Wheeee! We Go Down The Bowl Last!

This is amusing to wake up to on a Monday morning....

The strengthening U.S. economy is proving no deterrent to the biggest rally in Treasuries since 2008, and America's largest bank says it may get even better for bond investors.

Uh huh. It's called "fear" and it's been driving money into the US and, specifically, into Treasuries. It's rather obvious with just a cursory look at the FX and Treasury markets.

The rally in Treasuries accelerated since October even as reports showed improvements in everything from consumer confidence to jobless claims to manufacturing.

Uh, no. The rally accelerated since October since the threat of a Euro zone blowup has gone sky-high. Money goes somewhere and the "somewhere" is here, at least for now.

The problem with this fear trade is this -- if those fears become realized then the so-called "money" evaporates.

Huh, you say? Yes, I said evaporates.

Remember folks, "money" comes into existence because someone pledges some sort of collateral for the debt that is on the other side of the ledger. It's a balance sheet and, as the name implies, always balances.

So let's ask the question: What happens when there's no more collateral?

That's what happened, basically, in 2007 and 08. The system ran out of people willing to pledge collateral because it had already all been pledged! The "last and biggest" was in residential real estate, which is a mighty big asset base. When that was all pledged (among those willing and able to pledge it) the monster started feeding on...

Read the full analysis here.