Friday, December 11, 2009

Revenge Of The Bond Nerds

Well, what do you know? The participants of the Roman orgies that took place during the Debt Dump and Bail Saturnalia (feel free to add punctuation marks as you see fit) are finally being presented with the bill. It's still in the process of being added up in toto, but it looks to be a doozy.

The irony is that - for the moment - the bill is being thrown at the face of those far less responsible for the mess than the big-time orgiastes. And to add insult to injury, the bill is summarily and contemptuously presented by that troupe of orgy-organizers who arguably made the mess much worse.

But, let's explain things in plain Latin.

Recent days have seen a raft of sovereign-credit downgrades and warnings by Moody's, S&P and Fitch, causing sharp rises in government bond yields and credit default swaps (CDS) for those affected. No doubt goosed by the (near-sovereign) collapse of Dubai, rating agencies are belatedly falling all over themselves to kick weakest-link borrowers in the groin, i.e. countries like Greece and Spain. Other countries like Italy, Portugal and Ireland are seeing their bonds come under pressure, too.

For example, look at the chart below tracking 5-year CDS for Greek government bonds.

Greek Government Debt CDS

After settling down from the late 2008 - early 2009 global panic, credit concerns rose again following some domestic issues (elections, dodgy statistics); but the catalyst that really spooked the market was unquestionably Dubai's loud insolvency, which made everyone stand up and face facts.

The rating agencies are also dropping hints about the UK and US, but they are still far from daring (or foolish) enough to really step on such big toes, preferring instead the time-tested method of beating on black sheep (or scapegoats, if you are more classically educated in things Greek and Roman) in order to send veiled messages to the King.

So, what of the "bond nerds" in today's title? (Apologies to my erstwhile colleagues - I use the term affectionately, of course). They are those ladies and gentlemen on trading desks and investment committees who have the decidedly unglamorous job of making markets and selecting straight, boring government paper to invest in: Treasurys, gilts, etc. They are very, very far removed from the hustle, bustle and juicy bonus pools common to more "meaty" structured debt securities. That is, they were - until the spectre of sovereign default raised its ugly head; suddenly, the nerds are running the show.

A 50 basis point swing in, say, the spread between Greek and German bond yields is enough to send global bond, stock and FX markets gyrating, causing massive stress to mandarins from prime ministers and central bankers, to Brussels-based bureaucrats.

What are the bond nerds saying, every time they hit a bid on the 10-year GGB or buy a Spanish CDS?

Simply this: Enough already with being so free with the taxpayers' and our investors' money... You guys can't run massive budget deficits as far as the eye can see and raise debt levels to the sky, without paying the price. You can't bail out the global financial system and keep unemployment down and consumption up, without us questioning your 1+1=3 arithmetic. You can't have your cake and eat it, there's no such thing as a free lunch - and funny money is no money at all.

Yeah, we may be nerds, alright, but you better take good care of us because you need us big time. Unless you want to walk the Minsky Way, that is...

Have a pleasant weekend (pondering government finances, perhaps?).


  1. The important question here is when (not if, when) the Fed steps in and starts purchasing Treasury bonds again. My guess is that it will take them at least a few months to decide. In the interim, it will be interesting to see how the spread between MBS (where the Fed is still buying in size) and long Treasuries behaves. . .

  2. Great tragedy of the commons saga

    Do you have a chart that looks at combined size of world wide debt (public plus private) minus tangibles (I sure of the actual term as I am not an accountant) and compares that net amount to the size of places in the world nerds can safely put their "panic cash" if states with all these debts start demanding different terms?

    Where will the nerds go?

  3. Sorry, typo (again)

    I am NOT sure of the actual term

  4. Must read, Taibbi on Obama:

  5. Great title.
    Lots of people may be up in arms about the bonuses.
    Not me... not particularly.
    It looks to me as though our western governments have handed over THEIR sovereignty to..
    the ratings agencies.
    Now... those are people, and institutions more interesting to target...
    But that's what you get when you decide that you have to index everything with $$$$, €€€€, etc, and that nothing else... COUNTS.

  6. And... by the way, Hell, I feel that you have been pointedly ignoring my... POINT that John Q Public's assumption that the government is a borrower JUST LIKE ANY OTHER BORROWER and that it is to be treated as such... is a FALSE one that is part of our problem.

  7. Dear Thai,

    It may sound funny, but you can't compare "tangibles" with "money" any more because (fiat) money is intangible.

  8. Dear Debra,

    I don't know about John Q.P. but I don't think that sovereign borrowers are like any one else. Nevertheless, size matters and one nation may be completely different than another.

