Friday, March 11, 2011

Armageddon Scenario Unfolding in Bond Markets – PIMCO Total Return Fund Dumps Treasuries as Congress Plays Chicken with Debt Ceiling Vote

3/11/2011 Portland, Oregon – Pop in your mints…
What seemed an unbelievable yet probable event is beginning to unfold before our very eyes.  You won't see it make any headlines but if you put the pieces together, you will see that what The Mint affectionately calls "Armageddon" in the Bond Markets is beginning to unfold.
Apparently Bill Gross, founder of PIMCO and co-chief investment officer of its Total Return Fund, which happens to be the largest Bond fund in the world, sees Armageddon on the horizon as well.  The Total Return Fund dumped all of its US Government related debt holdings between December and February.  At roughly 22% of fund assets, this was a flood of roughly $53 billion into the already saturated US debt markets.
We use the term saturated loosely.  What we really mean is that the market is saturated at current prices, which are being artificially held up by the Federal Reserve via its various flavors of QE or in layman's terms, money printing.  If the FED were to stop printing money to buy Treasury debt it is anyone's guess what the market's clearing price would be, but we reckon it would be lower.  We do not, however, believe that the market for US Debt will cease to exist as people will always need toilet paper and fuel for fires.
But Mr. Gross's $53 billion bomb is not enough on its own to start Armageddon.  The US Congress and Treasury are doing a whopping one two punch to the nation's credit.
The Congress is doing its part by perpetuating an apparent stalemate on budget talks.  Now we have word that the Republicans want to "see how tax revenues come in" before taking up a vote on raising the Nation's debt ceiling.  This would push the vote out until April 18th and probably a bit later which neatly coincides with the "MAYDAY" dates given as an ultimatum for action as the current debt ceiling is predicted to be reached sometime between April 15th and May 31 of this year.  This is significant as both Treasury Secretary Tim Geithner and FED Chairman Ben Bernanke have given dire warnings of "chaos in financial markets" if action to raise the ceiling is not taken.
Mark Faber, author of the Gloom, Doom, and Boom report, sees the future unfolding into hyperinflation and then war:


Sounds like Armageddon to us.  On cue, the FED has already begun to speak of QE3, yet another round of money printing to absorb the unwanted Treasury debt.
While these two events alone would make for merely rough sailing, we believe that Armageddon may unfold primarily due to the sheer size of the deficits that are being run by a Congress that has no ability to act to curtail them.  On Monday came word that the US Treasury borrowed $223 BILLION dollars during the month of February.  This is a record. 
Admittedly, February is traditionally a month that the Treasury runs up the credit card because a majority of American's who are due an income tax refund receive them in February.  Theoretically, the Treasury pays this off in the month of April when those who owe tend to pay their taxes.  Unfortunately, this wasn't the case last year, and with the number of stimulus programs being collected upon by the general public, we have our doubts about the prospects of an April surplus this year.
If Congress cannot agree to act on the debt ceiling, we hold out very little hope that they will reach an agreement on any meaningful budget cuts or even to do something as elementary as pass a budget, no matter how much of a deficit it projects.  These people are truly out of touch with reality.
So with Congress literally unable or unwilling to act, it will be up to the markets to mete out the consequences of their inaction on both fronts.  Bill Gross has already made his move and the FED is preparing to fill the gaping hole with more quicksand.
Armageddon, Here We Come!
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Key Indicators for Friday, March 11th, 2011

*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.