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“Maximum Fraud” In The U.S. Treasuries Market? (TLT, TBT, SHY, UUP, GLD)

January 4th, 2012

Jeff Nielson: Spending as much time as I do writing about the Land of Fraud, I never thought I would see myself using the phrase “maximum fraud” to describe any U.S. market. Each time I thought I had witnessed the apex of human fraud, within a matter of weeks or perhaps months I would witness some even more extreme outrage.

One should never underestimate Federal Reserve Chairman B.S. Bernanke, however, when the subject turns to fraud and deceit. This is the same man who told the world (day after day) that the U.S. had a “Goldilocks economy”, where U.S. markets and house prices would keep going up forever – at the very peak of the made-in-Wall-Street U.S. housing bubble. This is the same man who then promised the world (again and again) that the U.S. economy would experience a “soft landing” after that gigantic bubble had already burst. This is the same man who has announced more “exit strategies” than Harry Houdini – with not one of them ever materializing.

Yet even the infamous “Helicopter Ben” Bernanke has outdone himself with his latest operations in the U.S. Treasuries market. For those who missed the news, foreign central banks (the largest holders of U.S. Treasuries) have been frantically dumping more Treasuries onto the market over the past four weeks than at any other time in U.S. history.

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Those with even the tiniest understanding of supply/demand fundamentals understand how markets operate in such situations. When there is a sudden explosion of supply, the price buyers are willing to pay for that good plummets until enough new buyers enter the market to soak-up all of that excess supply.

So how far have U.S. Treasuries prices fallen during this “panic” in the U.S. Treasuries market? Zero. To comprehend the absolute absurdity of this situation requires adding one more piece of data to our scenario: U.S. Treasuries prices are currently at their highest level in history – despite the fact that the United States has never been less solvent.

Readers need to realize how a bond market works. Prices and yields (i.e. interest rates) move in a precisely opposite/inverse manner to each other. As yield goes up, bond prices decline in a precisely proportional manner (and vice versa). Given that yield is (supposedly) a function of risk, with the U.S. economy being less solvent than at any other time in history, this implies record-low prices for U.S. Treasuries – not all-time highs.

Realizing that many ordinary investors don’t understand the dynamics of the bond market, let me equate this situation to the world of equities with an analogy. Picture a hypothetical company with the world’s largest market-cap, which we’ll call “U.S. Treasuries Inc.”

The share price of U.S. Treasuries Inc. is sitting at an all-time high (and has been there for many months), despite the fact the company is teetering on bankruptcy. Suddenly, the largest shareholders of U.S. Treasuries Inc. all start simultaneously dumping more shares than at any other time in history. Anyone with even a modicum of market experience knows the inevitable consequence of such an event: the share-price would crash.

Understand what is directly implied here. For maximum supply to be dumped onto this market, while prices didn’t even budge slightly from all-time highs does not merely imply “high demand”. It necessarily implies infinite demand. Only where demand was literally “infinite” would we see sufficient buyers instantly materialize (at the highest prices in history) irrespective of how much new supply hit the market. And this did not simply occur over some anomalous one- or two-day period, but rather consistently for (at least) four solid weeks.

However, even if it was mathematically plausible for there to be infinite demand for U.S. Treasuries (which it is not), “infinite demand” is not a plausible explanation for what has transpired in the U.S. Treasuries market, since it is directly contradicted by other price data.

As a matter of unequivocal arithmetic, if there was infinite demand for U.S. Treasuries, yields for all maturities of U.S. Treasuries would be compressed to 0%. The fact that (even at the highest prices in history) these yields are not at 0% is absolute proof that there has never been anything close to infinite demand for U.S. Treasuries.

With that fact conclusively established, we can return to the mechanics of this market. U.S. Treasuries have plateaued at the highest prices in history. Indeed, with the yields for shorter-term maturities essentially at 0%, those Treasuries are already at their maximum theoretical price. Thus when we ask ourselves what would suddenly cause large numbers of new buyers to enter this market, we can answer that question with absolute certainty: significantly lower prices.

With much/most trading now assigned to the abominable trading algorithms, there is no possible scenario where near-infinite numbers of buyers for U.S. Treasuries could surface with zero decline in prices. To make these impossible parameters even more ludicrous, in the real world there are effectively zero buyers for U.S. dollar instruments – and infinite sellers.

China and Japan (two of the world’s top-5 economies) just announced they are phasing-out U.S. dollars from their bilateral trade. This is merely the latest in an endless series of bilateral and multilateral deals which are incrementally (but relentlessly) removing the U.S. dollar as the world’s “reserve currency”.