    For example, Greece and the US are in completely different leagues. If the former declares bankruptcy the world may get upset for a while but it will settle down quickly. If the latter goes...

  9. Thai, with respect to your question, you don't want to be in paper, anyone's paper, for return of your capital. We are in the last part of the aforesaid Hyman Minsky path, ponzi finance, and there is no turning back.

  10. Hell's comment to you Thai is a demonstration of just how difficult it is to realize ALL the ramifications/implications of that consummate abstraction.. fiat currency.
    Liquidity may have its advantages, but in my book we are going to be painfully reminded of the extent of its... DISADVANTAGES in a very short time.
    My wealth is in... THINGS at this time...
    BEAUTIFUL THINGS that can be passed on to my family, and not traded for... liquidity.
    For the goldbugs : quick return to the Midas story is essential. And... as usual, a quick look at the Merchant of Venice, scene of gold casket...
    Good luck...

  11. Hell, thanks

    Deb, agree. The problem with these subjects is that they are an endless rabbit hole. You think you have gotten to the bottom and then you notice there is another hole.

    But Hell, the general point I was making re: tragedy of the commons, e.g. If all the big nation governments (e.g. US, EU, UK, Japan, etc...) all cooperated and decided to play hardball with the bond market, then the bond nerds would not have anywhere to hide, would they? Non-paper assets would be of no protection under such a scenario.

    ... I guess if the bond market was able to get some of the various big governments to play off each other, the bond traders might create temporary safe harbors to try and avoid some of the swings. But if the governments held ranks, there is no where they can hide.

    Or is this wrong?

  12. And if that was the case, it would be in each government's interest to borrow as much as possible right now until they needed to close ranks and play hardball with the bond market.

    In fact, it would be the government that did not borrow right now that would get squeezed tomorrow under that scenario- they would be least interested in closing ranks.

    Anyone know which big government is NOT borrowing in large amounts right now?

  13. Clear concise summary....

  14. Yop, when the government taxes someone, they give the money to someone else (minus their "transaction fee").

    One person "looses" (the person being taxed), while another 2 people "win" (the government worker who gets their cut and the person the government gave the money to).

    Of course as the two new "winners" do ANYTHING with their money, whether they spend it, or save it by putting it in the bank, etc... the money moves to yet another person. (Do economists call this the velocity of money or multipliers? I am obviously not an economist).

    Anyway, it can even go back to the worker or the investor who was originally taxed as the "winners" spend it again on their goods and services, etc...

    My frustration is with THE WAY government is spending its money, as not all methods of spending work (at least from my own viewpoint). This is particularly true as expensive "externalitites" (I think this is the word) are created with this spending that are obvious to anyone who looks at the system/what the government is doing, from a different viewpoint.

    It is of course the same with a private business. When a business fires someone and therefore becomes more profitable, one person "looses" (the person being fired) but others "win" (the workers/owners of the more profitable business).

    The improved profitability now leads to more money ending up in the owners pocket where it can be used anywhere else. It can go to another "service", or investment, etc... e.g. where the person who was just fired can now find work (at the cost of all those transactions), or it can go to another person for them to spend, or it can end up in a bank account where a bank's debt is paid down and from there ends up in the pocket of another lender, etc...

    E.g. it is the same "multiplier" or velocity of money issue, etc... that we see with government taxes or with loans or anything else.

    But in either instance, from a collective perspective, the new issue becomes what kind of externalitity is created by the movement of the money to its new location, etc...

    e.g. zero-sum

    We have been creating an awful lot of externalities with all the places we have moved our money/resources.

    We MAY now be paying down some of these externalitites. From many viewpoints (those affected by these externalitites in particular), this is a good thing.

    It is just my opinion, but I personally think we all have to live in a little fear that the collective CAN spank us if we individually get too far out of line.

    I am a fan of the carrot, but I also see how the stick is just as necessary at times.

    Indeed, I have always voted Democrat, and I do not spank my children (maybe I should), but I did have to laugh when I read the following post.

    Discipline is not always a bad thing, and we do not need to have totalitarianism for it to happen. The market will discipline just as readily. Indeed, there are many ways to be disciplined.

    A lot of people seem to live in belief that they can game the system for themselves. It's just my opinion, but I think it is impossible.

    But here is my main point, and on this I agree with Keynes, whatever mess we already made with our bad collective spending decisions (and again, you must define "bad" relative to a particular viewpoint, and this is where the real issues lie), we already spent the money.

    As Keynes said: "animal spirits"

    Nothing has really changed- except our viewpoint of the situation.

    As for needing to develop a plan (with variable rates of success) that will help avoid personal consequences of tomorrow's possible turbulence, this is always going to be true.

