The Bananas of our Banana Republic Wish to Offer this Brief P.S.A.: Oh Crap!

by John Galt

December 9, 2009


Yes, the Bananas, upon threatening to kick the snot out of another mascot again as pictured above demanded equal time tonight. So instead of our regularly scheduled rants about the markets they wish to offer something of a warning, of great importance, and a follow up to a previous thread on the bond market:

FunnyPart-com-oh_crapOh Crap!

To say that today is a reason to worry, well, that’s an understatement. The 10 year auction indicated something that many blew off as “year end” nonsense. I view it as something dangerous and different that the Treasury and Fed will never admit to publicly:

That the world is tired of investing in a loser and the process of rotation out of the long end and into the short term has accelerated.

The results say it all:


This was not a good auction and even old Rick Santelli gave it a grade of “C”. Thus why the concerns about tomorrow’s 30 year auction and how the yield curve has steepened because the 1-3-6 month maturities have dived and the long end is spiking up (Chart courtesy of FINRA):


If the long end cracks 4.80% then 5.00% watch out as the cheap money for mortgages will dry up overnight and the cost of loans to small business, something the administration is touting will be horrible for the statistical recovery.

The one month yield chart on a weekly basis best reflects the gravity of where we are compared to where we were and why this “rally” in equities is about to come cratering down:

UST1M2YRWEEKLYjgflaThe three month chart is much the same message with the bananas screaming “oh crap” and the large institutional and foreign SWF”s stuck with dollars are piling into the short end of the curve:


Lastly, the 30 year yield chart, this time on a daily time line indicates we are within striking distance of the higher yields which means demand for our long dated toilet paper is coming to an end. A break above 5% and I would expect a fast, furious and damaging move to above 7.2 to 7.6% within a year:


Once we cross that “Line of Death” I have drawn on this chart be very, very scared as to what is next. This means the low volume we have seen the past five months in the equity markets is not a fluke. It means the very tentative rally in the U.S. Dollar might just be a technical bounce and nothing more. It means that if the foreigners continue to threaten default, especially in Eastern Europe and the weak sisters of the EU, the Dollar will continue to have support but the long end of the U.S. bond market will have reduced bids as those nations  will sell their U.S. holdings to attempt to raise capital and cash for the home front, not wishing to gamble at Casino Federales Reserve any longer.

Buckle up, everything is point to a wild ride in the first four months of 2010. And the data does not look good for the “Obama Miracle” which he wanted to tout going into next year’s election season.



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12 responses to “The Bananas of our Banana Republic Wish to Offer this Brief P.S.A.: Oh Crap!

  1. Tom

    The only miracle that will save us at this point is one out of the “good book” itself. Thank you for all the warnings you give out. At least some of us can have a leg up when the fit hits the shan.

  2. KEIKO

    Hi, John.

    I wonder those indications & financial corruptions in foreign countires affect to a gold price in the next year??

    Or you are just suggesting that mortgage rate is going up?

    I am sorry that I asked such stupid questions, my english complihension is limited…I will read it over again.

    • Administrator

      Not a stupid question as gold is approaching a major Central bank buying spree worldwide. Once the 3 months expire with these Treasury notes that the foreigners hold, I doubt they will roll them over this time into other debt instruments and will instead buy real money for their banks. They are tiring of our “promises” to control our spending and not destroy the dollar’s value.

  3. Alwie

    So, what is the conclusion?
    The first 4 months of 2010:
    1. stock will go down.
    2. dollar will go up or down???

  4. Mark

    The difficulty I have with government figures is they come from demonstrated liars and crooks. Harsh perhaps, but that’s my interpretation of the government record. John has pointed out on numerous occasions the fudging on employment and CPI for instance.
    So when the Treasury comes out and publishes the bids received by category for the debt auctions, does the source have credibility? Is the rise in Caribbean bids from overseas hedge funds or has the Fed moved off shore? The primary dealers typically take the debt and peddle it off to others, like pension funds, insurance companies, the public. Do they peddle it off to the Fed if it can’t be sold anywhere else after a week?
    No one really knows since the Fed’s next audit will be the first audit. And behind this curtain they can do just about anything with the numbers. Their only limiting factor would be other central banks and governments credulity being strained. It is after all a confidence game and China is leading a growing number of countries in calling that confidence into question.
    So I doubt an auction will ever fail or if a higher bid to cover ratio is required that it will not to be generated. Which is why I find John’s scenario where a world meeting comes about one weekend and announces a new exchange rate scheme that reflects the hitherto unaccounted for monetization.
    Alternatively, maybe those folks at the Treasury and Fed are honest.
    Your choice on the color of the pill.

