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The USTreasury Bond market
can be confusing. Price inflation in the United States
is intentionally made confusing. That keeps the public ignorant and poorly
prepared to interrupt grand larceny and elite control of the printing press,
the result of which has been a few decades of hidden confiscation of Middle
Class work, wealth, and dreams. Long-term bond yields have many fundamental
reasons why they should fall lower in the United States.
They are interwoven and integrated. The USEconomy is being killed by rising
costs, in no way justifying higher borrowing costs. Yet amateurish opinions
seem to coalesce in an absurd consensus. The Asian renaissance contributes
mightily to both the impoverishment of America
and its economic stagnation. Anyone who believes the US and Europe should share a consistent rhyming
monetary policy is asleep at the analytic wheel. In the zero-sum game that is
currencies, higher prices in the United States come with
lower prices in Europe.
Refer to marginal incremental movement in prices.
MONETARY
INFLATION VS PRICE INFLATION
My personal observation of
the entire inflation debate is one of awe, for the ignorance is beyond
description. Neither the public nor the financial community has a clue what
inflation is, how it affects the USEconomy, how it should price bonds, how it
produces imbalances. A smirk comes when an email hits my inbox asking about
inflation versus deflation. My answer usually covers a few key economic items
and how each is subject to rising prices or falling prices. Lost is the
meaning of inflation, which is the increase in money supply above and beyond
economic growth. My favorite example to clarify that price inflation is not
simply rising prices comes from the orange example. If frost hits Florida
and the orange crop is partially ruined, higher market price for oranges is a
basic response to reduced supply. Demand might drop a little, but supply
dropped a lot, and price fires higher. That is supply & demand doing its
job, and in no way related to inflation. Crude oil nowadays is suffering from
reduced supply of easy deposits once available in older huge oilfields,
higher degree of difficulty for newer production areas like deep water and
remote locations, almost weekly bandit interruption of important production
zones, not to mention the outright treachery displayed by certain energy
warlords (see Putin, Chavez, Nigeria).
Thus supply & demand dictates a higher oil price, against a backdrop of a
thoroughly decimated USDollar in which it is priced.
The US
financial markets have become a comedy. Investors jump with the slightest
jawboning from central bankers as though they possess wisdom, as though they
understand the hellish outcome wrought by their failed financial engineering,
as though they actually have ANY policy options left. US central bankers,
which include the rookie chairman, the governors, and the regional
presidents, are as scared witless as they are hopelessly lost. They have
become inflation apologists, struggling to explain how staggering monetary
inflation has produced staggering asset deflation, how a robust housing boom
has produced a totally wrecked banking system, how the pursuit of low cost
solutions in China
& India
has produced an ocean of failed debt instrument like derelict crafts cast
among flotsam and jetsam. Their arguments have become replete with twisted
logic, so much that if their brain stems were closely examined, they would
likely resemble pretzels. Be sure, those stems are much smaller than we realize.
THE WALL
STREET CONMEN
We are witnessing the
destruction of the US
financial foundation to its very core, with most of its appendages wrecked as
well. The bankers cannot offer any solutions except for the public till to
rescue them before they become abject paupers. The have become beggars on the
political steps, offering no wisdom, only blueprints for rescuing their own
hides. Amazingly like today, Bernanke and Paulson each were on the receiving
end of bootlicking by Congressmen, when they should have been vilified. They
propose taking more control of the system, when they have destroyed the
system. They act as authorities still, when they should be defendants in
grand larceny and grand fraud cases before the world court. When the Wall
Street human wrecking crews come before the US Congress to propose solutions,
they might better spend their time to explain how their financial engineering
failed and why they should not be banned from all government and regulatory
posts. The public cannot bail them out as taxpayers. The bills will continue
to be paid by foreign investors via credit supply. What they refuse to pay,
the US
will rely on the ultimate quicksand to print counterfeit money, which will
deliver the next severe blow to the USDollar. The foreign wealth centers have
begun to shun the USDollar and USTreasury, except for the Arabs, who harbor
some last drop of pity for their military master keepers, all part of a vast
protection racket.
THE GREAT
CENTRAL BANK SCHISM
A split has occurred. The
Europeans have forged their own path. The Americans are on their own, more
isolated than in their recent 40-year history. So the Germans and Trichet
want higher interest rates. What they might be thinking is that a still
higher euro exchange rate can reduce the actual cost of commodities, from
energy to metals to paper to grains. The lower cost comes from the strong
euro currency discount. Such is the vagary of the Competing Currency Wars,
which seemingly nobody discusses anymore even as it heats up like never before.
