Friday, October 15, 2010

The Bond Market Pushes Back

I have a busy day but I wanted to get this up.  

The plot thickens. 

So Ben comes out with his little speech today and tells the world that the Fed has many tools left in the toolbox and will do further easing if the economy doesn't continue to recover:

"U.S. Federal Reserve Chairman Ben Bernanke said on Friday that high unemployment and low inflation point to a need for a further easing of U.S. monetary policy, but he offered no details on the central bank's next step.

"There would appear—all else being equal—to be a case for further action," Bernanke said at a conference sponsored by the Boston Federal Reserve Bank."

Quick Take:

So how did the bond market react?  They basically shoved his speech up his *ss and said prove it:

Treasuries sold off hard on the news.  Here is the 30 year:

The bond market has always loves to call the Fed's bluff when they think their hand is weak. 

It's no different than a game of No Limit Hold Em Poker.  If you think your opponent has a 2/7 off suite after he goes "all in" you call him.

This is what we saw from the bond market today.  Bernanke gave no details about his additional tools in his toolbox.  The reason he gave no details is there are no more tools.  The box is empty and the Fed is now impotent.

Here is the full speech from Bernanke if you would like to take a peek.

If the bond market really believed his box was still full of tools they would have piled into treasuries and front run the Fed knowing that they could sell the treasuries back to them at a higher price.

This could still possibly happen.  Essentially by taking yields higher the credit markers are forcing Bernanke to show his hand.

Folks, this is basically morphing into a serious chess match between the bond boys and the Fed.  Stay tuned.

$100 Oil?

This is what OPEC wants as the dollar drops in price.

"The 13 percent decline in the Dollar Index since June has led some OPEC members to call for oil to rise to $100 a barrel.

The U.S. currency’s weakness means the “real price” of oil is about $20 less than current levels, Venezuelan Energy and Oil Minister Rafael Ramirez said after yesterday’s meeting of the Organization of Petroleum Exporting Countries in Vienna.

Shokri Ghanem, chairman of Libya’s National Oil Corp., said a higher crude price would help OPEC offset the loss of revenue from the weaker dollar.

“We would love to see $100 a barrel,” Ghanem said yesterday in Vienna. “We’re losing real income. Libya in particular would like to see a higher oil price.”

Kuwaiti Oil Minister Sheikh Ahmad al-Abdullah al-Sabah said in an interview this week that $70 to $85 is the “most comfortable” range, while his Algerian counterpart, Youcef Yousfi, said between $90 and $100 is “reasonable.”

Quick Take:

Ahh...Don't you just love the unintended consequences of a collapsing dollar as a result of the Fed's reckless policies?

Folks, this is so ugly I don't even know where to begin.  All one has to do is go back to the late '70's to see what kinda damage OPEC can do when it's not happy with oil prices.

Oil is used to manufacture pretty much everything.  If you think prices are rising now.  You "ain't seen nothing" yet if oil hits triple digits.

The Bottom Line

Stocks were down after Ben's speech.  I don't think they got enough specific language regarding the Fed's easing policies.  It was a pretty "wimpy" speech all things considered so I can understand the disappointment.

None of this is going to end well folks.  If the Fed heads down the QE2 path(which is likely) the dollar is going to get slaughtered. 

If Ben doesn't pull the QE lever then it appears the bond market is going to take rates higher in an attempt to push the Fed into "puking up" their new easing plans.

The Fed's in a tight spot and the economy hangs in the balance as they contemplate their next move.  I am sure they are terrified by what's happened to treasuries the last two days.

The consumer news today certainly didn't make Ben's job any easier.  It appears the falling dollar is already hitting consumer confidence:

"WASHINGTON (MarketWatch) — Consumer sentiment dropped in October, according to an index released Friday, showing the U.S. consumer is still wary with the U.S. jobs market weak.

The Reuters/University of Michigan consumer sentiment index fell to 67.9 in October from 68.2 in September, a reading which was less than the MarketWatch-compiled consensus of 69.8."

Let me close with a tidbit on the banks.  They are getting hammered again today as the ramifications of foreclosuregate continue to intensify.  This is the next big thing folks.  It could make the subprime crisis look like a walk in the park.  More on this later.

The market is really heating up, and I think we are nearing a major inflection point. 

Our way of life hangs in the balance as the market starts demanding answers from the Fed.  Stay tuned.


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