*****The Steepening US Yield Curve And The Fed’s Toxic Assets*****

Treasury Yields

Before reading the articles below, have a look at this chart which shows treasury yields for all maturities. Notice how long term rates have started moving up sharply. The growing gap between short and long term yields means the US yield curve steepening.

The Fed is confused

The Guardian reports that Federal Reserve puzzled by US yield curve steepening.

(emphasis mine) [my comment]

Federal Reserve puzzled by US yield curve steepening
Reuters, Sunday May 31 2009
By Alister Bull

WASHINGTON, May 31 (Reuters) - The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.
[You have got to be kidding right? Are they being dishonest or are they just incredibly incompetent?]

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit?
[Answer: No] If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.

With officials still grappling to divine the factors steepening the yield curve
[is it really that hard to understand?], a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

"I'm in wait-and-see mode," said one Fed official who spoke on the condition of anonymity. "We laid out the asset purchase plan and we're following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don't think we should be chasing a long-term interest rate," the official said.


An important clue could come on when Fed Chairman Ben Bernanke testifies about the economy to U.S. lawmakers on Wednesday morning.

After lowering short term interest rates to near zero in 2008, the Federal Reserve said at its March meeting that it would buy up to $300 billion in longer-term Treasury securities over six months as part of its efforts to increase the money supply and ease the credit crunch of the past two years. So far, the Fed has bought $130.5 billion or about 44 percent of that $300 billion.

The Fed also has a goal of buying up to $1.25 trillion of mortgage backed securities (MBS) and $200 billion of debt issued by agencies like Fannie Mae and Freddie Mac. The Fed purchases of agency MBS total $507.075 billion so far in 2009.

But last week the benchmark 10-year U.S. Treasury bond yield jumped to a six month high around 3.75 pct, while the spread between 2-year and 10-year bond yields widened to a record 2.75 percentage points.

Economists at Barclays Capital in New York have argued that the Fed should announce plans to increase its planned purchases of longer-dated Treasuries to $1 trillion from $300 billion to drive yields back down
[they will end up doing this], lower home mortgage rates again, and support the embryonic economic recovery.

They warn the Fed cannot afford to hold fire until its next scheduled policy meeting on June 23-24.

Bond Vigilantes scared of accelerating inflation

Bloomberg reports that bond vigilantes confront the US.

Bond Vigilantes Confront Obama as Housing Falters
By Liz Capo McCormick and Daniel Kruger

May 29 (Bloomberg) -- They're back.

For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a president's attempts to revive the economy with record deficit spending. Fifteen years after forcing Bill Clinton to abandon his own stimulus plans, the so-called bond vigilantes are punishing Barack Obama for quadrupling the budget shortfall to $1.85 trillion. By driving up yields on U.S. debt, they are also threatening to derail Federal Reserve Chairman Ben S. Bernanke's efforts to cut borrowing costs for businesses and consumers.

The 1.4-percentage-point rise in 10-year Treasury yields this year pushed interest rates on 30-year fixed mortgages to above 5 percent for the first time since before Bernanke announced on March 18 that the central bank would start printing money to buy financial assets. Treasuries have lost 5.1 percent in their worst annual start since Merrill Lynch & Co. began its Treasury Master Index in 1977.

"The bond-market vigilantes are up in arms over the outlook for the federal deficit," said Edward Yardeni, who coined the term in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds. He now heads Yardeni Research Inc. in Great Neck, New York. "Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever."

Investor Dread

What bond investors dread is accelerating inflation after the government and Fed agreed to lend, spend or commit $12.8 trillion to thaw frozen credit markets and snap the longest U.S. economic slump since the 1930s. The central bank also pledged to buy as much as $300 billion of Treasuries and $1.25 trillion of bonds backed by home loans.

For the moment, at least, inflation isn't a cause for concern. Dur ing the past 12 months, consumer prices fell 0.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008, according to the Labor Department.

Bill Gross, the co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co. and manager of the world's largest bond fund, said all the cash flooding into the economy means inflation may accelerate to 3 percent to 4 percent in three years [Hah, that is a good one. Inflation will reach AT LEAST 100% this year]. The Fed's preferred range is 1.7 percent to 2 percent.

