Fed Buys Less in 4-7YR Auction - Treasuries Plunge

"You want to know strange? Equities selling off, oil selling off, and treasuries selling off all at the same time. Where's the money going? Gold perhaps?"

Nothing strange about it, Noah. There is no money flowing “into” stocks, oil, or treasuries when prices increase or “out” off these market when prices fall. The stock, oil, treasuries markets aren't containers, into which money is poured and accumulated when prices rise, or from which money is drained when prices fall. Every trade has two sides. A seller and a buyer. From the perspective of the seller an equal amount of money is taken “out” off the market, which is put “in” the market from the point of view of the buyer. There is always a holder of the assets. Although, it is every day talk to say, e.g. “I put my money into stocks”, when I buy equity, the money I spent won’t be “in stocks” afterward, it will go into the pockets of the ones who sell the equity to me. The money isn’t flowing into the markets, or out of them, it flows between households, and the ownership of the assets changes. The markets are interfaces between the households that exchange goods or assets for money and vice versa. Therefore, the prices of all asset types can fall at the same time. It's like with the "money on the sidelines", which allegedly was waiting to "get in" and drive prices upward. There is always "money on the sidelines", since there are always holders of the cash at the same time when there are holders of the assets.

rc

I agree with Noah. Not surprisingly, gold is +1.47% this afternoon and the stocks of goldmining companies (AU, NEM, GFI, GG) are flying - in the face of an equity market decline.

thx for comment rootless!! sideline money theory always makes me chuckle!

especially the sideline buyer theory for Manhattan real estate sold to buyers by the brokers. It goes like this, 'buy now, because sideliners are waiting for the market to fall 5% to scoop up the deals so the market wont be able to fall further!'

love that one

TBT - The road to hyperstagflation.

Thanks Noah. I am in agreement with your observations and your thesis. Over the last several months, I have been more comfortable with GDX, GLD and SLV as a way to position myself as we attempt to sell debt. Conceptually, TBT makes sense, and I owned it in the past, however, I sold it the last time Bernanke started buying Treasuries, which I am assuming he will again. If he does, that will most likely have an adverse impact on TBT, while GLD will continue to rise.
I will be a buyer of TBT, but I think I will wait.
As for GLD, it seems to me to be picking up momentum rather quickly. Obviously, the main resistance point will be 1000...If it breaks through that, which I believe it will, it could get to 1200 pretty quick. I will watch it at those levels and have tight stops, but I feel pretty certain that GLD should be able to easily reach 1500 if things continue as they have been.
By the way, as I have been adding to my positions, I have been about 50% GDX, 40% GLD and 10% SLV. Any thoughts on an appropriate alignment of these positions as we go higher?

well, know your own risk appetite because if this is not the real move for gold it can reverse rather quickly. Its creeping higher slowly with credit getting tighter and much better. So its clearly not a risk aversion/end of world trade anymore. The public perceives its more of a reflation trade, which I think will be the reason for the latter surge, while now I see it as a anti-paper money trade as sovereign debt is being downgraded and USA may lose AAA rating and who knows when someone will question how badly the fed compromised its balance sheet and how much they will have to print.

wow, treasuries are rolling. Is it possible its happening already?

when does fed step in to buy? I thought it would be at a planned meeting but it could happen next week if auctions fail at huge issuance

The dollar's not in a very happy place.

The scary thing is that TBT could already be factoring in the Fed's purchases.

Other signs of the reflation trade include the possible pickup of industrial metals like copper and steel. And of course (some) grains like wheat and soybeans. In fact wheat broke $6/bushel this week.

regarding agricultural commodities, IDWT, i don't have access to any great data at this second, but I had heard that the credit crunch hugely hurt many of the agricultural producers this past year. there may actually be a temporary shortage in certain areasof the agricultural supply chain.

Noah:
It is sad to say we go from the frying pan into the fire. My biggest worry right now are rates backing up. It will kill the real estate market. We are just getting going a bit. I truly feel that deflation is still our worry. If the economy doesn't go the rebounds in commodities will die.

Brenda, I write extensively about the agricultural situation.

Here are some older links:

Rice
http://debtsofanation.blogspot.com/2009/05/debts-of-spenders-cbot-rice-futures.html

Farmer Credit Crunch
http://debtsofanation.blogspot.com/2009/05/debts-of-spenders-grain-bulls.html

Wheat
http://debtsofanation.blogspot.com/2009/05/debts-of-spenders-wheat-weather-outlook.html

Corn and Soy
http://debtsofanation.blogspot.com/2009/05/debts-of-spenders-soy-and-corn-story.html

Richard - that is exactly right and part of endgame and unintended consequence of actions taken to stem this crisis. Its why I expect a slight rebound and then another wave of pressure

TBT broke outside the inverse bond-equity relationship today. +4% in a down day for the mkt. That is really scary from a taxpayer viewpoint.