Great Depression Online Archive Issue:

One of Life's Tipping Points

Great Depression Online
Long Beach, CA
June 25, 2010

Inside This Issue You Will Discover…

*** Buying Funnel Cakes at the County Fair
*** Hitting New Lows
*** One of Life’s Tipping Points
*** And More

Buying Funnel Cakes at the County Fair

In Tuesday’s GDO we made the suggestion to keep an eye on treasury yields.  In particular, 10-year treasury yields.  We thought that, perhaps, with the U.S. Treasury attempting to auction off $108 billion in new debt this week…that just maybe, yields would go up.

Of course, markets are a bewildering place.  And what seems so obvious is never quite so.  Yields obviously should have gone up.  Who but a fool would loan the U.S. government money these days and ask so little in return?

On Tuesday the U.S. Treasury opened its auction of two year-notes.  But investors didn’t demand a better price for their money.  Instead they lined up around the corner like they were buying boysenberry funnel cakes at the county fair. 

~~~~~~Double Dip~~~~~~

Talk of a double-dip recession is seemingly increasing these days.  Home sales have dropped like a brick since the end of the special tax breaks for buyers.  Weekly job reports are showing much larger rises in unemployment claims than previously expected by whoever it is that decides what exactly is expected – 427,000 new filings in just the last weekly report.

The problem this time around, however, is not just the economy itself.  The problem is that our supposed saviors are all out of tools to help the economy climb out of the deep, dark hole we now find it in.

We Cannot Afford to Double Dip 

~~~~~~~~~~~~~~~~~~~~~~~~~

For whatever reason, yields didn’t go up.  In fact, they did the exact opposite…they went down.  At market close on Monday 10-year treasuries yielded 3.24 percent.  By the end of they day Tuesday 10-year treasury yields had dropped to just 3.16 percent.

“Investor demand was ravenous Tuesday at a Treasury auction of $40 billion in new two-year notes,” reported the Los Angeles Times.

We suspect sometime, within the next two years, lenders at Tuesday’s auction will have buyer’s remorse.

Hitting New Lows

By the time Wednesday rolled around even more investors had lined up with cash in hand, and willing to give it to the government for practically nothing.  By mid-session 10-year treasury yields hit a new 52-week low of just 3.09 percent and ended the day at 3.13 percent.

Fear had gripped the markets and investors were fearful of everything but U.S. government debt.  The economic news of the day was not good.  The Commerce Department reported that sales of new homes in May had collapsed 33 percent, to the lowest level on record, as the $8,000 federal tax credit expired.

“We fear that the appetite to buy a home has disappeared alongside the tax credit,” said Paul Dales, U.S. economist with Capital Economics, in a note to clients.  “After all, unemployment remains high, job security is low and credit conditions are tight.”

Ben Bernanke, following a two-day meeting of Federal Reserve Governors, stated the Fed would continue to hold the federal funds rate at record-lows for an “extended period.”  Stock investors didn’t know what to make of all the noise; stocks ended the day about where they started.

By Thursday, however, stocks convulsed and threw up on themselves with the DOW dropping 145 points.  Ten year treasuries yields hit their second 52-week low in two days…falling to just 3.07 percent before ending the day at 3.12 percent.

One of Life’s Tipping Points

There must be nothing more boring than watching treasury yields move.  So why do we do it?

The short answer is because we’re bores.  We’re kooks, curmudgeons, and fuddy-duddies.  We take interest in the duller side of life…like watching paint dry or a pot of water come to boil.

But we also do it because, as PIMCO’s Bill Gross noted in his June 2010 Investment Outlook…

“The burden of debt can take decades to accumulate, but only a few short months to change course into crisis.  Many investors, economists and politicians alike have little understanding of why attitudes and lending standards can reverse so quickly – how a seemingly innocuous ‘two will get you three’ build-up of debt will suddenly produce a crisis.”

Here at the GDO we believe the western economies of the world – including the U.S. – are past the point of no return.  We currently sit at one of life’s tipping points…where the apex for debt based economic growth has been surpassed.

We don’t know precisely when lending standards will reverse?  But we do know how.  One day, perhaps soon, government debt auctions of the world will go no bid in tandem, interest rates will spike up, and, if all four wheels come off the applecart, the paper currencies of the world will fall to their intrinsic value.

In other words, the world as we’ve always known it will have come to an end.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Between rising borrowing costs, the already hefty budgetary burden of paying prior debt interest, and the ever-expanding rolls of government employees, legislators can hardly keep up on the bills these days, let alone inject any more into the economy.

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