While the MSM instigates reasons why we should give a damn about what people who have little control over the T bond market were thinking at the last meeting, why don’t we just tune it all out and manage the markets instead?
The top panel shows the 30 year yield marching toward the traditional limiter AKA the 100 month EMA. The pattern measures to 4.5% or so, so there could be a spike above and a hell of a lot of hysteria at some point. That’s the collective markets; 98% hype, hysterics and emotion and 2% rational management. Either the 30 year yield is going to do something it has not done in decades (break and hold above the EMA 100) or it is not. Simple.
The relationship between long term bonds (30) and short term bonds (2) in the middle panel is currently negatively diverging gold as the ratio has dropped this month. Again, we wonder is gold (bottom panel) leading the curve this month or should gold bugs take caution? I think gold is leading the curve, but it bears watching. The relationship became distorted in second half, 2012.
As for gold, it probably bottomed at the end of June. That is because the sold out condition of the sector (read: Paulson puking GLD, hedge fund net short positions, India’s antagonism toward its would-be gold buyer citizens, etc. etc. etc.) was simply historic.
Really, just dialing down all the noise of the last 2 years it was a grand and climactic panic IN to gold in 2011 by the global public in the face of the Euro’s supposed Armageddon. Everyone had bought and then it was time for the bleeding out of this emotional money.
The bleeding went on longer than I originally thought it would, but that is why we do ongoing work to interpret things every step of the way. Hey, no harm no foul. A little patience and ongoing perspective and now we have what appears to be a purified asset class, free of unhealthy sponsorship.
Back to the chart’s top panel. China is a net seller of T bonds. Japan is a net seller of T bonds.
As we have been noting every step of the way T bond yields are a function of supply and demand. The global system endured a solid decade of net inflows of global funds into the T bond market. Now it appears the tide may be going out. Hence, interest rates all along the curve – save for the officially manipulated ZIRP on the Fed Funds – are going up.
It is all normal to free market participants; just another phase. It is only abnormal if you buy in to the idea that the Fed is in control and can remotely operate the financial markets indefinitely; if you buy in to the idea that the Fed decides when the cycles are to change.
If you look at it a certain way, it’ll tickle your funny bone as you listen to Huey, Dooey and Louie jawbone ‘Taper’ in the media or as you review what a bunch of bureaucratic clerks had to ruminate about at the last FOMC meeting at 2 PM US Eastern today.
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Title: Head for the Hills ! Are you saying we should dump all stocks now? Should deposits in banks be withdrawn and hidden under mattresses? converted into gold coins? All responses welcome!
The continued rise in rates and corresponding drop in bond values is immensely important and somewhat surprising, since it seems to indicate that the Fed has lost control over the process of propping up bond values and suppressing rates. Apparently Bernanke's Taper Tantrum (whether or not it was a trial balloon) started the avalanche -- soon we will see if it is indeed possible to halt this process, otherwise, all hell is truly about to break loose.
I would argue that this is not a normal, free market process, precisely because of the immense extent of manipulation/intervention that has occurred, primarily through the purchase of literally hundreds of *trillions* of dollars worth of interest rate swaps. These have provided the primary mechanism, the motivation for purchase of the bonds, they were used to create the demand for the bonds; thus the Fed was able to maintain zero percent interest rates at a time when Federal deficits were in the trillion dollar range, hardly a normal circumstance. This also propped up the US dollar and made the balance sheets of the too-big-to-fail (jail) banks look solvent.
Because the Fed has the ability to create unlimited amounts of dollars to purchase US bonds, I had assumed that this amounted to the ability to provide unlimited support . . . at least until the dollar was abandoned as the global reserve currency, which seems quite predictable, given that those holding US dollar denominated debt have been watching in horror as their investment is continually debased by massive, Weimar-like dollar creation by the Fed.
What I think is happening is that everyone is selling, all the banks are trying to unwind their carry trades, all the foreign entities are dumping their bonds . . . an avalanche of selling is taking place. Still, theoretically it seems like the Fed could just print more and more . . . we shall see. But at this point, rates have moved up enough to cause great damage to the banks that own the derivatives, as well as to the markets dependent upon low interest rates. How much has the payment on the national debt increased by the rise in rates? Etc, etc.
If this continues, then the derivatives will implode, the bond market will collapse, the bank's balance sheets will go to hell, and banks will fail, leading to massive bail-ins and loss of deposits by depositors who have been reclassified by corrupt bankruptcy laws as "investors", whose "investments/deposits" are placed last in line, with the derivative exposure of the banks being placed FIRST. Given that there is less than $2 trillion in deposits, and more than a couple hundred trillion in derivatives, seems unlikely that many deposits will survive. Don' worry you will get some worthless bank stock in exchange for your retirement account.
All this is hardly "normal to free markets", since we no longer have free markets . . . every market has been rigged by the Fed, and we shall reap the whirlwind as a result of allowing this to happen.
The fed wont be tapering anytime soon becuz well it just can't the level of debt that has be accumulated would not be able sustain a increase with interest rates. Besides nothing is where the fed wants unemployment (7.4) they want 6.5. Inflation is at 1.6-1.8 they want 2%. And GDP is dropping, 1st qauter GDp was revised twice from 2.4 to 1.1. Second quarter GDP was at 1.8 percent and I can tell you right now this be revised down further especially with your manufacturing indexes dropping.
B I N G O !
I do not agree completely with your analysis of the FED and the power it exerts over the markets. The FED is in charge of the worlds reserve currency. If the FED decides to taper QE3, it will have an immediate effect on the markets. It will have a global effect due to the fact that the dollar is still the world's reserve currency. Sure, there will be individual companies and sectors that will continue to move on their own. Agriculture is a good example. However, the markets we have today, are not totally free markets. It has been said that there are no markets, only manipulations. I do not agree with that statement, but we need to be careful about underestimating the power of the global banking cartel. Read, "The Creature From Jekyll Island." That will explain in detail why the banking cartel has so much power.