Wednesday, May 27, 2009

Yelling "FIRE!" In A Crowded Bond Market

What happens when you are holding a trainload of ALT-A mortgage paper, and 40% (+/-) of the mortgages in those securities are 60 days delinquent? (Think every Money Market fund in the USA)

You sell.

What happens when you are holding 10year US Treasury notes and the government keeps "stimulating" itself at a $trillion per pop, and tax revenues are only 50% of total expenditures? (Think every business in America that holds US Treasury notes as a store of cash)

You sell.

What happens when you are holding massive amounts of debt in a insanely foolish "vendor financing" scheme and your customer just lost his job? (Think China buying US debt to keep interest rates low to spur further buying of Chinese dreck)

You sell.

What happens when your income stream gets clipped and you have a bunch of bonds that can sell to raise cash? (Think export nations that sell to the US)

You sell.

What happens when you are running an insane amount of spending, but you can't tax enough to make ends meet? (Think US government)
You sell.

What happens when you foolishly chased the latest bubble in bonds, and now see that it has clearly topped and is heading down? (Think Money Market/Retirement funds)

You sell.

What happens when some fool from Princeton offers to buy mortgage dreck and US Treasury notes at above market rates? (Think....well, you know who I am talking about)

You sell as much as you can.

What happens when you have spent three straight months convincing people that the bottom is in, houses are cheap, inflation is coming, and the government saved the day, but you know the opposite is true and have a bunch of massively overpriced bonds? (Think large New York investment banks and hedge funds)

You sell.

What happens when the selling pressure overwhelms the bid in the bond pits?

Prices drop.

What happens when bond prices drop?

Interest rates rise.

What happens when mortgage rates jump by 30% in a half-day's worth of trading?

Pending contracts, lots and lots of pending contracts (appx. 50% by one estimate), blow high and wide.

What happens when a house sale "falls through?"

It goes back on the market.

What is the mindset of the owner in a depressed market that just lost a sale?


If the next few weeks see followthrough on this trend, the amount of selling in real estate will simply overwhelm the bids and the entire real estate market will be frozen, until the owners capitulate and lose their homes to auction. The bond market is the "end game" and is why The FED has been buying bonds.

Just as you can't get out of debt by paying your VISA with your MasterCard, we can't keep our asset values high by borrowing money to pay off debt.

It's a global dash for cash. Everything is being sold to raise cash, and that includes trendy real estate.