$130 Million in trades busted on a series of PUMP trades on Russell 2000... Hmmm..Why would someone buy all the offers in a market with no offers and more to the point, who can afford to lose $130 Million.... except....

Earlier we reported on a completely inexplicable 10% surge in the IWR ETF resulting from a whole lot of busted trades. We didn't know precisely how many trades were involved until the kind folks at Nanex sent us this cheat sheet. The answer: 1,379,128 shares of IWR! Which, at the prices crossed, amounts to just over $130 million. We wonder: which algo could afford to lose $130 million on what in retrospect was a busted fat finger, and just what is the purpose of lifting every single offer into an offerless market beyond the point of ridiculousness? Luckily, the trades, which crossed just after close, did not happen 5 minutes earlier, or the market would have seen a fully blown inverse flash crash, carrying across all asset classes. On the other hand, we know of one person who is very focused on the Russell 2000 as an indication of the overall strength of the economy. Is the Fed now, in perpetuating its 3rd mandate, solely focused on buying IWR (and/or other) ETFs?

From Nanex:

And below are the actual 1,379,128 busted shares:

Cancelled Trades:

tc|NxTime|Symbol|Listed Exg|CorrectionType|OrgSeq|OrgCond|OrgPrice|OrgSize|
16:53:10|eIWM|PACF|Cancel;Busted;|225190|98|94.35000|292|
16:53:10|eIWM|PACF|Cancel;Busted;|225191|98|94.35000|500000|
16:53:10|eIWM|PACF|Cancel;Busted;|225192|98|94.35000|499708|
16:53:10|eIWM|PACF|Cancel;Busted;|225193|98|94.35000|230|
16:53:10|eIWM|PACF|Cancel;Busted;|225194|98|94.35000|560|
16:53:10|eIWM|PACF|Cancel;Busted;|225195|98|94.35000|928|
16:53:10|eIWM|PACF|Cancel;Busted;|225196|98|94.35000|581|
16:53:10|eIWM|PACF|Cancel;Busted;|225197|98|94.35000|178|
16:53:10|eIWM|PACF|Cancel;Busted;|225198|98|94.35000|1200|
16:53:10|eIWM|PACF|Cancel;Busted;|225199|98|94.35000|2360|
16:53:10|eIWM|PACF|Cancel;Busted;|225200|98|94.35000|7638|
16:53:10|eIWM|PACF|Cancel;Busted;|225201|98|94.35000|2800|
16:53:10|eIWM|PACF|Cancel;Busted;|225202|98|94.35000|1000|
16:53:10|eIWM|PACF|Cancel;Busted;|225203|98|94.35000|4562|
16:53:10|eIWM|PACF|Cancel;Busted;|225204|98|94.35000|2800|
16:53:10|eIWM|PACF|Cancel;Busted;|225205|98|94.35000|2638|
16:53:10|eIWM|PACF|Cancel;Busted;|225206|98|94.35000|2800|
16:53:10|eIWM|PACF|Cancel;Busted;|225207|98|94.35000|181|
16:53:10|eIWM|PACF|Cancel;Busted;|225208|98|94.35000|204|
16:53:10|eIWM|PACF|Cancel;Busted;|225209|98|94.35000|609|
16:53:10|eIWM|PACF|Cancel;Busted;|225210|98|94.35000|591|
16:53:10|eIWM|PACF|Cancel;Busted;|225211|98|94.35000|9409|
16:53:10|eIWM|PACF|Cancel;Busted;|225212|98|94.35000|291|
16:53:10|eIWM|PACF|Cancel;Busted;|225213|98|94.35000|2509|
16:53:10|eIWM|PACF|Cancel;Busted;|225214|98|94.35000|1000|
16:53:10|eIWM|PACF|Cancel;Busted;|225215|98|94.35000|6191|
16:53:10|eIWM|PACF|Cancel;Busted;|225216|98|94.35000|3809|
16:53:10|eIWM|PACF|Cancel;Busted;|225217|98|94.35000|2800|
16:53:10|eIWM|PACF|Cancel;Busted;|225218|98|94.35000|1000|
16:53:10|eIWM|PACF|Cancel;Busted;|225219|98|94.35000|1991|
16:53:10|eIWM|PACF|Cancel;Busted;|225220|98|94.35000|8009|
16:53:10|eIWM|PACF|Cancel;Busted;|225221|98|94.35000|1591|
16:53:10|eIWM|PACF|Cancel;Busted;|225222|98|94.35000|1209|
16:53:10|eIWM|PACF|Cancel;Busted;|225223|98|94.35000|1000|
16:53:11|eIWM|PACF|Cancel;Busted;|225224|98|94.35000|7391|
16:53:11|eIWM|PACF|Cancel;Busted;|225225|98|94.35000|2609|
16:53:11|eIWM|PACF|Cancel;Busted;|225226|98|94.35000|2800|
16:53:11|eIWM|PACF|Cancel;Busted;|225227|98|94.35000|1000|
16:53:11|eIWM|PACF|Cancel;Busted;|225228|98|94.35000|113|
16:53:11|eIWM|PACF|Cancel;Busted;|225229|98|94.35000|277|
16:53:11|eIWM|PACF|Cancel;Busted;|225230|98|94.35000|9610|
16:53:11|eIWM|PACF|Cancel;Busted;|225231|98|94.35000|2800|
16:53:11|eIWM|PACF|Cancel;Busted;|225232|98|94.35000|1000|
16:53:11|eIWM|PACF|Cancel;Busted;|225233|98|94.35000|2129|
16:53:11|eIWM|PACF|Cancel;Busted;|225234|98|94.35000|7871|
16:53:11|eIWM|PACF|Cancel;Busted;|225235|98|94.35000|2800|
16:53:11|eIWM|PACF|Cancel;Busted;|225236|98|94.35000|1000|
16:53:11|eIWM|PACF|Cancel;Busted;|225237|98|94.35000|4232|
16:53:11|eIWM|PACF|Cancel;Busted;|225238|98|94.35000|200|
16:53:11|eIWM|PACF|Cancel;Busted;|225239|98|94.35000|5568|
16:53:11|eIWM|PACF|Cancel;Busted;|225240|98|94.35000|2800|
16:53:11|eIWM|PACF|Cancel;Busted;|225241|98|94.35000|1000|
16:53:11|eIWM|PACF|Cancel;Busted;|225242|98|94.35000|2832|
16:53:11|eIWM|PACF|Cancel;Busted;|225243|98|94.35000|600|
16:53:11|eIWM|PACF|Cancel;Busted;|225244|98|94.35000|6568|
16:53:11|eIWM|PACF|Cancel;Busted;|225245|98|94.35000|1000|
16:53:11|eIWM|PACF|Cancel;Busted;|225246|98|94.35000|2800|
16:53:11|eIWM|PACF|Cancel;Busted;|225247|98|94.35000|10000|
16:53:11|eIWM|PACF|Cancel;Busted;|225248|98|94.35000|804|
16:53:11|eIWM|PACF|Cancel;Busted;|225249|98|94.35000|1996|
16:53:11|eIWM|PACF|Cancel;Busted;|225250|98|94.35000|1000|
16:53:11|eIWM|PACF|Cancel;Busted;|225251|98|94.35000|10000|
16:53:11|eIWM|PACF|Cancel;Busted;|225253|98|94.35000|2800|
16:53:11|eIWM|PACF|Cancel;Busted;|225254|98|94.35000|1000|
16:53:11|eIWM|PACF|Cancel;Busted;|225255|98|94.35000|10000|
16:53:11|eIWM|PACF|Cancel;Busted;|225256|98|94.35000|2800|
16:53:12|eIWM|PACF|Cancel;Busted;|225257|98|94.35000|1000|
16:53:12|eIWM|PACF|Cancel;Busted;|225258|98|94.35000|22404|