    ... And it will ALWAYS create an externality. ;-)

  15. Yes, the moron quotient is, as the article at the link strongly suggests, higher in Alabama than it is in, oh, say, Wisconsin. The 'Bama morons, who trust in corporal punishment, ineluctably flocked-like the bird brains they are- to POW McCain and his running mate, The Whore of Babylon, whereas the somewhat less moronic denizens of Wisconsin, who don't like to hit their children, went for The Great Mocha Hope. Hooray for progressivism.

    Anyway you slice it, whether you hew to the idea that beating young 'uns is the way forward, or if you prefer to not physically brutalize minors, both sides get had every four years by the political establishment.

  16. Juicy bit of history on the M-I-C for anyone interested in a little skulduggery and tampered helicopter fuel gauges.

    Doubtful that Obama will be able to outflank the M-I-C if Ike couldn't. These characters remind me of Slim Pickens riding the H-bomb out of the bomb bay in Dr. Strangelove. If they can't rule the world, they're damn sure taking the rest of us down with them.

  17. Thanks, yoyomo, for reminding those who need to be reminded, who the enemy really is. In the meantime, a line from The Wizard of Oz best sums up-at least for some of us- "Why we Fight" in Afghanistan.

    "Poppies, poppies."

  18. Great point Thai!

    Indeed it really depends on where the money (debt) is spent. If it is consumed (big tv, bigger house, etc) vs invested (infrastructure, tools, technology, etc).

    If we spend the money (debt) on something that makes us more efficient, productive, etc then the losses of increasing the money supply are offset by the gains....though the win/lose will still be measured by the cost vs benefit reality.

    If we spend the money (debt) on something that we just consume. Then we are left with loss of value when the excess is consumed.

    So really it boils down to all individuals in the macro system rather than the system itself or even wall street or a couple individuals at the top....choosing to consume rather than invest.

    Another major driver is wealth transfer. System designs to transfer wealth to a few that then consume more resources.

    Of course the real macro scenario includes the whole system which would be the whole earth. Now you get into system design for the transfer of wealth to others (Fed, China, etc). And if

  19. By the way, Hell, my compliments on the title of your post.
    It is worthy of a... Hollywood blockbuster.

  20. re: "Another major driver is wealth transfer. System designs to transfer wealth to a few that then consume more resources."

    Depends what they do with these resources they disproportionately consume.

  21. "If we spend the money (debt) on something that makes us more efficient, productive, etc then the losses of increasing the money supply are offset by the gains....though the win/lose will still be measured by the cost vs benefit reality."

    You guys are misguided in this productive/unproductive debate. For most part, the debt was indeed used in buying houses (productive assets) and leveraged companies (productive assets).

    It is pervasiveness of debt that matters, not whether the money is blown away in Las Vegas.

    For that matter, if I borrow 10M to blow away in Vegas, and the casino takes the money to pay salaries for people, didn't my money get spent into productive uses (the casino being the channel)?

  22. Fair enough, I am mixing viewpoints again (it is really hard to not do).

    There are really two viewpoint: the individual's viewpoint and the collective's viewpoint.

    The collective is much more concerned with the collective's debts.

    The individual is much more concerned with the individual's debts.

    And of course there is a relationship between the two for each viewpoint.

    So a collapsing collective debt to an individual with no debt is not that threatening: to a point.

    A collapsing individual debt to a collective with no debt is not that threatening either, again to a point.

    ... So wouldn't it really always be both?

  23. Thai...
    I read the word "looses" too many times in the last few posts.
    The correct word is... "loses", not "looses".
    How do you expect my Froggy friends not to get mixed up if YOU GUYS in the mother country SCREW UP in your spelling ???!!!
    You're equating productivity with those dollar signs again, Thai.
    That doesn't work. (Only on paper, as I keep screaming here...)
    Elementary economics teaches that the quickest way to sink an economy is through wealth concentration. It is extremely logical. I don't really think I need to explain it further, do I ?
    For spankings, and carrots, and sticks, and the whole business..
    I am the kind of Rousseauian person who DESPISES the carrot/stick analogy.
    It is great for.. HORSES (geez, even a MULE is smarter than that), but it sucks for INTELLIGENT people.
    That's all folks.

  24. Let's look at that argument a little closer along with the Anonymous analogy....if I effectively understand the points being made -

    If Thai is robbed at gunpoint and the robber then spends the money putting it back into the economy...the only harm is to the individual (Thai) and not the collective right?

    If the collective taxes the mass and pays Thai a stipend every month which he then spends back into the economy....the only harm is to the specific individual who pay taxes right?

