Bond Vigilantes and the Free Market 
(Neanderthal, 3984 
Points) on 6/8/09 at 7:55am
The best-laid plans of mice and men often go awry. -- Robert Burns
Today is not a good day for the Obama economic team. Their boy's approval rating is slipping, the damnable free market won't cooperate, and now the bond vigilantes are back.
Who knew that investment banks wouldn't be excited about executive compensation limits? Or that secured creditors would take umbrage at their debt being subordinated to the interests of a labor union? Or that bond holders would actually expect their bonds to be worth something at maturity, and would react badly when the Fed perverted the money supply?
Why can't they all just play team ball???
We are at the point where government intervention and free market forces are at loggerheads. The current administration has pushed further into the market than any since FDR, and now the market is pushing back.
Today, an group of Indiana pension funds appealed to the Supreme Court to stay the sale of Chrysler. In their filing, they stated:
"Absent a stay, the Court will be deprived of the opportunity to decide critical, nationally significant legal issues relating to management of the economy by the United States Government."
While I don't think Ruth Bader Ginsburg is our best hope for a ruling in favor of secured creditors, ultimately it won't matter. The market is saying enough is enough.
Chrysler and GM have no shot at receiving any type of debtor in possession financing, as no sane lender is willing to risk the government abrogating another contract. The net result is that the cost of doing business rises dramatically for companies with excessive government involvement.
The message the market is sending to the Obama administration?
Keep fucking around and we'll make it impossible for nationalized companies to stay in business.
Enter the bond vigilantes. This nebulous group of ne'er-do-wells is the economy's best hope of stopping the runaway train that is the Federal Reserve.
Taking exception to the Fed's policy of flooding the market with dollars, the vigilantes are pushing long term yields higher in an effort to choke off mortgage financing and other consumer credit. By making it harder for the Fed to re-inflate the bubble, the vigilantes are protecting their bond investments and, by extension, the American taxpayer.
And they've been successful. Yields on 10-year Treasury notes have risen to 3.7% from 2.5% in March. Mortgage rates are up better than a quarter point this week alone, putting a stop to the burgeoning number of re-financings. 30-year mortgage rates are currently at 5.29%, the highest level since December.
The small matters of a $1.8 trillion budget deficit and runaway government spending are providing even more fuel for the vigilantes' fire. Until the boys in D.C. get their shit together, things could get pretty ugly.
Just when I started thinking capitalism was dead in this country, market forces prove once again just how impotent the government really is. The market lets the government get away with a lot, and a lot more this time than ever before in our lifetimes, but it's nice to know that when the government takes a little too much of the leash that the market isn't afraid to jerk it right back and smack the Feds on the snout with a rolled up newspaper.
Look for the market to be more proactive in punishing wrongheaded government policy in the future. Enough rope was given, and I believe the wealth redistributionists have hung themselves.
That's not to say it will be smooth, capitalist sailing from here on out. I don't expect the socialists to go down without a fight.
Ultimately, though, the market will be successful in exposing them for the idealistic dreamers that they are and the country will wake up. At least that's my hope.
Top notch post there, Uncle
by MezzTop notch post there, Uncle Eddie. Thanks for the color.
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Great post.
by tiniyoGreat post.
Well-written. Except for the
by BluesHillWell-written. Except for the quote: "The best laid plans of mice and men go oft awry." is a better/more acceptable English paraphrasing of the original line from "To A Mouse": The best laid schemes o' mice an' men
gang aft a-gley.
Just my 2c.
LOL
by Edmundo BravermanWell-written. Except for the quote: "The best laid plans of mice and men go oft awry." is a better/more acceptable English paraphrasing of the original line from "To A Mouse": The best laid schemes o' mice an' men
gang aft a-gley.
Just my 2c.
Yeah, Google works on my computer, too.
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by ideatingOh Jesus, give me a break Edmundo... this is no better than CNBC.
How long do you think this is going to last? Where do you think assets are going to flow now that equities are stalled above the 200 day MA and the DXY is showing signs of rebound? Ascribing this sort of premeditated price action is just irresponsible.
And this whole bond vigilante thing is laughable... how long do you think this is going to last?
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Ideating
by Edmundo BravermanThe inflation issue isn't going to go away. I'm just curious. Do you believe there isn't a group of bond vigilantes? It's perfectly reasonable that they might be an urban Wall Street myth, but recent activity tends to suggest otherwise.
