Fascinating Fleck snippet
Thrown a Yield-Curve Ball: Regarding the ongoing debacle in the bond market, I had been canvassing my best sources there to try to figure out where the "dead bodies" are (the firms that have been blown up by the move-in rates). Thus far, I'd been unsuccessful in learning anything useful until I was able to track down a friend who just retired. He was a knowledgeable bond-market trader who'd been at his post for the better part of 30 years, and is on record for having predicted this wipeout. In answer to my query, he sent me an interesting email (realize that this is one man's opinion, and not fact) that I would like to share with readers, in uncut, uncensored form:
He begins:
Dead bodies are hiding behind the Mark to Market. The curve has killed all the wise guys as the two- to 10-year spread went out 70 in the last few weeks. Fannie Mae and Freddie Mac are staggering nightmares, and I think the Fed is buying their paper on the open market. You see what Lehman Brothers did, bought Neuberger to "lower profile in bonds" where they can't make any money. Look at Merrill's earnings 57% from proprietary trading, meaning carry trade! Look at the footings of LEH, Morgan Stanley, J.P. Morgan Chase. They are staggering. They all are on one side of the trade. Institutions can't get out now because Wall Street is not bidding, and what is coming down the road is the most violent bond market you will ever see.
I got out because they did not need smart salesmen. The SEC has changed the rules. There is a new trading system called Market Access. Gives bond prices transparency, and every idea I gave out had to be put in competition. It is over for bonds. Bill Gross has nowhere to sell his bonds because Wall Street is now going to be his enemy. He has to put his stuff on Market Access, and Wall Street is going to front-run it all. I will add more later, but rates are going up a ton. I see 6% 10-year notes by December. There is no money for the Treasury. They have worn out the welcome this time. But dead bodies? Not for a while. The Fed and Treasury will cover it up as long as possible. LTCM is going to look like a hiccup.
The key is liquidity. There is none, which is why I am shocked the dopes at Treasury did not offer $30 billion 30-year bonds. They have no clue. Bond management is now a race among the mediocre. Indexing and consultants have forced even the smart guys to capitulate and buy stuff that makes them gag. It is going to evolve into a lemming mentality. And the moves are going to be enormous. Look, the long bond contract fell what, 18 points in a month? That is real money. But you still have an economy that is not borrowing, and you can't make people borrow. Going to get wild. If we don't have a depression caused by enormous debt defaults, the other side is gold at $3,000 an ounce.
Who here wants to comfort the parents of the soldiers below?
4005 brave American soldiers killed..sent to their death by a cowardly president called bush and the opposition that enabled it.
