CR,

Does the yield curve reflect reality?

I need to empty my pool so I can catch all that money dropped from Ben's helicopters.

Speed,

Conjure could do that job very well.

Ben has to force a new long-term low from the 5.25% in 2003 (well, actually, he's done that) in order to keep the credit bubble intact. If he can't refi enough at 4.75% of whatever it is currently, the bubble implodes further. And if he can't push it down again to 4.25% or so in a couple of years, same thing.

Don't be fooled. China is buying less long bonds because (a) they don't want to hold more dollars because they know Ben is printing at full blast, and (b) they can't buy as much anyways since their surplus is dramatically shrinking (exports are way off). Fed can print dollars to monetize government debt, but that will lead to long term hyper inflation.

From Across the Curve, the 2-year/30-year spread is 366 basis points. The record on that is 369 on October 05 1992. Only 3 bp away from breaking that spread record.

CR,

That is what I was getting at.. real data can be based on manipulated conditions.

//So yes, the graph is real - but the reason for the high yield curve is probably different than in earlier periods.//

iceman,

China may be buying fewer long bonds then short ones, but they are still buyers all along the curve. They're pretty much a captive buyer for now.

You might want to check out Brad Setser, he follows this very closely.

Setser 

"several analysts suggest the current ten year sell-off is due to concerns about increased Treasury issuance to finance the deficit."

Then you have the people selling off to live on the money.

CR: One of the reasons I see a sluggish recovery is because the historical pattern is for housing to lead the economy out of recession. That won't happen this time - we are just hoping housing stops being a drag!

Of course, the assumptions you're making are that a recovery in housing will take at least another year or two, but that recovery will come much sooner.

What if you're right about how long it takes for housing to recover, and it does lead the way to recovery? Housing prices bottomed in the summer of 1932, after all.

and that is going to work for the next thousand years?"

Probably not going to work at all. But.... I will give Ben credit. If he can somehow truly consolidate the growth trends around the globe, he may be able to alter the 25-year credit cycle and push it out a few more years, bringing in more people from India and China into the pyramid.

A great comment from accrossthecurve.com

People try to over-complicate public policy, but its really common sense.

If you own a store, and your revenues are smaller than your costs — you have a problem. You need to sell more stuff (increase GDP) or raise prices (and risk having customers cut back on purchases). Either price or quantity have to go up (or some combination), and higher prices frequently result in lower quantity so there is a limit to that “solution”. To buy yourself some time to work the problem out, you can borrow money — which is essentially borrowing from future sales, meaning future costs will be even higher than current costs, which are already higher than revenue.

Our store costs (aka government spending) in the US has grown roughly twice as fast as revenue (aka GDP) for the past 4 or 5 decades. This is not a Democrat or Republican problem, its both.

If your bond portfolio is yielding 4.5% (the long term GDP growth rate), but your repo costs are 8% (the increase in government spending) — the law of compounding returns says you are going to be in a world of hurt very quickly.

The US was the world’s largest creditor as recently as the early 1970s — thanks to the negative carry (4.5% - 8%), we are now the world’s largest debtor… and still sinking fast.

We need to find a way to close that negative carry. Making GDP grow faster is a nice idea, but easier said than done (and higher tax rates are known to cause slower growth under both parties). Cutting government spending? Yeah — you go tell grandpa he isn’t getting his social security check. Between interest expense and “entitlement” spending — all revenue is spoken for. There is no money left for Congressional perks, parties or fact finding missions, never mind the rest of government. Even if the entire rest of government were to shut down, interest expense and entitlement spending are growing faster than the revenue to support them.

Uncle Sam has two options: shut down or find more revenue to make up the difference. Throughout centuries of human history, every government has achieved this through seniorage. Devaluing the currency by whatever means necessary. The Romans did it. The Spanish, French, and British empires, Chinese dynasties, Russian czars. Seniorage is the default choice of banana republic dictators everywhere.

So over the next couple decades, entitlement spending will be cut back. They will introduce “means testing” (cut benefits to the “rich” as defined by politics), they will rig CPI (or wage inflation) to increase less than the cost of living.

The mighty U.S. military may defeat the Taliban and whomever else — but they will be defeated by underfunding from a government that cannot afford to keep them operating.

History says the last spending to get cut is excessive government bureaucracy. Historically, that seems to stay until their is an armed revolt.

The remaining difference between rising costs and slowing revenue has always been solved via seniorage — debasing the currency. Citizens see this debasement as inflation

The U.S. government acts more and more like a banana republic, plus history says even “responsible” empires turn to inflation to facilitate spendthrift ways … I am just saying that history is going to repeat itself, again.

