US DEBT - 61% purchased by the FED in 2011

good article from wsj - what you need to know about US DEBT.

Demand for U.S. Debt Is Not Limitless

In 2011, the Fed purchased a stunning 61% of Treasury issuance. That can't last.

By LAWRENCE GOODMAN

The conventional wisdom that nearly infinite demand exists for U.S. Treasury debt is flawed and especially dangerous at a time of record U.S. sovereign debt issuance.

The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, "If you look at the markets, they're practically falling over themselves to lend money to the federal government." Sadly, that's no longer accurate.

It is true that the U.S. government has never been more dependent on financial markets to pay its bills. The net issuance of Treasury securities is now a whopping 8.6% of gross domestic product (GDP) on average per annum—more than double its pre-crisis historical peak. The net issuance of Treasury securities to cover budget deficits has typically been a mere 0.6% to 3.9% of GDP on average for each decade dating back to the 1950s.

But in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector—namely banks, mutual funds, corporations and individuals—have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009.

The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury's need to borrow and a more limited willingness among market participants to supply Treasury with credit.

The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction. Lessons from the recent European sovereign-debt crisis and past emerging-market financial crises illustrate how it is often the asynchronous adjustment between budget borrowing requirements and the market's appetite to fund deficits that triggers a shock or crisis. In other words, budget deficits often take years to build or reduce, while financial markets react rapidly and often unexpectedly to deficit spending and debt.

Decisive steps must be implemented to restore the economy and markets to a sustainable path. First, the Fed must stabilize and purposefully reduce the size of its balance sheet, weaning Treasury from subsidized spending and borrowing. Second, the government should be prepared to lure natural buyers of Treasury debt back into the market with realistic interest rates.

If this happens, the resulting higher deficit may at last force the government to make deficit and entitlement reduction a priority. First and foremost, however, we must abandon the conventional wisdom that market demand for U.S. Treasury debt is limitless.

Mr. Goodman is president of the Center for Financial Stability and previously served at the U.S. Treasury.

GLOBAL WARMING Again

another article from wsj on global warming proving yet the supporters wrong again. read section in blue and red.

Global Warming Models Are Wrong Again

The observed response of the climate to more CO2 is not in good agreement with predictions.

During a fundraiser in Atlanta earlier this month, President Obama is reported to have said: "It gets you a little nervous about what is happening to global temperatures. When it is 75 degrees in Chicago in the beginning of March, you start thinking. On the other hand, I really have enjoyed nice weather."

What is happening to global temperatures in reality? The answer is: almost nothing for more than 10 years. Monthly values of the global temperature anomaly of the lower atmosphere, compiled at the University of Alabama from NASA satellite data, can be found at the website http://www.drroyspencer.com/latest-global-temperatures/. The latest (February 2012) monthly global temperature anomaly for the lower atmosphere was minus 0.12 degrees Celsius, slightly less than the average since the satellite record of temperatures began in 1979.

The lack of any statistically significant warming for over a decade has made it more difficult for the United Nations Intergovernmental Panel on Climate Change (IPCC) and its supporters to demonize the atmospheric gas CO2 which is released when fossil fuels are burned. The burning of fossil fuels has been one reason for an increase of CO2 levels in the atmosphere to around 395 ppm (or parts per million), up from preindustrial levels of about 280 ppm.

CO2 is not a pollutant. Life on earth flourished for hundreds of millions of years at much higher CO2 levels than we see today. Increasing CO2 levels will be a net benefit because cultivated plants grow better and are more resistant to drought at higher CO2 levels, and because warming and other supposedly harmful effects of CO2 have been greatly exaggerated. Nations with affordable energy from fossil fuels are more prosperous and healthy than those without.

The direct warming due to doubling CO2 levels in the atmosphere can be calculated to cause a warming of about one degree Celsius. The IPCC computer models predict a much larger warming, three degrees Celsius or even more, because they assume changes in water vapor or clouds that supposedly amplify the direct warming from CO2. Many lines of observational evidence suggest that this "positive feedback" also has been greatly exaggerated.

There has indeed been some warming, perhaps about 0.8 degrees Celsius, since the end of the so-called Little Ice Age in the early 1800s. Some of that warming has probably come from increased amounts of CO2, but the timing of the warming—much of it before CO2 levels had increased appreciably—suggests that a substantial fraction of the warming is from natural causes that have nothing to do with mankind.

Frustrated by the lack of computer-predicted warming over the past decade, some IPCC supporters have been claiming that "extreme weather" has become more common because of more CO2. But there is no hard evidence this is true. After an unusually cold winter in 2011 (December 2010-February 2011) the winter of 2012 was unusually warm in the continental United States. But the winter of 2012 was bitter in Europe, Asia and Alaska.

Weather conditions similar to 2012 occurred in the winter of 1942, when the U.S. Midwest was unusually warm, and when the Wehrmacht encountered the formidable forces of "General Frost" in a Russian winter not unlike the one Russians just had.

