I tell ya taking 24 hours away from reading the news is usually like taking a month away from TV.
After a 30 day sabbatical from the idiot box one first notices that the scenes change so fast that it is almost hard to watch. Your brain which had been moving at the speed of say your inner monologue as you read a book or the speed of your idle musings as you saunter down the street is all of a sudden affronted by quickly cascading images that shift subject and tone.
Jumping back to blogs and news after a 24 hour absence this time however revealed a most similar subject and tone.
A fairly depressing one.
As in lead and zinc prices being more depressed from their July highs than the drop during the Depression and copper comin' close.
As in the yield on speculative-grade bonds implying a default rate greater than the Great Depression.
As bad as that is, you want to know what is really depressing?
A Fed chairman, purportedly a student of the Great Depression, that didn't see this one coming.
A Treasury Secretary that supposedly was a Master of the Universe that had no idea that AIG was systemic until Goldie took him aside during one long weekend.
And a 'systems' guy appointed by Trader Hank to administer the TARP that hasn't been able to construct the system.
It seems that now that the above parties have convinced themselves that much like in a structured product where equity is the first loss tranche, when it comes to the bigger picture the same thinking applies to the markets.
Listening to PIMPCO opine the death of equities and BUCKROCK unveil a teaser for a century note and smartypants like Citizen Grant and John Paulsen stating that they are bullish on debt (selectively)it is clear that the elites are building a BLINGFENCE, that is a wall of treasuries to protect the silver of this aristocracy.
How do you devalue the scrip but not increase the yield on the sovereign debt? Monetize the long bond. How do you monetize the long bond whilst applying the proper narrative for the great unwashed? Lower mortgage rates. (Buy MBS and agencies and by lowering rates push folks to grab duration i.e buy long bonds, effectively monetizing the long bond.) Never mind that like the banks, when it comes to households, it is an insolvency issue not a liquidity issue. Creating zombie banks and zombie customers will create a rising tide that will raise no boats.
The psychology of such actions is the very negative feedback loop that the elites are trying to avoid ... why do anything now until you can get the new lower rate?
Just like when liquidity dried up in the markets due to the ban of short selling, just like how no corporate other than a steller credit can issue debt at anything under usury, now who will get a rate any other place then the new and improved public trough?
And this 'shutdown' of competitive markets results in the liquidity sponge that strengthens the attractiveness of the sovereign credits, Treasuries -real and synthetic (FDIC guaranteed).
Which perversely allows the Federales to keep their financing costs down even as they devalue the scrip that will be used to pay it.
(As an aside if a protection seller of CDS on Treasuries is effectively creating a synthetic bond, is the buyer shorting because given this monetization strategy you can't short the real?)
So you have this BLINGFENCE ... but built for what?
Built for the shadow banking system I would guess. No one knows for sure how much in the way of synthetic CDOs or ABS CDOs or single-name CDSs will explode.
When you don't know the full size of the market, despite the DTCC PR, when you don't know the idiosyncratic terms of each synthetic CDO, when you don't know if the collateral rules are only applied to the evil hedgies, when you don't even know what is on the books of companies, how much is off the books or how much it would be worth if forced back on (probably not much).... it's hard to say how badly the elites need a long-term low rate environment but it is easy to see why they might.
With 60% of the debt due in the next 2 years both to offset the damage from the shadow system undergoing a controlled burn and to pay for all the collateral and coincidental damage,if we can't drop(yield) and roll debt then we are (fiscally) dead. What is 10% of 10 trillion? - an unsupportable interest cost.
If one assumes that the elites aren't suicidal then there is a presumed interest in us getting through this process intact. The only way that happens is if the massive debt can be financed at low rates with no more than a moderate rate of inflation during the 'rebooting' process.
And for that to happen there has to be a shift where folks focus more on the PE of debt, with sovereign as AAA, rather than any other asset class.
The fear as I type this is that it is so uniquely American. Optimism in the face of potential calamity.. we can get through it! I have always believed that the sun always rises... until one day when it doesn't. Let's hope the supernova is long after BUCKROCK's first century note matures.