patrick.net

Today, it is not triggered by PPT, surprisingly, it is triggered by this:
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN1361207920081113

The moment of truth is drawing near as there will be dwindling amount of money available to buy US Treasury from the Arabs (falling oil price), China (their own stimulus), and Japan (simply out of gas).

One of those days not far off in the future, something will set off the collapse of the US Treasury, which will trigger a massive exodus of USD fixed income assets. Today is just a rehearsal.

@OO

So if there is a mass exodus, where will the money it go? Stock market? other currencies?

OO,

The People's Republic of China may be in the process to cause the collapse of the US Treasury. They have a bailout to pay for and lots of Tbills to liquidate. They may force the fire sale of our gold reserves to pay for their bailout or else we watch the dollar go to crap.

Care to explain, neutron? A fire sale in T-bills would force down the price, which would in turn increase the guaranteed yield. How could anyone force us to liquidate our gold reserves? And who in the world has the capacity to buy $1T of government bonds, and how would China maintain our trade deficit without them?

So if there is a mass exodus, where will the money it go? Stock market? other currencies?

Into the great, dark abyss of deflation.

Eh, it seems as though some higher education is of value.

I have several friends who never made it into college. One has a fine well-rounded career and life, and she just headed back to college (full ride, German business school) in her 30's for a sense of completion. Another can write code but cannot seem to organize any other aspect of his life. Two more work in retail, cannot quite understand the full impact of their recent real estate purchase (I tried, I swear), and feel that anything over $10/hour is real money. And the last two are highly intelligent people who simply never received the inputs necessary to see a bigger picture. I cannot begin to tell you how awful it was to explain to them that their condo purchase would not generate $300K in equity within 2 years, and that in fact they could lose money on the condo (disbelief and the assumption that I was a jealous bitter renter--I would have stayed silent if they were not making major plans that hinged on their false assumptions).

Given all of that, I think I'll stand by the idea that for most people, a basic grounding in liberal arts, life skills, mathematics, and economics has value, and as high school does not provide, higher education is the way to go.

I've taken great JC classes and terrible private university classes, so a good education does not necessarily have to be expensive, and an expensive education is of course not necessarily good. But *some* education will probably help you out at least a bit.

If the Tbills are sold by the Chinese to finance their bailout, the value of the Tbill and dollar will drop. The only thing left to keep the value of the dollar up would be trading our gold for their Tbills.

This is economic warfare. The only thing that I see that could prevent this from happening is a major food shortage in China. I was only 5 at the time, but I do remember the news about the USSR buying up all the excess wheat in the mid 1980's.

Eliza,

Make no mistake, I truly believe the pursuit of knowledge and higher education is the most important thing in the world. It's what makes us human.

And its why I *choose* to work in that arena, despite the frustrations and crappy salary compared to the private sector.

I just personally don't think its for everyone and its certainly not worth going many tens of thousands of dollars into debt for.

And I'll point out that Wall Street is/was full of Ivy League MBA's and look where that got us.

It depends on whether we default on our T right away or we choose to print.

It is extremely unlikely that we will choose to default. The fact that Fed has grown its balance sheet by $1.3T in a matter of 3 months indicates that Fed is willing to print.

In the extremely unlikely event that we default, don't bother. Other countries will become financially unstable as well so there is no place to hide. We are all toast, worry about survival at the basic level, stock up on food and water, load up ammo.

In the more likely scenario of unabated printing (printing whatever we need to fund the deficit), buy consumer staple stocks (condiments, toilet paper, sanitary napkins), and commodities that people cannot do without, not copper nickel zinc, but energy, wheat, rice, sugar etc.

I am now convinced that every country will go ZIRP within the next 12 months, so save your breath on FX, they are all heading to 0, if you can manage to leave no paper trail at all, get some physical gold.

Neutron,

No, China is NOT in a position to force us to do anything. But they are in a position to not buy our new T, and they cannot afford to.