    Now if Mr. Anonymous borrows $10k which he then gambles away thus providing salaries for employees and ROI for owners the only harm is to Anonymous right?

    Does the robber produce anything?

    Does the welfare recipient produce anything?

    Does the Casino (and everyone engaged there in) produce anything?

    Are they not parasitic drag on the economy that once reaches critical mass can topple the economy and the well being of everyone involved?

    Side note about a house being a productive asset - how is it productive?

    As I understand it....a house is in decay from the moment constructed and produces no product or services outside of a roof to live under. Outside of satisfying the basic comforts...all the rest is misalignment of economic resources.

  25. Yohat, I am on your side on this one. My "modifier" was "and of course there is a relationship between the two for each viewpoint."

    In the end it seems that it always gets back to how you want the world to look like/how you want to spend your money/what you are willing to tolerate.

    Anon, your Vegas example does not include the issue of energy loss/friction. Indeed it is basically a perpetual motion machine.

    Improving productivity pays for itself and the loss of energy associated with the change. Your Vegas example continually requires more energy from outside the system to compensate for the loss of energy within the system itself.

    And Deb, ouch!. I thought you were from Washington, not Alabama.

    ... Further you appear to have a certain cognitive dissonance that has looste me. For this spanking seems to be a stick.

    Where is my carrot? ;-)

  26. Cognitive dissonance is a big scam, Thai.
    When was the last time YOU wanted to be a binary computer ??
    Notes on the "productive" dilemma.
    To what extent does man "create" anything ? (Judaïsm is really careful about this sticky, stickly point.)
    But, mucho energy is expended in keeping things created (or produced) from falling apart. (Like that house which must be kept from falling apart, if we want to keep the roof over our heads.)
    It is fallacious to imagine that the "productivity" question can be reduced to things that we magically pull out of that industrial hat.
    In my opinion.
    Recently we seem to have deliberately discounted the fact that keeping things from falling apart is an important.. INVESTMENT.
    As far as spanking in concerned...
    I DID swat my lilluns from time to time when they became ridiculously obnoxious.
    Oddly enough, sometimes low to moderate physical violence is a better solution than trying to explain the social contract to 3 year old Johnny in the grocery store when he throws himself down for a tantrum.
    It... reassures him...
    Too much liberal bullshit on this topic, in my book.
    (And I'm not a redneck to those who know me.)

  27. BIG QUESTION, Thai, that I submit to others on this blog too. (Yeah, philosophy helps to be able to ask questions like this one..)
    Do we want the machines to serve US, or.. do we want to serve the MACHINES ??
    The answer to this question determines what kind of society we live in.
    And it largely determines our idea/ideal of productivity.

  28. Since I am feeling chatty this morning...
    HOW is the individual "harmed" through taxation when he pools his money with others to deliver a stipend to Thai ?
    Because he has "lost" money ?
    But... who SAYS he has "lost" money ?
    Who says he isn't.. investing it, instead ?
    If I pool money in some form so that a pregnant woman will receive prenatal care, thus enabling her to be able to carry that baby to term, and deliver it in the best conditions, and if I enable her to enjoy living conditions in which she can be a good, caring mother for little Johnny, then...
    aren't I INVESTING that money ?
    Who can say with all certainty that I'm NOT investing it ?
    And if I'm investing it.. then how am I harmed for that investment ??
    I, for example am not sweating 16 hours a day for filthy lucre.
    This FREE time is available for me to do those INTANGIBLE, uncountable things that keep society working smoothly and in a humane fashion. (a smile, helping an elderly person with groceries, spending a half hour talking with a lonely, elderly person, doing volunteer work).
    So... if I received a stipend that allowed me to live decently to be able to do that, YOU GUYS WOULD THINK THAT I WAS JUST LOAFING, RIGHT ?
    Now you understand what I mean about the perversion of the Protestant work ethic. It has tainted your.. souls.

  29. Deb, re: "Do we want the machines to serve US, or.. do we want to serve the MACHINES ??"

    There are so may viewpoints on this issue... Perhaps it is best to just agree that "a rose by any other name does not smell as sweet". ;-)

  30. Well since you are feeling chatty...why not...

    1) They give up economic resources to Thai who contributes nothing in return (work, labor, production, etc)

    99 weeks of unemployment is just that....99 weeks of unemployment.

    As for your investment scenario...perhaps....any statistics for that scenario?

    If the soul is be it! Tell it to the states who are currently borrowing 5-25% of current revenues (at an accrued 5% interest) to fund the DIFFERENCE between unemployment income and unemployment expense.

    The day of reckoning for debt is rapidly approaching!