Monday, December 28, 2009

The Hangover

The week after Christmas is a time for 'the hangover'; general recuperation from post-feasting over-indulgence.

And it could well be that 2010 is viewed as a giant 'hangover' year. With that in mind I'd like to toss out a few thoughts for your consideration.

A few faithful readers wanted my advice about investing in this tumultuous time.

The first, and best, advice I can ever give is that you should never take serious investing advice from an anonymous Internet blogger.

As a portion the disclaimer at the bottom of this blog so eloquently states, "the author(s) of the posts on this site are not investment advisors and they do not offer investment advice. They try to provide some hopefully useful data with sources - especially concerning real estate - and then add their own analysis."

With that in mind, a few things for you to consider...

The number one issue that faces our country in the coming year, in my humble opinion, has already be pinpointed by our Finance Minister.

"Canada could face 'serious' economic consequences should the United States fail to address its bulging budget deficit", warns Finance Minister Jim Flaherty.

2009 will be remembered for two things: there was a huge credit and liquidity crunch, and then there was Quantitative Easing.

And Quantitative Easing was the way government played a shell game with the economy.

Right now the vast majority of us are oblivious to the debt monster hiding in the closet.

Consider this from Zero Hedge:

  • In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. Accounting for securities purchased by the Fed, the stunning result is that net issuance in 2009 was only $200 billion.

    Take a second to digest that.

    And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget.

    As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all. Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand.

    To sum up: $200 billion in 2009; $2.1 trillion in 2010.

Where is the money going to come from?

2010 is going to be a hangover year for the US economy. There is an upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was $1.1 trillion increase from 2008.

Unless the US consumer decides to dramatically ramp up purchase of some US Treasuries (and not just any: 30 Year Bonds or bust), the Bond printer will be forced to find vast foreign appetite for its debt.

We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of America. Japan will have its hands full monetizing its own sovereign issuance, let alone America's. And lastly, the UK - traditionally the third largest purchaser of US debt - is beset with problems worse than the United States and will not be doing much purchasing any time soon.

So the tipping point could be as close as 2010.

Which brings us to the first of the predictions for 2010. Look for:

  1. the United States to announce a new iteration of Quantitative Easing, a move that will be met with massive disapproval.
  2. Prepare for a major increase in interest rates. Carney and Flaherty can see it coming and have started pounding the warning drums in Canada. Many observers in the US are confounded by Ben Bernanke's complete lack of preparation from a monetary standpoint to a forced interest rate increase. This is what is fueling the fears of runaway inflation almost overnight.
  3. Watch for an engineered stock market collapse. Stock Market investors have realized there is no more risk in equities because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. When the time comes to hit the reverse button, the resultant rush into safe assets from the stock market will be dramatic. Will it be enough to generate the needed endogenous demand for US Treasuries? Doubtful. But you can rest assured that there will be an engineered sucking of money from equities into Treasuries on a giant scale nothwithstanding... and it will drive the market down by 30% or more.

Baby New Year will have a spinning head right from day one.


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  1. I believe the plan to buy each other's debt with freshly printed money, in one giant circle-jerk, hoping to create inflation. It will ultimately succeed when people lose all faith in the value of money and start hoarding. Having seen such vast sums given readily to plutocrats, I'd say we're more than half way there.

  2. According to Morgan Stanley expect the 10-year notes to rise 40% to 5.5% and the 30 year mortgage rate to be around 7.5% to 8% by the end of 2010. With so much government largesse, 2010 will be a year of big indigestion