Large fluctuations from warm to cold winters have been the rule for the U.S., as one can see from records kept by the National Ocean and Atmospheric Administration, NOAA. For example, the winters of 1932 and 1934 were as warm as or warmer than the 2011-2012 one and the winter of 1936 was much colder.

Nightly television pictures of the tragic destruction from tornadoes over the past months might make one wonder if the frequency of tornadoes is increasing, perhaps due to the increasing levels of CO2 in the atmosphere. But as one can read at Andrew Revkin's New York Times blog, dotearth, "There is no evidence of any trend in the number of potent tornadoes (category F2 and up) over the past 50 years in the United States, even as global temperatures have risen markedly."

Like winter temperatures, the numbers, severity and geographical locations of tornadoes fluctuate from year-to-year in ways that are correlated with the complicated fluid flow patterns of the oceans and atmosphere, the location of the jet stream, El Niño or La Niña conditions of the tropical Pacific Oceans, etc.

Princeton physicist William Happer argues that computer models vastly exaggerate the effects of carbon dioxide on climate and that CO2 may in fact be beneficial.

As long as the laws of nature exist, we will have tornadoes. But we can save many more lives by addressing the threat of tornadoes directly—for example, with improved and more widely dispersed weather radars, and with better means for warning the people of endangered areas—than by credulous support of schemes to reduce "carbon footprints," or by funding even more computer centers to predict global warming.

It is easy to be confused about climate, because we are constantly being warned about the horrible things that will happen or are already happening as a result of mankind's use of fossil fuels. But these ominous predictions are based on computer models. It is important to distinguish between what the climate is actually doing and what computer models predict. The observed response of the climate to more CO2 is not in good agreement with model predictions.

We need high-quality climate science because of the importance of climate to mankind. But we should also remember the description of how science works by the late, great physicist, Richard Feynman:

"In general we look for a new law by the following process. First we guess it. Then we compute the consequences of the guess to see what would be implied if this law that we guessed is right. Then we compare the result of the computation to nature, with experiment or experience; compare it directly with observation, to see if it works. If it disagrees with experiment it is wrong."

The most important component of climate science is careful, long-term observations of climate-related phenomena, from space, from land, and in the oceans. If observations do not support code predictions—like more extreme weather, or rapidly rising global temperatures—Feynman has told us what conclusions to draw about the theory.

Mr. Happer is a professor of physics at Princeton.

Europe and high oil prices

europe especially france has themselves to blame on the recent crisis. given their intervention mentality in libya, tunisia, iraq, iran, sudan, brent crude has persistently stayed above texas sweet crude for 20 odd usd. with the austerity wind blowing strong, the economy needs lower oil prices to buffer the impact to consumers, but it is exactly the other way round, wage cut, layoffs are met with higher gasoline prices, no wonder everything under the sun have to expect lower prices as consumers are squeezed and cannot afford higher prices after deducting their gas and utility bills from their lower income or soon to be cut wages or even, in the case of layoff, unemployment insurance or welfare.

expect a lower euro which again will translate into higher prices for european consumers when it comes to materials or products that have to be imported, this will dent the economy even further.

Apple vs Silver

some of the readers who received updates not included here should find that not long ago, i compare apple stock with silver.  here below is an article from one of the technical analysts who is following a similar path.

March 2, 2012

Is AAPL This Year’s Silver

By Abigail F. Doolittle

It is hard to deny the seemingly unlikely but stunning comparison between AAPL’s last six months of trading and the last six months of trading in silver to precede its correction last May.

This does not mean, however, that AAPL will suffer from the same sort of collapse nor is it the purpose of this note to predict that AAPL will suffer from a correction.  Rather, this uncanny chart likeness should be used as a possible signal that AAPL’s nearly 40% move over the last three months may be unsustainable and may need to consolidate.

It makes sense, then, to monitor AAPL’s near-term uptrend for any signs of a potential reversal considering the speed and violence that took silver down in reaction to its dizzying ride up.    After all, the only difference between the chart of silver shown below and the one shown above is five trading days.

That and 33%, of course, after silver overstayed an unsustainable uptrend and something that produced an equal and opposite reaction to the last two months of that move up.

Will this sort of a correction occur in AAPL?  Who knows and it very well may not, but it is worth pointing out the possibility sitting clearly in its chart when aligned with the chart of silver and a possibility that stands out even when AAPL’s possibly more precarious-looking chart sits alone.  Much of this year’s nearly 30% rise in AAPL, after all, is built on top of an unclosed gap and something that is likely to close, or to be reversed by an Island Reversal, with the goal of either possibility to take AAPL back down to between $420 and about $430 for a more than 20% potential decline.

And this brings us back to the question posed above about the challenge around how to identify the potential for a dramatic decline in AAPL and this is probably best done through the use of Bear Fan Lines even though this methodology cannot predict the reversal but only prove when it has started as can be seen by taking another look at silver.

