Pumps on "Full"

One of the themes that I have been strongly promoting in my enrolled member area is the idea that most of what we are seeing in the financial world these days is more of a reflection of the perverse influence of a liquidity flood than anything meaningful.   Watching how the markets were instantly recovered from the Dubai Debacle on Friday and today (Monday), and seeing gold and stocks and bonds all floating along despite the crisis is just further confirmation for the idea that the world's liquidity pumps are set to "maximum power."

I am truly amazed at what I am seeing out there in the markets these days.  I also understand and share the frustration of the many analysts who know what "should" be happening but is not.

What should be happening is massive, self-reinforcing deflation caused by debt destruction and resulting from the housing bust and retreat of consumer borrowing.

These are harrowing figures:

Consumer credit falls for 8th month

NEW YORK (CNNMoney.com) -- Consumer credit fell in September for the eighth straight month, the longest streak of declines since the Federal Reserve started keeping records in 1943.

Total consumer borrowing fell a seasonally adjusted $14.8 billion, or 7.2%, to $2.456 trillion in September, according to the Federal Reserve.

One in Four Borrowers Is Underwater

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

There is simply no doubt that a finally defeated US consumer is in full retrenchment mode.  With one-in-four houses now with a mortgage 'underwater,' and record breaking declines in consumer credit, the great consumer credit bubble is well and truly over.  Deflation should be driving down assets (like stocks and commodities).

However, our financial markets are telling a very different story, with signs of plentiful, if not rampant, liquidity everywhere.

First, in the largest market of them all (by sheer size) is the bond market.  There we find staggeringly large Treasury auctions being held week after week with stupendously low yields and suspiciously high 'indirect bidders' (foreign central banks) showing up each week.

Check out the results from this past week (November 23-25).

Monday November 23

11:37 [UST3MO] Treasury sells $31 billion 6-month bills at 0.142%

11:37 [UST3MO] Treasury sells $30 billion 3-month bills at 0.041%

Monday November 23

1:04 [UST2YR] Treasury sells $44 bln in 2-year notes at 0.802%

1:04 [UST2YR] Bidders offer $3.16 for each $1 in 2-yr debt sold

1:04 [UST2YR] Indirect bidders buy 44.5% of 2-year note auction

Tuesday November 24

1:05 [UST5YR] Indirect bidders buy 61% of 5-year-note auction

1:05 [UST5YR] Treasurys extend gains after 5-year-note sale

1:04 [UST5YR] Treasury sells $42 bln in 5-year notes at 2.175%

1:04 [UST5YR] Bidders offer $2.81 for each $1 of 5-yr debt sold


Treasurys gain, straight through 2-year auction

NEW YORK (MarketWatch) -- Long-term Treasury prices advanced Monday, maintaining higher ground as the government's 2-year-note sale received sufficient demand, kicking off $118 billion in debt sales scheduled for this holiday-shortened week.

Gains made earlier in long-term Treasurys stemmed from Federal Reserve officials' comments that eased concerns about rising interest rates by suggesting that the U.S. central bank may need to continue its asset-buying programs and keep interest rates low for a very long time.

Excuse me, but what?  To me it is counterintuitive that interest rates should remain low, because the Federal Reserve has promised to flood the world with ever more freshly-printed dollars.  It seems to me that normal market forces would operate in the exact reverse direction from what we are currently seeing.

Of course, as my long-time readers know, I happen to believe the mystery can be solved by simply understanding that our bond markets are now subject to large and frequent interventions by so-called non-economic players (i.e. central banks), which do not care about gains or losses.

Evidence of the Liquidity Flood

Let's look at the various components that have caused me to be extremely careful about hopping on the deflation bandwagon.   I fully suspect that I will at some point, but for now, the markets are telling me that we are awash in money.

Exhibit A - Bonds

Below we will look at the bonds that were auctioned this week: the 3-month T-bill, the 2-year and the 5-year note.


The funny stuff I recently saw in the 3-month bill has really left me scratching my head.  Marked on the chart is one example.   I am left wondering why it is that investors show up at auction and pay so much that they receive a 10x worse rate of yield than they could secure in the open market the next day.   Who does that?  Not regular investors, we can be sure.

Why does the media never question the odd behavior of Treasuries becoming more expensive right before or on the day of a massive auction?  In a normal world, huge quantities of new supply to sell would drive the price down, not up.


There has been a massive flood of money coming into the 2-year issuances as well. That's quite a run from August.


Ditto for the 5-year. There has clearly been plenty of money coming into these markets.