16:53:12|eIWM|PACF|Cancel;Busted;|225259|98|94.35000|27596|
16:53:12|eIWM|PACF|Cancel;Busted;|225260|98|94.35000|16000|
16:53:12|eIWM|PACF|Cancel;Busted;|225261|98|94.35000|700|
16:53:12|eIWM|PACF|Cancel;Busted;|225262|98|94.35000|6000|
16:53:12|eIWM|PACF|Cancel;Busted;|225263|98|94.35000|6000|
16:53:12|eIWM|PACF|Cancel;Busted;|225264|98|94.35000|4000|
16:53:12|eIWM|PACF|Cancel;Busted;|225265|98|94.35000|2000|
16:53:12|eIWM|PACF|Cancel;Busted;|225266|98|94.35000|2000|
16:53:12|eIWM|PACF|Cancel;Busted;|225267|98|94.35000|2000|
16:53:12|eIWM|PACF|Cancel;Busted;|225268|98|94.35000|2000|
16:53:12|eIWM|PACF|Cancel;Busted;|225269|98|94.35000|300|
16:53:12|eIWM|PACF|Cancel;Busted;|225270|98|94.35000|100|
16:53:12|eIWM|PACF|Cancel;Busted;|225271|98|94.35000|100|
16:53:12|eIWM|PACF|Cancel;Busted;|225272|98|94.35000|100|
16:53:12|eIWM|PACF|Cancel;Busted;|225274|98|94.35000|1500|
16:53:12|eIWM|PACF|Cancel;Busted;|225275|98|94.35000|800|
16:53:12|eIWM|PACF|Cancel;Busted;|225276|98|94.35000|200|
16:53:12|eIWM|PACF|Cancel;Busted;|225277|98|94.35000|400|
16:53:12|eIWM|PACF|Cancel;Busted;|225278|98|94.35000|100|
16:53:12|eIWM|PACF|Cancel;Busted;|225279|98|94.35000|2400|
16:53:12|eIWM|PACF|Cancel;Busted;|225280|98|94.35000|2200|
16:53:12|eIWM|PACF|Cancel;Busted;|225281|98|94.35000|5000|
16:53:12|eIWM|PACF|Cancel;Busted;|225282|98|94.35000|500|
16:53:12|eIWM|PACF|Cancel;Busted;|225283|98|94.35000|500|
16:53:12|eIWM|PACF|Cancel;Busted;|225284|98|94.35000|200|
16:53:12|eIWM|PACF|Cancel;Busted;|225285|98|94.35000|300|
16:53:12|eIWM|PACF|Cancel;Busted;|225286|98|94.35000|200|
16:53:12|eIWM|PACF|Cancel;Busted;|225287|98|94.35000|250|
16:53:12|eIWM|PACF|Cancel;Busted;|225288|98|94.35000|1140|
16:53:12|eIWM|PACF|Cancel;Busted;|225289|98|94.35000|250|
16:53:13|eIWM|PACF|Cancel;Busted;|225290|98|94.35000|266|
16:53:13|eIWM|PACF|Cancel;Busted;|225291|98|94.35000|1500|
16:53:13|eIWM|PACF|Cancel;Busted;|225292|98|94.35000|200|
16:53:13|eIWM|PACF|Cancel;Busted;|225293|98|94.35000|1190|
16:53:13|eIWM|PACF|Cancel;Busted;|225294|98|94.35000|4000|
16:53:13|eIWM|PACF|Cancel;Busted;|225295|98|94.35000|200|
16:53:13|eIWM|PACF|Cancel;Busted;|225296|98|94.35000|115|
16:53:13|eIWM|PACF|Cancel;Busted;|225297|98|94.35000|470|
16:53:13|eIWM|PACF|Cancel;Busted;|225298|98|94.35000|10400|
16:53:13|eIWM|PACF|Cancel;Busted;|225299|98|94.35000|2002|
16:53:13|eIWM|PACF|Cancel;Busted;|225300|98|94.35000|620|
16:53:13|eIWM|PACF|Cancel;Busted;|225301|98|94.35000|100|
16:53:13|eIWM|PACF|Cancel;Busted;|225302|98|94.35000|500|
16:53:13|eIWM|PACF|Cancel;Busted;|225303|98|94.35000|200|
16:53:13|eIWM|PACF|Cancel;Busted;|225304|98|94.35000|200|
16:53:13|eIWM|PACF|Cancel;Busted;|225305|98|94.35000|200|
16:53:13|eIWM|PACF|Cancel;Busted;|225306|98|94.35000|250|
16:53:13|eIWM|PACF|Cancel;Busted;|225307|98|94.35000|636|
16:53:13|eIWM|PACF|Cancel;Busted;|225308|98|94.35000|547|
16:53:13|eIWM|PACF|Cancel;Busted;|225309|98|94.35000|1000|
16:53:13|eIWM|PACF|Cancel;Busted;|225310|98|94.35000|1000|
16:53:13|eIWM|PACF|Cancel;Busted;|225311|98|94.35000|200|
16:53:13|eIWM|PACF|Cancel;Busted;|225312|98|94.35000|1400|
16:53:13|eIWM|PACF|Cancel;Busted;|225313|98|94.35000|321|
16:53:13|eIWM|PACF|Cancel;Busted;|225314|98|94.35000|200|
16:53:13|eIWM|PACF|Cancel;Busted;|225315|98|94.35000|100|
16:53:13|eIWM|PACF|Cancel;Busted;|225316|98|94.35000|100|
16:53:13|eIWM|PACF|Cancel;Busted;|225317|98|94.35000|1000|
16:53:14|eIWM|PACF|Cancel;Busted;|225318|98|94.35000|389|
16:53:14|eIWM|PACF|Cancel;Busted;|225319|98|94.35000|120|
16:53:14|eIWM|PACF|Cancel;Busted;|225320|98|94.35000|100|
16:53:14|eIWM|PACF|Cancel;Busted;|225321|98|94.35000|350|
16:53:14|eIWM|PACF|Cancel;Busted;|225322|98|94.35000|800|
16:53:14|eIWM|PACF|Cancel;Busted;|225323|98|94.35000|139|
16:53:14|eIWM|PACF|Cancel;Busted;|225324|98|94.35000|100|
16:53:14|eIWM|PACF|Cancel;Busted;|225325|98|94.35000|400|
16:53:14|eIWM|PACF|Cancel;Busted;|225326|98|94.35000|155|
16:53:14|eIWM|PACF|Cancel;Busted;|225327|98|94.35000|184|
16:53:14|eIWM|PACF|Cancel;Busted;|225328|98|94.35000|1725|
16:53:14|eIWM|PACF|Cancel;Busted;|225329|98|94.35000|200|
16:53:14|eIWM|PACF|Cancel;Busted;|225330|98|94.35000|300|
16:53:14|eIWM|PACF|Cancel;Busted;|225331|98|94.35000|380|
16:53:14|eIWM|PACF|Cancel;Busted;|225332|98|94.35000|100|
16:53:14|eIWM|PACF|Cancel;Busted;|225333|98|94.35000|100|
16:53:14|eIWM|PACF|Cancel;Busted;|225334|98|94.35000|300|
16:53:14|eIWM|PACF|Cancel;Busted;|225335|98|94.35000|100|
16:53:14|eIWM|PACF|Cancel;Busted;|225336|98|94.35000|101|
16:53:14|eIWM|PACF|Cancel;Busted;|225337|98|94.35000|200|
16:53:14|eIWM|PACF|Cancel;Busted;|225338|98|94.35000|1170|
16:53:14|eIWM|PACF|Cancel;Busted;|225339|98|94.35000|100|
16:53:14|eIWM|PACF|Cancel;Busted;|225340|98|94.35000|100|
16:53:14|eIWM|PACF|Cancel;Busted;|225341|98|94.35000|270|
16:53:14|eIWM|PACF|Cancel;Busted;|225342|98|94.35000|119|
16:53:14|eIWM|PACF|Cancel;Busted;|225343|98|94.35000|300|
16:53:14|eIWM|PACF|Cancel;Busted;|225344|98|94.35000|300|
16:53:14|eIWM|PACF|Cancel;Busted;|225345|98|94.35000|49700|
16:53:14|eIWM|PACF|Cancel;Busted;|225346|98|94.35000|400|
16:53:14|eIWM|PACF|Cancel;Busted;|225347|98|94.35000|775|
16:53:15|eIWM|PACF|Cancel;Busted;|225348|98|94.35000|125|
16:53:15|eIWM|PACF|Cancel;Busted;|225349|98|94.35000|200|
16:53:15|eIWM|PACF|Cancel;Busted;|225350|98|94.35000|100|

