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Crowding Out

Marketupwatch had an interesting piece about the failure of the auction rate securities market today (link below). The failure of this market is an example of the crowding out problem with Trashuries that I’ve been talking about in the Wall Street Examiner Professional Edition. With the supply of Trashuries mushrooming and investors demanding the safest securities, they have no reason to invest in anything but Trashuries. This is self defeating behavior, as is any other kind of investment panic.

Here again is an issue that no one except me and a few others are paying attention to. I have been warning about it regularly in the daily Professional Edition Fed Report.

Here’s the problem, or I should say, one of the problems. As a result of this panic into “safety”, other sectors of the credit market are shutting down. Meanwhile, we’ve had a bubble in the Trashury market. This cannot continue because the cash available to invest in Trashuries is going to dry up as the commercial paper market lemon gets squeezed dry while the supply of Trashuries continues to explode. The result will be skyrocketing interest rates. Those who buy longer term Trashuries at today’s levels are going to get absolutely killed.

The Federal Budget is careening out of control. Every week the Trashury auctions are blowing out the Treasury Borrowing Advisory Committee estimates of the government’s borrowing needs by huge and growing margins. NO ONE foresaw the need to do TWO massive 2 month Cash Management Bills totalling $49 billion this week, not to mention the $27 billion in new money in the 4 week, 13 and 26 week bills. Most of that settled today. While the Fed did a huge liquidity injection it did not come close to covering the market’s needs. If you want to know why the stock market melted down today, there it is.


It is so over. So truly over.

Marketupwatch article.

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  1. Crimson Ghost

    Yesterday was the first day stocks and treasuries plunged together if memory serves.

    The most bearish kind of action imaginable IMHO.

  2. Lee Adler


    I get a lot of comments asking me to look at other analytical work.

    I almost never do it. Unfortunately, given the volume of research I produce and the other commitments on my time, I just don’t have one spare second. And even when I do look at a short piece or a few paragraphs that someone else has posted, I don’t like to critique. Some folks see things the same way I do, but most don’t. Different strokes for different folks.

    I express most of my “off the cuff” opinions over on the message boards at I invite everyone to join us there. It’s a great board. During trading hours we chat at Intraday Stool and in the after hours and on weekends at Mark to Market

    For those who are seriously interested in my opinions, I invite you to try the Professional Edition risk free for 30 days.

    Thanks for your interest!

  3. John


    I work with one of the large banks. To keep their PC’s from being swamped with viruses they block access to many sites based on the type of site (like porn – not that I’d have personal experience with this, of course). There’s always a reason given for a site being blocked. One of my favorites is “Technical/Business Forum” – as I’m an IT guy at a business make you wonder what is OK to look. But, this is what YOUR site says:

    The URL address you attempted to access is blocked by
    Category(ies): Stock Trading; Gruesome Content
    URL Address:
    All Forbidden Access Attempts Are Logged.
    Continued access attempts may result in disciplinary action up to, and including, termination of employment.

    I guess things are getting “Gruesome” out there.

  4. Lee Adler

    Grusome content???


    We have a little fun with sophomoric toilet humor. The only thing gruesome about it is the truth about the financial markets.

  5. Stuart

    We should all be expecting the monthly Treasury budget data over the coming months then to reflect this explosion in debt issuance relative to the budget. Skeptical of Treasury data, BLS data etc.. I am inclined to expect a less muted effect reported upon in the coming months, certainly not reflective of being buried by exploding treasury debt issues. Public exposure of data showing severe crowding out would raise too many eyebrows in the public arena IMO.

  6. Chuck Beef, COO

    good insights, however recommend not to use predictors such as ‘its over’

    as we have seen, the beast is more sly than that and manages to digitize itself out of all th eproblems as fast as you et al. can uncover them.

    I guess someone was paying attention when they watched ‘The Fly’… digital trans-teleportation!

    (possibly interpreted as digitally fixing things, such as… maybe currency)

    Evolution of currency:
    Sand Dollar -> Spice -> Gold -> Paper -> ElEcTrOnIc! -> ??? slaves ???

  7. Lee Adler

    Hyperbole is just part of my style. The goal is to get people thinking and talking about the things I write about. Like Steve said above, it’s kind of a cheeseball B movie thing. He nailed it, and I loved his take on it.

    So, is it really over? Let’s just say I’d expect life in these United States to get a lot more uncomfortable in the years ahead. Hopefully I’ll be proven wrong.

  8. OOUA

    #13 “So the question then is, what happens to the currency as a result of “crowding out” ”

    well, since the FED has been sopping up any excess liquidity, and even a little that isn’t excess, the availability of our currency for use in payments as they come due, becomes scarce and ‘values’ the currency on a relative scaricity basis to other currencies … since the comparison is against other fiat currencies, this strangling of availability causes the value to be what it is … as an associate intoned “a scarce worthless currency unit”

    my own thought on where this leads is that as rates spike we are actually witnessing a risk premium being reflected in the anticipated falling value of the currency … summary > the deflation forces will succumb to the inflation necessities

  9. Lee Adler

    I want to emphasize again that the Fed did a huge about face last week. Do not assume that the Fed will continue to keep a tight rein on the monetary base. Could be a huge mistake.

    This is something that’s covered in depth in the Professional Edition Fed Report.

  10. Stuart

    RE#14, and could one then extend an argument that dollar denominated assets will rise in nominal value as the dollar succumbs to necessities of inflation.

  11. OOUA

    #16 it becomes inevitable with the exception that debt instruments denominated in dollars will act inversely … it is possible that colateral assets will deflate while consumable necessities inflate for a while

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