Market Ticker often posts this graph of total debt (public and private) in the US:

We can see from that graph that the trend is now changed to “down” after 50 years of “up”.  The Federal government has been unsuccessfully attempting to offset the decline in private debt with increases in public debt.  With the trend to more austere budgets, the growth rate in Federal debt will also begin to decline, accelerating the decline in total debt.  What does this mean for interest rates?  A shrinking supply of total debt means there is a shrinking supply of debt securities in which investors can invest.  All other things held constant, this implies that debt prices will  be bid up and interest rates down.  In the case of US Treasury debt, we can expect a significant fraction of it to be monetized – bought by the Federal Reserve and paid for with Dollars that don’t cost the Treasury any interest.  This monetization process will not increase the total amount of dollars available, but it will further reduce the supply of interest bearing debt instruments available for investors to buy – resulting in still more upward pressure on Treasury prices and downward pressure on rates.  There appears substantial probability that long term Treasury Bond rates could be cut in half (from 4 to 2%) within 18 months.  Only when the private economy begins to recover with real, non-government financed growth will we have significant risk of a rise in interest rates.

More on this topic (What's this?)
Anticipating The Rate Hike
Equity Risk Premium In A Rising Interest Rate Environment
Janet Yellen Launches New Ladies Fragrance
Read more on Interest Rates, Debt at Wikinvest

Karl Denninger at The Market Ticker has some interesting thoughts on Friday’s spike in the last few minutes of trading.  First, here’s his chart. Then some of Karl’s reasoning:

es-1

Directly in front of the bell 1,000 contracts were bought – as near as I could tell at the market.

Each single point that was disadvantaged to the buyer by this execution cost him a cool quarter-million bucks, and on average, the “disadvantage” was likely around five full handles, meaning that the buyer of these contracts, if this was an “organic” order, willingly ate $1.25 million dollars.

I don’t believe for one second that is what happened.

There are only two possibilities that I can come up with, and both demand answers:

  1. “Someone” was forcibly liquidated out of a short position – a fairly big one.  1,000 S&P “big” contracts has a maintenance margin requirement of $22,500,000 – that’s not a small position, and each point, as noted, has a $250,000 move associated with it.  Who was it and why?
  2. “Someone” who didn’t give a damn if they lost a sizable amount of money intentionally wanted to shove the cash market up through the 200DMA, a critical technical level.  They were 1 minute late; they succeeded in doing so in the futures, but not the cash!

#2 makes for great conspiracy theories, but my money is on scenario #1 – someone got forcibly liquidated into the close, perhaps a big customer, perhaps a hedge fund, but someone.

Interesting…We are at the 200 day moving average and somebody gets forced out?… or, the option Karl is not fond of: “someone” didn’t give a flip what it cost to remove stop losses on shorts for some new upside potential. Karl reports he went a little short on the spike, but it’s anybody’s guess what next week holds…unless “someone” let’s us know…