The Bond Market Waterbed, Operation Twist causes the first of many weak US Treasury Auctions

10/12/2011 Portland, Oregon – Pop in your mints…

At this point, most FED watchers have heard of the FED’s latest move to appear to stimulate the economy while at the same time appear to control inflation, Operation Twist.  In theory, the FED is simply reshuffling its bloated portfolio of worthless paper, exchanging the pieces of paper that have dates that are in the near future for pieces of the paper with dates farther off in the future.

Sounds simple enough, the FED is not directly increasing the money supply; rather, it is stepping from one end of the bond market waterbed to the other in an attempt to shake things up.

Now anyone who has ever jumped on or skipped along a waterbed knows it is a dangerous exercise.

The FED prepares to Leap to the Long end. Where will the water go?

Why is it dangerous?  Because the FED, whose balance sheet is leveraged 55:1 as of October 5th, is telegraphing its trades in bold letters everywhere it can and is bound to be front run and take some losses.  Any mortal bank, bound by the restriction of marking its assets to market, would need to raise capital in the open market, beg the Government for a bailout, or increase its clients’ fees to cover these predictable losses.

Not the FED, they have the luxury of keeping their assets on the books at face value, running a negative capital balance, and printing the money necessary to absorb the losses.  All of these strategies have the ultimate effect of robbing their depositors (anyone holding US Dollars) of purchasing power. 

In the end, the Federal Reserve will become technically and later functionally insolvent.

They true tragedy in this gross, final expression of monetary madness by the FED is that they have no hope of achieving their stated goals.  Ostensibly they are selling on the short end of the yield curve in an attempt to raise rates and somehow spur lending, yet at last check, rates on the short end are as low as they have ever been.

Meanwhile, long yields, the ones the FED is theoretically partnering with the “free” market in order to lower rates so that everyone can refinance their underwater variable rate mortgages, are rising.

Inconceivable!  Yet true.

If today’s US Treasury auction was any indication of things to come (and there is no reason to think that it will not be), then the weakened demand for Treasuries that expressed itself today could overwhelm any attempt for the FED to lower rates and the logical end game is that the FED will be the ONLY entity bidding on long dated Treasuries.

Picture the waterbed.  A 300 pound Ben Bernanke jumps from one end to the other, where does the water go?  Follow the water, then race to get off the bed.  As long is Ben Is jumping on the bed, the bed (i.e. the Government controlled bond market that it represents) won’t hold water much longer.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint


Key Indicators for October 12, 2011

Copper Price per Lb: $3.38
Oil Price per Barrel:  $84.90

Corn Price per Bushel:  $6.41  
10 Yr US Treasury Bond:  2.23%


Gold Price Per Ounce:  $1,676 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.4%!!!   UP UP UP!!!
Dow Jones Industrial Average:  11,519  

M1 Monetary Base:  $2,144,500,000,000 RED ALERT!!!
M2 Monetary Base:  $9,473,100,000,000 YIKES!!!!!!!