"There's becoming an embedded inflationary premium in the bond market that wasn't there six months ago [The US is headed towards hyperinflation so this "embedded inflationary premium" is only going to grow]," Gross said yesterday in an interview at a conference in Chicago.

"The deficit and funding the deficit has become front and center," said Jim Bianco, president of Bianco Research LLC in Chicago. "The Fed is going to have to walk a fine line here and has to continue with a policy of printing money to buy Treasuries while at the same time convince the market that this isn't going to end in tears with fits of inflation." [Impossible to do]


The dollar has also begun to weaken against the majority of the world's most actively traded currencies on concern about the value of U.S. assets. The dollar touched $1.4169 per euro today, the weakest level this year.

The bond vigilantes are being led by international investors, who own about 51 percent of the $6.36 trillion in marketable Treasuries outstanding, up from 35 percent in 2000, according to data compiled by the Treasury.

New Group

"The vigilante group is different this time around," said Mark MacQueen, a partner and money manager at Austin, Texas- based Sage Advisory Services Ltd., which oversees $7.5 billion. "It's major foreign creditors. This whole idea that we need to spend our way out of our problems is being questioned."

MacQueen, who started in the bond business in 1981 at Merrill Lynch, has been selling Treasuries and moving into corporate and inflation-protected debt for the last few months.

Chinese Premier Wen Jiabao said in March that China was "worried" about its $767.9 billion investment and was looking for government assurances that the value of its holdings would be protected.

The nation bought $5.6 billion in bills and sold $964 million in U.S. notes and bonds in February, according to Treasury data released April 15. It was the first time since November that China purchased more securities due in a year or less than longer-maturity debt.

The world's largest economy will begin to expand next quarter, according to 74 percent of economists [74 percent of economist do not have a clue] in a National Association for Business Economics survey released this week. The Standard & Poor's 500 has risen 36 percent since bottoming on March 9, while the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans, fell to 0.66 percent today from 4.819 percent in October, according to the British Bankers' Association.


Central bankers want to avoid appearing to react solely to market swings. Bernanke hasn't formally asked policy makers to consider whether to increase Treasury purchases and may not do so before the Federal Open Market Committee's next scheduled meeting June 23-24. Officials are confident they can mop up liquidity without gaining additional tools from Congress, such as the ability for the Fed to issue its own debt. [Fed "Officials" are either incompetent or dishonest]

The Fed declined to comment for the story. Bernanke has an opportunity to discuss his views when he testifies June 3 before the House Budget Committee in Washington.

"We have daily reminders from bond vigilantes like Bill Gross about the prospect of losing our AAA rating," Federal Reserve Bank of Dallas President Richard Fisher said in Washington yesterday. "This cannot be allowed to happen." ['AAA' = toxic, so the US is in no danger of a downgrade (at least from US credit rating agencies)]

'It's Over'

Inflation expectations may best be reflected in the yield curve, or the difference between short- and long-term Treasury rates. The gap widened this week to 2.76 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003. Investors typically demand higher yields on longer-maturity debt when inflation, which erodes the value of fixed-income payments, accelerates.

"The yield spreads opening up imply that inflation premiums are rising," said former Fed Chairman Alan Greenspan in a telephone interview from Washington on May 22. "If we try to do too much, too soon, we will end up with higher real long-term interest rates which will thwart the economic recovery."

Other economists are more pointed. After falling from 16 percent in the early 1980s, 10-year yields have nowhere to go but up [Agreed], according to Richard Hoey, the New York-based chief economist at Bank of New York Mellon Corp.

"The secular bull market in Treasury bonds is over," Hoey said in a Bloomberg Television interview. "It ran a good 28 years. They're never going lower. That's it. It's over."

China is not happy

China's Yu, a former central bank adviser, says global crisis 'inevitable' unless US starts saving

Global Crisis 'Inevitable' Unless U. S. Starts Saving, Yu Says
By Bloomberg News

June 1 (Bloomberg) -- Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser.

It may be helpful if "Geithner can show us some arithmetic," said Yu. "We need to know how the U.S. government can achieve this objective."
[it can't. See my arithmetic below]

Yu said U.S. tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of "fighting two wars."

