“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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Saturday, June 22, 2013

A LOOK AT THE BOND CHART

In previous posts I had laid out what I believe has been happening across the financial markets this past week on the heels of the FOMC statement and Chairman Bernanke's comments.

In summary - the Fed, the ECB and the BOJ, have created an environment in which the word "RISK" had no meaning. Once upon a time, in a galaxy far, far away,  investors looking to put rare, scarce and hard-earned capital to work weighed the costs of so doing against the potential yield or earnings that they could expect. All things considered, if the reward was sufficient, they would choose to allocate that capital.

That all died with the advent of Central Bank intervention into the marketplace. Hailed by many, who are too short-sighted in their thinking in my view, as necessary saviors and as a sort of cosmic fire hose used to extinguish various financially-related infernos, they gave the green light to hedge funds, institutional buyers and sovereign wealth funds to throw any caution or reservations they might have to the wind and jump into a host of markets with little regard as to what might happen when the spiked punch bowl would be withdrawn.

In a near zero interest rate environment, yield hungry investors were focused on only one thing - how much they could make. Ne'er a thought flit through their minds about how much they might lose. After all, who was going to lose a dime if the almighty Central Banks were there continuously pumping liquidity into the financial systems? When this sort of environment is created, history has already taught us what to expect - a proliferation of highly leveraged, one-way bets. As long as the general consensus of the market players is that the status quo will continue, the game proceeds according to expectations and the seas are smooth.

Let a few rogue pebbles be introduced into the serene pond; a few stray gusts of wind arise, and suddenly, the sleeping mariners are startled from their complacency. That is what occurred this week.

I find it particularly insightful to observe what has happened in the interest rate markets. I have said many times, that those markets are the most significant on the planet, far more so than the equity markets and even more so than the currency markets.

Look at this chart of the US long bond. Notice the continued plunge even in the face of a sell off across the equity markets. Typically we see the exact opposite occurring when equities sell off, namely, bonds rise as money flows into safe havens. In other words, if "RISK OFF" is the play, bonds rise when equities sink.


What we had this week was BONDS FALLING right alongside EQUITIES. This is something far more than "risk off". It is a shift in perceptions aggravated by an enormous unwinding of one way bets in the interest rate and equity markets. Remember, the drive higher in stocks has been the continued expectation of unlimited amounts of liquidity. Same goes for bonds in the sense that $45 billion of Treasuries were going to be bought each and every month by the Fed as part of QE4's $85 billion per month.

Large speculators had positioned themselves accordingly in these markets to take advantage of that continued liquidity. The slightest fear that it would slow or cease altogether has set off a chain of uninterrupted selling as those massive positions built up since the start of the new year are being violently unwound en masse. Selling fuels more selling as margin calls proliferate and losses compound due to that same leverage now working against its owners. One has to wonder if we are seeing the beginning of the Central Bank encouraged bubble bursting?

Selling of the nature that we are witnessing in these markets can continue longer than many expect because it is all about money flows, reducing risk, rethinking exposure, cutting losses, etc. It will continue until all of that repositioning has been accomplished. Then the dust will settle out and we can re-evaluate.

In watching these things for as long as I have been trading, I keep coming back to the same thesis - the SOLE CAUSE OF THE WILD, INCESSANT AND UNPREDICTABLE VOLATILITY IN TODAY'S FINANCIAL MARKETS IS EVERY BIT THE CONSTANT INTERFERENCE BY THE CENTRAL BANKS. They refuse to leave the markets alone and are thus distorting the signals that would otherwise be generated. Their actions move markets from one extreme to the other by herding speculative forces and directing them in whatever direction those policies are designed to drive them. In the process of so doing, they create the perfect environment for reckless leveraging which always ends in creating more havoc and chaos. You would have thought they might have learned something from all the crises faced since the year 2000. Apparently not. Humility is certainly not a virtue found roaming the halls of the buildings that house these Central Bankers.



