"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Wednesday, February 16, 2011

Bond market

Following is a chart of the long bond laid out for you to examine.

About two weeks ago, the bonds experienced a significant price move from a technical perspective as they brokedown out of a nearly 7 week long consolidation pattern. That move signified a shift in trader psychology towards an inflationary bias and away from deflation that signified deflation as a viable theme was dead for the time being.

Since that time the bonds have managed to rally right back up into the level which had held all downside reactions in price over that 7 week period mentioned above.

From examining the chart one can see that they have reached a point at which a great deal of indecision or uncertainty in regards to pushing them back any higher has now returned.

Today the FOMC released the minutes of its Jan 25-26 meeting last month in which they expressed more optimism for the prospects of growth in the US economy moving forward this year while at the same time noting that job growth was anemic. The majority were looking at a period of at least 5 - 6 years before the number of jobs being created would be back at levels more commensurate with long term data from the US. A minority were talking a window past 6 years.

The point in this is that the Fed is trying to have its cake and eat it too. On the one hand they are eager, nay, almost begging for the markets to praise them for the apparent success of their policies. As you know those policies have been much maligned by an increasingly larger number of pundits who are looking at the longer term inflationary impact of the same. They are eager to point out the increase in growth as proof of their wisdom in moving down this unconventional path. However, they are also trying to tamp down expectations for job growth.

I get the distinct impression that the FOMC governors are attempting to send mixed signals to the market specifically to keep the rates on the long end of the yield curve from moving higher. In other words, they want to keep up the happy talk to gin up the stock market but not to the point where they cause another implosion in the bond market. They want a stock market that moves higher at the same time that the bond market is hesitant to push lower.

At some point the bond market will catch on to this game and will look past the rhetoric at solid data which is suggesting that more and more the Central Banks are way behind the curve when it comes to dealing with the inflation beast that has been loosed upon mankind.

We have seen in the last few days reports out of China, the UK and Japan detailing their problems with this beast. Can it really be expected that the mother of all liquidity creators, the Federal Reserve, has not given rise to the same here in the US?

Perseus will need more than the head of Medusa to kill this Kraken.  Once the velocity of money increases, the Kraken will make its appearance here in an undeniable fashion.This is what the bond market is focusing on. Traders see it and know it is coming. So does the Fed but they are attempting to keep the QE policy front and center on traders' minds so as to prevent them from unloading too heavily on the long end of the market. I do not think it is going to work.

If I am correct, bond traders will use all rallies in bonds as an opportunity to sell. If that is the case, the chart will soon reflect that.


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