Watch T-Bonds, Not the Criminally Insane Dow

If DaBoyz can squeeze a 500-point Dow rally out of yesterday’s administered easing of dollar “swap” rates, just imagine what they can do with a little Santa seasonality and a dollop of year-end window-dressing.  Let’s be straight about a couple of things. First, no one expects the latest easing of global credit lines to resolve Europe’s debt crisis. And second, the 800 points the Dow has tacked on this week represent little more than trading machines masturbating each other amidst a short-covering panic. Some observers merely yawned, noting that the swap arrangements that make it easy and cheap – and now even easier and cheaper, if such a thing were imaginable — for foreign banks to borrow dollars have been in place since 2007.  However, others saw the announcement by the central banks as nothing less than a bold step by the Federal Reserve to begin monetizing the debt of Spain, Italy, Greece, France et al.

It’s a moot point whether the U.S. has begun bailing out Euro-deadbeats, however, since the U.S. is a deadbeat itself, albeit one in sole possession of the world’s reserve currency and therefore of the ability to gin up unlimited quantities of the stuff at will. Meanwhile, there’s little point in pretending that the U.S. is somehow not immersed in the bubbling cauldron of toxic global finance. U.S. banks had stopped lending to their European counterparts, and that’s why the Fed stepped in to pretend it has the situation under control. This may work for another week or so, if that long, but it’ll be interesting to see whether reducing swap rates to near-zero will help suppress sovereign borrowing rates that recently topped the 7% “red zone” for Italy. Would you lend the Italian government hundreds of billions of dollars at 7%? That’s what we thought. But if you live in Europe or the U.S., you’ll be doing it anyway – and for a lot less than 7% –courtesy of the bankers.

A Hyperinflationary Step?

Not to spoil the party, but we’d suggest keeping a close eye on T-Bond futures rather than on a criminally insane Dow Industrial Average that has obviously run amok.  U.S. Bonds and Notes have been in a sharp correction, with the former closing on a key Hidden Pivot target of ours at 140^14.  The target is so clear and compelling that its breach would offer strong evidence that the Fed’s increasingly desperate attempts to hold deflation at bay are about to finish the dollar’s destruction since the Fed was created nearly 100 years ago.  We’re planning on bottom-fishing near the target (click here to join us – at no cost to you), but if it the “hidden support” is exceeded even slightly, it could be signaling a significant global increase in inflationary pressures.

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  • david casciano December 2, 2011, 4:25 am

    This deflation/inflation crap talk is stupid…gold and silver for 10 years what their sniffing out and thats with massive price suppression.TRo say we might head into global inflationary circumstances is like saying i took a knife and cut my arm and if i dont intervene i may bleed to death or @ the very least injure my arm.Chris Powell of GATA has said for years….THERE ARE NO LONGER MARKETS ONLY INTERVENTIONS!!!!its great for newsletter sales and talk but deflation would always be defended by the criminal cabal.

  • mava December 2, 2011, 4:02 am

    I mean, who buys debt? The FED, which is printing money. The Chinese, which are printing money too! ECB? CB or Russia? They all print. This is the money they use to “buy” government debt.

    How about personal debt? The money “loaned” to you and me by the bank, are created out of thin air. If bank stops charging interest, on all or some of the credit, this is not going to ruin it, just leave it without profit, but then what is profit today, why one needs profit when he can create a trillion, not just merely “earn” the percentage of that trillion?

    What interests me in this, is why do they bother to charge interest?

    • Robert December 2, 2011, 5:27 am

      “What interests me in this, is why do they bother to charge interest?”

      Because you (or someone) is still willing to pay it, and it generates crazier profit margins than collecting checking fees

    • mava December 2, 2011, 8:07 am

      Crazier than just printing that profit without bothering to collect anything from anyone?

  • mava December 2, 2011, 3:55 am

    Robert,

    I don’t understand it in such detail as you do, – I just sort of sense it, that the end is nigh.

    But, what if tomorrow, we no longer need to pay interest for the debt? After all, the CBs are merely creating this money to buy the debt. So conceivably, they can stop charging interest, can’t they? What then?

  • Bill December 2, 2011, 2:14 am

    Robert: “What a grand time to be alive. We are living in a historical period when not just one, but potentially EVERY fiat currency all simultaneously run away to their intrinsic value in harmonious unison….”

    Well, there you go – – if all of the fiat currencies are all doomed in Robert’s scenario then where do investors go who are trying to survive – aside from shacks in hills with military rations, guns and the like?
    When the storm does blow over and we look at the devastation and try to rebuild the ‘system’ it will be interesting to see what civilized people do. That will probably depend on what the same civilized people did during the devastation. If we resort to mobs and chaos the solution could go feudal and like something out of the dark ages or Mad Max. If are able to come together and help each other for the most part during the devastation then what comes next could be a cleansing of sorts. The latter scenario is my pipe dream, but power being what it is and the ability to blame and panic the masses will probably show us what we are – – just a bunch of ‘damn dirty apes’ (Planet of the Apes) in suits and subject to all the primal behavior we thought we left in our many ages of renaissance and enlightenment.
    Check please . . . and I’ll be sure and pay for it with my Mastercard!