First of all, we are not able to send over that much USD any more since all our consumers are pooping out. Then, they need to save their own ass since China is slowing down drastically. Think about a country of 1.3B population with 20-30 million migrant workers already losing their jobs, and this is just the beginning of the tsunami of unemployment. Proportion wise it sounds fine, but the sheer scale of it is scary, because if 1% of them are disgruntled, the country will be in for lots of social unrest. That's why China has to go for the huge stimulus, and there is another one on the way, rumored to surpass the first stimulus in the range of a T, USD, not entirely funded by their foreign reserve, but it will make a dent.

So one thing is clear. China will not be able to buy as it used to any more. Let alone the Arabs, their single-source revenue is tanking faster than China so they won't chip in.

The bag holders of US debt are like audience in a dark theater. Somebody mutters fire, and we smell some smoke. But nobody screams or yells or runs, because we know if we all start to run for the door, most of us won't make it out alive. But at the same time we hope the others are not noticing what we noticed so that we will have time to proceed quietly to the door ASAP. When the smoke gets thicker, someone will start to run, we don't know who. But we know that is when everyone will be forced to run at the same time.

The 2009 budget as it stands today has $436B deficit.

We all know the tax receipt will fall off a cliff, so that part of the deficit is definitely understated. Then, it assumes lots of government cuts, which will not all go through, particularly when depression is on the way. Then, we may still get a few more stimulation in terms of tax cut or rebate checks on the way, and when was the last time you saw a US government budget on the mark?

So the bottom line is, we are on our way to $500B+ deficit next year, plus some existing US debt to be rolled over. Just to provide a reference for this, just look at the the current T holding by different countries, and tell me which countries combined can buy that extra $500B Treasury?
http://www.ustreas.gov/tic/mfh.txt

Btw, I have been trying to find the maturity/duration of all US government debt on the Treasury site, but couldn't find any. Does anybody have that data handy?

OO,

I'm still struggling to understand all of your theory. If China sells a bunch of T-Bills, won't they get dollars in return? At some point they have to convert to their own currency. How do they convert $500 billion while keeping the exchange rate pegged?

News from Sun is bad this morning. 5,000-6,000 layoffs.
They did not state where and I know Sun has a gisnificant presence in Colorado, but I think the BA is once again shedding jobs.
Yikes!

On November 13, I said:
And there are more cuts coming. Very credible rumors about Cadence, Yahoo, Sun, and another search-engine company that I am not at liberty to mention.

There you go - Sun announced massive layoffs. In late October, I had heard about 2000 jobs being cut. I don't know if something else in the last two weeks made them go back and cut even deeper.

Even more BIG numbers are coming from other Bay Area companies, based on what I hear. If you are in the market for a house, do yourself a HUGE favor and wait - even if you are sure your job is "safe". This is a dam-buster event.

There is cash on the sidelines, big piles of it in unexpected places. Is a possible scenario China issuing massive debt to attract this capital, using their US Treasury holdings as backstop collateral? Might they have learned the game we have played on them, maybe their next endeavor is to join the con? Offer an attractive return.....much more covert warfare.

As US financial landscape will be a smoking crater in 12 months, maybe China *freedom* bonds become the capital safe haven? Ah, probably they lack the institutions of higher education and a serious cultural chasm that would facilitate an effective army of smooth MBA's to convince folks to buy chinese debt issues.....

But maybe....it's all so unpredictable now. Very forward thinking country, been around for a very long time, relatively stable, tight control of their population, very nationalistic.....man, if China actually could raise the sophistication of their finanical and banking game, we would be in real trouble.

HARM said:
Besides, if there’s anything in the world *worth* borrowing money for, shouldn’t higher education be near the top of that list? Oh, right, I forgot –it’s A-ok to borrow millions to flip RE and live it up like the Donald then default without recourse, but NOT for education, no sir. Odd priorities we have.

HARM, I totally get what you mean. But it is not an "odd priority" we have, but an "odd reality".

Borrowing for education only to graduate into a collapsing economy seems far less prudent in hindsight compared to dropping out of college, borrowing recklessly at low interest rates for speculation, keeping the profits and getting bailed out when the SHTF.

We may not _like_ it, but that is what it has become.

