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.
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