Meanwhile, back in the Untied
States
or Untied Snakes or Uppity Snoops, the benefit that Europe realizes in cost smacks the
Americans in the face as higher prices. As the USDollar falls, or even stays
depressed here, the practical effect is for a broad powerful deep increase in
costs throughout the USEconomy. At the same time, the USEconomy has failed to
invest in energy supply, metals supply, or much of any other supply properly,
including ethanol and grains, which has harmed its entire supply chain enough
to cause a higher price response. SINCE WHEN IS THAT INFLATIONARY??? Robust increase in the cost structure
without matching wage gains stands as the most utterly obvious and powerful
basis for economic recession imaginable. As the two great Western continents
go their separate course, why would anyone expect their two government bond
markets to be coordinated? Not only is the US split from the
European Union in crucial policy and self-destructive behavior, but Europe itself is split. This is covered in
the Hat Trick Letter July upcoming Gold & Energy Report. Welcome the
Latin Euro, a real possibility. Otherwise, why would Germans deny redemption
of Spanish or Italian government bonds into German Bunds?
PLANNED US
MIDDLE CLASS IMPOVERISHMENT
The primary objective of US
central bankers is to keep wages down. Think about what that means. Their
primary objective is to prevent Americans from being in a position to pay for
rising cost of living, which translates into impoverishment and often
insolvency, eventually many bankruptcies. The ruling elite in the US has
for three decades looked to Japan and the Pacific Rim in the 1980 decade, the
Mexicans in the 1990 decade, and the Chinese & Indians in the 2000 decade
to reduce their corporate cost structure. We have seen capitalism at its
best, but in the process, an abandonment of US workers, a knife in the heart
of US labor unions, and a relentless decline in the Middle Class wealth of
the nation. This is the primary objective of the ruling elite, who work in
close concert with their subordinates, the central bankers and other bank
leaders. Nowhere has the impoverishment of the US worker been more plain
that the invitation to subcontract US industrial needs to China.
Nowhere has the spread of poverty to US Middle Class been so obvious,
blatant, and vicious than the refusal to permit wages to rise. Central
bankers call it ‘Secondary Inflation Effects’ in queer tone. The
plan has been to passively permit costs to rise from a falling USDollar while
actively blocking wages from rising. Nowhere has the hypocrisy been thicker
among US banking and political leaders than to talk about a ‘Strong
Dollar Policy’ as the primary directive and boast of export gains out
of the side of their mouths.
The grant of Most Favored
Nation status to China
in 1999 opened the door to Asia.
It closed the door on America.
The Shadow Govt Statistics folks do great work. One can rely on them to
provide clean data series during dirty times for economic growth (shown below)
in the Gross Domestic Product, for the price inflation, for the unemployment
rate, and for the money supply growth rate. Notice the chronic USEconomic
recession that began to show in 2001, and has returned in 2004. It coincides
with the stock bust in 2000 and the emergence of China
in 2003. As their savings account has grown to over $1800 billion, the
impoverishment of the United States
has dovetailed in occurrence, as debts rose in staggering fashion. As long
as China
& India
are prominent players, expect continued recession and extremely sluggish
economic activity in the United States.
Their gain is our loss. Their job creation is our job loss. Their growth
comes at the expense of our recession. It is that simple. China
stands as the biggest external reason why bond yields should remain flat to
down, as they impose a profound wage and price ceiling in the USEconomy. In
fact, it has locked the Untied States in a recession ever since year 2001,
except for one or two quarters.
Notice that since China
achieved the Most Favored Nation status in 1999, the USEconomy has had only
one or two quarters of positive growth, according to the SGS data. The
USEconomy has been stuck in horrendous mud for over seven years, the heavy
penalty from globalization. That trend is defined as exploiting cheap Chinese
labor and sending components across vast oceans at great energy expense
before final assembly, then sending finished products across the same oceans
again at great energy expense. Has anyone figured out that higher crude oil
prices could be a result of globalization’s horrendous inefficiency? Now
there is a waste of oil. The effect on the USEconomy has been a backfire, as
many higher shipping and distribution costs are directly attributable to the
globalization theme. If the US built what it needed in
regions near where the products were delivered by people who used their own
output, then less energy would be wasted in transport and prevalent wages
would enable their purchase. That is logic too simple for total moron US
economists, the stupidest breed of two-legged animals on the planet.