China wants to know how the U.S. will withdraw excess liquidity from its financial system "in a timely fashion so as to avoid inflation" when its economy recovers, said Yu, now a senior researcher at the government-backed Chinese Academy of Social Sciences.

He questioned whether there would be enough demand to meet U.S. debt issuance this year.
[There won't be]

Referring to the Federal Reserve "as the world's biggest junk investor
[ouch]," and to Chairman Ben S. Bernanke as "helicopter Ben," Yu said the Fed has dropped "tons of money from the sky since the subprime crisis."

"The balance sheet of the Federal Reserve not
only has expanded like mad but is also ridden with 'rubbish' assets [anyone else impressed with the honesty and directness?]," he said.

Bloomberg reports that China's Yu Tells U.S. Not to Be Complacent About Debt.

"I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds'," Yu said in an interview yesterday. "The euro is an alternative. And there are lots of raw materials we can still buy." [raw materials = gold/silver?]

The U.S. should take China's interests into consideration "so that your own interest can be protected," Yu said. "You should not try to inflate away your debt burden." China could still diversify some of its Treasury holdings into euros or commodities, Yu added.

Nogger's blog makes fun of China's situation.

[I enjoyed this bit of humor]

I have this mental image of China now running round Duluth airport fifteen minutes before it's plane is about to leave, buying anything that's on the shelves, just to get rid of this bloody foreign currency it doesn't want. "I'll give you $760 billion dollars for the Barack Obama Mug and that inflatable pillow."

It can't be of any great surprise that
China would rather like to swap what has suddenly become the largest collection of Monopoly money in the world for grains, metals, or just about anything else.

You want your $760 billion back China? Here you go mate, but mind the print it's still a bit wet.

The world could just about be ready to enter a new phase of mega-inflation.

My reaction: The rising yields of long dated treasuries were predictable. I outlined nine reasons US interest were headed up in my article *****Fed Planning 15-Fold Increase In US Monetary Base*****

1) The Federal Reserve is 'puzzled' by US yield curve steepening

2) Investors from Beijing to Zurich are challenging a president's attempts to revive the economy with record deficit spending. These Bond Vigilantes (investors worried about inflation) are dumping long dated treasuries.

3) China is concern with the fed's ability to withdraw excess liquidity from its financial system to control inflation

4) China warns that there are alternatives to the dollar.

The arithmetic of shrinking the Fed's balance sheet

China raises a valid point about the Fed's ability to shrink its balance sheet. To withdraw excess liquidity from its financial system, the fed will need to sell assets, and there are three problems with this:

1) The balance sheet is ridden with 'rubbish' assets

China is also right to refer to the Federal Reserve "as the world's biggest junk investor." Less than half the assets on the fed's balance sheet can be sold to shrink the money supply.

The screenshot of the Fed's balance sheet shown below illustrates the problem of toxic assets. The blue circle represents assets which could be sold to shrink the money supply and loans to foreign central banks which are being repaid. The red X represent loans to insolvent financial institutions (which means loans can't be called in) collateralized by toxic 'AAA' securities (which are virtually worthless).

US Monetary Base VS Sellable Securities Held By FED

2) Market value of fed's assets falling fast

All the Fed's sellable assets are interest bearing securities, whose market value is vulnerable to interest rate fluctuation. Worse, of these interest bearing securities, over half of them have a maturity of over ten years, as seen in the graphic below.

With long term interest rates going parabolic, the value of these long dated assets is getting killed. Especially worrisome is the value of the 427 billion mortgage-backed securities. If the fed tries to sell these assets, it will only get a fraction of what it paid for.

3) If the Fed does try to sell these assets to control inflation, the US will go bankrupt

Interest rates are already going up because the US government is selling so much debt. If the fed starts unloading treasuries too in an attempt to shrink the money supply, the treasury yield along the entire curve would skyrocket, more so then in the eighties. With 20% interest rates, the cost of servicing the US national debt exceeds tax income.

Conclusion: After a closer look at the fed's balance sheet, the dollar's hopeless situation is easily be understood.

This entry was posted in Background_Info, China, Currency_Collapse, Federal_Reserve, Market_Skepticism, Wall_Street_Meltdown. Bookmark the permalink.

