DJ30 – 11,577   up 180
US Treasury 10 Year Bond – 2.15%    down 0.01%
USDEUR  -  1.3756
Gold – $1663  down $13
Oil – $88.23    up  $1.81

Stocks jumped today on news out of Europe – that I reported to you yesterday – but it took until 3PM EST to move the market as European newspapers reported it today.

US Treasury Interest Rates UP……..

I mentioned last week that I observed that the 10 Year Treasury Bond interest rate was rising, and I couldn’t explain it.  It bothered me.  I follow that particular measure of our economy, and when it couldn’t be explained easily, I believe something is going on “under the surface.”  I also believe it is my job to ferret it out.

So, here are my findings for your absorption.

It appears (as seen in the following graph) that foreigners are indeed selling our Treasuries.  The data shown is from the US Federal Reserve, so it should be fairly accurate.  I hypothesized that the Chinese could be selling our Treasuries as a “shot across the bow” warning the US that we shouldn’t mess with their internal affairs – like how they fix their exchange rate – as our Senate just did with a bill they passed.

You can see by this graph that foreign central banks are net sellers of our Treasuries – and they just set a record for that selling.  If this selling continues, it will be a true disaster for America.  It would be the equivalent of the “bond vigilantes” saying that it is time America paid higher interest rates because the “risk” involved in holding these IOUs is just too high.

It really doesn’t matter what central bank(s) is selling the Treasuries – the effect is the same.  Rising interest rates.  If it’s the Chinese, it means it is politically motivated, rather than “risk” motivated.  But, the effect is the same.

What are the takeaways from this graph?

1. We just set an ALL TIME RECORD for sales of US Treasuries held by foreign central banks.
2. $1 TRILLION in redemption is greater than the entire QE2 FED purchase plan of $600B – the FED can’t keep up with this type of redemption.
3. The selloff in September 2007 started the credit crisis of 2008.
4. As of the last quarter, foreign central banks are now holding LESS US Treasuries – FOR THE FIRST TIME.  (Is this a lack of faith in America?)

DJ30 – 12,267   up 65
US Treasury 10 Year Bond – 3.37%    no change
USDEUR  -  1.4331
Gold – $1497     up $4
Oil – $108.15    up $1.33

Gold topped $1500 during the mid day trading today.  Psychologically important.  Now we are ready to go higher.

The Debt Ceiling……

Let’s talk about the debt ceiling since we are going to hear a lot of “hot air” on this subject over the next few weeks (and possibly months.)

I would like to start by quashing a statement that is repeated on the news, and by people who know better.  That statement is that if the debt ceiling is not raised, the US will default on its debt.  What rubbish.

Let’s start with a definition.  Defaulting on the debt by the US means that the US Treasury will not be able to pay the US Treasury bond holders off when those bonds become due and will not be paying any interest on the bonds outstanding.  Let’s examine what happens if the Debt Ceiling is not raised.

First of all, legally it means that the US Government must stop its deficit spending at the point where the Debt Ceiling is reached ($14.3TRILLION).  That’s all it means.   Period, over and out.  Now, while this would be extremely painful, and would force the US economy into a recession or depression, it would NOT cause the US to default on its debt.

The US Treasury is receiving about $2TRILLION in tax income this year, and could use that money to pay any debt that is owed (about $341B in interest this year.)

When a US Treasury bond ends its life, the US Treasury must pay the holder of that bond, the face value of the bond – typically $1000 per bond.  However, let’s look at this a little closer.  When that bond is redeemed, the US owes that much LESS, and the DEBT decreases by the same amount.  The US Treasury can issue another bond for the same face value, and the net effect on DEBT is ZERO.  In other words, bonds coming due is not a cause of concern.

So, I hope I have put the argument that the US will default on its debt to bed – once and for all.  Please just laugh the next time you hear that statement.  Especially if it is “tax cheat” Tim Geithner, Secretary of the Treasury, stating it.

The 2011 Fiscal Budget……

The US Congress (all those people who we voted in) and the Senate (more of them) and the President (voted in too) all agreed to cut this year’s budget by $34B (but it reality is less than $400M and was a trick) – but the main point is that EVERYONE (that counts) has agreed that Obama can spend like a drunken sailor until October 1, 2011.

But, the Debt Ceiling will be breached in April or May of this year.  This is a big embarrassment for all those folks who voted and agreed on this year’s Fiscal Budget.  In effect, didn’t they all agree to raise the Debt Ceiling at the same time they voted for that budget?  After all, everyone knew the budget would be busted when they voted for it.  I think there was a tacit agreement – one that the public wasn’t made aware of.

