A Lost & New Decade, Part I

January 29, 2010


The steady rise in PIS since 1996 might be signaling a structural decline in the U.S. dollar (Figure 8).


A Lost New Decade Part I Fig8

(To see a larger version of Figure 8, click on the image above.)


The Supply And Demand For Upcoming Treasury Bill, Note & Bond Issuance

The FRB’s assets purchases in 2009 were near $1.7 trillion (t). Net United States Treasury bond (TSY) issuance rose from $980 billion (b) to $2.6t from 2008 to 2009, so private investor demand was near $900b. The market expects the FRB to stop its TSY asset purchases in March 2010. TSY issuance is expected to range between $2.6t to $3t in 2010. The higher estimate assumes RGDP growth of 3 to 4 percent, while the latter assumes 1 to 2 percent. I have not seen a single estimate that shows private and non-FRB demand increasing their TSY purchases by $1.7t to $2.1t to meet supply in 2010. Demand shortfalls range from near $1t to near $2t. Most of the number crunchers see 10-year (Y) notes ending 2010 somewhere between 4.5 to 5 percent, with Morgan Stanley’s high-end estimate at 5.5 percent. Frankly, any guess is possible.

Bulls are relying upon a strong economic recovery to lay to rest concerns about a double dip.

Over the past few weeks, I have been telling our staff that as the TSY 10-year note nears 4 percent, the FRB will make overtures to accommodate lower TSY yields and mortgage rates, which rise and fall with TSY yields. If yields breach 4 percent, they will panic by a re-entry into easing, causing the dollar to relapse into its decline. On Jan. 5, Market News reported that the FRB was talking easy again about its support for the mortgage-backed security (MBS) market:

FRB may re-enter MBS market later in 2010 - Market News, Jan. 5, 2010

The FRB’s re-entry would be negative for equities because it would confirm our dependency on government subsidies, which would cause analysts to cut top-line revenues and bottom-line earnings growth. High-end earnings estimates (S&P 500 $75-$85) are based upon a strong sustainable economic recovery. High-end estimates factor in the FRB’s backing-off of quantitative easing (a form of printing money, QE) and their MBS purchases as evidence of a strong economy in 2010. Those who see low growth (1 to 2 percent RGDP) do not.

Never in history has there been a globalized economy dependent upon an indebted consumer with real debt, wealth & incomes so strained as they have since 2007. Never before have we had sovereign debts exceeding more than 60 percent of national GDPs in so many developed nations (Figure 9). Never before has the world been so bifurcated into producers/lenders/savers and consumers/borrowers/spenders. The FRB’s model was supposed to enhance free markets. It did not. It has always been dependent on the rich few being subsidized by governments offering free money to bankers who offer their funds to the few at the expense of the cheap labor of the many (developing world workers) and the many indebted consumers (developed world citizens).



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