NEW YORK (TheStreet) -- The U.S. Treasury market is the biggest financial mystery today.
Much like the proverbial "lead zeppelin" defies the laws of physics, the current status of the Treasury market defies all of our financial fundamentals. It is a market that cannot exist, and yet it does.
my own writing
has focused upon one particular aspect of this absurdity: the highest prices for U.S. Treasuries at a time of maximum supply. This, in itself, is an absolute financial contradiction. The highest supply in history directly implies the lowest prices in history, for every market in the world -- except U.S. Treasuries.
But that is merely Act One of this Theater of the Absurd. These maximum prices are occurring at the point in history where the U.S. has
never been less solvent
. This also directly implies that U.S. Treasuries should be fetching the lowest prices in history -- as is occurring with their deadbeat counterparts in Europe.
No one has been able to explain this ultimate financial contradiction, and so I have previously done so myself. My solution for this conundrum was based upon the Holmesian Principle of logic asserted by Sir Arthur Conan Doyle: When you eliminate the impossible, whatever remains (no matter how unlikely) must be the answer.
In applying this principle to the logical/financial contradiction of the U.S. Treasury market, I was left with only one possibility: that B.S. Bernanke is secretly (and illegally) counterfeiting U.S. dollars -- and using those bogus dollars to prop up the U.S. Treasury market. There is simply no other viable theory for how this "lead zeppelin" continues to (supposedly) generate the highest prices in history for this thoroughly and obviously worthless paper.
Thus, I originally wrote
"Maximum Fraud in the U.S. Treasuries Market"
back at the beginning of this year. Since that time I have watched with interest to see if any competing theories would emerge.
Obviously I haven't been watching the mainstream media. The same mindless parrots who report on this financial absurdity on a daily basis have never seen anything even slightly unusual about maximum supply and maximum prices occurring simultaneously. So I have been watching other members of the alternative media for such developments.
To the best of my knowledge, only one such theory has emerged. This theory holds that the financial/logical contradiction of the U.S. Treasury market is simply a product of manipulation of interest rate swaps. Sadly, this theory appears to have been accepted by many members of this community despite the fact it is fatally flawed.
Understand that the mere (absurd) prices for U.S. Treasuries are the minor element of this mystery. The real question is and has always been:
Who is buying this worthless paper?
As an analogy, I can advertise a used car for sale and ask $1 million. People all around me may (would) scoff at the "fraudulent" price I was asking for this car, but there would be no need to punish me or even prevent me from attempting to carry out such a fraud. Why? Because merely listing a (fraudulent) asking price for the used car in no way compels anyone to purchase that car.
Here is where the explanation of interest-rate swap manipulation falls flat on its face, because it fails to explain the crucial component of this fraud: Who is buying all of the most overpriced bonds in the history of the world? There is no answer for that question. We need simply delve into some additional parameters of supply and demand to illustrate this point even more vividly.
Let's start with all of the currency swaps in which (predominantly) China has been relentlessly engaging for more than two years. By my count, it has already eliminated somewhere between $1 trillion and $2 trillion in annual demand for U.S. dollars. This factor alone means there would be much less demand for U.S. Treasuries
at any price
-- let alone the highest prices in history. Furthermore, most of the pre-Crash of '08 trade surpluses, which used to be "recycled" into U.S. dollars (via U.S. Treasuries), no longer exist. Yet another major plank of demand for U.S. Treasuries has evaporated
at any price
Then we have yet another absolute financial contradiction: Prices for the U.S.'s fraud-bonds being at the highest prices in history, while U.S. equities simultaneously approach their own record prices. Here the alternative media has been just as comatose as the mainstream media. Where is the denouncement of yet another fraudulent set of parameters?
It has been understood since the dawn of modern markets that bond prices and equity prices always behave in an inverse manner toward each other: When the prices for one are up, the prices for the other are down. Market commentators have offered "fundamental" explanations for this reality, generally based upon the concept of risk allocation. However, there is a much more basic explanation.
There is only so much capital floating around global markets. If that capital -- that tide -- flows into one market, then as a matter of simple arithmetic it must flow out of that other market. Thus, U.S. equities and U.S. bonds could never/can never both be at "maximum prices," since that it is just as absurd as a meteorological report claiming that all the world was simultaneously experiencing "high tide."
As a matter of simple arithmetic, the massive collapse in demand for U.S. paper globally has meant that it has been absolutely impossible to find buyers for this paper
at any price
. If there could not be enough buyers for all this paper -- even at legitimate prices -- then merely manipulating the "sticker price" on U.S. Treasuries lower through interest-rate swap manipulation is irrelevant, because that fraud cannot manufacture any buyers for this paper. It is just as ridiculous as trying to sell a used car for $1 million: One can attempt such a fraud, but one will never find a chump to execute it.
There is only one way in which the entire world can simultaneously experience "high tide": a much greater volume of liquid would have to exist to (globally) elevate the water level. The financial analogy is identical. The only way that the gigantic U.S. equities markets and the gigantic U.S. bond market can both exhibit maximum price simultaneously is if there was a much greater volume of capital.
Where has all that capital come from?
The mainstream drones will tell us that there has been a flight to safety: all of the world's lemmings simultaneously loading up on
worthless U.S. paper
. This explanation can be absolutely rebutted in two different ways.
First, the U.S. government publishes an official report on capital inflows and outflows into the U.S. economy. In order to prop up both of these gigantic U.S. markets simultaneously, there would have had to be a massive influx of capital into the U.S. -- reflected in that official report. No such migration of capital has ever occurred.
The second absolute rebuttal to this nonsense is something that the media drones have regularly been reporting on for the past three years (out of the other side of their mouths): the "destruction of wealth" that has taken place before/during/after the Crash of '08. Obviously the trillions of dollars that have been destroyed (primarily through listening to the absurd financial advice dispensed by the mainstream media itself) are yet another "minus" in the demand column for U.S. paper.
All other supposed explanations for the obvious and massive fraud currently taking place in the U.S. Treasuries market fall apart because they cannot account for "record demand" for U.S. Treasuries, when literally every component of that demand has partially/totally evaporated. I repeat: There would not/could not be enough buyers for U.S. Treasuries at any price -- and so merely manipulating those sticker-prices with interest-rate swap manipulation is
I assert yet again that there is only one theoretically possible explanation as to why the U.S. Treasuries Ponzi-scheme has not already blown up like Bernie Madoff's fraud: B.S. Bernanke is fraudulently counterfeiting U.S. dollars (by the trillions) to prop up this market. It is not only the only possible explanation for the Treasury market itself, but the only explanation for the simultaneous bubble prices of both U.S. bonds and U.S. equities.
A lead zeppelin would require an enormous amount of lighter-than-air gases to keep it afloat. The dual bubbles of U.S. equities and U.S. bonds similarly require a massive amount of capital to keep them from immediately popping. As there is no possible legitimate source for such capital anywhere on the planet, then Holmesian logic dictates that these bubbles are being propped up with illegitimate capital. Enter B.S. Bernanke, and his secret money printing.
I remain open to other
to this absolute financial contradiction. Absent any new (and viable) proposal, my theory stands alone.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.