  5. Tim

    So does this mean that your near-term gold prediction will be short-circuited? Does gold take off from here or does it fill the gaps and drop to your support level at 1040 first…

  6. Des

    OK, so for someone who just started trying to understand all of this a few months ago and agrees that things are tanking, where do you run if you only have a company-sponsored 401K? I have a good chunk of it in corporate bond funds (at least 4 different bond funds through Vanguard) and several stock funds that have really good 1 year returns. I’ve almost made up what I lost in the crunch, but where is “safe”? MM funds?

  7. John Hoffmann


    Can you explain why the 4.8% on 30 year is the line of death?
    I see today’s auction took the rate up from 4.4 to 4.5. I don’t like the idea that the Fed is buying the treasuries. Is it possible that Bernanke will not disclose the recipients of much of the bailout funds – because the truth is they were used to prop up our own treasuries? That would mean that the bailouts were IN FACT increasing the money supply and inflationary rather than disappearing into the black hole of retiring toxic liabilites which as we have been told is a reduction of the money supply and therefore deflationary. If this is possible and true, then the hyper inflation is much closer than the media has led us to believe since the “deflationary” step is actually based on a false premise.

    • Administrator

      4.8% opens up technical levels of 5.00%, 5.40% etc. It is sort of like $1,000 gold; once it is cracked there is little to slow down an ascent. And once we start seeing 7%+ yields on these bonds, the entire budget projection process for the United States is out the window. We will see rates skyrocket and a massive panic ensue in the markets.

  8. Justin

    DES, unfortunately, no place is safe. If you move your 401k assets to overseas funds, perhaps you would do a bit better, but to be honest you will probably end up kissing that money goodbye at some point — if the “fit” does, after all, hit the “shan”. Not knowing your individual circumstances, it is not possible to advise you well or accurately. However, it’s hard to go wrong having a month or two of non-perishables (food and hygiene and medical/first aid materials) on hand, as well as a modest number of small silver coins (pre-1964 U.S. coins would be perfect). Some people suggest getting a few hundred dollars in nickels from the bank, as the nickel is almost worth 5 cents in metal, but it will *always* be worth 5 cents in Reserve Notes, so it’s a no-lose idea. Best of luck to you!

  9. rookie

    To Des, see if your company vanguard fund has a VBO account (as mine does) and if you can take out a loan against it ( as I did ). Last November I took a 50% loan and spent every penny on silver bullion (don’t order it from anyone except maybe Jason Hommel, I love the guy but I trust trading cash for metal at a coin shop and putting it in my hands right now). Then I moved 90% into the VBO (vanguard brokerage option) where I moved that capital into PM (precious metals) stocks. I don’t trust that my 401(k) will be around or that the funds in it won’t be taxed by some unGodly percentage when I want it so I play with it. Congratulations on starting to educate yourself, welcome to the other side!

    To Justin, if you are into nickel’s try pennies. 25% of circulating pennies are 95% copper which makes them worth over 2 cents right now. Get twenty bucks from the bank every couple weeks. Its a 25% return on investment instantly.

    And to Mrs. Rand’s mystery man, keep it up you are on an enlightened path

  10. Mark

    The top chart in John’s piece (from FINRA) shows the shape of the yield curve today. I’m a subscriber to the Privateer newsletter ( ) and on the site is a chart which I am unable to copy and post here. So a verbal description will have to do. The Privateer’s chart shows the 3, 6 month, 2, 5, 10,and 30 year yields from December 2001 to present. Thus this chart is a 10 year look at where the yields were over this period. Each of the debt series creates its own line and it is easy to see how they were trending and the relative position of say the 6 month to 10 year debt at any time over that 10 year period.

    Over the last 10 years the yield range on this chart has been from 0 to 6% for the debt products the Treasury sells (most folks call these notes and bonds). From December 2001 to mid 2004 the yields would show a graph shape like the FINRA chart today though the top would generally be in the 5.75 to 5% range (for the 30 year) and the bottom 1-2% range (for the 3 and 6 month).

    Then from the period (roughly) early 2006 to late 2007, all the different debt series had about the same yield. Three month money earned as much as 30 year money (about 4.5 to 5%). In fact, for awhile there, the yield curve went negative with the shorter time debts out-yielding the longer term.

