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“We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.” –Luo Ping

While some America’s self perceived “financial savants” (Larry Summers) think that going Greenspan is the only way to bail ourselves out of this colossal mess, some of the objectively sober think about this a little differently. While the quote above, not surprisingly, is being back-pedaled on now by Beijing… the reality is that Ping said it, and it certainly sounded like he meant it.

Over the course of the last few week’s we have started to see what we have been calling “The Queen Mary” turn (10 year yields on US Treasuries turning higher). The 25 year chart of American long term debt yields has made many a leverage hound look like a financial genius… until most recently, of course.

The Chinese and Japanese are finally choking on the Greenspan/Bernanke legacy of rate cutting and debt issuance. At this point, it’s only a matter of math and time before America’s top debt customers say enough is enough. In the meantime, never mind what they say - watch what they do from here.

The government sold a record $67 billion in notes and bonds last week:

• FEB 10: a record $32 billion of three-year debt at a yield of 1.42%
• FEB 11: a record $21 billion of 10-year notes at yield of 2.82%
• FEB 12: $14 billion of 30-year bonds (the most since the auction when it reintroduced the security in 2006 -also $14 billion), at a yield of 3.54%

According to Bloomberg “The Fed’s custodial holdings of Treasuries for foreign institutions including central banks rose 0.5 percent to a record $1.743 trillion, central bank data showed. The holdings slipped last week to $1.735 trillion, the first decrease in 24 weeks.”

Keith R. McCullough
CEO / Chief Investment Officer

Andrew Barber
Director