Questions for Benny...

A game of 20 questions with the Fed Chairman...

1. The rescue packages in 2008-2009 were all aimed at restoring CONFIDENCE to the financial system.  Yet from 2001 to 2011 the DXY is down 41.5 and gold is up 473%. Does this not equate to a loss of confidence in the US monetary system? If not how would you explain this phenomena?

2. In March of 2009 you said the ONLY reason you care about Wall Street is because of the affect it has on Main Street. You wanted to become Fed Chairmen to make things better "for the average person". You have been Chairmen since 2006, do you believe you have accomplished your goal? And if so how?

3. In March of 2009 you stated that "many mistakes were made leading up to the crisis of 2008", chief amongst them was "enormous amounts of savings has flowed into the United States, and some other industrial countries. That savings has come from China and East Asia. It's come from oil producers. And it has-- and hundreds of billions of dollars, it has come into our financial system. And, you know, that would be great if we took that money and invested it wisely, and got a high return. But instead, our financial system-- didn't-- didn't do a good job"  What has changed since you made that statement? Is money being invested wisely.....getting a high return?

4. You believe that confidence in the financial system, is one of the most if not the most important aspect in creating a lasting recovery. Yet 2 years after the recession ended and the banks have been stabilized, the recovery remains tenuous at best. Could this be because "average people" do not trust a regulatory system that did NOT hold banks and the people therein accountable for their bad/fraudulent behavior leading up to the financial crisis of 2008?

5. What do you consider to be the mandates of the Federal Reserve? Is the "wealth effect" not the 3rd mandate of the federal reserve?

6. You have stated that you believe high food and fuel prices to be transitory. Can you define transitory? And define what you believe to be a return to normalcy for food and fuel prices.

7. In March of 2009 you stated that for QE1 the Fed was printing money. However, you have stated that QE2 is not printing money. Can you define the difference?

8. The recession has been over for 2 years. Yet job gains have been anemic. Why do you think this is? And how long until Americans will see a more normalized unemployment rate?

9. The disclosed portfolio of Maiden Lane I assets includes various eurodollar and interest rate swaps indicative of hedging. Does the Federal Reserve hedge its broader $2.7 trillion SOMA Balance Sheet? And if so how? If not, why not?

10. Has the Federal Reserve ever invested in domestic or international equity markets? If so, which Wall Street broker does the Fed use to conduct equity market interventions?

11. In the June 2003 FOMC Transcript Vince Reinhart disclosed that the Fed had sold derivatives on instruments held by the Fed's balance sheet: "the Desk sold options on RPs for the weeks around the century date change that totaled nearly $0.5 trillion of notional value." Has the Fed since then engaged in selling of derivatives on RPs or any other Fed assets? If so, which Wall Street institution does the Fed use as a broker to transact through?

12. The president recently announced that he will pursue oil "speculators" blaming them for the nearly 50% jump in Crude. Yet a simple correlation shows that broad commodity indices correlate nearly 100% with the size of the Fed's assets. In light of this do you side with the president and blame speculators for the surge in energy prices, or believe this is some collusive cabal acting independent of the surge in free liquidity?

13. A quick look at your most recent balance sheet indicates that "Other Federal Reserve Assets" hit an all time high of $125.6 billion in the week ended April 20. Can you provide a break down of what these "assets" consist of?

14. A prevailing theme of over 80% of recent Permanent Open Market Operations has been the prompt refunding of Primary Dealer "On The Run" (just auctioned off) Treasurys back to the New York Fed, with the Fed purchasing up to over the old SOMA limit of any given CUSIP within a month of auction. Can you explain how this is substantially different from outright monetization of up to a third of any given issue? Can you also explain and quantify what the economic benefits to the Primary Dealers are from participating in such a process? Does the Fed keep track of how much in Mark To Market gains and losses are incurred by taxpayers as a result of the POMO reverse dutch auction? How much money have Primary Dealers made by "flipping" bonds from the Treasury back to the Fed?

15. At the time QE2 is over, the Fed's balance sheet will be just over $2.8 trillion. The DV01 on that amount of holdings will be about $1.5 billion, or in other words a 1% rise in interest rates will be three times greater than the Fed's total capital of $52.6 billion as of April 20. Does the Fed only have a capital buffer for a 33 bps rise in rates? What happens if rates increase by more? What is the basis by which the Fed's total capital account is calculated?

16. As a result of rising interest rates, the principal repayments of agency MBS and agency debt (the mandate of QE "Lite") have ground to a halt. In fact, in the most recent POMO schedule, the QEQE Lite mandate will be rendered irrelevant. Does the Fed model for what interest level will end the process of principal repayments on its agency portfolio?

17. The Fed is expected to continue the QE2 Lite mandate of keeping the size of its balance sheet constant, which means rolling maturing Treasurys. As of April 20, the Fed held $119 billion in Treasurys maturing in under a year. Assuming the full amount is "rolled" this is roughly one fifth of the full amount of of Treasurys to be purchased under QE2. If so, will replacement Treasurys be purchased in the open market and what maturities will the Fed be focusing on?

18. Recently the San Francisco Fed compared QE 2 to 1961's Operation Twist whose purpose was to halt the exodus of gold as an interest rate arbitrage vehicle from the US to Europe. Is the Fed concerned that gold is once again being transferred offshore? Does the Fed have a "fair value" estimate for what the price of gold should be under the Fed's current view of the economy?

19. The Fed focuses on CPI to inform its decision about the prevailing rate of inflation in the US. In the US, food and energy components of CPI are deminimis, accounting for under 20% of the overall inflation gauge. Other countries, particularly China whose currency is pegged to the dollar, and whose monetary policy has a major impact on the US as well, have a CPI where food and energy account for nearly half the overall inflation metric. Is it this discrepancy that the Fed will attribute the paradox of China tightening rates (and having done so for nearly half a year now) while the US continues to rely on a ZIRP policy and is still loosening via daily POMO operations? At what point will the Fed consider this parallel tightening and loosening for the world's two largest economies, whose currencies are pegged, problematic?