27 comments:

  1. A friend of mine sent me a chart of inflation as measured by the PCE deflator and it showed 0.7%, the lowest reading ever. So I asked, how does the 40% decline in silver come into play there? It doesnt. So I conclude that whatever number is put up about "inflation" it has no relation to silver. And lastly, starbucks came out with that coffee is only 10% of the price of its coffee. So if coffee goes from 120 to 240, that would only mean that coffee represents only 20% of the price of starbucks coffee. Coffee could go to 4 and it still wouldnt have any effect on the price of starbucks coffee. In the case of cattle, the price of cattle could go from 120 to 140 and the retail price of beef would not go up at all. It would just affect the profits of packers. As would an increase in coffee prices affect the profits of starbucks, without having an iota of upwards pressure on that inflation index. Too much talk about inflation without anyone saying exactly what they mean by it.

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    1. My point was that silver doesnt need the government PCE deflator to either go up or down for silver to be either 50 or 17. That index, which is used to measure inflation, is useless. If silver was 40, it wouldnt affect that index at all. So silver , or gold, doesnt need "inflation" to go up to be higher then it is today.

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    2. Arnie - what you must realize is that markets move on PERCEPTION - that is far more important than anything else. If the market "perceives" that inflation is non-existent, then it has no reason to buy the precious metals as a hedge against what doesn't exist in its mind.

      When the perception changes, so too will the price of the metals. That is the only thing that matters.

      I can tell you anecdotally that I see signs of inflation everywhere I look. Electricity rates are going up here where I live; medical insurance and medical costs are going up as are property taxes, etc.

      None of this is picked up by the market right now. It will be in time but in order for psyche shift to one in which "inflation does not exist" to "inflation is rearing its ugly head" we need to see the VELOCITY of MONEY" begin to accelerate.

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  2. So coffee prices can triple and cocoa prices can triple and sugar prices can triple and how would it affect the PCE deflator? IT WOULDNT! So when we say we need inflation in order for silver to go up, its what kind of inflation. Not just "inflation" which can mean anything to anyone.

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  3. This comment has been removed by the author.

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  4. Nice one Dan. The moral (hazard) of the story is, what goes around comes around. In this case of the viscious circle of unintended consequences there are black swans flying in the perfect storms in the crap hitting the fan, all at once:
    http://cdn3.standard.net/sites/default/files/imagecache/max_800/2011/05/25/story-multivortexgraphic-83415.jpg

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  5. Check out the M2 velocity its in a free fall and by the look of it in its last leg before splatter...

    If you read Armstrong and his historical references i think it becomes clear we are dealing with something like Rome but with a modern means (no coin clipping but "bit clipping") and with different dynamics (electronic communication sped things up while people degenerated to the point they tolerate more BS and are less likely to revolt as our ancestors before). I know how inflation is being concocted up from the start (somewhere in EU) first hand and trust me the number is nowhere near right not much by influence of .gov (some part in weighing what brings what to index) but mostly by ineptitude of clerks selecting items and their substitutes which are the basis for group calculation and then finally the index. Inflation is a fact and is here of course people like to exaggerate and blogging about doom and gloom is more readable than some realistic numbers which do not shock (though they still should).
    I find it funny (and i'm also guilty of this) that most of us who know the end result of these "intervention games" can't seem to wait for end to come knowing full well it's going to be hell for most of the people. We constantly seek signs of doom and have real biased look on events. Like the little kid at every sign post "Are we there yet dad?, Are we there yet..."

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    1. Sharac - those are good comments and very true... I would much prefer to live in a deflationary environment (not that I would welcome that either) than an environment in which the price of silver quadruples or quintuples or the price of gold triples. Hyperinflation or even a rapidly increasing rate of inflation can devastate an entire society.

      Many rooting for the price of the metals to increase need best be careful what they are wishing for because the events and circumstances that will accompany that will be very, very difficult to live through.

      Preparing for such an occurrence is one thing - wishing for it is entirely something else.

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    2. Spot on, on that comment Dan. Wishing is a lot different than GETTING what you wish for. I get so tired of hearing, what the price of silver/gold will go to. I don't really care, because what will my purchasing power be at that time with my silver or gold I have. Might just be able to buy a loaf a bread. So I don't care if silver goes to $300 in today's dollars. Everything else, proven from history, will go up with it.

