Wednesday, March 24, 2010

Is the Government Attempting to Set the Stock Market Up for Another Crash?

The U.S. government is getting increasingly desperate. The amount of money it needs to raise each month continues at record highs. If interest rates climb from here, the monthly Treasury raise will, in the not too distant future, begin to climb at serious exponential rates. Here's analysis by ZH of the current situation:

1. The US has been issuing roughly $147 billion a month for the past 17 months, in a period in which total US Federal debt has increased from $10 trillion to $12.6 trillion.

2. A comparison of average blended interest rates, and overall (accrued) implied monthly interest, demonstrates that even as the blended interest rate has dropped to an all time low of 2.57%, the actual annualized cash out on marketable debt (excluding the Trust Fund shell game), has returned to levels last seen in December 2008, of about $204 billion per month. The last time the annualized interest was this high, the actual interest rate was 3.2%, or 60 bps higher!

3. China may or may not be bailing on US debt, one thing that is certain is that it is not rolling, and in fact may well be selling, its Bill exposure, i.e., short-term Treasuries that mature within a year.

4.The Treasury will need to generate wholesale interest for Bills in some way in the near future, or else it will drown itself in the vicious cycle combination of increasing interest payments pushing rates higher, etc
ZH suggests the Treasury may be attemting to engineer a second stock market crash, to cause a flight back into T-Bills. Indeed, months ago, we suggested that Bernanke's tight money policy may, in fact, be a program to drop the stock market for this very reason.

Whatever the reason, the money supply (M2) remains tight and a double dip to the Great Recession appears near--with the dollar continuing its strength and gold continuing to weaken. Eventually, the downturn will be severe enough that the Fed will again turn open the monetary spigots, just as they did in September 2008.   This will cause a knee-jerk in our positions. But for right now, it is bullish on the dollar and bearish on gold and the stock market.

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