20. In prior FOMC transcripts, Alan Greenspan indicated that gold had historically been used by the FOMC to gauge inflation expectations. Is it still used in that capacity, and if so what does it tell the Fed about where the market believes inflation is headed?

21. Bonus question: Per Frank-Dodd, the Fed is now regulator of all banks. Yet banks are still allowed to circumvent Mark To Market accounting. How comfortable is the Fed that the financial information provided it by the MTM-exempt institutions is credible, the institutions are actually risk-free, and that the Fed is conducting prudent monetary policy in the absence of real time financial data?

22. Bonus Bonus question: the Fed's primary market-valued liability: the USD has plunged to multi year lows. Yet the Fed's primary market-valued asset: Treasury bills continue to trade in a range and as recently as some months back traded at all multi year highs. To what do you attribute this fundamental mispricing?

Treasury has $99 Billion in Bonds scheduled to be auctioned next week. It will exceed debt ceiling even after their projected ( but unsure ) paydown....so how exactly are they planning on doing this???

Earlier today, the Treasury announced its auction schedule for next week consisting of $99 billion in new bond issuance (2 Year, 5 Year, and 7 Year). There may be a slight problem with that actually being legally allowed. Here's why...

As we reported previously, the total US debt is now well above the debt ceiling. Since then the total debt number has only grown and as of yesterday was $14,320,468,555,091.68. Luckily, the legal loophole, the debt subject to the ceiling is still marginally below the $14.294 trillion cap: it was $14.268 trillion, or just $26 billion less.

So here is the math that is just a little troubling:

According to Treasury direct over the next week there will be a rather substantial net cash pay down:

• April 21: $92 billion in Bill Issuance offset by $122 billion in maturities for $30 billion in net debt reduction
• April 29: $14 billion in $14 billion TIPS issuance settles (auction today): $14 billion in net debt increase
• May 2: $99 billion of the abovementioned bonds settle (auctions next week), offset by $52.6 billion in maturities: $46.4 billion in net debt increase.

Visualizing this from Treasury Direct:

This means that over the next week there will be a total of $30.4 billion in net debt increase.

Backing up, as noted above there is $26 billion in capacity under the cap.

So..... just how does the Treasury plan to offset the $4 billion breach of the legal debt ceiling that is projected to appear on the Treasury statement as of May 2?

We don't have an answer. We hope Sec. Geithner does.

And in other news, courtesy of the April 27 FOMC meeting, the next 5 year auction will close not at its usual time of 1:00pm but at 11:30am (with non-competitives deadline at 11:00 am). At least it explains the absence of POMO on that day.

From the special announcement:

In view of the upcoming FOMC statement scheduled to be released around 12:30 p.m. on April 27, 2011, the noncompetitive and competitive closing times for the 5-year note auction to be held on April 27, 2011, will be 11:00 a.m. and 11:30 a.m. ET, respectively.

Jim Rogers threatening to short Treasuries along with Bill Gross, if Fed keeps buying.

On one hand we have Goldman (and various other pundits) telling us there may be a small blip at most in Treasurys when the Fed stops buying bonds. On the other, as has been much discussed, we have the world's biggest bond manager disagreeing. Now he gets some popular company. Jim Rogers, formerly of the Quantum Fund, who traditionally comments more on the commodity space has chimed in and pledged his allegiance to Team Gross. In a release to Reuters Insider Rogers said: "If the bond goes up another 3 or 4 points, I for one am going to sell it short." He also said what we have been saying since about October of last year: "I mean the market is just going to give up. Once (the Fed) ... stops buying bonds I'm not sure who's left to buy bonds at that point." The right question is who are Primary Dealers going to flip their bonds to, especially once the marginal increase in excess reserves ends.

From Reuters:

Leading investor Jim Rogers said on Thursday he plans to short U.S. Treasury bonds if their price rises much higher.

"If the bond goes up another 3 or 4 points, I for one am going to sell it short," he told Reuters Insider in an interview from Singapore, where he is based.

Rogers was not specific about which duration bonds he was referring to, beyond mentioning 30-year paper in a comment about what he sees as a coming sell off.

"I just think at some point along the line, people are going to realise it's absurd to lend money to the United States government for 30 years in U.S. dollars at 3 or 4 or 5 or 6 percent interest," he said.

"I mean the market is just going to give up. Once (the Fed) ... stops buying bonds I'm not sure who's left to buy bonds at that point."

The Federal Reserve's asset-purchasing quantitative easing programme is due to end in June.

USD warning from Citi.Re: Debt ceiling

As anyone who has been following the VIX, US CDS (which is quite interesting as the US catastrophe trade appears to have become selling CDS to fund gold purchases in euros: more on that eventually), or stock markets in general has grown to appreciate all too well, no matter the amount of perceived risks, the market continues to shrug off any bad news: after all, the Bernanke put means that the greater the systemic shock, the higher the likelihood that the Fed will get involved yet again and push up all risk assets. However, the same can not be said about the dollar. The currency which in 2011 has traded like anything but the world's reserve currency is less than 1 point away from 2009 lows. But that could be just the beginning. Citi's head of FX has released a not warning about the potential coming avalanche to the greenback should debt ceiling negotiations hit a snag: "what we are looking at here is very much the tail risk event that the debt ceiling negotiations unexpectedly hit an impasse. The question is what the impact would be on USD." Englander's summary observations: 1) The USD will be in big trouble if investors get the sense that the debt ceiling negotiations have gone beyond the expected choreography into a zone where there is perceived risk to US credit; 2) More broadly, we think FX markets are increasing the attention they pay to fiscal sustainability relative to monetary policy; 3) The FX response may be non-linear so G10 countries may have a false sense of security in seeing little FX response to deterioration so far. Then again, perhaps a major step down in the dollar is precisely what the Fed wants...

Englander's summary view:

• The 2011 budget impasse was resolved with little markets impact
• If a breach of the US debt ceiling comes into question the impact will be larger
• Since September 2009, a 100bps increase in CDS has been associated with 8% currency weakness …
• … but there also is a level effect as poorer credits have faced larger FX pressures

Full note:

The USD dodged the 2011 budget bullet last weekend and is now facing the debt ceiling cannonball. Although the debt ceiling is not normally considered a tool by which fiscal consolidation is achieved, it seems likely that there will be a fair amount of brinkmanship before the debt ceiling is raised. Investors and most economists expect political posturing as the debt ceiling debate drags on through late May and June, but no event that affects perceptions of US credit quality. So far US yields are showing no pressure and US CDS is trading well within the range of the last 15 months.

So what we are looking at here is very much the tail risk event that the debt ceiling negotiations unexpectedly hit an impasse. The question is what the impact would be on USD.

Below we present a cross-section analysis across more than 30 major currencies on what impact a deterioration in credit has on the currency. The analysis covers the period September 2009 to the present – September 2009 was the trough in spreads between financial crisis related sovereign credit concerns and the European sovereign credit blow-up, so it gives us a good base for comparison.

We find a surprisingly strong impact of credit deterioration on currencies. A 100bps increase in CDS has been associated with 8% currency weakness over this period, but we also find that countries that started the episode with higher CDS tended to fall more or appreciate less than others. Having a September 2009 CDS level 100bps higher in the cross-section is associated with 7% less subsequent appreciation, given no further CDS deterioration. Hence poor credit seems to represent a headwind to appreciation beyond any additional deterioration.