THE GREAT HIDDEN
TAX
In the Hat Trick Letter
Special Report entitled “The Schizophrenic Bond Market” a
detailed but not comprehensive analysis is given for the troubled and
confusing USTreasury Bond market. To be sure, price inflation has risen
tremendously in recent months. However, it has done so on the cost side
without benefit of wage increases to households or much pricing power to
businesses. Thus, the inflation has a net suppressive effect on the
USEconomy like a giant tax, since it shows up on the cost side of the
economic ledger. Analysts understand tax hikes to push toward recession,
but miss how cost inflation does the same. Many reasons are provided, ten in
a list within the report, as to why long-term USTreasury Bond yields should
remain flat to down in the intermediate term. The 10-year USTNote yield
deserves close watch, since its chart pattern might be showing a hint
of powerful upward bond yield move. JPMorgan stands as the biggest
interventionist reason why bond yields should remain flat to down, since they
have essentially destroyed that market. Imagine a gorilla at your dinner
table every night, as parents pursue a balanced diet for their children. Your
children will tend to lose weight, just as the USTBonds will fall in yield.
CONFIRMATION IN
BY SHORT-TERM USTBILLS
The confirmation of lower
sustained US
bond yields, NOT higher, has come from both the 1-month USTreasury Bill and
2-year USTBill. Since the USFed was unmasked at their last FOMC meeting,
exposed on their bluff of inflation vigilance, the short-term USTBill yields
have come down, especially the 1-month. It flirted with 3.0% on the actual
FOMC debutante ball event, where Young Benjamina not only failed to wear a
nice gown, but she wore nothing at all. Since then, the 1-month TBill yield
has slipped down to below 2.5% incredibly. That takes pressure off the rate
hike. The 2-year USTBill yield has come down below the magic 2.0% mark and
has come down to below 1.5% incredibly. That actually puts pressure to
cut rates by the USFed, who have almost as little control as they have
credibility. Bear in mind that the USFed and their megaphone are
rarely known to speak either words in sensible language or plain truth. Their
job is to obfuscate. When they cannot raise interest rates to defend the
beleaguered USDollar, they talk about vigilance. When they have no policy
options left to address rising prices, they hint of rate hikes. Their
credibility is nil, a subject addressed in the July Hat Trick Letter Macro
Economic Report out yesterday.
TEN
KEY FACTORS KEEP BOND YIELDS DOWN
In the shizophrenia Special
Report, ten reasons are provided in a list as to why long-term USTreasury
Bond yields should remain flat to down in the intermediate term. They are
tracked from diverse arenas and sources, some of which are mysterious. In my
view, they are compelling. The consensus expectation of higher long-term
bond yields in my view is incorrect. The only way that they could rise
substantially is if a global boycott becomes deeply rooted, and the Untied
States simply cannot any longer fund its capital requirements. In other
words, the world might permit the US to fail financially, but at a
great cost to themselves from reserves wealth stored, banking system
foundations, and a lost market for exports.
1)
The
rising costs have resulted in squeezed profit margins, squeezed
households, depleted wealth, and broad bankruptcies. The great untold story
is that wages have fallen since 2003, like over 25% on an inflation adjusted
basis in the United States.
2)
Recession outcomes lift USTBonds. The most profound elements of
the USEconomy are a housing market bust, a mortgage bond debacle, an
insolvent banking system, tightened credit supply, evaporation of commercial
bank paper, grotesque debt collapse, and ruined confidence. Hardly a
combination urging to hit of the brakes with higher long-term bond yields.
3)
Funds
flow from stocks to bonds typically occurs in cyclical
rotation. Corporate profits are on the decline, as are most estimates for
future quarters. That harms stocks. When US banks begin the orchestrated
liquidation process this late summer or early autumn, a flight to perceived
safety will occur into USTreasurys.
4)
Many
bond spread trades are anchored in USTreasurys. They involve
mortgage spreads, corporate spreads, emerging market spreads. All have
widening bond differences, as many are being unwound. The process requires
buyback of the USTBond anchors, a strong demand in the cover to unwind.
5)
The
monstrous JPMorgan credit derivative book keeps the lid on
long-term USTBonds. They comprise 85% of the total credit derivatives. They
are not subject to ordinary accounting rules, a license to corrupt markets
and commit fraud. The behemoth remains very actively to keep long-term rates
down by using basic and exotic credit derivatives.
