High-Diving Investor Climbing, Climbing….

Treasury Bonds got savaged yesterday, but more-devastating carnage lies just ahead if our analysis from last week ago proves correct. Wall Street, for its part, seems to view the impending firestorm as though it were a Yule log. The Dow Industrials rose nearly 50 points on light volume, never even dipping into negative territory.  We’ve seen divers boldly ascend a 70-foot tower and jump into a big wet sponge, but the stock market seems positively arrogant about the dive it will inevitably take onto concrete.

Just a week ago, we told you to brace for the worst: “Falling T-Bond Threatens Illusion of Fed Control” read the headline.  At the time, yields on the 30-Year were around 4.43%, but we predicted that 4.82% was on its way, and thence 5% and…away-we-go.  Yesterday’s plunge in T-Bond prices pushed yields to 4.56%, so we’re already a third of the way there in just five trading days. A rise of 13 basis points over that period may not seem like reason to panic, but when you consider that trillions of dollars worth of debt – and hundreds of trillions of dollars worth of hyper-leveraged derivatives bets – will be subjected to the higher rates, you begin to understand why the stock market’s arrogant insouciance is worth troubling over. 

 Ben’s Big Problem

Adding to Ben Bernanke’s Big Problem is that the plunge in T-Bond prices has been so steep. If the dollar were falling now as well, it would probably trigger a panic, accelerating the fall of both. The fact that the dollar has been doing no worse than holding its own for the last month or so suggests not only that the herd instinct dominates the institutional investment scene, but also that expectations of a eurodisaster have made the dollar the only game in town, at least for portfolio managers who harbor a congenital distrust of bullion. Perhaps they think higher interest rates will put the kibosh on gold and silver?  No question, tighter money will put downward pressure on precious metals. But there are a score of big, sovereign buyers who will keep buying bullion no matter what the returns are on paper.  Can you blame them?

Rick Ackerman

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Rick Ackerman is the editor of Rick’s Picks, a daily trading newsletter and intraday advisory packed with detailed strategies, fresh ideas and plain old horse sense. Access to it and to all other Rick’s Picks services is available via a free seven day trial subscription available by clicking here.