Thursday, November 18, 2010

Look Out Below! Bond Markets Will Need Luck of the Irish to Survive

11/18/2010 Portland, Oregon – Pop in your mints…
The action today is in the Bond Markets so we must turn our attention away from our "Junk" to the Junk of the Irish.
Today from the Associated Press comes word that European officials are traveling to Ireland to "lift the lid" on Irish banks.  Apparently word is out that all is not well on the Emerald Isle.  A stench has been rising for some time and Bond Market participants have fled Irish paper in droves.  The stench has now gotten so bad that the EU feels compelled to take a whiff and to see these worthless bank assets first hand.  Again, we submit this as evidence of the wisdom of Government management in action on multiple levels.
The EU is lagging behind the United States on a crash course leading to currency and debt catastrophe. However, they both are heading in the same direction and will both meet with the same disastrous fate.  The EU, concretely Ireland, is still stuck on the mantra of curing bad debt problems by saying to the bond holders "Don't worry, we'll back the Irish bank paper (insert troubled asset) no matter what" and hoping that the bond holders don't call their bluff.  Unfortunately, as we have learned in a previous Mint, if you add a spoonful of sewage to a barrel of wine, you get sewage. 
The Irish Government, by explicitly backing the assets of Anglo Irish and other shoddy banks, is taking the banks' sewage onto their books and placing it in a sewage treatment plant cleverly named the National Asset Management Agency (NAMA).  NAMA is the Irish version of TARP or what we can call in this metaphor the US version of a paper asset sewage treatment plant.  The problem with NAMA is that the Irish Government's wine (bond rating) wasn't that good to begin with and instead of a spoonful they are taking on Anglo Irish's sewage by the bucket full.  The Irish claim they have until June 2011 to treat the sewage and clean up their wine vats (they allegedly will not auction more government debt until then).  But the stench is wafting through England and across the channel to the Continent, where Greece's foul odor will not go away and there are fears that Portugal and Spain are beginning their stink anew.  Who would want to jump in to the EU's dirty bond market pool now?
The Euro Soveriegn Bond Market is full of Sewage from Bank Balance Sheets
But the Emerald Isle is not the only place where bond investors are heading for the exits.  Analyst Chris Whalen is speculating that our neighbor to the south, California, will default on its debt, citing the lack of political will to continue the bail-out fiesta that has gone on since AIG was rescued three short years ago.
Does any of this come as a surprise, fellow taxpayer?  Not to us.  No matter how much paper money and rhetoric is thrown at the problem.  No matter how many times the authorities tell the public that it is OK, it is far from OK and the bond markets are beginning to look shaky on the high-wire they have been walking on.  
Mathematically, when you base a currency system entirely on debt, the debt must grow at an exponentially higher rate until the future debt load dwarfs the monetary base charged with extinguishing it.  Once the system freaks out and decides to pay down rather than create more debt as it is trying to do now, the currency and debt markets must collapse.  The ponzi scheme of a debt based currency is up.  This is simple math and simpler logic.  This is the lunacy of calling debt money.  This is where we are at circa 2010 and this is why the government is borrowing its way into oblivion to attempt to stem the collapse.
And now we look back at the Mushroom Shaped Dollar Debt Sponge and see that Ben Bernanke is walking back to turn his tiny QE hose up to full blast after seeing that his last turn has been completely absorbed by the Mushroom Shaped Dollar Debt Sponge.  What he doesn't seem to notice is that the Sponge is becoming saturated and is dripping back into the pool and that the Sponge itself is beginning to disintegrate via mounting credit card defaults, foreclosures, and $25 billion in obligations of the State of California that will likely be paid in worthless IOUs.  
Our guess is that as Ben heads back from opening up the hose he will see that the pool is beginning to fill with water and will breath a sigh of relief.  No sooner will this sigh leave his lips when the Mushroom collapses and a Tsunami fueled by the combination of the hose on full blast and the water that was in the Mushroom rushing out begins to rise from the overflowing pool and heads straight for him.  At that point Ben will be washed away along with all the others foolish enough to remain poolside.  He will not even be able to see, let alone shut off, the hose.
Or, if this prophecy is true, perhaps this has been his intention all along:
Stay Fresh!

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.