Monday, November 16, 2009

The Ponzis End

I am becoming more and more convinced that the ending of the ponzi scheme occurs when yields on government debt goes up. This is very backwards from typical market behavior. When yields moved higher (bonds were being sold) stocks were usually bought. (I am talking about Treasury yields, not the Fed Funds rate). This is because it showed signs of economic strength as the economy was heating up.

This time will be very different. It will be because trust will dissipate from government debt. Inflation expectations will rise demanding more return for the bonds. This is regardless of economic strength.

Since Ponzis rely on liquidity, if government debt yields were to really spike higher this would be a very big impediment.

Probably does not start in the U.S. but in Europe or Japan. That is why things in Europe are so important.

From Bloomberg:

Greek bonds dropped as the nation’s deteriorating finances deterred investors from owning the government’s debt.

The difference in yield, or spread, between 10-year Greek securities and benchmark German bunds widened to 156 basis points, the most since July 16. The yield on the bond climbed 11 basis points to 4.89 percent as of 4:45 p.m. in Athens. The yield has risen 22 basis points in the past three days.

This is not glaring yet. At some point, Greece, Spain, Japan, (or some government I am not watching as closely) could start the domino affect.


Clayton said...

I could not agree more with this. I really don't worry about much in life, but I am honestly kind of terrified of waking up to this day.

What do you see happening, though? I would think gold will go parabolic, but how will everything else react? Are ag commodities somewhat safe to sit in?

Market Seer said...

No...If interest rates go up, the response is everything should go down. Including gold (though less so). It will cause a halt to this liquidity fueled rally game. I still believe in one more price spiral and deflation scare. Rising interest rates will handcuff the government initially from playing their game.

The question is what happens after that? The governments won't be able to borrow money to play the game. I think they will litterally print money (not borrowed) and just give it away. That is when you run to buy gold and run for the hills.

Anonymous said...

interesting read on Japan. it's a bit contrarian view.
what's ur opinion ??

Market Seer said...

I don't think it is contrarian at all. At this point it is mainstream among the smart thinkers. Kyle Bass has huge bets on that Japan will default. So does David Einhorn. I probably would if there was an easy way to do it.

I think it is inevitable. My only question is if it is the catalyst. I could see Japan continuing on for several years just fine. The fact that everyone is talking about it at this point makes it more likely they will have a problem.

Keep an eye on the Japanese 10 yr. If it breaks 2%, the game is up. Now at 1.3%. Was at 1.49% last week.