When did residential investment turn positive in the 1930s?

I'm pretty sure it was sometime after the government began buying houses and bulldozing them.

What this means in real money:
I got a 4.75% 30 year fixed from wells fargo closed 2 weeks ago. Their website (which is continual updated and does reflect their actual current rate) is offering 5.5% for the same loan today, which would have cost me about $200 more per month.

" Making GDP grow faster is a nice idea, but easier said than done "

Tariffs could accomplish the same thing.
For awhile.

"Any recovery plan requires bondholders to be suicidal probably won't work."

It worked from 1937-1945.
I think you seriously underestimate what the Feds are capable of.

broward,

You should not take historical parallels too seriously. Our world is somewhat different from the past- the players, range of options and responses have changed.

The remaining difference between rising costs and slowing revenue has always been solved via seniorage — debasing the currency. Citizens see this debasement as inflation

The U.S. government acts more and more like a banana republic, plus history says even “responsible” empires turn to inflation to facilitate spendthrift ways … I am just saying that history is going to repeat itself, again.

Lenders might act first and flee the credit markets. In the kind of economy we have today that is so vertical, integrated, and credit dependent (who's got the cash to build a skyscraper?) that kind of breakdown in voluntary sharing of resources might be economically and politically fatal where 100 years ago it would have been survivable.

Didn't we just invade and occupy the country with the world's largest oil reserves? Seems like we could do a bit of plundering.

Let's say I have a relative who got laid off, but has a 30 year fixed with many left, slightly underwater perhaps but wants to stay. Worked for the same company for 30 years, moved up at the peak. What's the best way for me to help him out? I could refinance him with a private mortgage (that I wouldn't foreclose on unless he died), lend to him at interest or none, or try to gamble on buying it a discount at auction.

Your the kind of Fed chair
You meet in certain dismal dull affairs
Center of the crowd, jawboning much too loud
The country hasn't got a prayer

Here comes Bernanke's 10-year meltdown!

Another prayer?

//Feds understand what's happening much better.//

"Lenders might act first and flee the credit markets"

And go where?

Feds have tried at least twice to pass "one-time tax" on current 401K base.
And there's been motions to create a "retirement tax".

Utlimately, the whole point of this exercise is to force investors to accept returns which mirror sustainable growth. They receive much higher than sustainable returns on the up cycle of the credit cycle, which have to be compensated by below-average returns on the downcycle.

"Any recovery plan requires bondholders to be suicidal probably won't work."

It worked from 1937-1945.
I think you seriously underestimate what the Feds are capable of.

Well if they can come up with a credible threat from extinction by other means they might have a shot at it.

broward,

So it is not you who is going to pray?

//Dinner and sex.//

"Lenders might act first and flee the credit markets"

Utlimately, the whole point of this exercise is to force investors to accept returns which mirror sustainable growth. They receive much higher than sustainable returns on the up cycle of the credit cycle, which have to be compensated by below-average returns on the downcycle.

That's the idea, but there are alternatives:

1) Gold + Coffee Tin + Backyard
2) Move to Singapore and rent a room from Jim Rogers
3) Cut working hours in half so you have no savings to be taken

The real problem I think the US government faces now in terms of confiscating the wealth of its creditors is that there are so many foreign alternatives for capital today vs. the 1930s.

I think they need to put something in the drinking water to get people to be more... compliant.

Bernanke cannot turn off the presses, nor can he abandon QE right now. We are heading straight into a dollar crisis and eventual hyperinflation.

broward (homepage, profile) wrote on Wed, 5/27/2009 - 6:56 pm

It's easily possible that Ben will lose control and the thing blows up.
In fact, I think that's the percentage bet but the feedback mechanisms are faster and Feds understand what's happening much better.

absent a known better alternative, the past will be repeated. no Fed governor, however filled with hubris and delusions of grandeur, would be allowed to bet the house on a risky and unproven theory with no historical parallel. there may well be some seemingly insane yet-undiscovered economic solution in a complex PDE of a seventeen-dimensional hyperspace or whatever that would solve everything, but until all historically-known options have been completely exhausted I can't see that there is an actionable way out, a magic bullet, or a Hail Mary. the playbook isn't pleasant but it has been followed and when it was followed, human civilization didn't collapse, though empires died. like it or not, a crappy outcome that doesn't result in total systematic collapse will be preferred by all TPTB over the chance of catastrophic implosion of the global financial system.