Mish's has good explanation about how currencies fare during these times. I really like his analysis. He's been mostly on target. Take a look at his analysis.

FDIC now in the act:
http://money.cnn.com/2008/11/14/news/economy/fdic_bair/index.htm

There are two key elements to the proposal.

In addition, the FDIC would pay servicers who process mortgages $1,000 for each re-worked loan.

I would like to see the "31% of gross" calculated on the amount the borrower declared in the original loan application. Otherwise, caught up buyers would be tempted to ship a few payments, under-report thier gross, and thus get a 3% loan stretched for 40 years.

I am all for going back to the 31% gross loan requirement.

With the FDIC plan in motion, it does not make sense to approve loans with higher than 31% gross, right?

I see the Fortress cracking. :twisted:

@sa

Where on Mish's blog would I find how currencies fare during these times?

First, housing payments for delinquent borrowers would be reduced to 31% of gross monthly income.

The only incentive for homeowners to stay in the home is if they have enough equity. If you have -ve equity, why do you even care about monthly payments. The 300B plan for homeowners passed by congress is an utter failure. They are not getting any applications at all. The few applications they received were from banks (probably were defaulted ones). The bill was about reducing loan amount and giving some equity to FB. I can't imagine people embracing a lower interest rate plan. All these policies are probably based on assumption of policy makers about people being dumb.

danville woman

just type dollar in search box on Mish's site, It'll list all articles he has written about currencies.

on his main page today, he has article titled "Strange Case of Falling International Reserves Explored". Very interesting perspective. It does look +ve for $$.

MISH's site is searchable.

I would be EXTREMELY fearful of swimming in the currency waters right now. They world's Central Banks are rewriting the rules every day and about the only constructive point being brought up in the G20 meeting is that everyone is sick of dollar supremecy.
With that said, Mish simply states that the process of delvergaing is causing settle up in US dollars which is why the dollar is strong. Also, as other nations economies begin to fall to recession or worse, the US is seen as a relative safe haven.
I had stated her previously that I feltthe Euro would hit dollar parity. I stand by that. I also think the British pound Sterling would eventually achieve dollar parity. But, wow, it all looks pretty bad. The Russian Ruble looks risky as heck. The Yen is climbing on the Carry Trade Unwind - and it wll continue to do so. India's rupee looks aweful.
Remember, only jump in if you think you can guess what the world's CBs will do.

Remember, only jump in if you think you can guess what the world’s CBs will do.

Also, remember, trading requires only one to guess what the market is doing NOW.

Prophets are bad traders.

Not investment advice.

FuzzyMath,

I am not saying that China will sell $500B. I am saying that China doesn't have the $500B, not even close, to buy our NEW debt.

Our debt as it stands is squarely in the hands of bag holders, no worries about that. The issue is NEW bag holders, where do we find NEW bag holders for the EXTRA, FRESH, NEW $500B debt we are going to issue next year, because the old bag holders are maxed out.

That I believe is the trigger point for either a default (unlikely), or outright printing. We are alright printing outright but the scale is small and the Fed tries different kind of ways to hide it, we won't be able to do so next year.

It will go non-linear.

The only incentive for homeowners to stay in the home is if they have enough equity. If you have -ve equity, why do you even care about monthly payments.

Don't underestimate Joe HowMuchAMonth. Remember, house prices rose from Joe's easy credit powered buying spree. Joe "not care" about nuthin' 'cept today's monthly payment and "can I have it now?" Future rate hikes, balloons, and he like do not deter Joe. That pervasive mentality also fuels the easy credit stores, payday loan firms, and 7 year auto loans.

If the FDIC can lower the rate, and thus the payment, Joe will bite. He won't care about "equity" if his $2200 payment gets lowered to $1253 "today." ($350k loan @ 6.5% 30yrs is ~$2200/mo, while $350k loan @ 3% 40yrs is ~$1253/mo)

prophets cannot profit.