  • mava December 1, 2011, 10:28 pm

    As a former Soviet Union slave, I have a finely tunes gut instinct and acute sense of smell as far as determining what must be gutted next. To some this may seem to be a quality of undeveloped nature, but they are very wrong, because all that is is just heightened survival instinct superimposed on knowledge that the doom is guaranteed.

    Contrary to a popular belief, if I were to give someone a good advice, right now it would be “get into the debt as deep as you possible can”. Funny how it makes absolutely no sense to anyone who hadn’t had a pleasure of being a slave.

    • Robert December 1, 2011, 11:42 pm

      Makes perfect sense to me…

      1) Debt creates the need for service and repayment (even unpayable debt must be serviced if it is to be maintained and not repudiated)

      2) Debt service requires income, and increasing debt requires increasing income

      3) Presently, average Incomes are flat to down in both nominal and real terms, the 1% notwithstanding, but even the income of the 1% is not accelerating fast enough to keep pace with the accelerating debt.

      4) Debts are increasing.

      Number 4 is inescapable. The income required to service increasing debt MUST come from somewhere.

      Therefore, we can expect nominal incomes to begin rising soon to handle the increasing debt service costs.

      When nominal incomes are rising while real incomes are flat to falling, we can only expect interest rates to go one direction …. up.

      It is Rick’s Weimar potato farmer allegory, once again.

      A loan extended by a creditor that is about to be swept away by systemic collapse, becomes a gift.

      The logic is well formed and quite elegant.

      Regarding number 3 (and the “tax the rich” fallacy): applying linear progression to exponentially accelerating functions does not work. This is why we are doomed. The idgets in DC can’t move without consensus or compromise, and consensus and compromise only result in linear (point to point) progression.

      This is way we are (sadly) doomed to fail in escaping this predicament. We’ve got a bunch of 8th graders applying algebra to what is clearly a non-linear Senior Calculus problem.

      Because of this, the problem is running away faster than the solution algorithm can get in front of it.

      What a grand time to be alive. We are living in a historical period when not just one, but potentially EVERY fiat currency all simultaneously run away to their intrinsic value in harmonious unison….

      Spectacular.

    • Mark Uzick December 2, 2011, 2:17 am

      Robert: Does this mean that you’ll be buying your dream property soon?

    • Robert December 2, 2011, 5:17 am

      Don’t even get me started on that… my brain is spinning 6 ways from Sunday on that particular dilemma

      Now I’m thinking that instead of liquidating other assets (most of which are in tax-deferred accounts and face withdrawal penalties), what I need to buy instead are equity stakes in small businesses- something that generates cash flow, and then use the income to pay against a big fat mortgage on my dream property….

  • Bill December 1, 2011, 8:06 pm

    I agree with Gary in the short run – – the debt scale is so massive worldwide with such dire economic consequences I don’t see any safe harbor in a hyper-inflation  environment other than the resource rich countries with healthy balance sheets (a Peter Schiff suggestion). No country goes unscathed of course  –  this is a world calamity, but isn’t the first step of the world’s debt and derivative unwinding a collapse of financial markets? I am just looking at the order of the occurrences BEFORE we see hyper-inflation. Bonds have been going up as they are seen as a safe haven while equities get pummeled under the weight of negative fundamental valuations. We are seeing some attempt to monetize debt but it only seems to be delaying the inevitable collapse of stock prices. Does anyone think the stock market will have a sustained rally because of anything world governments have done so far?  I understand that equities rally in hyper-inflation environments – – and there’s the rub. If you think QE II, III & IV are around the corner to keep the markets from crashing and the Mad Max scenario then you have a case for higher equity prices and the bond market slide Rick is foreseeing. If those QE’s don’t occur in time then I think Gary’s post above is right and we see the deflationary scenario FIRST with  market prices falling / crashing followed by the inevitable hyper stimulating actions by governments because people will demand action – – anything – – and that will be the dinner bell for Ben to open the spigots. Then we will see the bond market debacle Rick’s forecasting. So, for me, it’s just the order of it all that I contemplate because betting on gold now or shorting bonds could be disastrous if markets do crash before they rally!
     I’m going to go talk to my shrink now …

    • Mark Uzick December 2, 2011, 2:13 am

      That’s right: if you try to time the markets with capital that you can’t afford to lose, then you’ll probably lose it and even if you get lucky you’ll be driven near insane with anxiety.

      Unless you have nerves of steel, then time the markets only with what you can bear to lose.

      For peace of mind, you may want to dollar cost average into precious metals, where a rising price brings profit but a falling price probably brings even greater profit in the long run.

  • Robert December 1, 2011, 6:28 pm

    I’ve determined that trading is a pastime that can be every bit as entertaining, and as exhilarating as Vegas.