We have three takeaways from this.

1) The USD will be in big trouble if investors get the sense that the debt ceiling negotiations have gone beyond the expected choreography into a zone where there is perceived risk to US credit;

2) More broadly, we think FX markets are increasing the attention they pay to fiscal sustainability relative to monetary policy;

3) The FX response may be non-linear so G10 countries may have a false sense of security in seeing little FX response to deterioration so far.

The debt ceiling negotiations

We have little to add on the debt ceiling negotiations except to reiterate that there is very little evident concern in either FX or FI markets. Both 10- and 30-year yields are in the year’s range, the 30-year Treasury auction on April 14 was very well received and there is no stress evident on CDS. Last weeks budget negotiations probably had a small negative impact on USD, and the concern about the process is a lingering negative, but the impact of any concrete debt ceiling risks would be much higher.

Impact of credit deterioration

We regress the Sep 2009 to April 2011 change in the value of 33 currencies against the beginning level of their sovereign CDS and the change in the sovereign CDS, the correlation of the currency with the S&P and a dummy to distinguish between G10 and non-G10 currencies.

The strongest association by far is with the CDS variables. The results imply that a currency with a 100bp higher CDS in Sep 2009 tended to appreciate about 8% less through Apr 2011, even if the CDS did not move, while a currency with its sovereign CDS rising by 100bps tended to appreciate about 9% less. (We ran our regressions using USD as a base but in a cross-section regression the base currency does not matter.)

The measure of riskiness that we used, the correlation with the S&P, was marginally significant, indicating that over this long period, the CDS coefficient did not reflect the appetite for risk to any great degree. Being in the G10 had a modest negative effect and being heavily correlated with risk had a marginally significant positive effect but they did not affect the coefficients or results greatly.

Figure 1 presents the actual currency changes as well the changes predicted by the model specified above. For such a simple equation it explains a fair amount of the currency variation. Most importantly for the USD it seems to have quite a bit of explanatory power for the currencies that have performed the poorest versus those that have performed the best. In some regressions we included levels and changes in swap spreads, but these did not seem to provide significant additional explanatory power.

We did not include the EUR in our regression since the combination of national sovereign risks was not necessarily linear. However, we did calculate a debt weighted average of CDS and CDS changes and used the estimated coefficients to get an estimated EUR impact. Interestingly the actual change in the EUR very much matched the predicted and the 96bp increase in debt-weighted CDS suggests that the EUR would be about 8% (11 big figures) higher had the EUR sovereign CDS retained their September 2009 level. That would explain much of the deterioration in EURXXX crosses against commodity and other risk-correlated currencies.

Visually we observe that the currency effect seems to become significantly larger when the CDS level was above about 90bp. Moreover the currency impact seems to kick in as soon as there is any deterioration. We do not want to emphasize this, but it comes back to the risk that there is a false security in having seen no effects till now.

Conclusion

This provides preliminary indication that FX markets have come to focus on debt and creditworthiness in addition to the standard macro variables. It suggests both potential upside for the EUR and other currencies that get their sovereign debt situation under control and significant downside for USD and JPY if markets ever begin to price in concrete risk that debt will become unsustainable

The whole story of Fiat currency, rogue Fed and the collapse of the USA financially

Michael Burry's ironic plight against pervasive lemming groupthink (such as the one gripping the nation currently) has been well documented in Michael Lewis' "The Big Short." It is thus not surprising that the topic of his speech to the Vanderbilt University (of which he is an alum) Chancellor's Lecture series is the current flawed conventional thought paradigm: that of central planning, of quantitative easing and of dollar debasement by the Fed, which are far more dangerous than anything experienced during the credit bubble as when the current regime finally fails, and it will fail, there will be nobody to bail out the US. From Burry's speech: "I am worried about a future of a nation that refuses to acknowledge the true causes for the crisis. A historic opportunity was lost. America has instead chosen its poison as its cure... Today I expect the US government to attempt to continue easy money policies into the next presidential term, past the foreclosure crisis, and past the corporate and public refinancing humps that are forthcoming. Junk bonds incredibly are again at all time highs. Quantitative Easing seems to be working for now. Buit this is an invalid validation of what America is doing. This is in fact a Pyrrhic gamble. As we continue to debase our currency, Bernanke says he is not printing money, again I disagree. As it stands I get an email from the Fed saying we bought another X billion in Treasurys. I don't know - that's pretty clear to me. In fact this program QE2 its scope and breadth raises the severe question of the Treasury's needs. The government's borrowing of money for the purposes of injecting cash into society, bailing out banks, brokers and consumers, is a short-sighted easy decoision for a population that has not yet learned that short-sighted, easy strategies are the route to long-term ruin. We never quite achieved the catharsis necessary to stoke the reevaluation of our wants, need, and feers. Importantly, the toxic twins: fiat currency and an activist Fed remain firmly entrenched, even more so with the financial reforms last year." 

Burry's practical advice: open a bank account in Canada.

Must watch:

5

The end game begins for the Fed. Debt Monetization failure. MBS prepayments plunge, excess reserves spike.

For those confused why gold just hit a new all time high of $1,480, it may have something to with this. In the week ended April 13, the Fed's balance sheet hit a new all time record of $2.65 trillion, primarily due to an increase of $15 billion in Treasury holdings by the Fed (chart 1). Not surprising to those who have read our previous post on the matter, prepayments to the Fed have all but dried out, and for the third time in a row there were no MBS prepayments, which at $937.2 billion have declined by just $12 billion since the beginning of March: so much for magnetization demand arising from QE Lite (chart 2). Excess reserves continue to surge increasing by $29 billion in the last week. The increase at this point is more than just one accounting for the $195 billion SFP program unwind (which finished last month): should the economy really improve and banks start lending, all hell may well break loose. At this point the surge in excess reserves (liabilities) is rapidly overtaking the increase in Fed assets since the beginning of QE2 (chart 3). "Other Fed Assets" hit a fresh new ridiculous total: $125 billion, an increase of $2.5 billion over the prior week (chart 4).  If this number is indeed a form of capitalized POMO commission to the PDs, then America likely has a right to know. Lastly for those still curious, the Fed's asset maturing within 1 year are $143 billion (chart 5). Putting this all together, presents the following picture: in a period during which the Fed's assets increased by $203 billion, GDP increased by about 1.5%, once all revisions are in the books. QE2 ends when Q2 ends. And so far, the economic in this quarter is without doubt starting to turn down. What will happen when there is no incremental monetization once Q3 kicks off, and GDP is about to go negative?

Chart 1: total Fed balance sheet

Chart 2 : weekly MBS/Agency putbacks to the Fed

Chart 3: excess reserves compared to total Fed assets

Chart 4: "Other Fed Assets"

Chart 5: maturity distribution

And a bonus chart, for the monetary purists: the money multiplier has dropped to what is probably the lowest ever.

