Morning Audibles 3.25.10 - Sobriety Checkpoint

"FUN"ding... As it turns out, isn't so much "fun" after all...

In recent months, Fed Chariman Ben Bernanke has been dropping hints that rates could go up later this year. In addition, the Federal Reserve, of late, has been reducing its purchases of mortgage-backed securities from Fannie Mae and Freddie Mac, and has 'still' not said it will extend those purchases past the end of March.


Those purchases have kept interest rates artificially low for months. What's the takeaway here? A game of chicken, if you ask me. In anticipation of an end to those MBS purchases, by the FED, the yield curve has gotten increasingly wider. Despite the decision to extend the first-time homebuyer tax credit through April 30, 2010, recent months have brought an unexpected drop in pending home sales. This is unwelcome news for a government, and a Fed that were expecting those markets to "auto-correct" (not that anyone 'outside' the beltway ever expected that to happen anyway - but beltway insiders live in their own fantasyland). 


The takeaway is painfully obvious. That is, that the entire system still only exists on life support by whatever money the government goes into debt to spend to support it, and by the money that the Fed prints to monetize it. The Treasury Department, (trying it's best to fund spending on top of spending by this goverment), has found that there is little interest, of late, in rolling over short term debt for a measley .02 return. (in Bills). Treasury is therefore having to look farther up the curve to fund this insatiable appetite of spending (turns out Obama paying for everyones gas and mortgages is costlier than the former community organizer would have ever imagined). The bond market now seems set to turn this into a "game of chicken". They're basically saying, "let's see how much you want to pay to come play in our yard". Since the US government has already heaped on an amount of debt that it's not likely to be able to service, the idea of ratcheting up even only a few hundred basis points more seems out of the question. So 'something' has got to give.

All this comes at a time when Washington is going to have to start considering OTHER spending or 'stimulative' proposals as well (such as a JOBS BILL, aid to states and local governments who are insolvent [time to break out those blue and red maps again to see which areas are in MOST DIRE need], and probably yet another extension of unemployment benefits). You know, elections are coming up in the fall. They're on SOMEBODY's mind I'm sure.


There are not many good options here, but the simplest idea, of course, would be to tank the equity markets for a bit. A couple of weeks of this could chase enough "risk" assets into the safety of T-Bills so that the government could go on "extending & pretending" servicing its debt for a few months. At that point, I'm sure Bernanke would have to come out and announce another round of MBS purchases in the $600bln range, and perhaps another round of Bond purchases depending on how the roll over rates on short term bonds (which haven't looked so hot as of late) go. Here's a recent picture of the Capital Beltway if you haven't been around these parts in awhile.

With the problems in Europe putting the Euro on shaky ground, it would seem to me that now would be the perfect time to orchestrate this type of shell game...


- Blame the stock market correction on Europe and it's problems (& deflect from your own structural problems).
- Let the Euro find a new level
- When the Euro finds its new level, Bernanke can fire up the printing press again
- Commodities ought to rebound at that point (but need to take a deep hit in the process)
- Hopefully, if orchestrated correctly, you'll be able to keep the plaster on the walls until November. At that point, one of two results occur:
1. You win (because people are still fooled into thinking things are alright, or because now you've 'scared' them into relying on YOU for all their needs)
2. You lose (and whatever 'austerity' that comes from that, and the PAIN that goes with it can be blamed on the 'other guy' because the effects will happen on their watch).


I'm not saying that any of the above will happen (it may, it may not). I'm just presenting the most logical scenario (but as we know, "logic", "politics", & "capital markets" don't often collide in the same sentence).


So for now, CV is basically saying that this will only be a "garden variety" sobriety checkpoint.

You're doing it WRONG!

You're doing it RIGHT!