debt [sovereignman]

If you haven’t heard yet, the United States of America just hit $16 trillion in debt yesterday. On a gross, nominal basis, this makes the US, by far, the greatest debtor in the history of the world. 

It took the United States government over 200 years to accumulate its first trillion dollars of debt. It took only 286 days to accumulate the most recent trillion dollars of debt. 200 years vs. 286 days. This portends two key points: 

1. Anyone who thinks that inflation doesn’t exist is a complete idiot; 
2. To say that the trend is unsustainable is a massive understatement. 

At an average interest rate of 2.130%, Uncle Sam will shuffle $340 billion out the door just in interest payments this year… and it’s a number that’s only going up. To put it in context, China owns so much US debt that the INTEREST INCOME they receive from the Treasury Department is nearly enough to fund their entire military budget. 

It’s rather disgusting when you think about it. 

Yet when you look at the raw numbers, there is no sign of improvement anywhere on the horizon. Last year, the Treasury Department brought in about $2.3 trillion in tax revenue. They spent $2.9 trillion JUST on -mandatory- programs like Social Security and Medicare, plus the very sacrosanct defense budget. 

In other words, the US government was $600 billion dollars in the hole before paying a dime of interest on the debt, or paying the light bill at the White House. In fact the government’s own numbers reflect a budget deficit through the end of the decade, i.e. the debt level is only going to get higher. These are their own figures.

Some clear thinking on the debt


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What Happened To The Debt? [theautomaticearth]

Alright, OK, so we have new sorts of relative highs in European and US stock markets, even as we keep a w(e)ary eye on Shanghai’s new lows. The western highs seem to have a lot to do with all kinds of expectations of ECB sovereign bond purchases and/or cooling German resistance against them.

All this is accompanied by a rising Euro, and that little detail is far more puzzling than is generally acknowledged. Because there is only one reason for the ECB, with perhaps Angela Merkel and the Bundesbank chiming in, to even consider such measures as more – PIIGS – bond buying, that are tremendously unpopular among a broad swath of Europeans. That reason is that the PIIGS countries, and Greece, Spain and Italy in particular, are doing much worse than anyone wishes to admit in public.

Thus, we have a substantial part of the Eurozone sinking deeper fast than anyone will tell you, while at the same time the currency they use is rising. A rise based on expectations of other Eurozone nations, notably Germany, basically putting up the health of their own economies as collateral to inspire confidence in ECB sovereign bond purchases. Now, you can play this game for a while, no reason to doubt that. But I would personally think we’ve finished playing out that particular “while” a long time ago and running. Whatever remains now is but a wager. As in: the entire Eurozone has turned into a casino.

If we, and they, the ECB, Germany, Holland, Finland on the one hand, and Monti, Rajoy and Samaras on the other, want to play these moves AND have a shred of credibility left once they’re done (and I know what you’re saying: will they ever be done?), we and they will need in the end to be able to answer this one simple question. Which they will never ask, we will have to do that for them. That question is: Where’s The Debt? Or maybe more accurately:What Happened To The Debt?.


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The Shape of the Debt Reset [Azizonomics]

By Aziz of

I was asked recently by Max Keiser who benefits in the case of a debt reset, and when we should expect such an event to occur.

I don’t think I answered it as comprehensively as I should have. I talked a little about the fact that events leading up to such an event could be extremely messy and its impact unpredictable, and so it is hard to say who will benefit, although we can expect the powers-that-be  — and particularly the Wall Street TBTF banks — to try and leverage events for political and financial gain. And of course, all three kinds of debt reset — heavy inflation, liquidation or an orderly debt jubilee — would look very different.

Here’s the problem:

The crisis in 2008 was one fuelled by excessive total debt. As society became more and more indebted the costs of servicing debt became proportionally higher, which has made it harder for countries to grow. Instead of individuals and businesses investing their income or growing their business, a higher and higher proportion of income becomes taken up by the costs of paying down debt.

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Waiting and Hoping for the Printing Presses to Roll [financialsense]

If The Central Bankers Disappoint Things Could Get very Dicey.

There are four key markets that are setting up for big moves. And when you put the charts together, the only logical conclusion that may be reached is that the market is betting on such a large move from global central banks that the world will literally be swimmingin paper money.

