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Was this Crash Engineered by the Fed to Bolster Demand for Treasuries?

Editor — Sun, 31 Jul 2011 07:22:06 +0000

It was suggested 1.5 years ago that the next stock market crash might be one orchestrated by the Fed to create interest from historic buyers of US debt. The scenario went like this: you let the stock market collapse (i.e. no interference by the infamous “Plunge Protection Team”) to generate a “flight to safety” environment which would push billions, if not hundreds of billions, of dollars into U.S. Treasuries, soaking up its increasing debt issuance and roll-over with little difficulty thereby flooding the bond market with much needed demand. Were the recent dramatic declines in the U.S. stock markets so engineered by the Fed? Words: 852

Graham Summers was the individual who suggested the above back in January 2010 an article* aptly entitled Will the Fed Engineer a Stock Market Crash to Flood the Bond Market With Much Needed Demand? In light of the events of this week Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has revisited that insightful article and presents it below in an edited ([ ]), abridged (…), updated and reformatted fashion for the sake of timeliness, clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. The gist of Summers’ comments was along these lines:

The U.S. Treasury is facing a debt spiral; a situation where it needs to issue [large quantities] of new debt every month while rolling over trillions in existing debt at a time when investors are willing to lend to it for shorter and shorter periods of time. The big question has always been: who’s going to be buying this stuff ?

[The events of the past 2 months in Washington, where the underlying dire financial insolvency of the nation was blatantly ignored in favor of expedient short-term political posturing, has clearly demonstrated to the entire world the inability of the U.S. government to resolve the problem let alone even deal with it in a serious non-partisan way. It became very clear that holding the debt of a bankrupt country such as the U.S. was hardly a safe haven for assets.]

Historically, foreign investors and foreign governments were the biggest buyers of US debt… [but,] suffice it to say,] given the juvenile display of total irresponsibility during the debt ceiling debate] foreign governments [were hardly inclined to] step in to pick up the slack in the Treasury market.

The next biggest purchaser of U.S. debt behind foreign governments… is the Federal Reserve itself via its quantitative easing programs. Given that unpopularity [and apparent ineffectiveness] of this approach it is unlikely to be repeated (at least not in a form large enough to pick up any slack in the Treasury markets).

So what about state or local governments, pension funds, or insurance companies (historically decent sized buyers of U.S. debt)?…These groups have been either net sellers or small buyers of Treasury debt of late so the likelihood that these groups suddenly buy hundreds of billions of dollars of Treasuries is minimal…

The same goes for “other investors” …(comprised of “Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors)… unless, of course, we have another crash in the stock market.

Think about it. The U.S., if it were treated like a corporation, is effectively bankrupt. It has to issue a massive amount of new debt while rolling over trillion in old debt at the very time that most historic buyers of U.S. debt are losing interest in lending to the US for any period longer than a few years.

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So how do you create interest from historic buyers of U.S. debt? Simple, you let the stock market collapse. The “flight to safety” that would follow would push billions if not hundreds of billions of dollars into Treasuries, soaking up the debt issuance and roll-over with little difficulty…

I am not saying the Fed and friends will do this but, given that the Fed is coming under increased scrutiny as public outrage rises, letting stocks come unhinged it perhaps the least politically controversial move the Fed could make as opposed to more quantitative easing which would really get the public upset. [Letting the stock market crash] would do the following:

1) Bring stocks closer to reality…

2) Create great demand for Treasuries (something the US desperately).

3) Have relatively minor political ramifications compared to another quantitative easing program or more bailouts…

Conclusion

Could the Fed be preparing another [indeed, has the Fed engineered the recent] stock crash to flood the bond market with demand? Who knows but it would make plenty of sense to me.

*http://www.marketoracle.co.uk/Article16321.html ( Summers’ www.GainsPainsCapital.com provides a free daily newsletter dedicated to providing daily insights to the stock, commodity, currency, and bond markets and telling investors the REAL story behind the moves in the financial markets.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

Massive Stock Market Selloff Likely in Mid-2011! Here’s Why

Editor — Mon, 06 Dec 2010 07:18:11 +0000

How to Protect Yourself From the Crisis of 2011

A major crisis is coming in the first half of 2011 and it could cause a worldwide financial disaster, global market crashes and the destruction of wealth that will make the popping of the dot-com and housing bubbles feel like a mild inconvenience! Why? Because, quite simply, America is playing a dangerous game of “chicken” with its national debt – and the ramifications are extraordinary. Words: 1475

So concludes Marc Lichtenfeld in his article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted into edited [...] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Lichtenfeld goes on to say:

I’m going to explain the situation and give you three ways to protect yourself from this impending crisis before it’s too late…

A Debt Crisis is Coming to America as Early as May 2011

America’s debt ceiling currently stands at $14.3 trillion - the level that, by law, the government’s debt is not allowed to exceed – but the trouble is, the government’s present debt has swelled to $13.7 trillion [already] and this means that at the current rate, we’re on course to smash through that $14.3 trillion ceiling around May 2011 (although it might happen a month or two later, depending on what budget cuts are enacted in the next few months and how quickly they’re implemented) unless something is done quickly to avert what would develop into a major crisis of confidence in the U.S..

The Domino Effect of the Crisis Would Be Brutal

What will the government do about this impending crisis? Same thing it’s done almost every year since 1962 – raise the debt ceiling so America can pay its bills. Congress really has no choice in the matter either. If the ceiling isn’t raised, we’ve got a problem – a crisis – and a very big one. Without Congressional approval for additional debt, the U.S government cannot pay its bills – most notably, interest payments on treasury bonds, bills and notes.