23 Responses to *****The Steepening US Yield Curve And The Fed’s Toxic Assets*****

  1. SPECTRE of Deflation says:

    The steepening curve isn't because the bond market believes inflation is right around the corner. It's choking on supply which won't be able to keep up with Obama's wreckless spending and $2 Trillion Dollar deficit in 2009. By going to bills and notes from bonds, China has us by the short hairs.

  2. Anonymous says:

    Choking on supply? You either vomit or eat it, and this time the bond market is saying you need to pay up bcs the value of this paper is less than yesterday. China buying T-Bills? You should familiarize yourself with Bills vs. Notes macro-economically and only then you will see why they are eating Bill supply. Check out Armstrongs latest piece on just such issue. Gotta run. -Troy
    PS - good work Eric.

  3. kenneth says:

    @eric or someone else could you please offer a short primer on the treasury yield curve? what are the implications of a widening gap between short and long term rates? is it always a bad thing? what makes it good or bad? thanks

  4. OperationNorthwoods says:


    One question we all have is what kind of deals the Chinese had to make to get the US to support their entry into GATT. The assumption that the Chinese can, say, sell US paper is based on the premise that there wasn't a deal that they wouldn't sell for X number of years.

    The controllers of the US may be arrogant and crazy, but they surely had some idea of what would happen once China became the factory for the world.

  5. dashxdr says:

    "74% of economists do not have a clue"

    "‘AAA’ = toxic, so the US is in no danger of a downgrade (at least from US credit rating agencies)"

    It's a pleasure reading your blog, Eric.

  6. dashxdr says:

    "The controllers of the US may be arrogant and crazy, but they surely had some idea of what would happen once China became the factory for the world."

    That's just it. There was no long term thinking inside the US. There are short term benefits to outsourcing for any company that does it. But there is long term pain for the overall economy.

    The outsourcing wouldn't actually occur if it weren't for the Federal Reserve and the fiat money system and the artificially propped up US dollar. Without the US military machine corrupting foreign governments and basically enslaving the rest of the world (3rd world in particular) the US dollar would not be so strong.

    What this means is that US labor costs more than foreign labor. And it's all due to the controlled nature of the US dollar, which the US can create out of nothing.

    The US government thrives on this, however. Its power base is the banking cartel that bribes federal officials, controls the media, and owns wall street. They can't expose the corruption without cutting their own throats.

    So over time the US manufacturing base has been destroyed, we import everything, paying for it with valueless paper, setting ourselves up for a monumental disintigration at some point in the future. That point is now.

  7. Bowtie says:

    who is selling metals today?

  8. Anonymous says:

    The Fed is selling metals today, in order to pay for the huge amount of treasuries and agencies it is purchasing. They've got plenty of gold to sell too, so you had better sell yours right quick.


  9. Numonic says:

    The simple fact remains, if there were really as much physical gold/silver as people who say that there is allot of physical gold/silver in the world says there is, we would not have went off a gold/silver standard and we would be using physical gold/silver as currency today and not paper. We would be able to stretch physical gold/silver as much as we did the dollar these past decades. We would be stopping defaults with physical gold/silver. But we are not. The reason we are using paper and not physical gold/silver for this banking system is proof that physical gold/silver is not as plentiful as some of these people are making it out to be.

    Why did spot gold/silver drop in price? Easy, more Federal Reserve Notes flooded the paper gold/silver market and stopped defaults and brought the price down.

    This particular blog by Eric is one of my favorites but I have a few comments:

