On September 4, CNNMoney.com reprinted an article from Fortune with a rather provocative title - “Should US government debt be rated junk?” As the article progressed, it became clear that the title is
rhetorical. To make their point, Fortune took some statistics from Greece - whose sovereign debt IS rated
as “junk” - and compared them with the identical statistics from the US.
The first statistic was the deficit as a percentage of national GDP. The outcome was Greece at 13.6
percent with the US trailing at 10.6 percent. Then came a omparison based on total government
(funded) debt as a percentage of GDP. Here, Greece also “won” at 115.1 percent against a US total of
86.5 percent. But when the debt of the US GSEs (Freddie and Fannie) was included in the total, the US
figure soared to 121.6 percent. The GSEs are indeed now wholly “owned” by the US government.
The third comparison was in debt as a percentage of government revenue. Here the US was the clear “winner” at 358.1 percent against a Greek total of 312.2 percent.
The Fortune article ended like this: “So, should US government debt be downgraded to junk status? If we simply look at the ratios and the future outlook, the answer is quite obvious.” We have no argument
with the conclusion. But until very recently, the Treasury market certainly did.
The Peak Of A Thirty-Year Bull Market?:
The longest running of all bull markets in US paper is the market for long-term US Treasury debt. On a
monthly average basis, the yield on US 30-year paper peaked in October 1981 at 14.69 percent. The yield
has fallen ever since then with each new low below the previous one. Officially, the latest monthly
average - 3.99 percent for July 2010 - is the lowest in the sequence. Unofficially (the Fed hasn’t
published it yet), the average yield for August 2010 was still lower at 3.88 percent. And on August 31,
2010, the yield on the 30-year bond hit an all time low of 3.52 percent.
We ended this section of our previous issue (Number 660 - published on August 22) like this: “China is no longer adding to its stash. It has instead been whittling it down for a year. Americans are buying Treasuries not because they are “confident” of their future value, but because they are terrified of the prospect of owning anything else. ...The higher this spike in Treasuries goes, the more abrupt will be the fall when it comes.”
On September 1, four trading days after the Dow closed below the 10000 level for the second time since
July, longer-term Treasury yields staged an abrupt turnaround. The 30-year bond had yielded 3.52
percent on August 31. By September 3, the yield was up to 3.79 percent. On the 10-year paper, the yield
had risen from 2.47 percent to 2.70 percent over those same three days. That is a HUGE move in longterm
Treasury yields over a very short space of time. The prices for Treasury bonds move in the opposite
direction to their yields. Over the first three days of September, prices on the T-Bond futures market fell
from a 2010 high of 136.25 to 132.45. That is also a huge move over a very short space of time.
The Spin From The “Authorities”:
For many months, any weakness in the US Dollar or Treasuries has been explained as the markets regaining their appetite for “risk”. That in its turn is said to be a good thing since it has the potential to
rekindle borrowing and therefore economic “growth”. Conversely, any abrupt rise in the US Dollar and
Treasury debt is said to be a flight to “safety”.
The abrupt about-face on US stock and bond markets this far in September is getting this “interpretive” treatment too. But if the abrupt turnaround in the US Treasury markets and in the US Dollar keeps going
and the stock market cannot mirror that by continuing to climb, this “take” on events is doomed to failure.
The Last Postponement?:
No matter how distorted by government statisticians, influenced by political blathering or mindlessly
crunched by computer trading programs, prices have work to do. To the degree they are prevented from
doing it through the manipulation of interest rates and constant injections of new “money” into the
system, economic and financial chaos ensues. Prices reflect that too, as a chart of any market bubble will
attest. Economic booms and busts are a direct function of the interference with prices through the
arbitrary manipulation of money and credit. Prices reflect that too - in BOTH directions.
There is no other way of deriving an outline of the future from the events of the past except the study of
history. The history of markets is not a series of “valuations”, it is a series of prices. Only actual prices
reflect human action. Talk is cheap. It is what people DO that counts. And that is shown by prices.
Right now, the abrupt turnaround of the prices of long-term US Treasury debt has provided the fuel for
US stock markets to claw their way back to being (at least in the case of the Dow) in the “black” for the
year. The problem is that the only entity still frantically borrowing in the US today is the federal
government. That fact is putting ever more pressure on Treasury yields and will eventually force them
MUCH higher than the all time lows they recently hit. The existence of the “death cross” on the Dow
chart is historical evidence that the September rally is unsustainable. The mere fact that long-term
Treasury debt is in an almost 30-year bull market is historical evidence that the BIG turn is coming - soon.
The only mitigating factor left is the simple fact that the US mid-term elections are now less than two
months away. The “authorities” will throw all caution to the winds in an attempt to keep these price signals from getting any stronger between now and November 2. After that, we face a financial void.
Ó 2009 – The Privateer
(reproduced with permission)
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