Last week, U.S. stocks and to some degree European stocks took off after European Central Bank (ECB) president Mario Draghi promised that the bank would do something dramatic. Now, every red blooded trader in his or her right mind would have to have a huge amount of doubt with regard to Mr. Draghi’s ability to actually do something substantial. But, if you put Mr. Draghi’s likely course of action, assuming he actually delivers, with the action that the central banks in Brazil and China have already begun, and if you factor in that the Federal Reserve has also been hinting at some kind of move, you may have something to consider.

Yes, the global economy is in deep trouble. Growth rates everywhere have been slumping. The U.S. GDP was reported to have fallen to 1.5% last week. And China’s own growth rate, whether you believe it or not (we don’t) has been trending lower, recently clocking in below 8%. Brazil’s own growth rates of late have been more akin to those of a developed country. And India, another growth economy has been in a slump. That means that the global economy is now synchronized. And that the global economy is heading lower, together.

The global central banks have printed trillions of dollars since the 2008 subprime mortgage crash. But much of it is either sitting in bank vaults, propping up decrepit balance sheets that resulted from bad subprime bets and the subsequent crash, or has been used by companies to boost their own balance sheets. That means that for all intents and purposes, the Fiat money from global central banks has been mostly dead money.

But what if, and this is a big if, those bank vaults are topped off. And what if the next round of cash from the printing presses doesn’t actually go into propping up balance sheets? Now, you’ve got a twofold situation. The bank vaults can’t hold any more money. And the frightened global central banks, fearing that the global economy is about to implode, may be ready to put such an overwhelming amount of money in circulation, that it has to do something?


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Debt crisis: ECB intervention hopes drive markets higher [Telegraph]

European markets rose sharply amid mounting speculation of a dramatic intervention by the European Central Bank to arrest the crisis engulfing the region.

Investors were buoyed as a meeting in Frankfurt between US treasury secretary Timothy Geithner and the Bank’s president Mario Draghi fuelled expectation of imminent policy action.

The IBEX 35 in Spain jumped 2.8pc to 6,801.8, while the DAX in Germany rose 1.3pc to 6,774.06, and the CAC 40 in France closed up 1.2pc at 3,320.71. In London the FTSE 100 rose 1.2pc to 5,693.63.

“Investors continued to gorge themselves on equities as on the prospects of further central bank stimulus in the very near term increased today,” said Angus Campbell, head of market analysis at Capital Spreads.

Jean-Claude Juncker, head of the eurogroup of eurozone finance ministers, added to the sense of urgency by warning the eurozone had reached a “decisive point” and has “no time to lose.”

Debt crisis: ECB intervention hopes drive markets higher

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$10 Trillion M2 Is Now In The Rearview Mirror [Zerohedge]

Two weeks ago we observed that the broadest money aggregate tracked by the Fed, M2, was less than $10 billion away from crossing the historic $10 trillion mark. As of this week, this number now officially has 14 digits for the first time ever, or $10,035,100,000,000 to be precise (technically the non-seasonally adjusted number crossed $10T last week, but for some reason bank deposits need to be seasonally adjusted, so waiting for the traditionally fudged data seemed appropriate). And we have a $50 billion increase in savings deposits, aka deferred buying power to those who still have the capacity to save, in one week to thank for putting $10 trillion in the rearview mirror.

Which actually brings us back to a point we have discussed previously, namely that even though M1 may be flattish and declining in direct proportion with the amount of excess reserves held by banks, and currency in circulation is rising at a glacial pace of about $1 billion each week – a key reason why the inflationary animal spirits have not bee unleashed yet, it is M2, i.e., total deposits, where the bulk of electronic money is contained, and which is rising at a soaring pace as seen on the chart below.

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Very few analysts realize what will happen to the United States when the US TREASURY BUBBLE BURSTS.  We are now seeing plenty of coverage and news releases on LIBOR manipulation, PFG bankruptcy, Gold Manipulation… and etc.   The world is really starting to realize just how bad the situation has become.  All that is left is for the large DEAD STINKING CARCASS OF THE WESTERN BANKING SYSTEM to fall off the cliff.

When the world realizes that the ALLOCATED GOLD is not there, and in its place is nicely printed gold certificates… WE WILL ENTER INTO A NEW WORLD.
This will be great for a fraction of the public, but hell for the rest.  This is also true for countries who produce GOLD & SILVER.

