Tuesday, June 9, 2009

Quarterly $1 Trillion Monetization

[Note: monetization is the process by which a country's central bank purchases the debt of its national government. Typically governments access the private market for funds. When there are insufficient private money, they (sometimes de facto but often times de jure) require central banks to close this gap. The following article, while lengthy, accurately describes the Federal Reserve System policy concerning this topic. It is certainly worth the time to read. I concur fully with its assertions.]

Quarterly $1 Trillion Monetizationby

Jim Willie, CB. Editor, Hat Trick Letter June 2, 2009

The rising long-term USTreasury Bond yield has captured attention. The breakout chart for the 10-year Treasury was pointed out here when it rose over 3.1%, hardly a high level. In the first week of May, a target of 3.5% was cited, one easily surpassed. It zoomed to 3.75%, enough to create some waves in the stock market distracted and preoccupied by nonsensical Green Shoots talk on the psychological side and by falsified bank balance sheets on the accounting side. Bigtime stress has come to the USTreasury complex, a story difficult to mask and conceal, since it is at the epicenter of the credit markets. Only on Wall Street can we hear lunacy of less bad economic statistics (framed in sophisticated second derivative arguments) amidst an absolute cavalcade of miserable news on the jobs front, home foreclosure front, and home price front. So the unemployed workers, dispossessed homeowners, and insolvent households will lead the nation on a recovery, while credit approval is much more strictly applied even to the creditworthy among us? Doubtful! Only on Wall Street can we hear of the banks undergoing a healing process when huge credit asset writedowns are replaced instead by convenient ‘Credit Value Adjustments’ as booked profits on their books.

So a stream of upcoming additional asset losses will lead an investment boom by basic accounting fraud, calling them gains with SEC blessing? Doubtful! The stock market rally is being called a ‘Sugar High’ by the venerable Wall Street Journal, very accurately. Sadly, foreigners are watching, and they are selling the USDollar down. They observe the mountain of USTreasurys hitting the market like Chain Letters bound in Treasury Auctions. They observe outright monetized purchases of the Treasury Investment Protection Securities (TIPS) designed as an inflation signal. With fading confidence, they are selling the USDollar down the river. One might realistically perceive the stock rally as based upon a flood of monetary inflation, given an assist by blatant recovery propaganda, powered further by good old fashioned accounting fraud.

Behind the bushes, a powerful billboard message can be seen by the trained eye, accompanied by loud signals audible to the trained ear. The US Federal Reserve will be forced to continue the gargantuan monetization scheme. The first round was announced in mid-March, for $300 billion in USTreasurys and $750 billion in USAgency Mortgage Bonds. Most did not give a second thought, that it was a one-time event. WRONG! The monetization news dealt a powerful blow to global confidence in the US financial system generally and the USDollar specifically. The $1 trillion monetization will be repeated, and even become a quarterly event, much like a constant sub-surface flow of water to remove a foundation built upon sand.

The trip to China by USDept Treasury Secy Geithner should be viewed as a key reassurance to these important creditors, later to be viewed as a betrayal. The Chinese audience responded with loud laughter when Geithner assured them that their $2 trillion in savings was safe and secure. This was a national humiliation event, as Geithner has been muzzled. If only the USCongress had such broad wisdom and deep courage to laugh when Goldman Sachs henchmen ‘(Made Men’) from the syndicate gave regular speeches laden with deception and rationalizations for their continued fraud. Then again, the Chinese audience is not on the receiving end of graft and bribery, nor the object of revolving doors.