    First of all I'm against the bailouts/credit/price fixing but China wants us to default on all this other debt and thinks that defaulting on that other debt will not effect the value of the debt they hold of ours. I think some people are still shortsighted here. Yes, there is the issue of China getting back worthless dollars when the debt matures if we continue to print our way out of debt, but that's only one side of the problem. The debt will be effected if we print too much but it will also be effected if we default on too much debt. If you have soo much debt and you default on 90% of that debt, your future/remaining debt will become worthless. Who would accept debt with a high chance of default?, those that do will obviously ask for a larger return for taking such a risk. So I don't understand why people are only looking at one side of the story. To tell you the truth, because we have soo much debt, it's more likely what will affect the value of the debt will be defaults not valuless dollars from over printing. Contrary to what many inflationists believe, I'm not worried about the govt. printing it's way out of debt, I'm worried that they can't/won't(without Zimbabwe size bills). In fact when I first started reading this particular blog that's what I thought this was getting at. This particular blog is basically saying that all the printing is not enough to stop defaults. Defaults(IMO) being the reason the yield curve is rising. Basically saying the govt. can not print fast enough to stop defaults, what I have been saying all along. Now others(I think Eric also) is saying the reason the yield is rising is because no one is buying the debt because they see it returning worthless dollars in the future with all this printing. But I disagree that the reason the yield is rising is because of investors refusing to buy it, i think this is a crisis of economic law and insolvency. I don't think this crisis is in the hands of China and the investors. I think that the govt. is having trouble supplying Federal Reserve Notes for the Treasury Debt redemptions/maturities and this is causing defaults and causing the yeilds to rise. I think that all these central banks are in this together. It's hard for me to believe that China has not considered the repercussions on the value of debt they hold of ours if the govt. allowed all the other debt to default. But at the same time I seem to be the only one considering those repercussions as everyone is more focused on the value of the debt dropping from a flight away from these treasuries by investors/China because of an over printing of the currency.

  10. Numonic says:

    I see the grave danger to the debt being insolvency/default while most others see the grave danger being no buyers. The way I look at the massive printing having a negative affect on the value of the debt is that holders of our debt see that the massive printing is still not enough to stop defaults and sell the debt in an attempt to avoid being defaulted on and the selling of the debt puts more pressure on the credit market by it's demand for the Fed Notes and causes more defaults leading to a rising yeild curve. It's not the increase in base money(printing) that will cause the yields to rise, it's the inability to create enough base money to make good on the debt that will cause yields to rise. I see it as the more the yeild rises the greater chance there is of default.

    Here's a theory: I'm trying to figure out what's China's reason for threatening to sell our debt or to stop buying our treasuries and one theory is that they(China) say that to make people believe that the fate of the value of the debt is in their hands and usually when we hear threats of China selling the debt some one else always comes in to contest that idea saying it's in China's best interest to buy our debt and that we should not worry about China selling our debt and in this way it makes it seem as if the fate/value of the debt is in the control of the US govt. By China threatening to sell our debt and the US Govt. responding that it's in China's best interest to continue buying our debt, these two central banks make it seem as if the fate/value of the debt is in their control when the truth is the fate/value of the debt is in the control of economic law and the debt is facing defaults that even the massive printing by the Fed can not prevent and is evident by the rising yield.

    okay i talk too much.

  11. Aaron Krowne says:

    It is rather funny the Fed once again finds itself with a long-end "paradox".

    Apparently the bond vigilantes are back and aren't piling into the long end of the market just because the Fed is doing quantitative easing sabre-rattling.

    One can see today's long-end paradox as the mirror image of the paradox towards the tail end of the housing bubble. Remember that one? When Greenspan started raising rates, the long end stayed stubbornly low.

    That turned out to be because of the exporters' dollar recycling, and the feedback cycle of more leverage leading to reduced risk premiums leading to more leverage.

    Both of these factors are now dead -- an equal and opposite consequence, as sure to follow as night is to follow day. China and other creditors no longer want to invest in the US's future (read: the US's bailout), and risk premiums are back with epochal vengeance.

    One long-end paradox has begat another. This has nothing to do with recovery or the business cycle: this is all about the credit and currency cycle.

  12. OperationNorthwoods says:


    I guess we'll just have to agree to disagree regarding whether the elite at, say, the David Rockefeller level just promoted the rise of Chinese manufacturing for short-term profits. I think that breaking US unions and having US financial capitalism finally triumph over industrial capitalism would be more important to him. He proudly wears the label of internationalist, and that inevitably means the relative decline of the US.

    I do agree on the question of the dollar being overvalued. But, as Catherine Austin Fitts has estimated, up to 90% of its value is based on force. The US has a massive infrastructure to intimidate the rulers of other countries to "see the light".

  13. Anonymous says:

    Is it possible Fed can cover up the next wave of crisis--trillions of CDS's defaults to pretend that the economy has no problem and is going up? By what means? Anybody has any ideas? Eager to know...Many Thanks.