I would imagine gold and silver mines will be nationalized in shocking speed when this event takes place.  The United States is not in a good situation as it only produces approximately 36 million oz of silver.  Below we can see the LINEUP:

The USA comes in 9th in the long list of silver producers.  If we take a good look at the different countries, common sense would tell us that these countries have the largest risk of nationalization:

1) Bolivia

2) Argentina

3) Peru

4) Mexico


The first which is Bolivia would have the most risk, and Mexico would be the last.  Don’t think that Mexico would not nationalize its mines, if the world could no longer trust Financial Institutions or Central Banks.  These four countries produced 324 million of the total 750 million oz of silver in the world in 2011.

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German tax authorities raiding homes of ‘suspected’ evaders [SovereignMan]

July 12, 2012
Brussels, Belgium

Late last night I arrived to Brussels. As the capital of the European Union, Brussels is Europe’s political mother ship, the home base of the continent’s good idea factory.

You may recall, for example, the proposed EU regulations from 2010 which required all foods to be labeled by weight instead of count. A dozen eggs, for example, could no longer be labeled ‘one dozen’, but rather ’674 grams’.

This is the sort of genius that springs from a body of do-gooder bureaucrats who sole function is to impede the market. It is the embodiment of Ayn Rand’s famous quote:

“When you see that trading is done, not by consent, but by compulsion – when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.”

Decades ago, Rand perfectly characterized what we’re dealing with today… economies run by men who deal in favors and produce nothing. And there’s something very peculiar about their nature…

Aside from a sociopathic narcissism which causes one to believe that s/he has a superior ability to spend other people’s money, politicians also hold a worldview based on of scarcity.

Politics itself is really the art and science of allocating scarcity–making decisions about the collection and redistribution of resources within an economy.

German tax authorities raiding homes of 'suspected' evaders


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US June Deficit: $60 Billion, $17 Billion Worse Than Prior Year [Zerohedge]

The good news: the deficit in June was $59.7 billion, just on top of expectations of $60.0 billion. The bad news: the June deficit was $59.7 billion, following $125 billion in May (and yes, right after that shocking and one-time, tax return driven $59 billion surplus in April), and $16.7 billion higher compared to last June. Total debt in June increased by $85.7 billion so more or less in line. The cumulative deficit in Fiscal 2012 is now $904 billion through June, compared to $970 billion last year over the same period. Will this ever change?

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Treasury Yields Near Record Lows Amid “Suspicious” Direct Bidder Demand; Suspicion Easily Explained [Mish]

From http://globaleconomicanalysis.blogspot

Curve Watchers Anonymous is investigating the yield curve in the wake of reported “suspicious” bids for treasuries at the latest auction.

US Treasury Yield Curve Since 2003

click on chart for sharper image


  • $IRX: 3-Month Discount Rate
  • $FVX: 5-Year Treasury Note
  • $TNX: 10-Year Treasury Note
  • $TYX: 30-Year Bond

Chart above shows closing yield for the month except the front month is current.

Treasuries Approach Record Low After Note Auction

Bloomberg reports Treasuries Approach Record Low After Note Auction

 Treasury 10-year note yields approached all-time lows after the U.S. sold $21 billion of the securities at a record rate and minutes from the Federal Reserve’s last meeting showed some members favor more stimulus.

The auction attracted record high demand from a group of investors that include pension funds and insurance companies. The notes drew a yield of 1.459 percent, compared with a forecast of 1.518 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The previous record low auction yield of 1.622 percent was set last month.

Demand ‘Suspicion’

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.61, the highest since April 2010, compared with 3.06 percent in June and an average of 3.07 for the past 10 sales.

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Gold investors putting their eggs in the QE basket [mineweb]


When the US launched its first quantitative easing programme at the end of 2008, it is fair to say the world was in a fairly parlous state and in the four months following that significant liquidity injection gold rose around 36%.

When QE2 was announced gold rose again but, by not nearly as much. As ETF Securities points out in a new note, by the end of the second round of QE  the gold price rose by 11% to US$1,500oz.

While these were impressive moves, the real price action happened in September of 2011 when gold hit its record high, not on a third bout of liquidity in the US but, rather, on the expectation that the Fed would have to step in again to help out the ailing economy.

Now, granted, the situation in the US did not evolve in a vacuum, indeed, many would point to the ever-worsening sovereign debt crisis in Europe as another significant factor in gold’s solid move higher but, it is clear that US monetary policy has a very significant impact on the metal.