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If America defaults on those payments, or even misses them by just one day, the domino effect of such a crisis would be brutal…

Domino #1: The country would lose its AAA credit rating and those bonds, bills and notes would no longer enjoy their status as the safest investments on the planet.
Domino #2: In turn, a lower credit rating would mean that the United States would pay higher interest on its bonds in order to attract investors. Result?
Domino #3: A tidal wave of selling through fixed income markets, driving interest rates higher still.
Domino #4: Social Security would be hit hard, as its funds are invested in Treasuries. Suddenly, Social Security would have far less resources than just a day or two earlier.
Domino #5: If money is pouring out of so-called “safe” investments, you can bet that in that kind of environment, the demand for riskier investments would be next to nil. Stocks and financial markets around the globe would plummet.

The Circumstances Surrounding Whether or Not to Raise the Debt Limit Are Very Different This Time Round – and the Consequences of Not Doing So Would be a Crisis of Major Proportions!

This year’s Congressional raising of the debt limit is different than [any previously] … because, this year, some members of Congress have said they won’t vote to raise the debt ceiling – and they may be serious this time.

Earlier this year, 38 Republican Senators voted against raising the ceiling [doing] so, knowing full well that they would be outvoted and that the limit would be raised despite their “objections.” That way, they could return to their Congressional districts, claiming some semblance of fiscal responsibility. Their vote didn’t matter so much back then… but with the Republicans having wrestled control of the House of Representatives last week, it sure does now. [It is a crisis in the making.]

[This year's vote] throws up an interesting dilemma. The Republicans – and particularly the Tea Party candidates who ran on a platform of cutting spending and the deficit – will have a very difficult choice to make. Either go back on their word and vote for an increase in the debt ceiling, or vote against it and run the risk of a financial crisis – a calamity.

It’s still early, but some Senators are already threatening to vote “no” – [to set the groundwork for the crisis in motion].

Senator-elect Rand Paul of Kentucky has indicated that he won’t vote in favor of raising the debt ceiling.
South Carolina Senator Jim DeMintsaid he won’t vote to raise the limit unless it’s combined with some plan to balance the budget, return to 2008 spending levels and repeal President Obama’s health care plan.
Utah Senator-elect Mike Lee, when asked if he’d vote against a debt ceiling increase, even if it leads to a government shutdown answered, “It’s an inconvenience. It would be frustrating to many people and it’s not a great thing, yet at the same time, it’s not something we can rule out.”
Republican National Committee Chairman Michael Steele told CNN, “We’re not going to compromise on raising more debt or the debt ceiling.”

[Such a political strategy may prove to be the makings of a major crisis because the lay of the land is different these days than in the past]… In 1995, the Republicans threatened President Clinton with shutting down the government if he didn’t agree to their budget but Clinton vowed that he’d never agree to it, even if his approval rating fell to 5%. [In the long run] he won. [While] the government did, in fact, shut down the Republicans became the focal point of America’s anger and President Clinton’s approval numbers actually went up. [That was then.]

Flash forward to today. President Obama is likely aware of this history and while he may be willing to negotiate on spending cuts he will not repeal health care reform which is the hallmark of his Presidency so, for Obama, the situation in 2011 will be much worse than it was for Clinton in 1995. I’m talking about a crisis of major proportions, namely, a meltdown in the stock and bond markets!

Washington Style Rhetoric Could have Devastating Consequences on the Markets

Bruce Bartlett, a former advisor to President Reagan and deputy assistant secretary for economic policy at the Treasury Department under President George H.W. Bush, recently stated, “You introduce even the tiniest little bit of doubt into the minds of ultra-conservative investors and that’s potentially disastrous. It hurts our ability to raise money without a risk premium.”

The Senate likely doesn’t have the votes to defeat a bill to raise the debt ceiling, while the House does [but] in the end, it doesn’t matter. The bill doesn’t have to be defeated. A filibuster accomplishes the same thing. In fact, a filibuster is even more powerful than a “no” vote and the mere threat of a filibuster could spook investors badly enough to sell first and ask questions later.

Protect Yourself From America’s Debt Showdown

You need to go about protecting yourself now from the distinct possibility of such a calamitous event. Here are a few investments that will likely do well in the chaotic environment I just described…

Gold: The resilient yellow metal should soar as the U.S. dollar sinks and investors flee to safety. If you don’t want to own the metal itself, you can buy the SPDR Gold Shares Trust (NYSE: GLD) ETF, which serves as a close proxy to the price of gold bullion.
Short Treasuries (Option 1): Consider the ProShares Short 20+ Year Treasury (NYSE: TBF), which aims for a 100% inverse correlation to the Barclays 20+ Year U.S. Treasury Bond Index.
Short Treasuries (Option 2): If you’re a more aggressive investor, take a look at the ProShares UltraShort 20+ Year Treasury (NYSE: TBT). It seeks to obtain results that are double the inverse daily performance of the Barclays 20+ Year U.S. Treasury Bond Index. So if the index falls 10%, the ETF should gain about 20%.

Conclusion

Investors who are agile and aware of the potential debt ceiling landmine can grab profits by getting into the right investments at the right time. Additionally, the ensuing volatility may create buying opportunities for some of your favorite stocks, so be sure to put together a watchlist of stocks you’re interested in owning at lower prices.

From most crises comes opportunity – and this impending debt crisis is another such opportunity

* http://seekingalpha.com/article/236123-how-to-protect-yourself-from-the-crash-of-2011?source=email_the_macro_view

Editor’s Note:

The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.

Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

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