  14. SPECTRE of Deflation says:

    Anon No, I'm pretty damn sure when you offer $100 Billion in one week, and the long end says enough with exploding rates, you are choking on supply. I have no idea what you are talking about concerning where China is buying on the curve. They will not touch anything longer than a note at this point. Do you understand the difference between the various debt products offered by the FED?

    Have you ever looked at the M1 Money Multiplier? Educate yourself.

  15. SPECTRE of Deflation says:

    Anon, You are looking at $1.4 Quadrillion Dollars in Derivatives with 95% being on margin. There is no papering over these unimaginable sums. We are screwed. This is all bread and circus while they steal the very last nickel from the once great American Treasury.

  16. SPECTRE of Deflation says:

    Well looky here. I guess rates are headed up in CA because they are seeing green shoots all over the place. :>)!

    California's fiscal mess has begun to rattle municipal bond investors. Market yields on the state's outstanding general obligation bonds have jumped in
    the last week, reflecting falling prices for the securities as buyers have backed away. Traders were quoting annualized tax-free yields of about 4.7% on 10-year California general obligation issues on Tuesday, up from 4.4% early last week. The yield on five-year California bonds was around
    3.45% Tuesday, up from 3.04% a week ago, according to Bloomberg News.

  17. Bowtie says:

    china is using the t bills as collateral - as stated by GATA. If the t bills go to 0 they can just exchange them for whatever they are holding.

  18. Numonic says:

    People need to realize what I just said:

    "It's not the increase in base money(printing) that will cause the yields to rise, it's the inability to create enough base money to make good on the debt that will cause yields to rise."

    It's not the creation of more debt that is causing yields to rise. If more debt caused yields to rise then we should have been experiencing a bear market in bonds these past decades where more and more bonds/debt was issued, not a rally with yields dropping. It's defaults that are causing yields to rise. The reason the yields over the past decades were dropping while more and more debt was being created was because issuers of that debt were able to make good on that debt. Yields rise when someone can not make good on the debt. Right now the bonds are just coming off of a long rally so the defaults are not really noticable but i bet after these yields rise to some higher point(not sure at what %) we will start hearing/reading about defaults in the Treasury Bond market. We should be hearing about it now but instead the mainstream media with the help of the rise in stocks wants you to believe that investors are in control and that this rise in bond yields is the effect of a move investors are making, moving from safe assets(in their opinion: bonds) to more riskier assets(in their and my opinion: stocks). But when the paradigm shifts and both bonds and stocks take a dive together it will be harder for them to come up with a reason.

    ""The secular bull market in Treasury bonds is over," Hoey said in a Bloomberg Television interview. “It ran a good 28 years. They’re never going lower. That’s it. It’s over.” "

    I think people who say the stock market will rise high while bonds crash low are wrong. If the govt. could print enough to cause a large rally in the stock market, they would also save the bond market. But they can't and right now they are struggling to keep one of these markets afloat at a time. And this is proof that this rally in stocks will not go far, because if it were able to go far, the resources(printed dollars) the government used to cause a massive rally in stocks would also be used in the bond market to keep yields down. That's why I think the idea of a massive rally in stocks and massive drop in the value of bonds can not happen at the same time. If the govt. could cause a massive rally in stocks, it would not let the bond market tank. So this stock market rally we are experiencing right now will not go far. Right now the govt. is trying to choose which holes to plug and right now the hole of choice is the stock market. But more holes are appearing and soon the govt. not be able to print enough to plug the massive amounts of holes. And both the stock and bond market will crash. How soon? I say before this year ends.

  19. Numonic says:

    Eric did you catch this CNBC interview with Jim Rogers and the CEO of BG Cantor talking about Treasuries.

    This is the exact fallacy that I am talking about. This guy says that yields won't rise until there is growth in the economy. Jim Rogers and myself as I heard this was jumping out of the chair. You have to watch this session. It took place this past thursday June 4 2009.

    Here is the youtube video:


    Also the other fallacy is that if you store your money with the govt. you will get your money back. My point is just because you have a printing press does not mean that you can print as much money as you want(not with a $100 bill limit) and this is why yields are rising, because they can't print as much as they want and defaults are taking place which is the reason yields are rising.