6)
The
most powerful reason is the strong Chinese presence in global trade
has an enormous effect on the all important labor market. Together with India, the
two nations create a vast ceiling on labor wages for the majority of manufacturing
industry and a sizeable slice of service industry. The USEconomy is held firm
in a constant state of sluggishness and recession.
7)
Back
in the 1990 decade, the ‘Bond Vigilantes’ as they
were known, had a powerful role in the bond market. They are not a dying
breed. Vigilantes see the price inflation as embedded in costs, thus pulling
the USEconomy deeper into recession. Vigilantes are buying USTBonds.
8)
An
unorthodox reason (more a personal tool) is that a certain group of
analysts forecast higher long-term USTreasury Bond yields. They tend
to offer carefully articulated, but wrong forecasts. They tend to have vested
interests in the system. They have a bad track record.
Other reasons appear in the
Hat Trick Letter, related to petro-dollars and more. Too little time and
space. Gotta go. The Special Report goes into much more detail. It includes a
brief technical analysis of the 10-year USTreasury Note yield (TNX). A
potential powerful reversal pattern is presented, one that must be watched
closely. A rising Head & Shoulders pattern must be watched for. If it
exerts itself in a reversal lift of bond yield, a move up in the TNX yield
could shoot up toward 5.2% in the next few months. No immediate threat for an
upward breakout is yet evident. Watch to see if the TNX falls below 3.8%, its
neckline support. If the 10-year bond yield goes below that level, the
H&S pattern is busted, and the TNX will again test lows. Given its
downward momentum, and how cyclical indicators on a weekly basis in no way
show exhaustion of the decline in yields, look for the reversal pattern to
break down soon. My forecast is for the TNX to retest 3.5% by autumn, when
the panic starts.
The Special Report goes
into more detail also about JPMorgan, the pit bull on Wall Street, defender
of the ‘Garbage Can’ that is alive, full to the brim, whose
stench is offshore just like the rancid effluent stench associated with
Enron. Bear in mind that JPMorgan taught Enron all they knew, while Arthur
Anderson looked the other way and was blamed for the entire mess. Back then
the corrupt financial device was the Special Purpose Entity. Now Wall Street
prefers to deploy a revolving door of identical illicit devices with changing
names like Structured Investment Vehicles, Variable Interest Entities,
Unidentified Financial Objects (my favorite UFO), and more. Be amused,
don’t be fooled. The mess today in the Shadow Banking System is
directly related to the failure of Enron-style devices that never went away. JPMorgan
is the secret weapon for keeping down long-term USTreasury Bond yields. They
do so in order to prevent the entire US banking system from imploding.
They defend the risk price model. The other side of the shadow banking system
operating on US
soil derives funds from the Afghan product, another scummy story at times
hinted, but never in detail, always steeped in darkness.
APPENDIX ON
SILVER
Hardly unrelated to the
decline in USTreasury yields since the last FOMC meeting in late June, the
gold & silver prices have recovered nicely. They have set the stage for a
powerful upward move. The other stage is being fully designed and planned for
a pulled plug on several major US banks. A panic is coming
within a couple months possibly. The precious metals have responded, and will
continue to respond.
The silver chart displays a
Double Cup & Handle reversal pattern. Some call it a W-shaped reversal
pattern. If the 18 level holds for silver upon consolidation after a strong
move since the June FOMC meeting from 16.50 up by 10%, then look out above! A
quick assault on the 20 level is assured. Also, even as the USDollar found
some lift after the euro gave back 200 points from 158.5 to 156.5, silver
held on strong. In fact, the euro shows a similar W-shaped reversal pattern. It
is analyzed in the second July Hat Trick Report, with plenty of fundamental
factors as well. The base for silver and gold have been constructed, enough
to serve as a strong base for a powerful upward summer and autumn move in
price. My long-term silver price forecast is 50 before year 2010 is over.
Jim Willie CB
Home
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Jim Willie CB is the editor of the
“HAT TRICK LETTER”
Jim Willie CB is a
statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His
career has stretched over 24 years. He aspires to thrive in the financial
editor world, unencumbered by the limitations of economic credentials. Visit
his free website to find articles from topflight authors
at www.GoldenJackass.com . For personal
questions about subscriptions, contact
him at JimWillieCB@aol.com
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