The group of 20 to 22 bond dealers with contracts to sell USGovt debt securities are under siege, suffering a grand new plight. This is perhaps the best kept secret in the entire credit market right now. The USFed primary bond dealers are being squeezed. They actually have some power to respond. They are at risk, and face a possible rapid extinction. Despite the rising long-term USTBond yield, money going into USTBond purchases in general is growing like a powerful torrent. Demand for USTBonds is growing fast, very fast. Bond supply is rising faster than demand though!! The role of primary bond dealers is to hold inventory as intermediaries, a prospect that makes those dealers LOSERS right away. Auction sizes one or two years ago used to be $5 billion, $10 billion, even $15 billion on a given month. Just last week the official auction was for $110 billion, a 10-fold increase. The pushback comes from these primary bond dealers, who collectively possess the power to tell the issuer (USDept Treasury) and the agent (USFed) that buyers just do not exist in sufficient volume to absorb such huge regular supply. Fear has entered the hearts and minds of the dealers. They will soon tell their bosses at Treasury and the USFed that more monetization must come in order to lighten the supply load, or else face a renewed crisis, at least horrendous negative publicity. The credit market trucks are breaking down from the weight. The $300 billion monetization sounded like a big amount, but it is not. That amounts to two or three months in supply, if the $1800 billion in USGovt deficits is to be financed. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in failed auctions, crushing losses by the primary dealers, and their possible disappearance. Remember what happened to private equity firms stuck with their own stock and bond inventory? They went bust. That is precisely the risk to these bond dealers.


The trend is clear for those with open eyes. The official bond auctions will continue relentlessly, probably well over $100 billion per month, for perhaps twenty months at least. Worse, the USGovt federal deficits will be much bigger than estimated. Here is a sobering fact. The USGovt tax revenues are down 35% year over year. For the first time in US history, the tax collection month of April 2009 was a net negative month. Expect the USTBond supply pressures to build, not reduce. My conclusion is clear. PURE MONETIZATION WILL SOON BE A REGULAR QUARTERLY PROMISE. IF NOT, THEN A USTBOND DEFAULT THREAT LOOMS NEAR ON THE HORIZON, OR A POWERFUL SUDDEN STOCK MARKET COLLAPSE WILL ENSUE. A monetization commitment forestalls a USTBond default at a later date.

Meanwhile, the economic impact of this unremedied crisis will slowly be recognized. Watch the job losses, which continue in huge numbers. Watch the home foreclosures, which continue in accelerating numbers. Watch the national home prices, which continue in steady declines. Recall that the USEconomic recovery that began in 2001-2002 was built upon a housing bubble as a foundation. The burst of that bubble is absolutely not a completed process. The national insolvency will take its toll on USTreasurys as a certain reflection. The debt downgrade (imminent, scheduled, expected, who cares its label?) of the UKGilts two weeks ago should have awakened the world to the perception of the USGovt debt as Third World debt paper. The government finances of the United Kingdom are no better and no worse than those of the United States. The global reserve status of the USDollar and USTreasury, the greater size of the USEconomy, these only guarantee that the impact of the US fiasco have broader shock waves. The fiasco is tied to the USGovt committed debt being transformed into debt securities, the USTreasury Bonds. It is a gigantic hairball. It is like a rattle snake swallowing a goat.

The USTreasury Bond supply (skyrocketing) is growing much faster than the rising demand. The untold story is that demand is rising in stride to take the rising bond supply, FOR NOW. A rising USTBond long bond yield does not mean necessarily that money exits. Price is determined as demand meeting supply. The rising bond supply will be continuing, not just for a month or two, but for a year or two or three, maybe four. Projected USGovt federal deficits are due to occur for as far as the eye can see. Bond analysts knew that big problems would result. They have begun. Huge USGovt debt commitments ensure a skyrocket of continued USTBond supply. It is sucking in funds all over the financial markets, like a Black Hole. The stock market is at growing risk for its available funds. The primary dealers have the ability to put pressure on fund managers of a wide variety. Those managers will be urged to purchase more bonds, to alter their allocation ratios, and to respond to government pressures. Some will be lured to earn future favors. The Dow Jones Industrial stock index and the S&P500 stock index have begun to stall, after quite a run powered by short covering, relaxation of accounting rules, and widespread talk of early sightings of recovery evidence. The gargantuan outsized USTreasury Bond auctions must find funds to feed the beast, and the stock market is a nearby target. The great Black Hole of USTBond issuance and sale has the potential to draw the entire stock market into its vortex. The conclusion is simple, and the USFed must respond. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. Refusal by the Treasury and USFed to monetize could result in painful stock market declines, the effects from which the public observes and understands well. Their pain usually results in hue & cry, and if not addressed, panic.