    If I had to rely on it for my daily income, however, I’d be a basket case.

  • Alvaro de Orleans-Borbon December 1, 2011, 5:50 pm

    Time to look beyond “black and white”, “boom or bust”.

    It makes sense to paint Italy bust should their bonds yield beyond 8% p.a., but remember how that country chugged along happily at 12% and more for years — and providing decent reliable income to a legion of Italian families that invested in tax free Italian bonds.

    It makes sense so that the current “bust” scare induces the Italians to accept the bitter medicine proposed by the emergency doctor, Prof. Monti.

    Once the medicine has been swallowed, look for the problem to leave the headlines — liquidity for 2012 roll-overs & company will be there.

    Inflation will be the next big one — top restaurants are already on a +20% price level, a good leading indicator — but this will take care of the solvency, bringing the debt/gdp ration within sustainability.

    Living on a knife’s edge? Yes, but maybe it’s the most efficient way for these economies; no crisis, no decisions.

    • gary leibowitz December 1, 2011, 6:33 pm

      Since governments, even socialist ones, are on an austerity path there is no way they pass on higher wages to their workers. It will be the same world wide. With banks still reeling from years if not decades of hidden unresolved debt there is no way credit gets lossened anytime soon. In other words the consumer can’t rely on their house for collateral, and will not be getting new revlving credit. Since wages will not rise and their unemployment figures will rise like ours has, there is no way inflation takes hold.

      No one ever imagined that this amount of world wide debt will choke their ability to entice new lending and borrowing. Even the concerted efforts of governments to buy back their bonds will not prevent the inevitable dam to break.

      There is just too much world-wide damage to orchestrate a new global inflation binge. The third world countries has help us from falling into the abyss of a depression. That can’t last forever.

      I keep hearing about the next bout of inflation but it hasn’t come and will likely not come until we purge off the excess debt first. This is debt that will most likely not get repaid. The inflation everyone is talking about is coming from 2 sources, both external. Third world emergence, and excess fed money going into investment vehicles (gambling).

    • fallingman December 1, 2011, 10:16 pm

      “Since governments, even socialist ones, are on an austerity path…”

      Which governments aren’t socialist?

      Really, I can’t think of any.

  • Tom December 1, 2011, 4:57 pm

    I am in GSS(GSC on the TSX). It is traded by CIBC and NESBIT and anonymous mostly on the TSX , but as gold approaches $2000 will break out and and hopefully be a 10 bagger.GSS has producing gold mines in Ghana(around 400,000 ounces /year) and some exploration properties in South America. Currently trading at $2.07. Had a high of $6.01 last year.

  • Tommy December 1, 2011, 4:30 pm

    Cam,

    I have a position in CGR, aka Claude Resources a junior Canadian gold miner. Up 12.17% yesteday alone. It would seem that you are right.

  • gary leibowitz December 1, 2011, 4:24 pm

    The mounting evidence that China is slowing, along with the EU recession will hit us hard. This event will not take long for businesses to feel the affect.

    The timing of the money swap announcement came at a very critical day, technically speaking. I was about to pull the trigger to short until I noticed the futures market went ballistic.

    Yes the Fed can turn what looked like a decidedly bearish trend resumption to a rip-roaring rout. Since everyone follows trends and technical levels it is a shoe in that we go higher for one month more.

    I am looking at SPX of 1340 – 1360 to be the top.

    The presumed bear destruction is analogous to waiting for Godot. Seems like we will never get there.

  • Cam Fitzgerald December 1, 2011, 8:51 am

    Oh yeah, buy gold stock. Do it quick. Juniors may be stellar.

    • BDTR December 1, 2011, 5:55 pm

      (Above reply belongs here, woops.)

  • Cam Fitzgerald December 1, 2011, 8:49 am

    Told you we are going inflationary. Nobody listens.

    • mario cavolo December 1, 2011, 11:22 am

      Hey, I’m been listening ! 🙂 …

    • BDTR December 1, 2011, 5:54 pm

      Maybe not so much, beyond the very short term, Cam. ‘Stellar’ one day, black hole the next.

      Fundamentally; bankable feasibility study/reliable cost projections and financing in this ‘monetary’ environment + technically; micro-algo’s driving unlimited $’s streaming wink & nod Fed accommodations to da boyz makes for pathetically exploitable counter-trend set-ups run on, say, a Fujitsu K @ 10Pflops. (Small spec/investors shooting rubber bands at a nuke.)

      The Mother of all sucker’s markets = right NOW.

      Economic Survival Rule #1; utterly minimize counter-party risk. So, if it ain’t physical, it ain’t real. Get real, real soon.

  • Robert December 1, 2011, 7:30 am

    My position in RRPIX would/will benefit greatly from this analysis if accurate… 🙂

  • Rich December 1, 2011, 4:12 am

    Nice calls and trades Rick.

    Along with Big4 since last Friday, we remain bullish on stocks if not the dopey Dow.

    Click on Rich to see details and charts.

    Cheers All…