There's really nothing else to say, except that lots of money has been pouring into the bond markets and the major source is not really in doubt - central banks.  Naturally this makes sense, as they are dead-set on getting the credit markets back moving again, even if this means punishing savers with low yields and forcing people to take more risks in the stock market.  In fact, that last one is a desirable outcome.

Exhibit B: Stocks

Given the fundamental stories out there, including the precipitous drops in state sales tax revenues, unemployment, plunging government income tax receipts and the like, the fundamental view would be that stocks should be mired near their recent lows.

But that is simply not the case.


Normally when stocks go up, bonds go down but we are living in an environment where both are going up. What does this mean? That's easy, it means that there are gobs of money flooding into the paper markets.

Exhibit C:  Commodities

Copper is often called "Dr. Copper" for its keen ability to tell what's going on in the world economy.  When the economy is booming, copper goes up.  When the economy turns south, it goes down.  Many traders listen carefully to the good doctor.

What's he saying?


In the past 8 months, Dr. Copper has more than doubled in price.  Does this smell like deflation?  Not to me, it doesn't.

And it vexes me because I simply cannot square up the news reports I am reading about the state of the world economy and this price chart.  Has the good doctor lost his abilities?  Does he no longer predict anything?

What's going on here, I believe, is that copper is merely signaling that there's entirely too much money floating around searching for something to do.

Think of the money the Federal Reserve (et al) has poured into the big banks like jelly squeezed in a fist.  It's got to go somewhere.

So instead of telling us something clever about the health of the world's economies, I think Dr. Copper is merely drunk on a bunch of funny money.  His voice is garbled and we'd do better than to follow his staggering gait around town.

Still, at least we know there's a party going on somewhere  they are serving high-quality hooch.

Exhibit D:  Gold

I do not view gold as an inflation hedge.   I think of gold as, first and foremost, my protection against a currency decline or accident.  Secondarily, it protects me in the event of a systemic financial accident or crisis.

The recent price action of gold is indistinguishable from that of copper or bonds or stocks so I consider its current price to be mainly reflective of a liquidity flood.


The Dollar

At the same time that we are seeing a pronounced liquidity flood manifest throughout numerous financial and commodity markets, the dollar has been steadily losing value.


To me this looks like an entirely orderly and coordinated process.  In theory, with foreign central banks snapping up record amounts of Treasuries, there should be a pretty good bid under the dollar.  However, it just keeps leaking away, month after month.

This is exactly what I predicted would happen, simply because it is the only policy that makes sense.  The US is insolvent, and the only hope of reconciling current debts with a future economy is by having a devalued dollar make those debts appear smaller.

If you were to fashion such a program for the government, you, too, would quickly derive a three point plan consisting of a lower dollar, low interest rates, and massive deficit spending.  We are seeing all three of these, and they are really not all that surprising to me.  What is surprising is the fact that the foreign central banks and governments are going along with the plan.


All in all, I think what we are seeing in the markets is most consistent with, and best explained by, a simple policy of dumping lots and lots of money into the markets.  At the same time the dollar leaks away.

When do markets cease to be markets?  When they are so distorted by monetary interventions that they no longer provide useful or rational price signals.

Until some form of useful price information is allowed to once again enter the markets, I will consider them to be largely untradeable for anybody but the very good, the lucky, or the well-connected.

I am not sure when this ends, but I am reasonably certain that it ends in tears, because I doubt that policy can trump reality.

While I sympathize with the challenges facing the monetary and fiscal leadership of the world, I remain stubbornly unconvinced that a problem rooted in too-cheap money and too much debt can be fixed with cheaper money and more debt.

And I am not the only one raising such questions.  In the NYTimes this article recently ran:

Wave of Debt Payments Facing U.S. Government

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

I invite you to read the rest of the article, as it really pulls no punches and lays out what should (there's that word again) be an iron-clad case against buying Treasuries at these ridiculous levels.

As always, I will continue to watch the markets very closely for any signs of change. For now we remain stuck with the liquidity pumps on "full."