Fukushima update 04-05- 2011. Marine and Fish contamination

his time nobody will be blamed for not carrying the decimal comma. While a few weeks back TEPCO scrambled to lie to the public that a reading 10 million times higher than normal was really just 100,000 times above threshold, today TEPCO, whose stock hit an all time low in overnight trading, finally admitted the truth that radioactive Iodine 131 readings taken from seawater near the water intake of the Fukushima No. 1 nuclear plant's No. 2 reactor reached 7.5 million times the legal limit. This means Godzilla is most likely very close to hatching. But it gets worse: "The sample that yielded the high reading was taken Saturday, before Tepco announced Monday it would start releasing radioactive water into the sea, and experts fear the contamination may spread well beyond Japan's shores to affect seafood overseas." In other words, as TEPCO was dumping 11,500 tons of radioactive water in the sea, it already knew, but kept away from the public, the radiation was nearly ten million times higher than legal limits. At this point we truly marvel at the stoic ability of Japanese people, and most certainly its east-coast fishermen, whose jobs are finished as nobody will want to buy any fish in the foreseeable future for fear of radioactive toxicity, to accept such lies, very often with an intent to hurt, day after day, without anger spilling over in some form of violence.

More from Japan Times on this disgusting precedent set by a country which once was believed to care about its people and the environment:

The unstoppable radioactive discharge into the Pacific has prompted experts to sound the alarm, as cesium, which has a much longer half-life than iodine, is expected to concentrate in the upper food chain.

According to Tepco, some 300,000 becquerels per sq. centimeter of radioactive iodine-131 was detected Saturday, while the amount of cesium-134 was 2 million times the maximum amount permitted and cesium-137 was 1.3 million times the amount allowable.

The amount of iodine-131 dropped to 79,000 becquerels per sq. centimeter Sunday but shot up again Monday to 200,000 becquerels, 5 million times the permissible amount.

The level of radioactive iodine in the polluted water inside reactor 2's cracked storage pit had an even higher concentration. A water sample Saturday had 5.2 million becquerels of iodine per sq. centimeter, or 130 million times the maximum amount allowable, and water leaking from the crack had a reading of 5.4 million becquerels, Tepco said.

"It is a considerably high amount," said Hidehiko Nishiyama, spokesman for the Nuclear and Industrial Safety Agency.

Masayoshi Yamamoto, a professor of radiology at Kanazawa University, said the high level of cesium is the more worrisome find.

"By the time radioactive iodine is taken in by plankton, which is eaten by smaller fish and then by bigger fish, it will be diluted by the sea and the amount will decrease because of its eight-day half-life," Yamamoto said. "But cesium is a bigger problem."

The half-life of cesium-137 is 30 years, while that for cesium-134 is two years. The longer half-life means it will probably concentrate in the upper food chain.

Yamamoto said such radioactive materials are likely to be detected in fish and other marine products in Japan and other nations in the short and long run, posing a serious threat to the seafood industry in other nations as well.

"All of Japan's sea products will probably be labeled unsafe and other nations will blame Japan if radiation is detected in their marine products," Yamamoto said.
Tepco on Monday began the release into the sea of 11,500 tons of low-level radioactive water to make room to store high-level radiation-polluted water in the No. 2 turbine building. The discharge continued Tuesday.

Alas, initial fisherman jobless claims are about to join true radioactivity levels in surging above legal thresholds:

On Monday, 4,080 becquerels per kilogram of radioactive iodine was detected in lance fish caught off Ibaraki Prefecture. Fishermen voluntarily suspended its shipment. The health ministry plans to compile radiation criteria for banning marine products.

And the bottom line is that after almost a month, Japan is nowhere near closer to fixing this whole goddamned mess:

Tepco initially believed the leak was somewhere in the cable trench that connects the No. 2 turbine building and the pit. But after using milky white bath salt to trace the flow, which appeared to prove that was not the case, the utility began to think it may be seeping through a layer of small stones below the cable trench.

When all is said and done, the lies are removed, and the truth is finally revealed, this will end up being far, far worse than Chernobyl.

The chart below from the NYT shows what is currently known about the intentional water release and unintentional leak from Fukushima:

Fukushima impact 04-02-2011

The NYT has compiled a useful visual summary of the current assessment of the Fukushima radiation, distributed by either air, soil, water and food,  compiled through the work of the International Atomic Energy Agency and others. The observable trade off is that while the impact of inland radiation has so far been muted courtesy of favorable wind direction and modest rainfall, the actual concentration of radioactivity in the sea and groundwater is rising at an exponential pace. How long before conventional wisdom realizes that radiation tens of thousands of times above normal contaminating the sea is very bad, while one day of northeastern winds will set off every seismic counter in Tokyo?

Gold !! Where could it go?

Gold Over £900/oz As British Pound Falls Sharply - Soaring Inflation Sees UK Retail Sales Plunge Most On Record

Gold is marginally lower in all currencies today except sterling after UK retail sales plunged the most on record in March due to deepening inflation. Consumer’s finances in the UK and internationally are being negatively impacted by food and energy inflation showing the UK’s vulnerability to a double dip recession and stagflation. Gold rose 0.5% in sterling over the £900/oz mark again.

Silver has recovered somewhat from yesterdays sell off and is nearly 1% up against major currencies and 1.5% higher against the pound. Yesterday’s selling was likely primarily due to speculators taking profits and locking in recent gains.

Japan's Nikkei fell and equities in Asia and Europe have come under pressure on the gradual realization and admission that the impact of the March 11 earthquake may be far more severe than assumed and as Japan put its nuclear crisis on par with Chernobyl.

A nuclear catastrophe does not bode well for an already fragile global economic recovery.    
 

Gold and particularly silver are vulnerable to a short term sell off. The fundamentals remain very sound but correction and consolidation may be necessary in both markets. Most participants are again expecting sharp pullbacks and some brave souls continue to assert gold and silver are “bubbles” about to burst. They are likely to again be disappointed as markets have a habit of doing the opposite of what the herd expects.

In gold, should a correction materializes previous resistance just above $1,400/oz and the 100 day moving average at $1,375/oz (see chart above) are likely to provide strong support. Resistance is at the recent nominal high at $1,475/oz.

The record nominal sterling high of £915/oz looks set to be challenged as sterling comes under pressure due to soaring inflation and record low interest rates.

Households in the UK are seeing their spending power eroded at the fastest rate in more than 60 years as food and energy costs soar and the faltering recovery restrains wage increases. Concerns about the tentative economic recovery as well as the government’s VAT increase and the deepest spending cuts since World War II are undermining consumer confidence.



NEWS

(Telegraph) -- Gold to Break $2,000/oz Barrier

The price of gold will reach $2,100 an ounce within three years.

The price of gold will reach $2,100 an ounce within three years and could rise to almost $5,000 by the end of the decade, according to a new report.

Rising demand for gold in China and India will drive the precious metal's continued bull run, analysts at Standard Chartered, the Asia-focused bank, predicted. They said low interest rates in America and a time lag before mines started supplying more gold would see the rally extend to at least 2014.

"Our base-case forecast is that prices rally to peak at an average of $2,107/oz in 2014, although our modelling suggests a possible ‘super-bull’ scenario of gold prices rallying up to $4,869/oz by 2020, should current relationships between Asian demand and gold persist," the analysts wrote.

The bank said there was a "powerful relationship" between income per head in Asian emerging markets and the gold price.

The report added: "We expect some headwinds for gold to come from higher US [interest] rates, but we find that the impact of higher rates is rather muted and we do not expect this to derail gold’s rally for now," they added.

"More important, we believe, will be the impact of higher mine production. We expect a steady acceleration in mine-supply growth in the years ahead, which should overwhelm demand growth beyond 2014. Nevertheless, we expect an extended period of high gold prices."

In a previous report, the analysts had predicted that average income per head in China and India would reach 30pc of the US level by 2030. "Under this scenario, and assuming that the relationship between rising income levels and gold holds, gold prices could reach $4,869 by 2020," the report said.

