"It's Rigged" From Larry Levin

From guest blogger Larry Levin

A few weeks ago I was on television and when asked about the market I said "It's rigged!" To be sure, I said more than that; however, that was the core of what I said and the video practically went viral. And when I speak of "the market" I am referring to the market in its entirety, which includes the bond market among others. Well folks, the bond market is rigged too! Other traders and I have discussed this on the floor for a while now but I didn't want to report rumors to you. Now it looks as if the rumors are a smoking gun.

Last Wednesday I wrote about the Treasury auctions that hadn't been going well. A 2-YR Note auction was poor, but the 5-YR Note auction was worse: it was so bad many declared it a "failed" auction. Because of this many market pros were very concerned about the following day's 7-YR Note auction, as was I. If it too had "failed" the fit would hit the shan.

But I guess we don't have to worry about that any longer. The kleptocracy under Bush & Greenspan is alive and thriving under Obama & Bernanke. If you haven't guessed what happened yet, the Fed rigged the 7-YR Note auction and voila - all was fine. If you don't like the term kleptocracy, try on generational theft/thieves for size.

From Zerohedge...

In a brilliant piece of investigative reporting, Chris Martenson (original article here) has uncovered that the Fed, merely a week after issuing $28 billion in 7 year bonds via its puppet, the US Treasury, of which $10 billion ended up being purchased by primary dealers, has turned and bought 47% of the primary allocated bonds in Open Market Purchases. This is undisputed monetization removed simply via one primary dealer and less than 5 days of temporal separation in order to leave no easy trace. As Martenson points out:

"A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using 'primary dealers' and 'POMOs' and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public."



The question is did the Fed implicitly tell the primary dealers they are merely holding the treasuries for a flip, and that it would acquire them immediately. Absent this $4.8 billion in effectively monetized bonds, what would the Bid-To-Cover have been for the primaries? Would this have been the second practically failed auction for USTs after the deplorable 5 year auction results a day prior? One wonders if there would have been 62% indirect interest in these bonds (which the day before had a measly 32.5% indirect bid) if the purchasers were aware of the Fed's immediate prompt monetization of a large part of the directs' balance.

It is truly a sad state of affairs when the Fed has to manipulate public and media perception in this way, and has to cover up for the complete lack of interest in US Treasuries.

Here is the evidence Martenson dug up:

(copy and paste these links into your browser and you'll see what I mean)

http://www.zerohedge.com/sites/default/files/images/7%20years%20CM.jpg

http://www.zerohedge.com/sites/default/files/images/7%20Years%20CM%202.jpg

Martenson's conclusion needs no elaboration:

"The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.

And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers. They'll have to do something with all that freshly minted cash....."

I think it's clear folks; there is no "free market" and what is left of the stock and bond markets have become a pyramid scheme that makes Bernie Madoff look like a piker.

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