The USTreasury Bond cannot be monetized without enormous damaging fallout to the global reserve currency in the USDollar. It has begun to arrive, both to the USTreasury Bond and USDollar. For many months, my analysis has stated that even with intervention, either the USTBond falls or USDollar falls, guaranteed one, since official pressure to aid one would render harm to the other. In the last couple weeks, we have seen both fall in value, as colossal mismanagement might be the global perception that prevails, as debt quality is heavily scrutinized. The entire world is awakening to the development of a dying USDollar. Watch the euro head back to 150 with ease, then to 160 later this summer. Even the garbage British pound sterling is running, whose possible impetus is not what one might think. The commodity currencies are rising. See the Canadian Dollar, whose base creation at 77-78 cents has preceded a rise over 92 cents. See the Australian Dollar, whose base creation at 61-62 cents has preceded a rise over 81 cents. To be sure, the recovery in the crude oil price has helped power the rise, but more factors are involved. The Deflation Knuckleheads should look to the crude oil price, and the commodity currencies for guidance, even contradiction of their theories. The primary stabilizing factor against deflation is the falling USDollar, which delivers rising energy prices (now with natural gas), rising food prices, apart from domestic banking challenges on the lending side.

The USDollar has fallen in a very noticeable manner, enough to capture the attention of the world, enough to force a meeting in Beijing by USGovt finance syndicate bosses. The chart looks absolutely miserable, surely ominous, and very dangerous. The daily chart has meaning, but the weekly chart has more meaning. Three important cyclicals are shown. The relative strength is down hard, not yet at the important trigger 30 level. The stochastix is down hard, not yet near a crossover for rebound. The MACD is down hard, not yet showing signs of a level reading. Watch for a powerful upcoming negative signal, like in with the next two weeks, for a bearish crossover event. The 20-week moving average (in blue) is close to crossing below the 50-week moving average (in red). When it does cross below, expect a powerful move in the DX index to 76 then to 72, for a bottom retest. The DX dollar index has fallen below the critical 81 level, where past weekly opens and closes were registered in December. That means a retest of summer 2008 lows is guaranteed. Some speed bumps on the downhill are due in the 77-79 interval.

Finally, bear in mind the enormous fallout from USGovt and USFed actions, based in desperation. The $1 trillion monetization MUST BE REPEATED, and even become a quarterly event. The effect on the USDollar will be profound, extremely deep, and potentially devastating. Confidence in the USDollar is already shaken badly by events of the last 18 months. Promised monetizations will only continue to shatter that confidence. As the USDollar plumbs the critical support lows, and pushes to lower lows later this year, the GOLD & SILVER PRICES WILL MAKE NEW HIGHS AND CAPTURE GLOBAL ATTENTION. Both gold & silver price levels are resisting even little selloffs. Be sure to avoid the Exchange Traded Funds, namely GLD for gold and SLV for silver. It is highly doubtful that they hold gold or silver bullion in claimed quantities. They are highly likely to be leasing their bullion to the cartel in order to suppress prices. See their prospectuses for names of gold cartel firms, whose names are frequently listed among the biggest owners of staggering outsized short positions on the COMEX in gold and silver futures contracts. Those are illicit Naked Shorts!


Focus has been steady on the USFed balance sheet. Not only is it huge, but it is loaded with toxic assets. They cannot easily sell off their assets in order to drain the excess liquidity from the credit markets, enough to prevent a spillover into the USEconomy. Such a big drain would permanently cripple the housing market, which would kill the banks. Doing so would cause a USTreasury bear market of monstrous proportions, which would kill the USDollar. Therefore, price inflation is coming for a simple reason that the USFed cannot drain the excess liquidity, and cannot prevent a certain eventual spillover. When price inflation arrives without welcome, or even with welcome, the impact on the gold & silver prices will be very big and very positive. The impact on USTreasurys is uncertain. Holding the line on USTreasurys will assure a powerful negative blow to the USDollar.

