2010: The Year of the Bond Market

Hello Folks!

Before I start I hope everyone has a safe and Happy New Year! I wanted to hop on here and talk a little about the year ahead as 2009 comes to a close.

IMO, 2010 will be the year of the bond market. The US government plans on borrowing over $2.5 trillion in 2010 after borrowing a record $1.5 trillion(give or take) in 2009.

Somehow the banksters and the US government found a way to get their treasuries sold in this year. They achieved their goals in 2009 in a couple of different ways:

First they kept borrowing rates at 0 which allowed the primary dealers to make a fortune buying treasuries. this allowed the primary dealers to make billions by borrowing at zero and then investing in higher yielding assets like the 30 year bond.

As I have explained before, the banks pocket a sweet spread when you borrow at 0% and then buy the long bond at 4.7%.

Secondly, they also found a way to talk the FCB's into going along with this charade(probably through threats) as the world continued to buy treasuries.

This zero interest rate environment allowed Wall St to make more money this year than any other year in their history including the housing bubble years of 2004-2006!

In a nutshell: The Fed's games allowed the Street to gorge on profits at the expense of the taxpayer. Meanwhile, Rome continues to burn as the average American continues to suffer from unemployment and low wages as this country remains mired in worst economy since the 1930's .

If you are a banker you are sitting on top of the world right now! On the flipside, if you are one of the "peasants" in the USA as the greatest fraud in the history of this country continues to roll on, your lives have probably never been so tough.

I know I am personally feeling it. I went home during Christmas and saw the toll that this recession/depression has taken on my family. I am sure many of you have seen the same thing within your own families.

Folks, we are being screwed more ways than a $5 hooker on a busy Saturday night by the oligarchs of this country.

For Example: If you were responsible over your lifetime and saved money, the Fed is now rewarding your responsibility with CD's that basically pay nothing. Gee thanks Mr. Bernanke! NOT!

Meanwhile the bankers continue to gorge on profits as they take advantage of historically steep yield spreads. I continue to be amazed that there are no torches and pitchforks in DC yet.

What is it going to take to make people rise up? There are reports out of Detroit that unemployment is nearing 50% and yet no one says a thing! How bad does it have to get before you wake up and do something? Where is the anger folks????

If you want to take action I suggest you follow the Huffington Post's advice and begin starving the "too big to fail banks" by yanking your money out of them and placing your funds into a community bank.

The Post has created a safe way in which you can find a solvent community bank by starting up the website Move your Money. This site allows you to find a safe community bank in your area by simply plugging in your zip code.


It's time that we "starve the beast" and take away the liquidity that allows the TBTF banks to manipulate the market, buy and sell unregulated derivatives, and then pay themselves ridiculous bonuses at the end of the year.

Remember folks, without taxpayer funds via the TARP, NONE of these banks would exist! The fact that their enourmous profits are going into the bankers pockets instead of the taxpayers is simply disgusting. Do you need any more proof that you are being blatantly robbed? I hope you all take action and move your money like I have.

The "Bondzilla" 2010 Bond Market

IMO, the banks have had their day in the sun when it comes to low interest rates and big profits. Moving forward, the bond market is increasing getting very agitated over the huge spending programs that have been announced in the past few weeks.

Take a look at the ten year(TNX) over the last 20 days:


My Take:

Yikes! That is one ugly chart! Yields hit 3.9% at one point today on the 10 year before pulling back as stocks began to fall. This is a monster move thatwe have seen over the past three weeks. Some would call it parabolic.

Remember, if rates soar to 6% housing is toast. You think the drop in housing prices is bad now? HA! You ain't seen anything yet if the 10 year continues to soar. As we all know, mortgage rates are set based on the ten year bond.

So why are bonds selling off(resulting in higher yields)? The real question you should ask yourself is why wouldn't they?

I mean the spending programs that have been announced over the past couple weeks are mind boggling.

The Senate passed a healthcare bill that is going to cost us over $1 trillion dollars(I believe it will be much more than that when its all said and done). This will be accompanied by massive tax increases and if you think its only the rich that will be taxed you are nuts.

The Fed/Treasury then added to our woes on Christmas eve when helicopter Ben and his pals announced that Fannie and Freddie's losses over the next 3 years will covered by the Treasury no matter what the cost.