In case you want to track Treasury bond prices yourself, just print out these symbols to use at the free charting service http://stockcharts.com:

$DJCBTI Dow Jones CBOT Treasury Index

$FVX 5 Year Treasury Note Yield

$TNX 10 Year Treasury Note Yield

$UST10Y 10-Year US Treasury Yield (EOD)

$UST1M 1-Month US Treasury Yield (EOD)

$IRX 3-month T-bill Yield

$UST6M 6-Month US Treasury Yield (EOD)

$UST1Y 1-Year US Treasury Yield (EOD)

$UST20Y 20-Year US Treasury Yield (EOD)

$UST2Y 2-Year US Treasury Yield (EOD)

$UST30Y 30-Year US Treasury Yield (EOD)

$UST3M 3-Month US Treasury Yield (EOD)

$UST3Y 3-Year US Treasury Yield (EOD)

$UST5Y 5-Year US Treasury Yield (EOD)

$UST7Y 7-Year US Treasury Yield (EOD)

$USTU 2-Year US Treasury Note Price (EOD)

$USB 30-Year US Treasury Bond Price (EOD)

$USFV 5-Year US Treasury Note Price (EOD)

$UST 10-Year US Treasury Note Price (EOD)

$TED Treasury - EuroDollar Spread

This is a companion discussion topic for the original entry at https://peakprosperity.com/pumps-on-full-2/

“Still, at least we know there’s a party going on somewhere they are serving high-quality hooch.”
What I find difficult to grasp is that the ‘high-quality’ hooch is only the dollar & the value of such bankers paper is in the end only given by the assets that the banker holds to redeem that paper, which these days is only more paper. Is this ‘asset’ paper of high quality?
The price of government paper (bonds) is increasing, but only when priced in dollars (Federal Reserve paper, non interest bearing at that). But government paper is redeemable in dollars, so I’m not sure that bond prices mean much in terms of the value of the dollar.
I still think the answer lies in relative rates of interest between currencies, the king of currencies being the noble metal, gold. That’s why it is called the king of kings.

Oil production Forecast nov 2009
Oil has been set in a steady decline since july this year, quite a bit down from july 2008. All this money pumping will go nowhere, the economy has no choice but to shrink. 


My brother is thinking maybe one of Pimco’s predictions is coming true:  The Immaculate Recovery – there is a recovery and no one knows how it is happening!

Dr. Martenson
I have been expecting another significant crash in the stock market for a few months now, but nothing has happened.  In your last report you mentioned that the PE ratio of the S&P was an extraordinary 82.  Should I abandon the thought that the market is going to crash again (as liquidity keeps getting pumped into the system)?  At what point will it become obvious to investors that even though their nominal stock values are stable or even rising, they’re losing real wealth due to inflation?  (I understand that the Zimbabwe stock market continued to rise, but could not keep up with the inflation)

I only ask this because the people around me seem to use the stock  market as their gauge for the health of the economy.  They still will not listen to me and be extremely cautious about having their wealth in equities



As ever, acute and lucid. Many thanks,



Thank you for the free reports like this one.  I am a college student, and cannot afford the subscription.  I have been following you for a while, and have spread the crash course as much as I can.

Chris noted:
“What is surprising is the fact that the foreign central banks and governments are going along with the plan.”

Au contraire, amigo! CIA has overthrown/“remodeled”  (50-ish) governments in the last few decades; you think it would be a problem to plant T-bond “buyers” “at”–no mistake on the parentheses–our “auctions?”; This, this covert inflation, will be known in the history books as spook inflation, aka, Dead Dollar Walking…



P.S. “…the sincerest form of flattery.”: http://www.postpeakliving.com/preparing-post-peak-life-part-3 (offering the Un-Crash Course)

I have also been expecting a stock market crash since March 2009 but so far nothing. Should I jump on the bandwagon with all the other plebs?

re: “…we find staggeringly large Treasury auctions being held week after week with stupendously low yields and suspiciously high ‘indirect bidders’ (foreign central banks) showing up each week.”

Is Foreign Demand as Solid as It Looks?

The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world’s central banks are still willing to help absorb the avalanche of supply, mightn’t be all that it seems.

When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.'s budget deficit.

But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.

The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.

Treasury officials didn’t respond to requests for comment. (MORE)


re: “In the past 8 months, Dr. Copper has more than doubled in price…it vexes me because I simply cannot square up the news reports I am reading about the state of the world economy and this price chart.”

Copper gains strength on China buying

China is buying copper hand over fist…“The State Reserve Bureau plans to buy 1 million metric tonnes of aluminum, 400,000 tonnes of copper and (a combined) 400,000 tonnes of lead and zinc over the next three years.” What’s more, Chinese imports of iron ore are also soaring… So is China just stockpiling for its infrastructure projects, or is it something else?

One theory is that China is attempting to diversify its investments away from U.S. Treasury notes and bonds. It is instead seeking hard assets, such as copper stockpiles and stakes in miners and their projects.

But there’s a second theory that goes beyond that …

An analysis from Britain’s Daily Telegraph speculates that China could be ready to end its dollar dependence and go on a “commodity standard.” (MORE)


Speaking of liquidity pumps…this just out this morning:
BOJ to Provide 10 Trillion Yen in Emergency Credit

Dec. 1 (Bloomberg) -- The Bank of Japan said it’s ready to pump more money into the financial system after unveiling a 10 trillion yen ($115 billion) program to help an economy battered by falling prices and the yen’s surge to a 14-year high.