Indeed, as ETF Securities points out, while gold has traditionally been considered a hedge against financial risk, “with the end of the second round of quantitative easing on June 30 2011, the positive correlation between the gold price and risk, as measured by the VIX index, began to fall, turning negative in October 2011.”

Adding, “In recent weeks, it has become increasingly clear that another round of quantitative easing from the US Fed is the main catalyst investors are waiting for – both for US dollar weakness and gold price performance.”

According to the group, if non-farm payrolls and other growth indicators such as the monthly ISM surveys do not quickly show substantial and sustainable improvement, a new round of QE seems increasingly likely and, this would be good for gold.

Jeff Nichols, MD of American Precious Metals Advisors and senior economic advisor to Rosland Capital made a similar point to Mineweb in a recent podcast saying, that recent moves in the gold price are much more dependent on developments in the US than on the continued unfolding of the euro zone crisis.

He too maintains that QE3 is inevitable and, is likely to be the catalyst for the next significant upleg in the gold price.

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Eurozone Banks Dump Bad Paper on Taxpayers [dollarcollapse]

Bloomberg is reporting on what looks like a brazen con being pulled on taxpayers by eurozone banks and governments. It goes like this: During the recent credit bubble the PIIGS country banks created and then sold a bunch of low-quality mortgage bonds. Now they’re buying them up at big discounts to the original price, booking a profit on the trade, and using those securities as collateral for low-interest-rate loans from the European Central Bank.

European Banks Bolster Capital With Shunned Bonds: Mortgages

Spanish and Portuguese banks are leading European lenders in buying back their own mortgage- backed securities at distressed prices to bolster capital and stockpile eligible collateral for European Central Bank loans.

Banco Bilbao Vizcaya Argentaria SA (BBVA), Banco Comercial Portugues SA (BCP) and other lenders this year repurchased 6.6 billion euros ($8.4 billion) of asset-backed bonds they issued, more than double the level for all of 2011, according to data compiled by Deutsche Bank AG. Banks buy the debt, packages of loans in which they kept subordinated portions, for less than face value, and book a capital gain similar to the discount.

The purchases follow European Banking Authority demands that banks raise 114.7 billion euros by last week after the sharp fall in the value of bonds issued by governments in the 17-member shared currency. The deals are poised to accelerate after the ECB last month reduced the minimum ratings it will accept for mortgage securities offered as collateral for cheap loans, adding incentive to lenders to buy back debt and pledge it with the Frankfurt-based institution.

“Compliance with the EBA rules has been the main reason of all buybacks we are seeing so far, but there will be more deals since the ECB will take more of that paper,” said Frank Erik Meijer, head of asset-backed securities at The Hague-based Aegon Asset Management, which oversees 220 billion euros of assets. “Lenders with little or no other sources to raise capital and funding can turn to this strategy.”

Northern Rock 
The bigger the discount the mortgage debt is trading at the larger the incentive for banks to repurchase their own deals because that translates into greater capital gains.

U.K. lender Northern Rock Asset Management Plc last month offered to buy back bonds issued under its Granite program as some were trading at 58 percent of face value. They’ve risen to 69 percent of face value after the Newcastle-based lender bailed out by the U.K government said it would offer 64 percent to 77 percent of par.

Incentives are greatest for Spanish and Portuguese lenders, where yields over benchmark rates for mortgage-backed securities are as much as 17 times higher than comparable notes pooling home loans in the U.K. Eleven Spanish banks and four Portuguese lenders have put out tenders to repurchase some of their securitizations, according to Barclays Plc data.

Few Alternatives 
European lenders have few alternatives to raise capital as demand for shares of financial companies has plummeted amid the crisis over the common currency.

Sales of stock from European financial institutions fell 71 percent to 2.7 billion euros, data compiled by Bloomberg show, as Europe’s sovereign debt crisis has spread from Greece to Spain, roiling credit and equity markets. The Bloomberg Europe Banks and Financial Services Index (BEBANKS) declined more than 28 percent in the last year.
Shares have fallen even as the European Central Bank pumped 1 trillion euros of three-year loans, known as the LTRO program, into the system since December, making it easier for them to fund such transactions. ECB provides the secured loans at a rate of 1 percent.

“LTRO money has made it easier for banks, especially from peripheral countries, to use funding to raise capital at a moment when other possibilities such as sale of stock or asset sales are virtually closed,” said Conor O’Toole, the London- based asset-backed securities analyst at Deutsche Bank. “Even as buybacks are at record levels so far this year, we expect a second round of tenders.”