I find it funny how they Fed/treasury conveniently annouced this right before the holiday hoping no one would notice. As you can see above, the bond market sure noticed!

How much money are we talking here? Who knows? It will depend on how bad the economy gets. We are talking at least $400 billion from what I have read. If the economy worsens and homeowners continue to walk away in droves from underwater mortgages the tab could be much higher. Could it be $1 trillion or more? Perhaps. Time will tell.

The Bottom Line:

Higher rates are inevitable in my view. There are some deflationists that are convinced that we headed back to 2% yields ala Japan in the 1990's. I just don't see it with the $2.5 trillion in treasury issuance's that are scheduled for 2010.

One thing is for sure in my view: The bond market will be the story of 2010. If interest rates soar on treasuries as the world begins to question our ability to pay the money back, the economy is TOAST.

The Fed may be forced to raise rates faster then they expected if the bond market goes berserk. Ironically, if the economy recovers, the Fed will be under even more pressure to raise rates because fears of inflation will arise.

I am afraid that 2010 will be a year where we transition from a low rate/high growth environment into high interest rate/low growth one.

This does not bode well for the stock market. An even bigger risk to the stock market is the bond market. Ben won't hesitate to pull liquidity and crash the stock market if he can't sell his treasuries. He knows that investors will run to bonds if the market falls apart.

2010 will be another year of caution for investors. "Buy and hold" worked this year. I don't see anyway possible that we see a repeat this next year. The road we are travelling heading into 2010 is filled with potholes and landmines.

Buyer beware.

Disclosure: No new positions at the time of publishing. Short treasuries via TBT in longer term accounts.

Inflationary Fears Creep Back into the Market

Despite golds recent plunge, today's auction tells you that the bond market remains extremely worried about inflation.

Today's 30 year bond auction was a complete disaster:

My Take:

Folks, I can't even begin to describe how ugly this is. Before I get into this, let me preface this by saying that we could see a short term higher move in the dollar as a result of global fears around sovereign defaults forces capital into the US.

This would then possibly trigger a huge short covering rally of the US Dollar as a result of an over crowded short dollar trade. Many may interpret this to be very deflationary. I just don't see it longer term. In my eyes, the trend for the US dollar and our economy is heading only one way: DOWN!

The 30 year bond auction confirmed that the bond market sees nothing but further printing and dollar devaluation. The world's FCB's are basically telling you that they don't want to hold any long term investments in the US as long as our government continues to print. This eventually is going to force interest rates to move significantly higher in order to attract demand.

BTC

As you can see above, the BTC was a measly 2.448. CNBC's Rick Santelli gave this auction a big fat "F".

It's pretty simple folks:

The bond market is scared to death of inflation. I mean who wants to hold a 30 year bond at 4.5% when inflation could rise 10% a year as we power up the printing presses?

You must also assume that the bond market presumably expects the US to continue to spend themselves into oblivion. IMO, it's becomes increasingly obvious that we cannot eliminate all of our debt without printing out of it.

Today's auction was very ominous: If we cannot sell our debt the jig is up. In my eyes, this was warning shot across the bow from the bond market.

Take a look at Jim Rogers appearance on CNBC today. His investment thesis continues to be focused around inflation:

Disclosure: No new holdings at the time of publishing.

Expect Continued Volatility as the Economy Hangs in the Balance

Hello all!

I know it's been awhile and I apologize.

Let's take a look at these choppy equities.

Mr Market appears to be confused. The positive jobs number last week(which was actually pretty impressive) really threw a wrench into the Fed's plans.

I find it interesting that the market sold off on the news. You would have thought the bubble boys would have taken the market higher after a -11k jobs print vs. the -150k or so that was expected.

Following the quick bounce after the announcement the market nervously closed pretty flat. Why?

There are a variety of reasons. As I explained in my last post, the banksters on Wall St really don't want to see an economic recovery. The reason for this is higher interest rates would soon follow because inflation would begin to start rearing its ugly head.

This would then flatten out the yield curve which in turn results in a less profitable environment for the banking system. I mean think about it folks: Borrowing at 0% right now and then lending at 5% is a pretty sweet gig for the banks. Any moronic banker can make money in this environment.