  20. Numonic says:

    Also Jim Rogers like many people is asking the wrong question. Instead of asking "who will buy all this new debt that we are issuing?", he should be asking "can the printing presses handle the job of printing enough Federal Reserve Notes to stop the massive defaults going on in the economy and at the same time supply those who bought treasuries and are redeeming their loan?" The answer to that is NO they can not and the proof is in the mounting bankruptcies going on in the economy and the rising bond yields. The only thing this massive printing seems to be doing is pushing up the stock market a little and keeping paper gold/silver prices from rising past their all time highs and also keeping prices of things(gas, oil, food etc.) from rising high. And all of those attempts looks to be close to failing and will definitely fail before this year ends. Before this year ends we will see a much lower DOW, a much higher price on spot gold/silver and oil, gas, food and everything else and a much higher yield on the Treasury Bond. The printing press will have failed at controlling the price of anything by the end of this year.

    P.S. I urge everyone to become hoarders and not to trust your physical gold/silver with anyone but yourself. And stay away from paper gold/silver because even as the paper prices rise, that will only be the face value. The gold/silver bond will promise to pay you X amount of Federal Reserve Notes but it won't because the very reason the paper gold/silver price rose to X amount of FRN's is because there were massive amounts of these paper gold/silver bonds that failed to deliver their face valued X amount of FRN's. And the higher the spot price goes the more of those bonds are getting defaulted on(and by default i'm not talking about getting paid in worthless FRN's I'm talking about getting NO FRN's at all. I mean you get absolutely nothing for the paper promise) But if you want to take the risk and see if you can be the first to run be my guest but just remember, the higher the price goes the further you are behind in the race so it makes no sense to race in the first place, just pay the premium and hold the physical yourself. That premium and the work of storing it yourself will be more than worth it in the end.

  21. stibot says:

    I've some gold/silver at home but i don't feel comfortable having all this way. And there is also limited liquidity.

    So I'd like to move cash into CEF or to Swiss fund. I closed my IB account in US because of risk of IOU/FTD as Eric warned, also considered possible US banks collapse.

    Now i asked local broker how about risk of IOU/FTD and of course he said there is no problem. I realized it is wasting the time ask him for more.

    I'm not familiar with that issue, so my question is: is it safe to buy stocks if broker uses so called depository for stocks, or it does solve nothing and there is risk of became owner of IOU?

    Do you've some idea if it is possible to own IOU when stocks is bought on exchange of Canada or Swiss? I'll try google something, but maybe someone knows..

  22. Numonic says:

    If your afraid of liquidity wait 'til all those funds/bonds/debt you own begin defaulting.

    My point is you should get out of any paper promise of gold because the higher the price goes the more ILL-liquid those promises become. The reason the price of paper gold rises is because more and more of the paper promises are becoming illiquid and not paying the settlement cash. So it makes no sense to hold paper gold. If you plan on holding paper gold until the price of gold goes to $2000, you will loose because when the face value of the promise is $2000/oz the promise becomes extremely illiquid. 90% of people holding bonds will not get what they were promised back from the bond and the other 10% who are lucky enough to get some of the money will loose what ever they get because of rising prices.

    I'm telling you we will have a currency collapse and 5 $1 bills will be worth more than 1 $100 bill. Meaning the dollar will reach it's commodity value because 5 pieces of paper is more than 1. The face value will mean nothing. 1 $1 bill will be equal to 1 $100 dollar bill or 1 $1,000,000,000 dollar bill.

    So that single piece of paper promise will be worthless, stay away from any bond/trust/or debt and become a full fleged hoarder, not to cause anything to happen but to protect your wealth from what is gauranteed to happen. Massive bankruptcies are upon us and don't expect FDIC or the govt. bailouts to protect you. You will get nothing. You will not get anything because the printing press can not print fast enough to stop defaults(not without Zimbabwe size bills) and the govt. will only pull that cat out the bag after massive defaults have already happened. Of course people will blame these larger bills on the rising prices when the truth is if the govt stopped printing right now or even back in 2007 when the great credit contraction began, the massive defaults will/would cause a massive rise in the price of all things. I explained it to death already but people aren't paying attention.

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