To date, these deals have already reduced the demand for U.S. dollars by $trillions per year. To focus on just the China/Japan deal, as an elementary reality of their new commercial arrangement, both of these nations need to hold more of each other’s currency – and less U.S. dollars. And this scenario is being repeated in one economy after another, all over the world.

Even beyond the fact that no other nations want any U.S. dollar instruments, we are confronted with the fact that there are no other (visible) buyers able to soak-up all these unwanted U.S. dollar instruments (including Treasuries). Most of the world’s largest economies are located in Europe, and what just finished happening there? The ECB conjured roughly $1 trillion out of thin air – to “lend” all that funny-money to various EU governments (to buy-up their own bonds) so that they were not immediately bankrupted by the economic terrorism being perpetrated in their debt markets by the Wall Street Vampires.

China, the world’s new economic juggernaut, has been dumping their Treasuries for over a year now. Japan’s economy requires every spare yen it can muster for economic reconstruction following the horrific disasters it suffered. And in most of the rest of the world’s economies governments are more likely to use extra dollars to subsidize exploding food prices (to prevent riots in the streets) rather than squandering their precious currency reserves buying worthless U.S. paper.

We have a seemingly intractable paradox here. In the real world there is essentially zero demand for U.S. Treasuries, while we have the recent transactions in the Treasuries market directly implying infinite demand. Fortunately we have the wisdom of the legendary Sherlock Holmes to guide us in resolving such intellectual quandries:

When you eliminate the impossible, whatever remains (no matter how improbable) must be the answer.”

We have no visible buyers for U.S. Treasuries, yet seemingly infinite demand. More specifically, we have no visible sources of capital to even finance the purchase of all of those Treasuries. Thus the phantom-buyer of all of these Treasuries must be an entity capable of “manufacturing capital” – directly implying that this phantom-buyer has a printing-press at his/her disposal.

At the same time, we have B.S. Bernanke getting in front of microphones day-after-day insisting that he has ended all of his bond-buying – i.e. the latest episode of “quantitative easing”. The obvious question is: can we trust anything that B.S. Bernanke says?

Could we trust him when he assured us about the U.S.’s “Goldilocks economy”? Could we trust him when he insisted again and again that the detonation of the largest asset-bubble in human history would lead to a “soft landing”? Could we trust him when (every six months or so) he announced another “exit strategy” from the serial money-printing and massive expansion of the Fed’s “balance sheet”? Indeed, placing one’s faith in the words of Ben Bernanke implies the same level of naivety as trusting a Goldman Sachs banker when he says “Have I got a good deal for you!”

Given that there is no other plausible buyer for U.S. Treasuries (in the entire world) than the Fed itself, and given that B.S. Bernanke is an individual whose personal credibility is somewhere below zero, what does this imply? Very simply, the Federal Reserve (and its Chairman) are secretly counterfeiting vast numbers of U.S. dollars, and then using that fraudulent “currency” to buy all these unwanted bonds and thus prop-up the Treasuries market.

Regular readers will note that this is in no way a “new accusation” which I am leveling at the Fed. Rather, this massive market fraud has been plainly visible on several other occasions – and I have identified those occasions in previous commentaries. Thus at this point it is necessary to explain “motive”.

Why does the Fed sometimes tell the truth about its bond-buying, while most of the time it covers it up? To understand that we need to refer to the words of someone who claims to understand bankers better than most, former Goldman Sachs employee and head of the CPM Group, Jeffrey Christian.

In The Great Gold Debate”, it was Christian who revealed one of the banksters’ fundamental Market Principles:

One of the first things you know about intervention in [i.e. manipulation of] the currency markets…is that it’s much more effective if people don’t know what you’re doing. They only see the effects you know, I mean there are reasons why people [i.e. bankers] don’t want the market to see them coming…”

The motive for the Federal Reserve to secretly counterfeit $trillions of U.S. dollars in order to buy U.S. Treasuries and prop-up the market is obvious: it allows Bernanke and the Fed to engage in the ludicrous charade that both demand for U.S. Treasuries and the market itself are “strong” – when nothing could possibly be further from the truth. Given that the Fed has never been audited in its near-100 year history means that we can add “means” and “opportunity” along side the extremely obvious motive.

Indeed, there is no mystery at all as to why B.S. Bernanke would want to counterfeit U.S. currency in order to secretly buy-up Treasuries. Rather, given the Market Principle by which the bankers operate, the real question here is why would Bernanke ever actually admit what he was secretly doing – i.e. “announce” some of his quantitative easing?