The fact the yield curve is so steep does not necessarily mean a V shaped recovery. The Japanese yield curve has been quite steep for some time. Not much growth there. I think that what we are seeing is that inflation expectations are moving higher. This is a good thing given that we were in danger of falling into deflation.

Um....I'm not going to do anything but pull from memory, but typically, the short end drops way fast as the FRB tries to juice the economy and the long end follows suit more slowly. That is not happening here, so any historical analysis based on the wavey line is useless.

"human civilization didn't collapse,"

Yes they did, the civilizations were more isolated, so it doesn't look like it across the globe.

Hey...I think I found a "real" it's different this time thingy.

now we just mainly produce bullshit financial ponzi schemes and pass the bill to the American taxpayers....

most Americans had better get a new dream and fast !

"most Americans had better get a new dream and fast !"

Gloom and doom dude. You need to get a sunnier disposition like I have.

History says the last spending to get cut is excessive government bureaucracy. Historically, that seems to stay until their is an armed revolt.

BTW one other thing history says is that governments and nations have collapsed completely because they have become unable to fund their operations - i.e. it isn't even a policy issue, it's literally a case of having an economic structure that is too inefficent to surive with the resources available. The economy essentially starves to death because its metabolic process uses more energy than it can produce.

In this case the limited resource may not be material so much as behavioral (e.g. credit and cooperative interaction).

We need more robotic AIs ASAP.

Old status symbol: Mercedes Benz
Newer status symbol: Stay at home moms
Latest status symbol: Mortgage-free homes

Long-term rates bottomed in 2003.

======

2003 is when I got into my 20-year 5% fixed mortgage

Why can't we refer to QE instead as DM (Debt Monitization)?

"Whatever the reason, this is a challenge for the Fed to keep mortgage rates low."

Q: Why is this the Fed's job again? Shouldn't setting risk premiums be a job more appropriate for "Mr. Market"
Just wondering...

I was thinking short sale, ehp, but I have no experience with the process. Do I have to take title or is leverage enough?

EHP,

Good nicknames rarely have more than 2 syllables.

nova - except Turd Blossom.

Anyhow, Jansen sounded like he needed a cup of tea and a lie down this afternoon.

Maybe something stronger after the 7-year tomorrow.

C

Remember back in 2004 and 2005, when the Fed raised rates (finally), but long term yields wouldn't rise?

Now we see the reverse. And yet the Fed still hasn't learned that it can't control long-term money rates.

I just hope that fool doesn't try his "peg the interest rate" theory, that will lead to the total collapse of the USA, IMHO.

nova
Smarmy, Night-time, Ninja

The key for "igniting recovery" is that the FED has backstopped the financial markets hence taking the "scardy cats" outside the house to spend and invest. With deflation risks dead, the FCB's basically dumped their long term treasuries as they ready for FED rate increases down the road.

Bad/good/bad/good. Pick your poison. They feared the same problems early in 2002 as well.

Bernanke isn't flying, he is falling with style, which is moderately better than simply falling

Speed: I need to empty my pool so I can catch all that money dropped from Ben's helicopters.

Just pour in the pool some Tide and you can launder Ben's money drop.

"high vacant house maintenance standards"

We'll check on that, excellent idea. He has a pristine credit history and would never trash his own or anyone's property, even in frustration. He's the type who would leave the house in mint condition no matter how long he lives there. I'm pretty sure he could tough out the mortgage but the kids are nearing college and he's had some health issues. Maybe sit on the fixed until the kids leave then reassess.

Which reminds me: some family can get a tax break for paying for education but I don't think cousins.

When did residential investment turn positive in the 1930s?
http://www.irvinehousingblog.com/images/uploads/20094early/Housing%20is%20the%20Business%20Cycle.pdf
Check out page 52 It looks like Housing Starts bottomed in early 1933. That would be one rough guide to RI turning positive.

Geithner Prepares to Meet With Chinese Leaders

- NY Times

“Perhaps the chief issue facing global markets is the extent to which China will continue investing heavily in Treasury bills.”

We have deteriorated into a debtor status so that we are now dependent upon the kindness of strangers. That is not where the world’s leading power should find itself.
Paul Sarbanes

Thanks Rufus, that's no 1 of course. I was assuming non-.

Just a minor quibble - the yield curve, as measured by the 10 year TNote less the 3 month TBill has been higher than it is now a number of times since the '30s, but its sure in shorter term record territory.

http://www.nowandfutures.com/images/yield_curves_long.png