Treasuries have been on a bit of a rally recently as the Lehman iShares 20+ year duration treasury fund (TLT) chart shows.







click on chart for sharper image



The recent downtrend line has been broken. Is the inflation scare over? That is hard to say. It's much easier to say is that it should be.



Destruction of credit via massive writedowns in banks and financials, accompanied by sharply rising unemployment rates, falling wages, and curtailment in credit lines everywhere is simply not an inflationary environment.



Of course, this all starts with a proper definition of inflation. In Austrian economic terms, inflation is an expansion of money and credit. Money is not expanding and neither is credit. There is an illusion that they are as discussed in Bank Credit Is Contracting.



We have reached Peak Credit, a once in a lifetime event.



Those focused on the CPI, M3, and other such measures are completely missing the boat. Yes, the CPI is understated (at least on the surface). However those using CPI data to short treasuries over the past few years have had their heads handed to them. OK there was a selloff from March to June, but seasonally this is an expected event. April and May are typically the worst months (tax season).



A warning shot was fired at the treasury bears today as circled above. Will they heed the warning?



Credit Deflation



Some choose to call what is happening "credit deflation". In this regard "credit" is an unnecessary label. Deflation is about the contraction in money supply and credit. The conditions now are very similar to what happened in 1929. The primary difference is that prices of many goods and services (notably energy and food) have been rising.



There are several reasons for this.



China and India are on a different credit cycle than the US.

Inflation in China is indeed rampant. Just so that it is clear, I am talking about monetary inflation. Monetary inflation is really the only kind, but confusion keeps cropping up so I spell it out. China is printing Renminbi to buy US dollars.

The US dollar is falling because of budget monstrosities by this administration and both parties in Congress.

More Credit Writeoff Coming

above

A new report released by Clayton Fixed Income Services, Inc. on Wednesday afternoon found that 60+ day delinquency percentages and roll rates increased in every vintage during May among Alt-A loans, while cure rates have declined only for 2003 and 2007 vintages.



The picture being painted for Alt-A is increasingly beginning to look a whole lot like subprime, as a result, even if peaking resets in the loan class aren’t expected until the middle of next year. In particular, loss severity continues to ratchet upward — a trend that portends some likely further reassessment of rating models at each of the major credit rating agencies, as they catch up with the data.



Those numbers make Standard & Poor’s Ratings Services latest assumption of 35 percent loss severity on Alt-A loans, only one month old, already start to look a little too conservative.

Bring On The Alt-A Downgrades

WMALT 2007-0C1

Facts and Figures

The original pool size adding up the tranches below is $519.159M



92.6% of this cesspool was rated AAA.



22.89% of the whole pool is in foreclosure or REO status after 1 year.



31.17% of the pool is 60 days delinquent or worse

Tranche List

Tranche A1

Cesspool Math

still

The Big Hit Is Coming

Gold Up

Trendline Break On The Dow





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