    From late 2007 to date, the yield curve has gradually resumed a more typical shape, though the low end for the 3 and 6 month has been hovering just above zero for most of this year and the longer term (10 and 30 year) has been trending up into the 3-4.5% ranges. (This is why one picture is worth at least a thousand words)

    Hopefully as this point you have an idea what the chart looks like. Now some observations:

    1. Money has been relatively cheap for a long time.
    2. During this period, US government debt and the Fed money supply have constantly been expanding.
    3. In the last 2 years, US government debt has exploded upward.
    4. At no time during this period have the “bond vigilantes” made an appearance. Historically, these vigilantes had the final say on whether the funding of Washington idiocy would be allowed to continue. They would express this displeasure by forcing the yield on debt upward to reflect both the increased money supply (created to finance the federal and private debt) since the future purchasing power of the money would decrease.
    5. Who the bond vigilantes are has changed over time. In the 70’s and 80’s they were Western (wealthy individuals, pension and insurance companies). Today, a much larger percentage belongs to non-Western sources (governments in the Middle East and China for example). These non-Western sources traded a future risk of lower purchasing power for the present economic development. Perhaps they even thought they might really get paid in retained purchasing power too.
    5. But Washington took things too far and the guns plus butter spending has gone to outrageous levels. And the vigilantes are finally objecting.
    6. Which brings me to John’s point about the 5% level on US Treasuries. It is not that this level is historically high. Many times in the recent (40 year) past the 30 year yield has been higher and did not threaten economic Armageddon. A higher rate is not bad all by itself. For a higher rate does 2 things: 1. It rewards saving and makes savings available for investment and 2. Only the more profitable endeavors are undertaken, those that have a very good payback potential. Government spending, typically never having any payback, is constrained as a bonus too.
    But this time, now, with all the malinvestments that only made sense in a very low interest rate environment, 5% and then higher, means more and more of these malinvestments start losing money. Worse, today’s financial wizards made financial products leveraged 20 to 1 and up (think CDO’s, CDO’s squared, …) based on these malinvestments. And they took their act worldwide with financial innovation in every corner of the globe.
    Now a feedback loop starts. Five percent and a up trend calls more and more malinvestments into question. Confidence, already shaky, is further eroded. The trickle toward the door out of financial claims grows. But where does the “money” go?
    That becomes a special problem today since for the first time in human history, all the planet has only fiat money systems. There is no hard money country to put the capital in to ride out what till this point had been isolated country fiat failures. There is no fall back to go to when the reserve currency of the planet dies. Except, as China is doing, by taking the funds and buying mines, farms, factories; elements like iron, copper, zinc,… by the tonne. In other words, cashing in someone’s promise to pay (fiat) for real wealth.
    John’s been calling attention to the new currency blocks that are being created, the Gulf Coast Countries (GCC) being the latest. These are government attempts to set up systems to keep things running when the Federal Reserve Note ceases to perform the basic functions of money (medium of exchange and store of value come to mind). Two problems come up with alternative systems: First, with confidence in the mighty United States money shattered, how many local folks are going to trust their politicians with a new pretty paper system? Two, how many local politicians are going to resist printing a little bit more to cover (insert good cause or need here)?
    As the Privateer points out, no where is the discussion of what money supposed to be, the function money is supposed to perform, going on in the halls of power. All the governments really like their ability to print at will. All think they can do better than the US Government. None can or will. And good luck trying to convince the local people their politicians are better after the US blows up.
    It gets worse, and because I didn’t intend to write a novel tonight, here’s the final thought. The present world economic system depends on the division of labor. Certain folks specialize in making something (anything) very well and trade that for the myriad of things one sees in a typical home. But the trade is indirect. Light bulbs are not exchanged for loaves of bread, they are exchanged for money (fiat). Call the nature of money (fiat) into question and up and down the supply chain vendors hesitate to part with real goods in exchange for a promise to pay. What price does every company put on their product that they are building now but will be sold in the future? How exactly will suppliers sign contracts to deliver X tonnes of iron ore for the next 1, 2 or 3 years at price Y?
    More complex products are at higher risk since just one part missing means you the manufacturer don’t have a salable end product. Think: It’s a fine car and only missing the tires!
    The basic ability to produce wealth, at the level we in the US especially have become accustomed to, is impaired. Large segments of the world’s population, and not just in the third world, get thrown back to subsistence production, ie: whatever you produce is what you have. Exactly how many welfare families have the skills to produce anything? How many automotive engineers, if they can’t trade designing a car for money, can make a pair of shoes? Try to imagine a banker, lawyer or politician doing anything really useful.
    I hope one of John’s coming segments takes us around the world at some point. He gave us some hints with mobs outside banks and stock market sell offs.
    But that’s just openers. Truly we are about to live in interesting times.

    And for now, my novella, comes to an end. Good night.