That's a deliciously politically incorrect phrase, isn't it? We don't know where it originated, probably in England but possibly in Australia. It was originally a cricket term, describing either the doctoring of the cricket pitch (the rectangle where the bowler bowls the ball) to favour one team or another or the outright sabotaging of the pitch so that a game cannot be completed (a game of Test cricket can take up to five days to complete). Wherever the term orignated, it has come to mean the act of ruining a plan or stuffing up expectations due to underhanded activities. It is especially popular in India. Just enter the phrase "queer the pitch" in Google and look at all the Indian news stories it finds.
In the US, the "pitch" that deflation is the main economic bugbear on the horizon, that the Fed is battling successfully against it, and that the economy is now in the throes of the long awaited "recovery", is now being royally "queered" by the bloodbath on US debt markets. That's ALL US debt markets, not just the highly visible Treasury debt markets.
Towards the end of the week, reports on the web started to proliferate, all dealing with the bloodbath on US debt markets. Here's one - from Reuters. The rot started a couple of weeks ago when reports out of Europe noted that the ECB was "warning" European banks that they should curb their appetite for US "agency debt" (read debt issued by those mortgage behemoths, Fannie and Freddie) and that they might even consider lightening up on their holdings of same. Ever since, as Treasury yields soared and capital values plummeted, the yields on US agency debt, mortgage debt, and even corporate debt has soared even faster.
By the end of the week, reports were coming out that the yield spread between these types of debt and equivalent maturity Treasury debt was blowing out to an extent terrifyingly reminiscent of the leadup to the LTCM crisis in 1998. Given the speed with which Treasury debt yields have been rising, that's quite a feat. Everybody, from the Fed to the Treasury to the money center banks to the derivative and currency traders still remembers that one with repressed shivers of ultimate dread.
What scares these people even more is the growing suspicion that the IMMENSE paper losses which have already been taken by the players in these debt markets - which dwarf the stock markets, by the way - are getting too big to be covered up. US debt market observers are agog at the simple fact that neither the US stock markets nor the US Dollar itself is yet showing any ill effects from this bond carnage, in fact, the $US index spent the past week regaining the ground it lost in the previous week.
And, to top everything off, the Treasury wades into THIS market next week (August 5-7) in an attempt to "auction" a record $US 60 Billion in brand new medium-term (three to ten year) debt paper. These auctions will fly in the teeth of what all agree is the worst bond bloodbath in a decade and many compare to the ultimate bond decimation of the late 1970s.
It is an awe inspiring fact that the US financial powers that be have so far managed to sell the scenario that the US economy is well down the path to recovery and accelerating levels of growth. The latest and most awe inspiring piece of "evidence" for this proposition was the report of second quarter GDP growth of 2.4%. Large as life amongst the data in the report was the fact that government military spending over that quarter had risen by 44% and that government spending as a whole had risen by 25.7%. It was then reported that fully 1.7% of the 2.4% GDP growth had come SOLELY from government military spending.
"Build bombs and grow rich - blow them all up and build more and grow richer!"
The "pitch" which the Bush Administration used to sell their war in Iraq is paling into utter insignificance in terms of sheer incredulity in comparison to the "pitch" which is now being used to sell the assertion that the US is in economic recovery and faces renewed and increasing growth ahead.
We cannot think of ANYTHING more at variance with the truth than THIS "pitch", unless one equates the concept of "economic growth" - in its entirety - with how much money the government can manage to borrow and spend without adverse consequences.
Unfortunately, for the Bush Administration, the Fed, and the Treasury, the adverse consequences are much too visible on the debt markets. Don't forget, it was this same Administration, not many months ago, which said that deficit spending and the height of interest rates have nothing in common.
US debt markets are in extremis. So far, the US Dollar and the US stock markets have NOT reflected this condition, to the utter amazement of everyone who has noticed what has happened to debt yields. Gold WAS reflecting this condition - LAST WEEK. This week, the ubiquitous funds have been rallied into action and have dragged the US Gold price all the way back to where it was at the beginning of the latest rally.
The reason why this has been done is painfully obvious. Next week's Treasury refunding auctions is probably the most important in the history of that institution. At stake is much more than the continuing profligacy of the Bush Administration. At stake is the entire superstructure of the global financial system based on the fiat US Dollar as the reserve currency. Treasury debt paper is both the ultimate reserve upon which ALL (with the partial exception of the European Union) global financial systems are built. It is the ultimate "safe haven", the financial instrument which, above all others, IS TOO BIG TO FAIL.
Everything that can be done IS being done to prepare for the successful conclusion of these auctions. One very important step was, of course, to debunk Gold, hence the swan dive this week. As already stated, many see the present bond bloodbath as beginning to rival the one in the late 1970s. The late 1970s saw the beginning of the parabolic Gold rise from $US 102 in August 1976 to $US 850 in January 1980. It also saw the near extinction of the US Dollar and an interest rate environment of almost hyperinflationary proportions, where short-term debt exceeded 20%. Back then, the US Government owed about $US 750 Billion.
Today, with official rates at 1.00%, the US government owes $6,751 Billion and the Bush Administration has been and proposes to continue to add to that figure at a rate never before approached. The soaring bond yields point to the fact that this can't go on much longer. A "failure" of the Treasury auctions next week would point to the fact that it must stop - RIGHT NOW! Anything and everything must be done to avoid that.
The longer the Gold supression is maintained in the face of the current situation, the more obvious it becomes. Many have noted the extreme reluctance of Gold stocks to follow Gold down this week. The longer the Gold suppression is maintained in the face of the current situation, the more violent the snap back will be when further mainainance proves impossible.