John Hussman makes two great points on this very important matter. He claims that price levels can remain under control only if the money velocity is held down permanently. To maintain low money velocity, the banks must keep their bank reserves over the current 95% level, something difficult to do as they gradually approve new loans. He claims that price levels can remain under control only if the value of goods & services is perceived as less than the value of USGovt liabilities packaged in debt securities. To maintain the USTreasury bubble will be difficult, especially when supply is overwhelming, especially when price inflation is seen as a growing future risk, and especially when foreigners are diversifying out of US$-based securities. Hussman makes the strong point that bank losses will continue, as new categories like commercial mortgages and formerly pristine prime mortgages add to big losses, a parallel point to mine. He concludes that the USEconomy will experience a 100% price inflation in the next decade, in order to bring back into line the debt ratio to the US Gross Domestic Product. That angle of reasoning makes perfect sense for a price inflation long range target. A double in consumer prices and the GDP price component would result in a gold price of $3000 per ounce, and a silver price of nearly $100 per ounce.


Volumes could be written about General Motors, dubbed recently Govt Motors. The illegal trampling of their bondholders is well covered. Their executives just requested $15 billion for walking around money during the bankruptcy hearing that began on Monday. Actually it is for continued operating costs. So AIG is the basket case ‘Ward of the State’ in the financial sector. So Fannie Mae is the basket case ‘Ward of the State’ in the mortgage & housing sector. Now General Motors is the basket case ‘Ward of the State’ in the industrial sector. Here is a wrinkle that few have considered. The issue arose in the 2005 near death experience suffered by GM. To confuse matters, the GM corporate bond resolution might cause a firestorm. My guess is that 5x the volume of CDSwaps are in circulation to insure against default of their outstanding corporate bonds true volume. The orderly resolution of CDSwaps might cause a powerful unwanted rally in GM bonds, even though dead. An embarrassing situation perhaps is coming. The resolution of Lehman Brothers corporate bonds was highly disruptive. GM has much greater debt volume, $172.81 billion to be exact. Since 2005, the Powerz have attempted to let GM bonds expire and roll over into more controllable securities. It could become wild.

GM is to emerge from the restructure process much smaller company, geared to selling much less profitable smaller cars. The United Auto Worker members are still attached to the USGovt umbilical line, with cost. The new & improved Govt Motors will be peddling a $40k electric hybrid called the Volt, while Toyota continues its production of the $20k electric hybrid Prius. Can anyone detect a price and experience differential in the financial transmission? Anyone who has any knowledge of competition head to head against government-run businesses should see the prospect of unexpected future losses of great magnitude at Govt Motors. Competing against high level bureaucrats who crowd executive offices is an easy prospect. Not to be dismissed, the USGovt is certain to order huge fleet purchases. By the way, evidence mounts that the main trait in common with the Chrysler dealers shut down last month were their campaign donations to the Republican National Committee by the victimized dealers. The business of politics is very consistent. Watch for a similar theme in GM dealer shutdowns. Just a footnote. The sale of the Hummer division is in the news. Each vehicle sold to the USMilitary was subsidized by a $25k payment directly to General Motors, to keep America strong.

The nation would be better served by giving every GM worker a $120k cash grant designed to assist widespread business startups, like bankruptcy counseling, import-export firms, internet software ventures, math-science tutoring, landscape services, security for abandoned empty homes, tent city planning, second sourcing for ammunition, research on the US Constitution versus fascism and communism, even lemonade stands. If 10% of new business ventures grew into viable businesses, that movement would easily eclipse the Govt Motors rebirth initiative. The costs this year and next year to General Motors will be staggering, whose estimates are way too low. The nation is obsessed with supporting failed businesses, starting with Wall Street banks, and now with industry in the heartland.

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