There is going to be a lot of ranting and whaling over the issue of raising the Debt Ceiling, and the Democrats are going to have to concede something – and what they concede will be interesting to see.

In the end, the Debt Ceiling will be raised.  Hope this helps you understand this murky issue.

Bonds also rallied (lower interest rates) today in sympathy with a stronger Dollar.

The Dollar gained over 2 cents against the Euro – an absolutely massive move that just shows what speculators can do to move a market.

Oil fell slightly, and gasoline moved up one cent – Ugh.

Gold fell, as the Dollar gained – and we are going to see some pretty good places to buy Gold soon.  Gold also appears to have an inverse relationship to the strength of the Dollar (strong Dollar equals weak gold).

In the news today…..

China and Japan reduce US Dollar Holdings – Just take a look at these statistics:

1. Total US assets purchased in March was $55.4B
2. Total US assets purchased in April was $11.2B – you can see that the Chinese are purposely reducing their purchases of US Treasuries.
3. China REDUCED its holdings in US Treasuries by $3B in April over March – the first reduction in a long, long while.
4. Japan REDUCED its holdings in US Treasuries by $1B in April over March – etc. – you can also see that China is dumping its US Treasury holdings.
5. China holds 10% of US’s publicly held debt – and they are starting to get worried.

I reported previously that Treasury interest rates were going UP because foreign nations weren’t buying as many Treasuries.  I was WRONG.  Interest rates are going up because foreign nations are starting to SELL their Treasuries now, AND they are aren’t buying as many Treasuries too.

This is the first time I was able to get my hands on actual numbers, and the numbers tell the tale.  “Follow the money” is a well worn phrase, but it also is a very valuable phrase when you’re trying to figure out what’s really going on in our economy.

If these trends continue, the handwriting has already been written on the wall.  Treasury interest rates are going up, and then ALL US interest rates will be going up.  And, goodbye recovery.  Let’s follow the money a little longer before we wish our economy an RIP.

Credit Card Default Rates – rose in May

Bank of America’s default rate rose from 10.47% to 12.50% from April to May – a massive increase.
AMEX rose from 9.9% to 10.4% over the same period.

If credit card losses exceed 10% for the whole year, the industry will lose $70B – and now we’re talking about a bunch of money – but don’t worry, be happy!!!!  The government will bail them out – won’t they???

Here are the last numbers for today:
Dow Jones 30 Industrial – 8612 (down 187 points)
10 Year Treasury Bond – 3.72% (down 0.08%)
Euro – $1.3796
Gold – $928 (down $13)
Oil – $70.62 (down $1.42)
Gasoline $2.05 (up $0.01)

Bonds started a rally today with decreasing interest rates.  This was caused by a successful auction of new Treasury Notes, and this satisfied the fears expressed last week on a great new supply of Treasuries being issued.

Gold fell below $910, so let’s wait to open that bottle of champagne.  Let’s let it rally again, as it undoubtedly will.

Oil and gasoline fell a lot today on fears for the US economy.  The news today wasn’t so bad as to drive oil prices down without driving stock prices down.  This just means that the oil market is still being manipulated, so watch out for a high volatility energy price market.

In the news today….

Consumer Confidence hit an ALL TIME low for January.  The public is worried about their jobs, home values and retirement funds disappearing.  And, all these worries are real.  This means the consumer, or 2/3 of the GDP of the US, is going to spend less money each day as it shops.  The result is predictable – the recession will just get worse.  Sorry for the bad news, but that’s what people are doing and saying.

The FEDs want mortgage rates to stay low.  Why??? Because it will help stop the bleeding in the US housing market by encouraging more home purchases by using low interest rate loans.  This is one of those “tools” that the FED can use – or can encourage it – by keeping interest rates low.  However, they have one big problem.  Mortgage rates are related to long term Treasury Bonds, and long term Treasuries have been on a rampage in increasing interest rates – and subsequently driving mortgage rates up.  The Treasuries market is a battle between the FEDs (who want low rates, and threaten to purchase Treasuries themselves to keep rates low) and the general market players (who want as much interest as they can get, and really worry about inflation) – and the market players are currently winning – because the FEDs haven’t bought one bond yet.  This will be an interesting battle to watch as it directly affects us all – as Treasury interest rates affect lots of related interest rates like credit cards, bank loan rates, corporate bond rates, etc.
 

Here are Today’s numbers:
Dow Jones 30 Industrial – 8175 (up 59 points)
10 Year Treasury Bond – 2.52% (down 0.12%)
Euro – $1.3189
Gold – $901 (down $9)
Oil – $41.58 (down $4.25)
Gasoline – $1.11 (down $0.04)