"On this basis, the bull run for gold could still be in its infancy. This is based on the assumption that the current relationship between gold and incomes persists through to 2020, which is considered possible, but unlikely."

The report concluded: "The bull run in gold is likely to continue for some time, but prices should peak around 2014 as supply finally catches up with demand and US real rates turn positive."

(Bloomberg) -- Gold May Advance to $1,560, Commerzbank Says: Technical Analysis

Gold may rise to $1,560 an ounce by the end of the year, indicating a 7 percent gain, according to
technical analysis by Commerzbank AG.

The $1,560 level is based on point and figure analysis, Commerzbank analyst Axel Rudolph said in a report on April 8.The attached chart shows gold may first climb to about $1,515, the 161.8 percent extension of the February 2010 to June 2010 gain, projected from the July low, one of the levels singled out in so-called Fibonacci analysis.

 “Other point and figure targets are at $1,515 and $1,530, so the $1,515 zone seems important, together with the psychological $1,500 level,” Rudolph said by e-mail yesterday. A price of $1,500 may be achieved before three months, he wrote.

Gold climbed to a record $1,478.18 yesterday after gaining for 10 consecutive years on demand for a protection of wealth and an alternative to currencies. The metal for immediate delivery traded at $1,457.79 an ounce by 7:42 a.m. in London.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index. Fibonacci analysis is based on the theory that prices tend to drop or climb by certain percentages after reaching a high or low. A point and figure chart gauges trends in prices without showing time or volume.

(Bloomberg) -- UBS Sees ‘Difficult Three Months’ Ahead for Metals, Miners

UBS AG said the next three months will be “difficult” for metals and mining companies, because of global slowdown, Middle East unrest, changes to U.S. interest rate policy and Japan’s earthquake.

The bank downgraded industrial metals, and expects a 5 percent decline “across the complex” in the second quarter, while gold climbs 5 percent, analyst Julien Garran wrote in a report today.

(Bloomberg) -- Gartman Adding to Gold in Sterling Terms

Newsletter writer Dennis Gartman adding to Friday’s gold position; had bought gold in GBP terms, says must add with gold trading upward through GBP900/oz.

Notes yr spreads for WTI, Brent both backwardated; Brent/WTI spread had gone “dramatically” in Brent’s favor;

watching Qaddafi -- w/ Qaddafi “conciliatory,” Brent’s premium waning; Qaddafi “recalcitrance” may push spread back out, beyond $15/bbl.

NOTE: Friday Gartman said gold remained strong, with  increasing monetary base, falling USD “gold has to move higher.”

(Bloomberg) – Bartels: Chances are Rising for NY Oil to Jump to $147/bbl

Oil’s potential to reach $147/bblis rising as crude “has started to trend above the 61.8% (Fibonacci) retracement level” of $103-$104/bbl, says Bank of America Merrill Lynch market analyst Mary Ann Bartels.

Says holding above 61.8% retracement “increases the potential” for oil to return to July 2008 high $147/bbl.
Says gold’s “breakout above $1450 supports the case for a rally to $1525 and $1575”, long term says may reach $2000-$2300/oz.

Says silver futures’s next resistance level $44-$45; says spot silver likely to reach $50/oz.

Says Investors Intelligence % of newsletter writer bears at 15.7% last week could be bearish sign for equities; says readings below 20% bears has been a “warning sign,” though sentiment is a poor timing indicator.

(Green Bay Press-Gazette) -- Steve Forbes predicts return to gold standard

Steve Forbes apparently no longer is interested in the White House.

The question just begged to be asked — would Forbes consider a third run for the presidency?

Although it didn't receive much mention during his lecture April 4 at Lakeland College in Howards Grove, Forbes willingly entertained the question afterward.
"There's an old saying that the third time's the trick," the audience member said rather encouragingly.

Forbes laughed along with the audience, and then put the matter to rest.

"Thank you for your compliment, but my role now is agitator," Forbes said.

Forbes, 63, president and CEO of Forbes Inc. and editor of Forbes magazine, shared economic philosophies that echoed his previous presidential campaigns when he delivered Lakeland College's 10th annual Charlotte and Walter Kohler Distinguished Business Lecture.

Forbes' presidential bids of 1996 and 2000 centered on a flat tax plan; ushering in a new system of Social Security for younger Americans, and allowing parental choice in the school system.

"It's highly unusual what we're experiencing today," Forbes said of our nation's current economic woes. "The norm for this country is for people to move ahead. When that doesn't happen, you have to look at what's standing in the way."

Forbes likened the economy to a stalled automobile — too little fuel and the engine stalls; too much and it floods — and said that the Federal Reserve's current monetary policy plays a fundamental role in the situation.

"The Fed has been on a bender since the early part of the last decade, printing too much money," Forbes said. "They're doing it again. … Some people may benefit, short-term, but overall you don't get productive investment, (which) means more inflation at home, speculation in commodities, currencies."

Looking ahead

In one of several predictions he made during the lecture, Forbes said that within the "next five years, for the first time since the 1970s, the dollar will be re-linked to gold."

The gold standard, in which currencies are tied to a specified amount of gold, broke down during World War I. The Bretton Woods system was in use from 1946 until 1971, when President Richard Nixon announced that the United States would no longer redeem currency for gold.

"We're going to have to do this," Forbes said. "Gold provides a stable value, as much as you can, in this imperfect world."

The Fed will not be able to fund Debt Monetization without QE3.

Recently there has been a meme spreading in the internet that the Fed does not really need to do QE3 as the central bank can maintain bid interest at sufficiently high levels by merely rolling and extending maturing debt, a form of QE Lite Version 2, where the Fed's balance sheet is kept constant even as MBS are prepaid and Treasuries mature. The argument goes that based on some "logic" and lots of estimates it is "reasonable" to assume that $750 billion in MBS prepays and Treasury maturities will depart the Fed's balance sheet and need to be repurchased in the open market in keeping with a pro forma QE Lite V2.0 mandate. This is false. Here's why.

First: one does not need to engage in complex calculations of what the maturity profile of the Fed's holdings are - it is there available for anyone with an internet connection to see for themselves. In each and every H.4.1 update (go ahead, click) the Fed lists the maturity portfolio of its assets. The most interesting for the purposes of this analysis is the securities due in under one year. This includes in addition to Treasurys, MBS and Agencies, also the following items completely irrelevant for this exercise: Reverse Repos , Term Deposits, Liquidity Swaps and Other loans. As the chart below shows, and as anyone with a calculator can estimate, there is $141 billion in Treasury, Agency and MBS maturities in under one year (and just $108 billion in purely Treasury holdings). This number is one tenth of the ongoing monetization of $900 billion in USTs and MBSs in the November-June period, or $1,350 billion annualized. In other words: simply rolling MBS and Treasuries will have one tenth the impact of the ongoing quantitative easing program. Period. End of Story.

So what about MBS prepays? Well, as we had thought we had made abundantly clear, the level of Fed MBS prepays is directly correlated with prevailing mortgage rates: the lower the mortgage rate, the more willing the end consumer is to "put" an existing mortgage to the Fed and open a cheaper one. And vice versa: the higher rates go, the less prepays the Fed experiences. Lo and behold: actually looking at the data, confirms precisely this. As the chart below shows, while in H2 2010, when 10 Year, and thus Mortgage rates, were dropping fast, prepays to the Fed, and thus the rate of QE Lite activity was very high: peaking at $45 billion in December. Alas, since then, due to surging rates, the prepay rates has plunged, and the February and March total of $40 billion is less than all of December. Should rates continue to rise, which they will if fears of no QE3 accelerate, and Bill Gross ends up being right, this number will plummet and could potentially hit zero as nobody has an incentive to prepay a mortgage when the existing one is far more economic.

