Elliott Wave InternationalmyEWISocioniomics.Net
Home > U.S. Economy

Mr. Hull's Giant
“There's a sucker born every minute."

By Bill Fox, Senior Bonds Analyst
Fri, 22 Aug 2008 18:45:00 ET
Add to Facebook Add to Twitter Email to a friend Printer Friendly

In the summer of 1868, Mr. George Hull of Binghamton, New York, decided to pull off a hoax. No, not about Bigfoot – but close. He had a gypsum block carved into the shape of a giant dead man and buried at a farm near Cardiff, New York. And then later, he had it dug up.
 
Keep in mind this was a gypsum statue. Nevertheless, thousands of people flocked to pay and see "Mr. Hull’s giant."
 
Soon thereafter, a syndicate paid $30,000 (in 1868 dollars) for a majority interest in the giant. A member of the syndicate, a banker named David Hannum, raised the admission price. Not long after that, a renowned sideshow promoter and politician P.T. Barnum offered $50,000 dollars for the giant.
 
It was later said by Mr. Hannum (talking about P.T. Barnum, but it's a quote often incorrectly attributed to P.T. Barnum himself) that, “There's a sucker born every minute."
 
Here we are, 140 years later. We have just uncovered a giant leveraged debt mess, but there are still suckers out there willing to buy this paper. As we move into the later innings of this credit crunch, one of its untold stories is the recapitalization that has taken place in the financial industry – despite the writedowns that have persisted at record levels for two full quarters.
 

Worried About Your Asset Value Erosion?
Find out where global markets are headed in the short and long term with EWI's Specialty Services.
 
Without the sale of assets, equity dilution, vulture capital, hostile takeovers and bailouts this leverage bubble implosion would have been at least a recessionary event – or a far worse one. Some of these deals have been astute transactions, others… have not. Either way, though, the pool of available suckers appears to be shrinking.
 
Market values of both Fannie Mae and Freddie Mac have declined dramatically – to $6 billion and $2 billion, respectively. Both are paying penalty spreads over Treasuries to sell debt while demand is rapidly in decline. The question is, how high will yields have to go to generate demand?
 
Each of these two GSEs have more than $100 billion in debt maturing before October, and foreign buyers – typically a reliable well of demand – have been scarce of late. That leaves us with the buyer of last resort: the U.S. Treasury, which may have to buy more than $30 billion of GSE preferred shares just to get us through Q4.
 
The forthcoming supply of Treasury bonds could weigh more than Mr. Hull’s giant – and be worth less.
 
This story originally appeared on the August 22 Daily Forecast page for the U.S. 30-year Treasury Bonds, inside Bill Fox's Interest Rates Specialty Service.
 
Bill Fox is EWI's Senior Bonds Analyst. He has been involved in the markets since graduating in 1988 from Vanderbilt University. He joined EWI in 1994; most of his subscribers are professional bond traders spread around the globe.

Rating: - based on [36 rating(s)]
Rate this content:
  
   


FFS"The clarity of your thoughts is so powerful that I typically read an issue at least a half dozen times." - R.N., Financial Forecast subscriber

The Elliott Wave Financial Forecast is a rational voice in a volatile marketplace with an unrivaled record of providing tomorrow's news today.

It helps you take control of your investments and anticipate the larger trends that most investors don’t recognize until it's too late.

Preview the latest Financial Forecast now>>


Free 50-Page eBook


Learn to Think Independently

The Independent Investor eBook can help you to challenge conventional notions about investing and explain market behaviors that most people consider "inexplicable."
Download your free Independent Investor eBook


© 2014 Elliott Wave International

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.