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  6. "In the process of so doing, they create the perfect environment for reckless leveraging which always ends in creating more havoc and chaos."

    If only some could Tweet this sentence alone to Bernanke's account...
    good luck all,

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  7. Dan, I think that the kid at Street Talk Live is right on interest rates, along with Gary Shilling and that the greatest Fraud of our time Uncle Warren the politically connected one, will be wrong. BTW, people all laughed at me when I said that the history books would not look kindly on the Maestro Greenspan, the Panderer of all Time. The only mkts to be bullish on are the $ and ................bonds. steve in sparks

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  8. "The fabulous statistics continued to pour out of the tele- screen. As compared with last year there was more food, more clothes, more houses, more furniture, more cook- ing-pots, more fuel, more ships, more helicopters, more books, more babies—more of everything except disease, crime, and insanity. Year by year and minute by minute, everybody and everything was whizzing rapidly upwards."
    --- George Orwell (1984)

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  9. My comment is only about the US 17 trillion dollar debt. If there are no consequences to that, and by that I mean much higher inflation, then those that think it means nothing will just laugh and say, who cares what the debt is. There are no consequences. So a lot higher inflation might get some people to think that 20 or 25 trillion of debt is not such a good thing after all. The current crowd couldnt care if it was 100 trillion. And why should they. Where are the consequences

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  10. I am guessing that the Fed is going to draw a line in the sand at the current resistance level. As many have noted, they cannot afford to let Treasury rates go up very much. Tomorrow and the coming days are going to be very interesting. I expect a bounce, but if this level fails, there could be a long drop ahead (or rise, if one looks at yields. It looks to me like the next significant resistance is above 3%)

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    1. Published on Jun 21, 2013
      http://www.youtube.com/watch?feature=player_embedded&v=c7E9SUwlooE 8 minutes
      "Abby Martin talks to Karen Hudes, former senior executive at the World Bank, about her experience blowing the whistle on the high level corruption within the international financial system and how her story was censored."

      Karen Hudes speaks out on currency wars and unsustainable policies and suggests gold may unravel the system within weeks.

      Delete
  11. Hi Guy..

    Two day of flushing long contract.. I am delight to notify spec that all my long still in tact as I do not have stop loss.

    To play future market , there always to two type of force one is short term and one is long term.

    Long term player like to buy when price is depress which is my type.

    Two year ago I unload all my long position in gold and silver from my start position at about us$800 at 2008

    Since 2008, I have being in the bull camp... I got off the bull camp on 2011.

    When the gold and silver market got serious correction , which is the first time I got stop out of my profit.. Just to see the price rebound in the next few week.

    Then I realize playing future it is not only about fundamental .

    I am not technical so I do not play with short trading.

    Future contract , I usually have at least 4x the margin call, but this type of market with high movement. I am preparing buy more of silver in this correction. And add more fund to my trading account so that I can hold all my future contract in silver and prepare to take all the delivery. So I am not leveraging my position.

    Fed cannot stop print or bond purchase, the housing market in US is still fragil , the raise in bond rate can stop the booming housing market.

    And I do not see how fed can stop, they can pause for a while ... Japan is one example

    Anyway, time will tell no matter how market play out , I am taking all delivery..

    Cheer guy and goodluck..

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  12. I think the question about further QE, bonds, dollar, gold prices (everything being interconnected) is interesting.