But don't they love profiteroles? :)

Headset,

That $300 Billion Hope For Homeowners Isn’t Working

Check out this link. Again, I wouldn't under estimate Joe HowMuchAMonth.

sa,

If you are right the FHA plan will be no more effective than "Hope for Homeowners." Wonder what they will do with the money allocated?

The fact that Fed has grown its balance sheet by $1.3T in a matter of 3 months indicates that Fed is willing to print.
A couple of points on the latest H.4.1 numbers and the Fed balance sheet increase of ~$140b last week. About $30 billion came from the Treasury general account and ~$100 billion was from deposits by member banks. The bulk of it went out the door through TAF. Interesting to note that the recent TAF "holiday" bridge auction had a bid-to-cover of less than 1%.
Needless to say, Bloomberg (and now some Congressmen) are very interested to see what type of collateral the Fed is holding. If any "printing" is going on, this is how it will occur. Bear in mind, any collateral the Fed takes in is subject to haircuts (PDF).

The problem with all the Joe HowMuchAMonth's is that they all work in retail/sales and are getting laid off in the next six months.

I was shocked at a seeking alpha article the other day when the listed the average hourly worker at GM makes $73 per hour.

WOW!

The only way to fix our manufacturing base is to purge the labor market with excesses. At times, unionized labor grossly distorts the labor market that that must be rectified.

Hopefully, they will just let the automakers eat cake. This is the only way to save them.

Duke,

I would be shocked too, but I am not at all certain that we should believe that number ($73.20 per hour).

If you follow the links backwards from seekingalpha to USAtoday, you will see that the exact words used are "labor cost of $73.20 per hour".

I'm highly suspicious of what has been counted as "labor cost" in this statistic.

I think the people who came up with that stat have thrown in a whole kitchen sink of non-wage items, such as pension payments to retired workers (which should really come from a pension fund, was that fund not so underfunded to begin with), healthcare costs for active AND retired workers, FICA payroll taxes and probably all kinds of other costs that have nothing to do with what the current Joe Assemblyworker literally gets in his paycheck.

I'd like to see some independent review of the number. It sounds like Bush/Limbaugh era propaganda made to order for the purpose of conning the public into supporting that "unions are bad" and to justify reneging on defined benefit retirement plans that have gone underfunded while management lined their pockets with SUV-fueled bonuses.

I think the correct number is closer to $25-30, which is not bad for unskilled labor, but a far cry from $73.20.

to do that we will have to eliminate all ‘job subsidy’ as well.

Subsidies are bad, right?

How are unions not labor cartels?

I read that a couple of days ago. I think if you look closely it is total hourly compensation. Justme is right, that would be the wage (includes emplyee taxes) + employer taxes (FICA, FUTA etc), + benefits (insurance, retirement), and accrurals like vacation and sick pay.

It is still high, so the discrepency between the other industries and the all category is still startling.

Justme, your concluding point is interesting. Yes, the bottom line number, the guy's actual gross paycheck is closer to $25-$35 per hour. All the oter nonsense is a result of unions and creative liberal taxation, which is why I made that point further up. All that junk where you are paying 2 or 3 times per hour what the guy's wage is is extremely wasteful and why these companies are flocking to go overseas. People can't pay their own taxes and expenses so it is creatively all rolled into the 'compensation' that they get. When people understand this, they might have a little different perspective.

$73 is including salary loading, which includes FICA, medical insurance, 401K matching and all that good stuff. The real biggie part of salary loading is actually T&E expenses for those who travel, it can go really high.

The detroit workers don't travel, the most salary loading they will get is around 35-40%, which makes it ~$54 per hour, plus overtime, which is way better than anyone makes in such a skill-equivalent job. Even without overtime, they are making about $120K a year. Jealous?

Well, wait until you hear that the Oakland dock workers are getting paid $200K per year. With BDI going the way it is now, I am sure these $200K jobs are drying up real fast.

justme,

there is no possibility that benefits and taxes add up to over 100% of one's salary. If you know of such a job, I'd like to apply :-) I wonder what kind of benefits I'd get, free access to the gentleman's club?

I am pretty sure the Detroit car workers are making around $50, not $25-30 per hour.