Fortunately this is a question which has been answered on countless occasions, by numerous commentators. If we refer back to media literature at the time of “QE I”, and even more so when “QE II” was announced, we see a plethora of commentaries which were almost identical.

These commentators were quite clear that they did not expect quantitative easing to accomplish must positive “good” – but yet they proclaimed themselves to be in favor of this policy despite its dubious potential. Why? Because they considered it absolutely crucial for “the market” to see the Fed and/or U.S. government “doing something” – and so the Fed simply announced the same manipulation of the U.S. bond market in which it had already been secretly engaging.

We thus have the one-and-only “exception” to the bankers’ Market Principle that it’s always best to hide their manipulation of markets: when the sheep are spooked so badly that they are reassured to be told that a market is being manipulated.

There is yet one more reason to find this latest episode of Treasuries-fraud to be especially alarming. Generally anyone engaging in such a massive, serial fraud would make efforts to disguise their actions. Yet here we have absolutely no attempt to do so.

Had the Fed’s fraudsters allowed Treasuries prices to decline at least modestly during this latest panic in the U.S. bond market, then at least they could have made a semi-plausible claim that (somehow) a herd of new sheep had suddenly and miraculously shown up to buy that massive amount of unwanted bonds (at near-record prices). Instead we have a farce so utterly absurd that it should not fool anyone with the brain-power to be able to count their fingers and toes (with only a minimal number of mistakes): infinite buyers lining-up to buy worthless U.S. Treasuries at the highest prices in history – despite there being zero visible buyers in this market.

I would suggest that it is impossible to construct a more outrageous scenario, even in totally hypothetical terms. On that basis it seems entirely reasonable to dub these latest events “maximum fraud”.

Related Tickers: PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP), SPDR Gold Trust (NYSEARCA:GLD), ProShares Trust UltraShort Lehman 20+ Year Treasury ETF (NYSEARCA:TBT), iShares Barclays 20+ yr Treasury Bond Fund (NYSEARCA:TLT), iShares Barclays 1-3 Year Treasury Bond ETF (NYSEARCA:SHY).

Written By Jeff Nielson From Bullion Bulls Canada

Jeff Nielson is from Canada and is a writer/editor for Bullion Bulls Canada http://www.bullionbullscanada.com.  He has a personal background in law and economics. Bullion Bulls Canada provides general macro-economic and political commentary,  since the precious metals markets are among the most complex (and misunderstood) in the world.

Bullion Bulls Canada also provides basic coverage of Canadian precious metals mining companies. Canada is the global leader in mining  exploration, and Canadian-listed mining companies (on the Toronto Stock Exchange and Venture Exchange) are responsible for the majority of the  world’s most-promising discoveries.


NYSE:GLD, NYSE:SHY, NYSE:TBT, NYSE:TLT, NYSE:UUP


 

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  1. Carlos Sempere
    January 5th, 2012 at 18:49 | #1

    Jeff – Have you considered that as China and other countries move out of US bonds, more US and foreign investors and pension funds are seeking the relative safety of bonds? You mention infinite and zero demand to make a point, but those are extreme concepts with no explanatory power. Disappointing article.

  2. James Robinson
    January 4th, 2012 at 23:12 | #2

    Thanks Jim for the interesting article… Regarding potential motives (at the risk of restating the obvious): 1) most retirees have a large portion of their savings in bonds, and much of that in US Treasuries – these folks have seen nice returns over the past year, which kept them content, and I would expect the current administration is doing anything and everything possible to keep these retirees, who like to vote, from experiencing any sort of nest-egg devaluation or sudden “correction.” This isn’t a knock against the Dems… I think a GOP admin would do the same if they were in Executive power, seeking re-election and capable of planning and executing the operation; and then potential motive 2) perhaps they are buying US Treasuries in an attempt to keep municipal bonds from plummeting, thereby allowing local governments to finance (and re-finance) themselves at record low yields… otherwise, solvency at the local municipal level could go very bad, very quickly (as Meredith once predicted). Quiet devaluation of the USD at the Federal level poses less acute trama to the public (voters) than dealing with massive local municipal borrower defaults across all 50 states, most counties, school systems, etc, which would be a media circus and stimulate calls for massive political administration change at all levels. Regardless of motives, the scheme underway might be the best way to dodge an uglier situation, and so we might do best to play along and try to protected ourselves against the systematic devaluation of the USD (and subsequent relative cost increases of commodities and precious metals).

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