WHAT'S IT ALL ABOUT, ALF?

I was sitting down yesterday to write about not much again when I heard the announcement that Bill Gross had emptied PIMCO of all of its Treasury paper. Hold on, said I, there's an auction today. What's this going to do? Well, not much it turned out as the 10 year went off pretty well which stopped me dead in my tracks as I expected the opposite and a headline for the blog. The result? No blog. But it got me thinking: if PIMCO, the biggest player in the game isn't buying this stuff, who is? And the answer is...I don't know.

I've talked to a few players but the answers I get are not particularly satisfying nor instructive. Let me say right away this isn't my bag and never has been but I think I still have a pretty good nose and something about this doesn't fully pass the smell test. Differences of opinion are what make markets but when a player like Bill Gross makes a move like this and no one seems to give a damn something's up. Either the entire world thinks he's a nut or the entire world is doing the same damn thing. But if the latter is the case why hasn't this view been reflected in the auction results or in yields? And if the former is correct...well, to be frank I would be surprised.

I'm getting, therefore, a rather queasy feeling about this thing. Suppose--just suppose--that the real buyer is the Fed through QE II and some of it's buddies around the world. What does that tell us? Well, two things perhaps: first that if this supposition is correct there may well be a QE III in our future to fund the $268 BILLION budget gap of the first quarter and those to follow and second, if there isn't we could witness a run up in yields that is far higher and far more rapid than any thing that has been predicted. Remember my comments about the financial condition of the states? There will not be a default in the classic sense but the way these things happen is that at a point the markets simply refuse to accept yields that make sense from the future standpoinds of issuers. A 100 b.p. move in the ten year kicks everything waaaay up and has the effect of slowing or stopping our economic recovery dead in it's tracks. It does NOT as the rosy-outlook guys keep trying to tell us mean the economy is booming. It means we're in trouble. Conversely, if the Fed keeps creating money we can surely expect an inflationary effect and an outcry from our "friends" around the world. Perhaps queasy isn't a strong enough word.

In the meantime in Euroland, tomorrow marks the attempt at a Pax Germania, i.e. the Germans MIGHT agree to bail out the Greeks and the Portugese and anybody else for that matter if everybody over there becomes a German. Not going to happen IMHE. By the weekend I think we are looking squarely at a coming rescheduling of sovereign risk in Europe over the coming months with unknown consequences for the European banking system which is about to be subjected to another stress test that is even a bigger joke than the last one as the issue of what constitutes capital is left to the individual political constituencies to determine. That might be a good sign as the nonsense of the exercise may actually mean that people are beginning to realize that capital, while nice to have, is for the most part meaningless. I close with a line from a very old, wise friend who FINALLY agrees with me: "Banks get sick because of their assets; they die because of their liabilities." Stay liquid my friends. In many ways we are like banks.