 

When the most parabolic part of silver’s 176% QE2 rally is isolated, it can be, and was here as you can probably imagine, dissected by using Bear Fan Lines that, again, do not predict when a decline might come but rather prove its likelihood to stick around once it begins.

Looking back at silver’s chart now, it is possible to see that its uptrend remained in effect so long as silver traded above that all-important bottom and third Bear Fan Line that is bolded and that was case until May 2 of last year.  Once, however, silver slipped below that trendline, it provided a signal that silver’s near-term uptrend was reversing down and not a bad signal at $45 per ounce relative to the $33.03 per ounce seen at one point on the Friday of that same week.

Interestingly, there were even more tightly calibrated Bear Fan Lines around the last few weeks of silver’s move up that began to signal something might be amiss and a line that is marked in lightly in the chart above and one that started flashing red before silver even hit its second incredible and greedy peak.

In turn, Bear Fan Lines may be a methodology well worth applying to AAPL to use a possible way to gauge a potential reversal whether it turns out to be as extreme or not and this means it is more about defense, reactive charting, as opposed to predictive charting.

After all, just because AAPL’s chart carries an uncanny similarity to the chart of silver in almost every regard does not mean it will produce the same result, but it may and it is that “may” or that possibility that is worth defending against should it happen.

And so this takes us to the chart of AAPL and what stands out the most is the fact that AAPL is flirting with the very trendline that provided the pre-signal to silver’s cross below its third Bear Fan Line.

 

Let’s be clear once more, though.  Just because AAPL is trading around the equivalent trendline that provided a strong signal around last year’s decline in silver does not mean that AAPL is about to decline.  It is simply a piece of technical information to be aware of and take into account should AAPL begin to decline in the days or weeks ahead.

In fact, so long as AAPL remains above that third Bear Fan Line at about $505 currently, its near-term trend is an uptrend and this trend should be presumed to be in effect unless proven to have reversed.

Proof of the potential reversal comes only if AAPL drops, preferably closes, below that third Bear Fan Line at $505 now and something that can be taken as a real possibility if AAPL closes below that short trendline at about $545 today and then quickly rising each day thereafter and more so if AAPL drops below the middle Bear Fan Line at about $525 currently and a level that rises each day with AAPL’s near-term uptrend.

Again, then, unless AAPL drops below its rising third Bear Fan Line at about $505, AAPL’s trend is up and it reverses only if AAPL drops below that rising level.

One reason to think that this near-term uptrend could reverse, however, and ahead of any potential pre-signals that would be sent by a close tomorrow below $545 or $535, is AAPL’s long-term and rather impressive bearish Rising Wedge.

Clearly this is one of the more absurd patterns out there, but there’s no denying that there is a very well-formed 5-touch Rising Wedge in AAPL’s monthly chart without even using its point of origination and it is so absurd that its target is not worth mentioning.

What is worth mentioning, however, is the fact that the potential for a seemingly dramatic reversal detailed in relation to the last few months of trading won’t even take AAPL to the bottom trendline of that pattern at about $370. 

Put otherwise, a 20% to 25% decline in AAPL will hardly register in AAPL’s long-term chart and to the degree that it does, it will serve to create what looks natural to that pattern’s rhythm and that is for a touch near that bottom trendline – consolidation – whether AAPL then climbs or drops to fulfill its massive monthly Rising Wedge or simply trades back up in AAPL’s long-term uptrend.  In fact, this means that the many fundamental calls for AAPL to move toward $1,000 do not exclude a near-term drop in AAPL nor does such a possible correction in the near-term preclude AAPL from climbing much higher in the long-term.

Nonetheless, should that type of decline take place in AAPL over the next 12 to 24 months, there will be good reason to say that AAPL is this year’s silver.


Sam’s Stash, Gold and the S&P
Let’s take a look at what silver is doing today after its most recent and dramatic decline that was a bit overdue and one that is still in reaction to silver’s 176% QE2 rally and frankly, one that looks like it will keep “reacting” down until complete equality of motion has been found.

Specifically, silver is trading in a very nice Descending Trend Channel with its current and bearish Rising Wedge bumping up and reacting off of that top trendline of resistance with an apex that appears to be a possible Double Spike Top that could take silver down toward $30 per ounce pretty quickly.

That being said, silver may trade sideways for a few weeks between about $32 and $37 per ounce and perhaps going into the March 13 FOMC meeting.

Irrespective of whether silver heads quickly for $30 per ounce in the days ahead or after a bit of sideways trading as occurred in the apex areas of those previous and fulfilled Rising Wedges, silver is likely to fulfill its current Rising Wedge, too, and one that confirms safely around $34.25 per ounce for a target of about $26 per ounce while the bottom trendline of that Descending Trend Channel would like to pull silver down to about $22.50 per ounce at some point in the first half of this year.

All in all, then, silver’s future may not be quite as shiny as it seemed at this time last year.

Thank you for taking the time to read this week’s piece and have a relaxing weekend.



DISCLOSURE:    Small positions held in SDS, TYP and ZSL.