“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"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, May 30, 2012

Rush into Treasuries Continues to Depress Rates

There is what feels like near-panic buying of US Treasuries at the moment, due to the implosion that we are witnessing in much of the European Sovereign Debt markets. Investors/traders are scared to death to own bonds from these problem nations and are rushing into both US Treasuries and German Bunds as safe havens.

The result has been to collapse US interest rates on the Ten Year firmly below not only the 1.8% level, but also below the intra-month spike lows near the 1.7% level. We have one more day left in the month of May but it certainly appears we are on track to set a new monthly closing low.



The flip side to this rush to Treasuries is that commodities are being thrown overboard, irrespective of any particular set of fundamentals, as hedge fund algorithms are whacking that sector, both liquidating long positions as well as instituting new bearish bets.

The question on the minds of many is when will the Fed step in to attempt to halt what looks like a growing tidal wave of deflationary pressures? My thinking is that they will not until they get the commodity sector, particularly the energy markets, more specfically the gasoline market, down to lower levels.

We are already at the 50% Fibonacci Retracement Level off the entire 2008 - 2011 rally. If the index cannot hold at this critical juncture, it will drop towards 465, which is the intersection of the bottom tine of the pitchfork and the 61.8% Retracement level. My view is that the Fed will act should commodity prices get to that level.




Keep in mind that while the Fed and the US monetary officials like these abnormally low interest rates ( it keeps loan rates cheaper and allows the US to continue borrowing and spending money at its drunken sailor pace), and while they are near gleeful at the prospect of falling food and energy prices, they do not want a deflationary mindset to take hold in the minds of investors or the public for that matter.

For investors, that will mean the equity markets willl collapse as they will dump stock holdings and for the public that means they will forego spending now on the notion that they can wait for prices to fall further. The last thing that the Fed wants is for consumers to rein in spending.

So, the question is, can the Fed get these stubbornly high gasoline prices to fall another 30 - 35 cents while holding off on any further stimulus or will the US equity market bears, force their hands?


4 comments:

  1. if the central banks (CB) are net buyers of gold, why do they not order TPTB to trash the price to lets say $33 an ounce (I know ridiculousness low level, but its the idea)? The computers algorithms must be capable of this kind of selling wave of paper contracts to take to price down to nearly zero. At that price to Central Banks step in and buy the real stuff for nearly nothing... Where is the catch?

    ReplyDelete
  2. @Michael

    There are at least two 'catches'.

    1) As the price of paper gold declines, there are fewer sellers of physical gold.

    2) Simultaneously, as the paper price declines, there is more and more demand for the physical.

    At some point, probably not too far below where we are now, the prices of paper gold and physical gold disconnect. When that happens, there will be what is called a 'commercial signal failure', and the market will become 'disorderly'. The result will be extreme 'backwardation', in which paper money will continue to bid for immediate delivery of real gold, at higher and higher prices, but there will be no gold bid for paper money. In other words, there will be no sellers at any paper price.

    TPTB know this, of course, and realise that to keep the system going they cannot let the price of gold decline too far. In fact, they need to let it rise in a 'controlled' manner in order to keep their paper gold ponzi going as long as possible.

    ReplyDelete
  3. Dan, I agree with you about the need for the FED to put the price of gas down as much as possible (73% of American are complaining about the cost of gas and Obama has to make sure the price goes down before the elections) I remember the same story with Bush (the son)and the talk at the time that Saudi Arabia was part of the plot to push the price of oil down.
    However, and I agree with you again, the stock market CAN NOT plunge too much because the fear for the 401K values...

    So what if the manipulation comes from the weekly Petroleum report? from 02/2012 to 05/2012 crude oil inventory went up from 344.9M to 382.5M (11% increase). Since the report is based on purchases and reports from the big oil companies, manipulation is easy. So by reporting higher inventories and therefore lower gas retail price, the FED and Co. could argue that this is good for the economy and therefore for the stock market. So I expect lower gas prices and still some kind of QE (because of the impact of European situation on the USA...YES the usual BS). This is the best scenario possible for Obama and it should happen.

    ReplyDelete
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