And now the Chinese are starting to ask if we'd be willing to denominate Treasuries in Yuan.
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by ideatingThe inflation issue isn't going to go away. I'm just curious. Do you believe there isn't a group of bond vigilantes? It's perfectly reasonable that they might be an urban Wall Street myth, but recent activity tends to suggest otherwise.
And now the Chinese are starting to ask if we'd be willing to denominate Treasuries in Yuan.
Agreed that inflation will not go away but the steepener is going to come into play over months, and certainly not in an environment with such absolutely crappy aggregate demand (even with questionable 2nd derivs). I also think there may be bond vigilantes but I think it's futile to attempt any sort of "vigilantism" in the credit markets - just way too many players and factors to attribute movements to any sort of financial morality (other than free market forces, which the bond vigilantes are not).
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Holy Shit! Ginsburg Got One Right!!!
by Edmundo Bravermanhttp://www.philly.com/philly/business/20090609_High_court_justice_delays...
Take that, contract abrogators!
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Solid post. Those vigilantes
by HoustonoilmanSolid post.
Those vigilantes could be the Asian Banks....they have recently moved their positions to the front end of the curve
Bottom line is the bond market is the s**t...only indicator of a true free market this country still has
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by Chim Chimhttp://www.philly.com/philly/business/20090609_High_court_justice_delays_Chrysler_sale.html
Take that, contract abrogators!
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Yes, I was originally happy, that for once, someone might stand up to Obama. But today, I was furious after the market close, I wanted to be that guy beating the shit out of the monitor on the other post. The stay being lifted today by the supreme court, and letting the Fiat/Chrysler deal run its course is ridiculous. Obama's admin just threw out 150 years of bankruptcy law.
So how bout those 10 year notes...
by DaCarez10-year auction at 4% today. Next stop...7-8%?
It keeps coming
by stk123Mortgage rates already up to 5.56%
Obama is backing away from caps on executive compensation, although I believe that congress' bonus limitations still do apply.
Edmundo, how's the Paris
by TetrisEcmundo, how's the Paris women?
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by Edmundo BravermanEdmundo, how's the Paris women?
I fall in love three or four times a day...
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Edmundo, Don't know you but
by HoustonoilmanEdmundo,
Don't know you but have read some of your posts, and you sound like a pretty well seasoned no bullshit guy. As I know this post doesn't pertain to the Bond Vigi. issue, I have got to ask
you where you see this country headed (politically, economically, etc.)
know that you are not currently residing in America, but you are able to witness what is going on this rapidly transforming tyrannical republic.
I am only 24 so I don't know shit...but what I do know is that this country is heading on a downward spiral day by day
I know this isn't Dr. Phil, but what do you foresee for the young entrepreneurs living in America scarred absolutely shitless of our government and their CONSISTENT INVOLVEMNET in our daily lives?
I like yourself am a true Conservative, not some phony Neo-con dooch or the religious right.
Bottom line, do you see this nation able to recover from its unbelievable deficits, future high levels of taxation, job recovery, etc. Your in France now and from an outside perspective I'd like to know where you see this country in 5-10 years.
Yes I know this post is long and off topic but its important for all the true free market capitalists who are deciding whether getting out the hell of this country ASAP is the best thing to do, etc.
^^
by stk123I am leaving this country too in the next couple of weeks! My bank offered me an opportunity to transfer and I ran with it.
My parents had to live through communism and I don't want my kids dealing with the same BS, which is the direction this country is heading.
I am tired of listening to the news and novelties of the Obama administration - it gives me a headache.
Good luck houstonoilman, I am OUT OF HERE, but I will be back when capitalism returns.
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by ideatingWow... let's get more dramatic? How do you even argue with that? You realize eventually the economy will recover and this isn't a permanent thing right?
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Well once those one million
by westsidewolf1989Well once those one million plus ARMs come back to bite people in the a** down the line, the housing market will fall right down the stairs before it gets to the top. Oh and HoustonOilMan, what say you about those guys in Pennsylvania and West Virginia demanding that good old union labor be used in drillin for Penn Grade Crude? As if they have any room to bargaining with the "burgeoning" steel industry.
To be honest I haven't
by HoustonoilmanTo be honest I haven't really been following that region and any labor issues....but with Obama having to compensate the NUMEROUS unions for their political support/contributions it's not a stretch that these guys are going to have significantly more considerable bargaining power