I took a break. 3 or 4 days on the Gulf of Mexico. Fishing, beer, family. It was time well spent away from the market, the phone, the Bloomberg, the government spending spree, everything.

I come back and it seems like half the people have money to spend but don't like what they're seeing, and the other half are out of cash but like the bonds I'm sending. It's just a strange market.

Treasuries were all over the map today...prices down in the morning only to rally back and then be up on the day, then in the afternoon a decent sell off was underway pushing Treasury prices back down the lows of the day.

This market has a bad feel to it. Everyone wants "value". It's tough to tell them, and nobody wants to believe it but "value" is dead. There is no more "value". "Value" means "cheap" and there are no more cheap bonds. Everything is efficiently priced...and the yields suck.

One of the very nice side effects of the meltdown we saw over the last two years was inefficiency in the capital markets. Liquidity concerns drove fear into every corner of the market. Falling asset prices triggered margin calls at firms around the globe. When you get a margin call your creditor wants more cash to cover your positions...and they want it NOW. This means you have to sell something RIGHT NOW. You don't sell the junk because you can't take the loss...so you sell the good stuff to get the best price you can. The problem is that there are a lot of other folks in the same boat as you, there aren't as many buyers and the few out there know that you're under pressure to sell. The more you have to sell to satisfy the margin calls the lower the prices go on the items you're selling. It's a self defeating plan...but it's what happens in a market like the one we've had over the last two years. It's a terrible thing if you have to sell...but if you have cash...oh what a time to be a buyer.

SO...we had lots of opportunities to buy "cheap" bonds. "Value" was easy to find. MBS spreads blew out to 300 bps over Treasuries...historically these spreads run around 128 bps over. Screaming cheap they were. We sold them by the boat load and those that bought them got big yields, and now that the markets have calmed down spreads have tightened in and they have big gains too.

Therein lies the problem. The markets have calmed down. The government has propped people up, provided insurance, guaranteed liquidity, directly intervened in the market by purchasing over a trillion dollars of Agency debt...the list almost has no end. All of these things combined have absolutely crushed spreads. When is the last time you heard of someone getting a margin call? Of a money market fund breaking the buck? Of a large firm failing? You don't hear of that stuff anymore. The market is operating in a much more efficient manner than it did from 2007 to early 2009. The fundamentals that provided "value" over the last two years simply aren't there anymore. The fear is gone and everyone has the liquidity they need to operate.

It sucks...I hate it as much as you do. It's not anymore fun to buy a 3 year non-call 1 year at a 2-something yield than it is to sell it. If Bernanke is telling the truth and he has no intention to raise the overnight rate any time soon then it looks like these yields could be the norm for a while.

What would cause this to change? Inflation certainly would but where is it going to come from? From consumers and businesses that can't get loans to buy stuff? From Americans that are now far more interested in SAVING than in buying big screen TV's? The US Savings rate is on a pretty steep trajectory right now. Rising up from roughly zero percent to north of 7%. People get it now. They understand that they can't live on credit forever. They understand that their job may not be there tomorrow, and that if that happens and they have no money saved up they will be in a world of hurt.

Econ 101 tells us there are only two things you can do with a dollar...save it or spend it. Americans are beginning to save...this is a very positive thing. BUT every dollar saved is a dollar that isn't spent. Every dollar that isn't spent means less stuff needs to be manufactured, shipped, stocked on a shelf, and rung up at a register. Fewer jobs are needed to support the lower demand for goods. This is by necessity a painful adjustment to make. The current powers in Washington are trying desperately to make this a painLESS episode. They are spending money like there is no tomorrow. It's like they are all sitting around reading John Maynard Keynes and smoking crack.