    Can the Fed continue its QE forever? (QE to infinity)
    - The Fed, as any other bank, has also a balance sheet, which is now looking more and more unstable.
    - The Fed may have plans, but its mandate is also to protect a bit the value of the dollar. I mean : it's all well and good to do QE when the USD index remains more or less stable because your friends are playing the same game (BoJ,...) and you can manipulate gold prices for a while, but what will happen when confidence in the dollar will start being challenged seriously, with USD index dropping? Because that's where we are headed, no matter what, even if velocity of money is decreasing, even if some shennanigans are delaying the process, eventually always more QE and printing fresh money mean a weakening dollar (and subsequently inflation. Until now, they control the game, with an inflation "low" enough so that perceived inflation is not a problem, as Dan mentioned. Will it always be that way? I doubt it. And then the Fed will have to consider if it can continue with QE forever or not.
    - QE forever will probably mean hyperinflation at some point. But if Fed tapers / stops QE, then what will happen? Let's see Cyprus : one major bank was closed. Another one bailed in. Retirement funds plundered. Desperate measures. So I'm trying to imagine the same in our western countries. Plunder the pension funds. ok. Let some major banks with too much debt just go bankrupt. ok. Help some others through bail in. ok. Decrease QE without stopping it totally. ok. That might suffice to avoid a systemic collapse of our Financial system (at the expense of the usual Joe), but what about the government debt? How does US cope with 16 Trillion debt, 100 Trillion USD of liabilities and 1 Trillion deficit per year??? 78% of TBonds are purchased by the Fed. If they slow down QE, interest rates will increase, which means a higher cost to pay back the interest on the US debt. That also leads to the US default and a collapsing dollar. I guess eventually, US will have to whether default on their debt, or print like crazy and start hyperinflation. I'm not sure what would happen if they simply chose to default.

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    1. How about outright currency devaluation? Repegging the dollar. It has been done before and is an option with change of FED HEAD? Plausible?

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  13. Nice short squeeze. Looks like the top may be in at 2.63 on the 10 year. It's already starting to drift back down.

    I'm looking for an intraday reversal, with the 10 year heading back to 2.55.

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  14. Well, at least we know all those commenting how precious metals would save you since the crash of 2008 were either complete idiots or pump and dumpers!

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  15. Garry,

    I think it is much deeper than this. I believe the Fed and Bullion Banks are/were trying to keep the value of the competitive currency (exchange of value & store of value)from competing with dollars. So they conspired and took anyone and everyone out and hurt them so to destroy both their wealth and will. It will backfire in the long run. This is actually "stealing" and they will pay for it, now and forever. Just a matter of time. Dan was trying to help and has indicated that they (bullion banks have now liquidate their short positions). He warned us several times. If we do not take direction we only have ourselves to blame. An asset that has been a source of protection for 6,000 years will survive. Price is getting very erratic. Lets see what happens. I have started establishing a position again slowly in miners. Again today it is getting drilled. :)

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    1. Lets hope this next trade of yours is one for the ages and the angels.

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  16. http://www.davejanda.com/guests/karen-hudes/sunday-june-23-2013

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  17. another sell signal, as sinclair is calling for the next bull phase to begin in a few weeks; probably as good as his call that we may never see $1600 again (oops); why do the perma bulls call for the bottom to be in without any time or work being done on the charts? Keep up the good work Dan as you are a breath of fresh air amongst the hot air shills, charlatans, and stopped clocks.

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  18. We are at the end of a 30 year bubble in bonds, get out and look at Alternative Investments whilst you still can!

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  19. Happy 4th of July Dan. This day is so special for all of us here in America. It was the start of a very special nation. A nation with the idea of true Freedom. A freedom that is being destroyed every day. I wake up in disgust every day with a pit in my stomach knowing that the country I grew up in is gone. Hijacked! Powerful wealthy men who will no longer allow us to live in this country free. In a country that is "Progressively" dying or already has died. This site attracted me originally because of Dan's views which are similar to mine. I believed that gold was the safe haven which stood 5,000 years for "Sound Money". It is now being destroyed by these powerful few that want to turn the nation into their view for us. This will end in only one way. Every socialist, communist and totalitarian nation on earth has failed. This too will fail as long as "WE THE PEOPLE" do not allow it. It will take courage, blood, and a dissolve to remove this growing filth. I have faith that true Americans will have this courage.

    Thank you Dan for your site. The raid on gold will begin again. At some point they will realize that they cannot destroy an ideal that began on the shores of this beautiful nation. I hope that people in this country read the above headlines posts and truly understand what they mean. Read the Declaration of Independence, the Constitution, and understand what they represent. Understand history and what this wonderful day really meant. It is truly a wonderful day to remember as many others were. But many in this country are blinded.
    May god be with you Dan. May god be with all those that will help and sacrifice when called on to fight this Progression towards Socialism, Communism and Totalitarianism.
    God bless America.

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