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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Bill Buckler
November 15 , 2012
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The Treasury Refunding Auctions:

The US Treasury auctions off new tranches of debt of all maturities on a constant basis. We would all like to conduct an auction at which there are (at least) 21 guaranteed bidders - otherwise known as the "primary dealers" - but the Treasury reserves this for itself. But even though the Treasury sells its debt constantly, there are four annual auctions which can and often do take special significance. These are the "quarterly refunding" auctions which take place in the first week of the middle month of each calendar quarter. Quarterly refunding auctions take place in February, May, August and November. It just so happens that the latest of these auctions took place over the three days of November 6-8.

The significance of the quarterly auctions is stated by the Treasury: "Changes in debt management policy are generally developed through the quarterly refunding process near the middle of each calendar quarter." Any changes are laid out in a "policy statement" from the Treasury which is issued just before the auctions take place. These statements are similar to the ones put out at each meeting of the Fed's FOMC. They are boilerplate statements whose wording seldom changes much. Sure enough, the statement for the November refunding was almost identical to the previous one in August. But the market reaction was not.

Last Time vs This Time:

The US Treasury has held the amount of the debt on offer the same ($US 72 Billion) at every quarterly refunding auction since the last one of 2010. Most of the new money raised is used to meet the cost of maturing debt. Less than $US 10 Billion of it is what the Treasury calls "new cash". The August 2012 "policy statement" differed from its predecessor in May. In May, the statement did not include a section on the Treasury's debt limit. In August, it did. The Treasury simply stated that it expected its current limit to be reached "near the end of 2012. It repeated that statement in its November statement. There was nothing in the November statement which had not already been stated in the one issued three months previously.

On the markets, there were two BIG differences between their reaction to the August refunding and the one completed in the first week of November. In August, neither the secondary market prices nor the yields on long-term Treasury paper moved during the course of the auctions. US stock markets hardly moved either. This time, the secondary market prices of long-term Treasury paper soared during the course of the auctions and yields dived near all time lows. Meanwhile, the stock markets had their biggest weekly fall in months.

The next Treasury "policy statement" put out as a prelude to a quarterly refunding will be issued at the beginning of February 2013. By that time, the anticipated Congressional wrangles over the US fiscal cliff could have been "settled" - most probably by pushing a decision to later in the year - or they could still be raging. But what is certain is that if the Treasury's debt limit has NOT been raised by the end of January 2013, the Treasury will be running out of the "extraordinary measures" it uses to keep borrowing. This fact did not deter the "markets" from the November auctions. Or to be more precise, it did not deter the Fed which is by far the biggest "buyer" of Treasury debt - especially long-term debt under its "operation twist".

The End Of The Twist?:

The Fed announced what was quickly dubbed "operation twist" - the process of selling its shorter-term Treasury "assets" and using the proceeds to buy longer-term Treasury "assets" - at its meeting of September 20-21, 2011. At the time, the operation was scheduled to last until the end of June 2012. At its June 19-20 meeting, the Fed announced that it was extending "operation twist" until the end of 2012. On November 9, 2012, the president of the Reserve Bank of St Louis, Mr James Bullard, acknowledged that the Fed will probably HAVE TO terminate operation twist on schedule at the end of the year because they are fast running out of shorter-dated Treasuries to swap for the longer-dated variety. He quickly went on to assure us all that the Fed would "compensate" for this - most likely by upping the ante on their QE 3.

It is clear that all the threads of the ongoing financing of both the US government and "growth" in the US economy are coming together in the gordian knot which has been dubbed the "fiscal cliff" at the end of this year. Unfortunately, "Bernanke the Great" is running out of sharp financial implements with which to cut through it and the US government is not having much luck in finding a fiscal implement to do the same job. There have been rumours that the Fed can and may utilise other "assets" in their balance sheet to replace the short-term Treauries they are running out of. But that raises the questions - to whom will they "sell" them and how much will they get for them?

Longer-term Treasury bond prices soared over the course of this just completed quarterly refunding and yields dived. If you take a look at the charts of long-term Treasuries (link on the Subscribers Pages) which accompany this issue of The Privateer, you will see that Treasury prices are now just below the peaks set in June and September 2012. This latest peak is similar to the one set in June in that the spurt in Treasuries came in tandem with a sharp sell-off on the US stock market. The difference is that the Fed extended operation twist for six months in June. Now, they have depleted their ammunition to do it again.

But unlike the stock sell-off in June, the one that has taken place over the first full week of November 2012 coincides exactly with the Treasury's quarterly refunding auctions. This was NOT what the Fed wanted in the lead-up to the fiscal cliff. It was not what the political establishment wanted to greet Mr Obama's re-election. Could it be that there are actually "limits" to the power to create "wealth" by issuing IOUs??

One Of Three Possibilities:

It has been very well known for a very long time now that the US Fed regards the "health" of the US stock market as being of primary importance. The huge rally from the March 2009 lows was touched off by the Fed's first foray into "quantitative easing" and has been fuelled by the Fed's money creating activities ever since. Mr Bernanke has often pointed to the "equity markets" as a measure of the success of his "growth" programs and has stressed its health as an important means of regenerating the borrowing and spending he craves. "If the stock market goes up, to paraphrase Mr Bernanke, the consumer will feel wealthier. If the consumer feels wealthier, he or she will be more prone to borrowing and consuming. If we get more borrowing and consuming, the economy will grow and we'll all live happily ever after."

The problem is that while the Treasury bond market is still going up - or at least revisiting highs it set earlier in the year - the stock market has had an abrupt attack of cold feet. The fact that this attack coincided exactly with the last Treasury refunding auction before the lip of the fiscal cliff is reached is very interesting indeed. Both Fed Chairman Bernanke and Treasury Secretary Geithner are members in good standing of the "Plunge Protection Team" (PPT), that august assemblage of government officials tasked with making sure that the financial "asset" markets reflect their preferred view of the US economy. And that's ALL these markets, not just some of them. There are three alternatives for what has unfolded on US financial markets this week. Maybe the PPT was asleep on the job. Much more likely, they were powerless to prevent the stock market dive. That has happened before. The third alternative is more ominous. It is that there is enough fiscal and financial ammunition left to support the US stock market - OR the US Treasury bond market - BUT NOT BOTH. If that is the case, it is clear which one is deemed more important.

A week does not make a "trend". But it does indicate a possible direction. There is not much time left before the US political and financial establishment has to revisit the unlamented days of July - August 2011 when they set up the fiscal cliff which now looms. A "triple top" on the longest running of all US bull markets - the Treasury bond market - would be THE signal to the ultimate limits to credit expansion.


.Ó 2009 – The Privateer

(reproduced with permission)


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