So putting it all together: assuming no QE3, and just continued rolling and transforming MBS in UST purchases, means that the Fed will have about $12 billion in average UST purchases per month from maturity extension, and about $20 billion from MBS prepays. This is at best one quarter of the amount the Fed monetizes per month currently and is largely inadequate to continue funding the US deficit. Also, should the 10 Year rate jump to over 5%, QE Lite will halt indefinitely, meaning the only source of dry powder for future monetization will be rolling maturity extensions, which are about one tenth of current monthly funding needs.

Lastly, and people tend to forget this, the primary reason why the Treasury needs the Fed to be the buyer of only resort is that no matter what happens to interest rates, and cash outlay to the Fed ends up being a revenue item for the Treasury! In fact, the higher the rate, the greater the purported revenue from Ben Bernanke, even though in reality it ends up being a wash transaction. For Tim Geithner the ideal situation would be one where the Fed owned all US interest paying instruments, as interest expense would be shortly reclassified as Treasury revenue. Should the Fed not be a key player in monetization, this is money that would ultimately leave the US. And if rates were to jump the annual interest outlays would actually be quite dramatic.

Exclusive: Bill Gross Is Now Short US Debt, Hikes Cash To $73 Billion, An All Time Record | zero hedge

Exclusive: Bill Gross Is Now Short US Debt, Hikes Cash To $73 Billion, An All Time Record | zero hedge: "In March, Pimco's flagship Total Return Fund (TRF) has now taken an active short position in US government debt: -3% on a Market Value basis (or $7.1 billion), and a whopping -18% on a Duration Weighted Exposure basis. And confirming just what PIMCO thinks of US-related paper is the fact that the world's largest 'bond' fund now has cash, at a stunning $73 billion, or 31% of all assets, as its largest asset class on both a relative and absolute basis."

Income: The Rich vs Everyone else...can you say MUTINY!!!

Tim Geithner's letter informing Congress the USA is out of dough in 1 - 3 months

Secretary Geithner Sends Debt Limit Letter to Congress

April 4, 2011

 

The Honorable Harry Reid
Democratic Leader
United States Senate
Washington, DC 20510

Dear Mr. Leader:

I am writing to update you on the Treasury Department’s projections regarding when the statutory debt limit will be reached and to inform you about the limits of the available measures at our disposal to delay that date temporarily.

In our previous communications to Congress, we provided regular estimates of the likely time period in which the debt limit could be reached. We can now make that projection with more precision. The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011. This is a projection based on the expected level of tax receipts, the timing of our commitments and obligations over the next several weeks, and our judgment concerning the level of cash balances we need to operate. Although these projections could change, we do not believe they are likely to change in a way that would give Congress more time in which to act. Treasury will provide an update of this projection in early May.

If the debt limit is not increased by May 16, the Treasury Department has authority to take certain extraordinary measures, described in detail in the appendix, to temporarily postpone the date that the United States would otherwise default on its obligations. These actions, which have been employed during previous debt limit impasses, would be exhausted after approximately eight weeks, meaning no headroom to borrow within the limit would be available after about July 8, 2011. At that point the Treasury would have no remaining borrowing authority, and the available cash balances would be inadequate for us to operate with a sufficient margin to meet our commitments securely.

As Secretary of the Treasury, I would prefer to avoid resorting to these extraordinary measures. The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations.

If Congress does not act by May 16, I will take all measures available to me to give Congress additional time to act and to protect the creditworthiness of the country. These measures, however, only provide a limited degree of flexibility—much less flexibility than when our deficits were smaller.

As the leaders of both parties in both houses of Congress have recognized, increasing the limit is necessary to allow the United States to meet obligations that have been previously authorized and appropriated by Congress. Increasing the limit does not increase the obligations we have as a Nation; it simply permits the Treasury to fund those obligations that Congress has already established.

If Congress failed to increase the debt limit, a broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds. This would cause severe hardship to American families and raise questions about our ability to defend our national security interests. In addition, defaulting on legal obligations of the United States would lead to sharply higher interest rates and borrowing costs, declining home values and reduced retirement savings for Americans. Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.

For these reasons, default by the United States is unthinkable. This is not a new or partisan judgment; it is a conclusion that has been shared by every Secretary of the Treasury, regardless of political party, in the modern era.

Treasury has been asked whether it would be possible for the Treasury to sell financial assets as a way to avoid or delay congressional action to raise the debt limit. This is not a viable option. To attempt a “fire sale” of financial assets in an effort to buy time for Congress to act would be damaging to financial markets and the economy and would undermine confidence in the United States.

Selling the Nation’s gold, for example, would undercut confidence in the United States both here and abroad. A rush to sell other financial assets, such as the remaining financial investments from the Emergency Economic Stabilization Act programs, would impose losses on American taxpayers and risk damaging the value of similar assets held by private investors without generating sufficient revenue to make an appreciable difference in when the debt limit must be raised. Likewise, for both legal and practical reasons, it is not feasible to sell the government’s portfolio of student loans.

Nor is it possible to avoid raising the debt limit by cutting spending or raising taxes. Because of the magnitude of past commitments by Congress, immediate cuts in spending or tax increases cannot make the necessary cash available. And, reductions in future spending commitments cannot supply the short-term cash needed. In order to avoid an increase in the debt limit, Congress would need to eliminate annual deficits immediately.

As the Congressional Research Service stated in its February 11, 2011 report:

“If the debt limit is reached and Treasury is no longer able to issue federal debt, federal spending would have to be decreased or federal revenues would have to be increased by a corresponding amount to cover the gap in what cannot be borrowed. To put this into context, the federal government would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011 (April through September 30, 2011) in order to avoid increasing the debt limit. Additional spending cuts and/or revenue increases would be required, under current policy, in FY2012 and beyond to avoid increasing the debt limit.” [1]

None of those budget policy choices is feasible or responsible. As a consequence, given that Congress has imposed on itself the requirement for periodic increases, there is no alternative to enactment of an increase in the debt limit.

I am encouraged that the leaders of both parties in both houses of Congress have clearly stated in public over the last few weeks and months that we cannot default on our obligations as a nation and therefore have to increase the debt limit. Because the date by which we need to increase the limit is growing nearer, I hope that the leadership in both houses will help us impress upon all Members the gravity of this issue and the imperative of timely action.

President Obama is strongly committed to working with both parties to restore fiscal responsibility, and he looks forward to working with Congress to achieve that critically important objective. In the meantime, it is critical that Congress act to increase the debt limit so that the full faith and credit of the United States is protected.

I hope this information is helpful as you plan the legislative schedule for the coming weeks.

Sincerely,

Timothy F. Geithner

Identical letter sent to:

The Honorable John A. Boehner, Speaker of the House
The Honorable Nancy Pelosi, House Democratic Leader
The Honorable Mitch McConnell, Senate Republican Leader

cc:

The Honorable Dave Camp, Chairman, House Committee on Ways and Means
The Honorable Sander M. Levin, Ranking Member, House Committee on Ways and Means
The Honorable Max Baucus, Chairman, Senate Committee on Finance
The Honorable Orrin Hatch, Ranking Member, Senate Committee on Finance
All other Members of the 112th Congress

Enclosure