Sunday, April 10, 2011

The cage is rattling

Dean Baker is OK with the US reneging on its debt.


Bruce Krasting thinks this is a terrible idea:


Meanwhile, back at the ranch, Bill Gross is not only out of US debt but short and holding a record amount of cash:


Complicating matters, gold, oil, and commodities are soaring:


Should be an interesting Monday morning. The natives are restless.






16 comments:

Mike Norman said...

Dean Baker, Krugman, I have no use for either of them anymore. Doing a lot more harm than good.

As for Gross, he is short and has a lot of influence on policy and with the rating agencies. They listen to him like he is God. He will "manufacture" his short Treasury profits by convincing other idiots like himself, to sell and/or downgrade US debt. He's apparently already convinced one idiot...Dean Baker.

Mike Norman said...

And if the Fed were smart or had any guts at all (or both) it would bury Gross and send the message that speculators should not seek to set monetary policy.

Mike Norman said...

If I were at the Fed I would crush Gross.

Tom Hickey said...
This comment has been removed by the author.
Tom Hickey said...

Mike, that is exactly what I was thinking when I was reading that. Great minds run together, I guess. :)

Too bad Hank the Hammer isn't Fed chair instead of bernanke. Gross would be a nail.

googleheim said...

reserves swelling ?

apj said...

If what Gross says is true, he is running a fairly large risk. His portfolio is so large that he undertakes his jawboning in order to get set from a better base, knowing that his flow is enough to considerably move the market. But now, with US growth hardly self-sustaining, and Europe facing even greater challenges (core mkt banks can't be all that happy ahead of stress tests to know that countries like Ireland and Greece are increasingly likely to restructure debt...), Tsy yields could get away from underneath him. A gorilla like him chasing the mkt could be very entertaining, especially in teh context of QE actually ending. As I've said before, the exit strategy of interest to me is not the Fed, it's the market.

Matt Franko said...

I'd have to think that shorting Treasuries is not the contrarian play at this point...

apj, are you talking about potential short covering in Treasuries in the market?

Calgacus said...

Baker replies with Problems of Reading Comprehension at Zero Hedge: No One Advocated Default . While I think he is too blithe about the consequences, Krasting goes over the top with doomsaying.

Baker notes that However the economy would eventually recover. The underlying factors that determine the country's wealth -- the physical stock of capital, the skills of the workforce, the state of technical knowledge -- will still be there following a default. But that is part of the problem. If the default erased all the post high-school memories of all mainstream economists, it might just be worth it. Otherwise, with their technical "knowledge" retained and applied, we might be looking for foreign aid from Somalia soon.

Red Rock said...

And Stiglitz wants a new currency system http://www.creditwritedowns.com/2011/04/stiglitz-proposes-new-reserve-currency.html#utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+creditwritedowns+%28Credit+Writedowns%29&utm_content=My+Yahoo

Mike Norman said...

@Matt: Gross will make it happen. The Fed is passive and anyway and there are probably a number of FOMC members who are cheering Gross: they WANT higher rates. To the extent that Gross facilitates this (I can't believe I'm even saying this!!!) they'll be happy.

Gross has policy influence beyond the Fed, too. People in the media worship him as do some at the White House.

Matt Franko said...

Mike,
If I were them (Gross & Co.), I guess I would want:

Step 1: get out of Treasuries after riding interest rates down to zero for the past 30 years. or even perhaps short them...

Step 2: Get the Fed to get scared of so-called 'inflation' and raise interest rates back up to 20% a la Paul Volcker 1980 redux.

Step 3: When short term rates get up to 20% again, get back into Treasuries and start another 30 year free ride all over again.

It seems like you say they would need the Fed's help in engineering this scenario.

If they are trying to push the bonds down today they are not succeeding apparently.... Maybe like you said, the open interest in the futures is sky high and they cant take any more short positions.....

Matt Franko said...

Mike,
If I were them (Gross & Co.), I guess I would want:

Step 1: get out of Treasuries after riding interest rates down to zero for the past 30 years. or even perhaps short them...

Step 2: Get the Fed to get scared of so-called 'inflation' and raise interest rates back up to 20% a la Paul Volcker 1980 redux.

Step 3: When short term rates get up to 20% again, get back into Treasuries and start another 30 year free ride all over again.

It seems like you say they would need the Fed's help in engineering this scenario.

If they are trying to push the bonds down today they are not succeeding apparently.... Maybe like you said, the open interest in the futures is sky high and they cant take any more short positions.....

Tom Hickey said...

apj, Gross may have something to do with Gundlach being on the other side of this trade. He knows that Gross will be forced in if things go against him and he knows that we are in a deflationary environment.

Tom Hickey said...

Interesting clarifying post by Baker. I had the feeling reading the original post at ZH that Baker was bluffing to call out Wall Street, and he admits it in the clarification.

I agree with Baker that the president should call the GOP on default and let Wall Street handle the GOP. Blankfein and Dimon know how to deal with these folks a lot better than the Dem pols. They would make short work of the default talk if it looked anywhere near serious.

apj said...

Matt, yes mate, talking about short covering. And it could be a monster because it will be a pain trade (esp. for Bill!). SPX looks like double topping here as QE draws to a close (no more 1-way bet!!), and there is serious divergence. RSI (strength indicator) has been falling all year, even though SPX has been rising.

I read something (somewhere) the other day to the effect that we might well think of QE and cash for clunkers similarly, and I agree. Essentially, both led to activity being brought forward into the present period (buying for cars, selling in the case of Treasuries....and remember, no-one forced anyone to do either).

All the previous examples of QE (Japan included) saw rallies into QE, then predictable sell-offs as soon as it began. And you'll never guess what happened after they ended...