So much for my “double-bagger” scenario, which had the Fed raising interest rates 50 basis points on Thursday instead of the widely expected 25. That would have flashed a clear signal that the tightening cycle begun two years ago was over, giving Wall Street, with its addiction to loose money, reason to celebrate, even if only briefly. But if things were actually about to play out that way, we should not have expected to see the stock market fall as sharply as it did yesterday. Shares suffered broad losses and the Dow Industrials fell 121 points, wiping out the previous days gains and more.

So what might this portend? Much as we should like to think short-term rates are close to peaking, more likely is a scenario that investors would rather not think about – i.e., that interest rates are going to continue to move higher for the foreseeable future.

Global Liquidity Squeeze

 Some good reasons for this are spelled out in the latest edition of The Privateer, an excellent Australia-based financial newsletter published by William Buckler. He notes in the late June edition that a global liquidity squeeze just begun will force the U.S. to keep raising rates in order to attract the approximately $1 trillion in foreign lending that is required annually to keep the U.S consumption engine chugging along. A major source of such funds is the yen carry trade, which has allowed investors to borrow yen for practically nothing and then to invest the proceeds in U.S. Treasurys. But that game is due to end soon, notes Buckler, because the Bank of Japan has been draining excess reserves at a spectacular rate in order to head off an expansionary cycle of borrowing by consumers at home. In addition, the BOJ is expected to raise short-term rates by 0.25 percent in mid-July.

China has tightened as well, raising its bank reserve requirements to 8.0 percent from 7.5 in order to cool investment fever there. This will be sharply contractionary because, as Buckler points out, it will subject both new and existing loans to the higher reserve requirement. The liquidity squeeze is in evidence globally, and, as Buckler notes, “the world’s bond markets are waking up to this.

Tightening ‘Everywhere’

“As of June 20 As of June 20, US 10-year bonds yielded 5.13 percent, up 74 basis points since the start of this year. Japan’s 10-year bonds are at 1.85 percent, up 36 basis points. Germany’s are at 3.94 percent, up 63 basis points. Canada’s are at 4.40 percent, up 43 basis points. Australia’s are at 5.76 percent, up 43 basis points. This is a GLOBAL credit squeeze.”

Indeed. And it will force the U.S. to keep pushing rates higher to avoid a wholesale savaging of the dollar. Not surprisingly, and like everyone else who is not deaf, dumb and blind to economic reality, Buckler sees only bullish prospects for gold. We couldn’t agree more strongly.

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Trading Notes

In yesterday’s Touts I projected a short-able rally peak in August Crude at 72.45, a hidden pivot resistance that missed the intraday high by just 0.05 points. The subsequent pullback was sharp, amounting to 85 cents/barrel in just a few hours, but I have my doubts that it will continue. Since there was a fat profit to be had by covering near yesterday’s lows, I wouldn’t try to squeeze much extra mileage out of this one, so consider covering overnight if you stayed with it.  We also exited a position in JetBlue, coming away with a profit of as much as $700 on an original 400 shares purchased in mid-May, just a day before the stock took off.

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Vancouver Seminar a ‘Go’

The Hidden Pivot Seminar in Vancouver is a definite “go” for the last weekend in October, so please let me know via-email  if you’re interested in attending. The event is being produced by a long-time Rick’s Picks reader who wants to introduce his investment clients to my technical methods.

The two-day class is geared to teaching traders of all skill levels the rudiments of my proprietary Hidden Pivot System. Post-grad mentoring in a chat-room is included so that students can master the techniques learned in the classroom in a real-time setting.

Dates are not yet firm for seminars to be held in San Francisco and Sydney, Australia, but it looks like they will take place either in November 2006 or February 2007. Both classes are filling up, so let me know soon if you’d like to attend.