“If there is a shortage of liquidity we are prepared to provide more funds,” Governor Masaaki Shirakawa said after an emergency board meeting in Tokyo today that decided to offer three-month loans at 0.1 percent to commercial banks.

Bond yields fell the most in 13 months, lowering borrowing costs for companies whose profits are being threatened by deflation and the yen’s advance.

Yikes.  While they are calling this "quantitative easing" and stating that the target is improved economic activity, the major driver of this activity is probably concern over the strengthening Yen. 

Let the competitive currency devaluation wars begin!

And yes, this is a repeat from the 1930’s. 

Here’s one result of that announcement:

And here’s another:

Japan has just announced the next wave of the liquidity pumping program.  Will it be enough?  How will Europe respond?  China?

And the very best of luck to US taxpayers in helping JPM recover their losses from an ill-advised mountain of gold shorts! 

And the very best of luck to US taxpayers in helping JPM recover their losses from an ill-advised mountain of gold shorts! 

[/quote]I can only wonder if the US CB will sell gold to JPM to cover their position like was done with Deutsche Bank and the ECB recently.


What a mess. Last night CPKL posted that N. Korea devalued and revalued it’s currency. Sure more will follow. Lots more.

“China is buying copper hand over fist…“The State Reserve Bureau plans to buy 1 million metric tonnes of aluminum, 400,000 tonnes of copper and (a combined) 400,000 tonnes of lead and zinc over the next three years.” What’s more, Chinese imports of iron ore are also soaring… So is China just stockpiling for its infrastructure projects, or is it something else?”
Just saw the movie 2012, maybe they are building arks? :wink:

Trust me, it is their main concern. I live in Japan and they don’t even try to hide it on the evening news. It’s like “The government said they will hold an emergency meeting today to figure out what to do with the strengthening yen, which is torning our economy apart, blah blah blah and also to counter deflation blah blah blah”… Ok so strong yen bad, so this means low yen good…  hum debasing anyone?

That’s a legitimate “yikes”… and people here don’t even react to this! They’re like zombies. I just bought my first “minibar”, as they call it here, of gold today… I’m not rich, but this is getting ridiculous. The pretty clerk was all nervous and obviously at lost about what to do to sell one of those minibars (to a “gaijin” no less)… !!!

I think its a mistake to think that China is diversifying out of the dollar for 2 reasons:

  1. The currency is pegged to the dollar, therefore they must buy USD to maintain it.
  2. If the allow their currency to rise against the dollar, they lose what is remaining of their export market.
I think its plausible that the Chinese will actually devalue their currency to the dollar in the next year. This scenario was proposed by Albert Edwards a few weeks ago. See:

Albert Edwards Calls For The Next Black Swan: Expect Yuan Devaluation Following Deep 2010 Downturn

With everyone and their grandmother screeching that it is about time for China to inflate the renminbi, despite that such an action would be economic and social suicide for the world's most populous country, SocGen's Albert Edwards once again stalks out the Black Swan in left field and posits the contrarian view de jour: China will aggressively devalue the yuan following a deep 2010 downturn coupled with escalating trade wars. As Edwards says: "I think the next 18 months will see major ructions in the financial markets. The consequences of a double-dip back into recession next year require some lateral thinking. If the carry trade unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be doubly destructive to commodity prices. A surging dollar, coupled with China moving into sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?"
The Currency Devaluation Wars are just getting started.

Warning: This video is very weird, but very entertaining.
So this is what its like to be the last bear on earth.


Gold hit $1200/oz this morning… Has the stampeded begun?

Tax payers are the main course and recess is in the gutters.  I’m glad we’re all so surprised but perhaps we need to start seeing how “they” see and the plans might just be found in the gutter mindset.  Maybe instead of thinking along the lines of how things should work we should be thinking along the lines of just what motherless rats are capable of.
How far can central banks go?

How far can the IMF go?

In the gutter mantality, what are “they” really capable of?

Maybe we can start to really find some answers there?

I have no idea myself and I’m not much for conspiracies I just keep seeing how surprised everyone is and figure it may be time for a shift in perspective.  Just sayin.

BTW, nice post JAG.

Kind of a cross between “Brazil” and “The Matrix” and Japanese sci-fi/horror, written by Karl Denninger and co-written and directed by David Cronenburg.  I approve… Laughing

  • Nickbert