Rating Changes
Last month, the ECB, which demands residential mortgage- backed securities to be graded by at least two credit rating companies, said it will allow a second ranking as low as the least investment grade, six steps below the prior requirement. The central bank also widened the range of asset-backed securities it accepts as collateral.

Banks can pledge between 40 and 50 billion euros of bonds, which were not eligible due to rating cuts, said Bank of America Merrill Lynch analysts including Alexander Batchvarov.

Securitizations pool assets ranging from corporate loans to mortgages and slice them into securities of varying risk. The transactions remain on the originator’s balance sheet when it retains the riskiest slices.

Bilbao, Spain-based BBVA bought back 638.2 million euros of bonds backed by mortgages, consumer and company loans in a deal allowing it to record a 250 million euro capital gain, according to a June 28 regulatory filing. Banco Comercial Portugues offered to buy back as much as 300 million euros of bonds it issued between 2003 and 2007 mostly under its Magellan program backed by residential mortgages.

Some thoughts
Stripped of all the terminology, this scam comes down to European governments investing taxpayer funds in risky mortgage bonds — in order to prop up banks that made a lot of ill-considered loans in order to generate big year-end bonuses. This may be legal, strictly speaking, but it’s definitely not moral, and to the extent that European taxpayers figure out what’s happening, the result should be, um, noisy.

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Why The Debt-Dependent Status Quo Is Doomed in One Chart [Oftwominds]

From http://charleshughsmith.blogspot

The global economy is now addicted to debt. Once debt stops expanding, the economy shrivels. But expanding debt forever is unsustainable. Welcome to the endgame.

Regardless of whether you call it debt saturation or diminishing return on new debt, the notion that taking on more debt will magically enable us to “grow our way out of debt” is not supported by data. Correspondent David P. recently shared this chart of Total Credit Market Debt Owed and GDP and this explanation:

The purpose of this chart is to examine the relationship of total debt to GDP. Since Debt is not factored into GDP, just exactly how much debt is being used to create growth, and over what time periods. But absolute numbers don’t work so well, since they don’t let you examine particular years, seeing what the 1950s look like vs the 2000s, for example.

Red Line: Annual Change in TCMDO (Total Credit Market Debt Owed) * 100/ That year’s total GDP, showing that year’s % increase in TCMDO/GDP.
Blue line: % change in GDP over last year.

Any gap between the red line and the blue line is what I would call the creation of debt in excess of income. And that gap is the ANNUAL gap, not a cumulative gap. As an example, in 2008 TCMDO grew by an average of 30% of that year’s GDP, while GDP itself grew by around 5%. Ouch.

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European Bank Leverage- Explained [Reggie Middleton 2011 video]

It’s time to connect the dots [Simon Black]


June 29, 2012  Tel Aviv, Israel

This week may very well go down as ‘connect the dots’ week. Things have been moving so quickly, so let’s step back briefly and review the big picture from the week’s events:

1) After weeks… months… even years of posturing and denial, Spain and Cyprus became the fourth and fifth countries to formally request aid from Europe’s bailout funds on Monday.

In doing so, these governments have officially confessed to their own insolvency and the insolvency of their respective banking systems.

Meanwhile, Slovenia’s prime minister said that his country may soon ask for a bailout. (Humorously, Slovenia’s Finance Minister denied any such plans.)

Spain’s 10-year bond yield jumped to over 7% again in response, and many Spanish banks were downgraded to junk status by Moodys.

2) Over in the US, the city of Stockton, California filed for bankruptcy this week… the largest so far, but certainly a mere drop in the proverbial bucket.

3) JP Morgan, considered to be among the few ‘good’ banks remaining in the US, conceded that the $2 billion loss they announced several weeks ago might actually be more like $9 billion.

4) The Federal Reserve reported yesterday that foreigners are reducing their holdings of US Treasuries.

5) Countries from Ukraine to Kazakstan to Turkey announced that they have purchased gold in recent months to bolster their growing reserves.

6) Chile has joined a growing list of countries that has agreed to bypass the US dollar and settle all of its trade with China in renminbi.

7) China has further announced plans to create a special zone in Shenzhen, one of its wealthiest cities, to allow full exchange and convertibility of the renminbi.

8) World banking regulators from the Bank of International Settlements to the FDIC are proposing that gold bullion be treated as a risk-free cash equivalent by commercial banks.

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