An even sweeter gig for these criminals is being able borrow at zero while charging 30% annual interest on a credit card balance. When you see this type of things, you really gotta wonder if any of these people have anything that resembles some type of conscience. I already have my answer.

I sometimes ask myself: Should this type of pillaging be regarded as criminal? IMO yes, but it's legal nonetheless. It's pretty sad when you can get a better deal lending money from the Sopranos instead of a bank!

I think it's absolutely disgusting that these arrogant banking gangsters have the gonads to charge 30% on credit cards after we bailed their behinds out! Where are the torches and pitchforks?

I guess I shouldn't be surprised after watching Wall St basically extort $700 billion from Congress in the form of TARP. Arghhh...I could go on and on about this but I feel my blood pressure rising so I better stop.

The bottom line here is this:

If the economy recovers, interest rates will eventually rise: Banking profits on lending would then shrink as a result. Housing prices would then drop because buyers will be forced to borrow at a higher interest rates.

Making matters worse, rising rates would lower the value of the bankers bloated mortgage bubble assets(MBS etc) that they continue to hold on their balance sheets. Banks would also have to pay higher interest rates on CD's.

So you see, an economic recovery isn't very profitable for the banksters. It could actually be very painful, especially if they borrowed at near zero and then bought 30 year bonds at 4+% and pocketed the spread. This is a great trade as long as interest rates stay low!

Many banks went under during the last economic crisis when they got caught on the wrong side of the interest rate trade like the one I described above as rates soared in the late '70's/early '80's.

A reminder to all:

Don't ever be fooled by these snake oil salesmen when they cheer about an economic recovery. They will tell you over and over on CNBC that things are getting better in an attempt to pump up stocks. However, behind closed doors, a floundering economy with zero interest rates is what the banks really want because they can make a fortune. They will never admit this of course.

Market Volatility and Gold

In the short term I expect a lot of volatility. Currencies are bouncing all over the place as a result of recent worldwide economic events. The Dubai debacle continues to rattle the world markets(this one ain't over folks).

We also face the threat of sovereign defaults of countries like Greece. Germany's production number was also very poor today.

All of this worldwide turmoil is forcing capital back into the dollar. If we have learned one thing in the past few weeks, the world still flocks to the US when things look shaky.

This surge in the dollar has taken its toll on the short dollar/long gold trade. Longer term I still remain bullish on gold because I think the US dollar will continue to drop as our own economic skeletons continue to come out of the closet.

Remember folks, history repeats itself so let's take a look at gold back in the 1970's:



Quick Take:

As you can see above, we saw a lot of volatility is the gold market as the world panicked about deflation, inflation, and the value of paper currencies. Inflation adjusted, gold would have to reach $2176 in order to match its highs in the early '80's.

We have done MUCH more damage to the dollar this go around as a result of our ridiculous spending deficits so I expect to see gold at least reach the previous inflation adjusted high of the early '80's.

Get used to the volatility! I expect to see see some serious wild swings in gold before we get there. You could see currencies bounce all over the place in the near term as various countries(including the US) teeter on the brink of disaster.

I continue to believe that its a good idea to hold gold because I think everyone should have "economic insurance" from the dollar in a market like this. If you are looking for a hedge your gold holdings, shorting the S&P at these levels makes a lot of sense.

The Bottom Line:

The market could get real choppy here in the near term. The jobs number threw everyone for a loop. The Fed will most certainly become more concerned around inflation if continue and see continued signs of an economic recovery.

Short term keep an eye on the bond market. Rates may begin to rise if the economic numbers continue to improve.

Don't misread me here folks, I am still extremely bearish longer term(Shocker eh?). My point is the market will begin pricing a recovery in if the numbers continue to improve regardless if they are accurate or not.

Remember:

Never underestimate the government and their ability to spin the numbers positive. I am highly skeptical of that jobs print. I bet that number would have looked pretty ugly if you took out the part time holiday workers and added the unemployed that have ran out of benefits.

I don't expect to see a sustained recovery anytime soon. IMO, The chances of seeing any consistent economic growth in the next few years are between slim and none.

That being said, the volatility should continue in the shorter term because the economic numbers continue to come in mixed.

Disclosure: Long gold and silver via GLD and SLV in longer term accounts. Short treasuries via TBT in longer term accounts.