The Department of Labor’s (DOL) jobs number was a big miss! So much so, that it led me to think that it might have been “a fix.” The reactions of many ranged from dis-belief to comments of the markets being nothing more than “a casino” as one trader remarked on the Talking Stocks Forum message board.
Now, at putting myself at risk of sounding like another “conspiracy theorist crackpot,” let me explain my rationale on this idea. Of course, readers should decide for themselves, but I only ask that readers consider the evidence.
First, keep in mind that the ADP payroll report showed 100,000 more private payroll jobs just the day before the DOL release. ADP is a very large payroll processing firm, and they have direct access to the payroll systems of many private employers. So, it stands to reason that ADP can see first hand if private employers are adding to or subtracting from their payrolls.
In the recent past, many popular media and government pundits have attempted to diminish the ADP numbers as being less reliable than the DOL’s numbers, but this attempt at slighting ADP’s results seems to be more of a miss direct attempt to inflate the value of the government report versus the actual payroll results of a top vendor in the payroll services sector.
The government report uses many adjustments including seasonality factors and a birth-death model for businesses that many experts question. The ADP number on the other hand, at least as it relates to private payrolls, is pretty much an un-doctored number.
So, if one assumes that the ADP monthly jobs report is is closer to reality (at least with private payroll figures), then let’s move on to some reasons that would be motivations for the Fed to hold interest rates steady (and keep bond interest rates low).
The first reason is the monthly Treasury bond auctions which occur this week in the U.S. As I have noticed time and time again, bond yields tend to fall in the week of each re-funding. However, there has to be some sort of fear of bad news in the air to drive down interest rates, and this bad news often seems to arrive in the week of each month when the Fed holds its largest bond auctions.
With our large sovereign debt ($19 trillion), it makes sense to try to auction off new treasury notes and bonds at as low of an interest rate as the markets will accept. As it is now, the US can only cover its interest rate payments, and that is at a stretch without sacrificing other areas of the bloated budget.
So, from the federal government’s position, it makes sense to try and auction off new treasury notes and bonds at the lowest possible interest rates. During times of fear, investor money typically rotates into US treasuries as they are perceived to be both liquid and safe investments. Bond prices tend to rise (and interest rate yields fall) during times of fear, due to the safety perception of this investment.
Yet, the Federal Reserve had been preparing us for another rate hike either in June or July, which is contradictory to the directions that yields take during times of worry. A rate increase seemed to be increasingly likely, and the short end of the yield curve was rising in anticipation of it. Rising interest rates create a problem of interest rate coverage– a financial concept that says that net tax receipts have to at least cover the interest rate payments on the treasury notes and bonds.
So, if the Treasury can auction off those debt instruments at lower interest rates, then those low rates remain intact to maturity some ten to thirty years out. Since interest rates are at near historic lows, and the amount of US debt is very large, it only makes sense for the government to try to auction off their paper at the lowest possible rates.
Now, back to the Fed. The US central bank had one caveat to its forecasts, and that was that an interest rate hike would be “data dependent.” On Friday, that data came in weak. So, the stunning low jobs number did “the dirty work” for the auctions by driving bond yields down and delaying a threatened Fed hike in June.
The low jobs number also helps several other concerns as far as keeping interest rates low:
Those examples include “Brexit,” China, and Europe. In the case of Brexit, the Fed can now avoid a mistake of raising rates right before the Brexit vote in the UK. A vote to leave the European Union could un-glue markets worldwide, and so keeping the US interest rates on hold (and thus keeping the US dollar soft) lessens the chance of large capital outflows from Europe and the UK, which could trigger a financial crisis.
And the lack of a Fed rate hike also keeps China from doing a devaluation of the yuan. The last major yuan devaluation occurred on August 24th of last year, and so take a look at your stock charts to see what happened last year on that date and you will understand why it is important for the Fed not to raise rates while China’s economy is weak!
China’s currency is weak but still pegged to the US dollar, so with the greenback now conveniently weakened, that takes pressure off China having to de-value its currency. A weaker dollar is in essence, a de facto devaluation of the Chinese currency relative to other currencies around the world. Yet, since China does not have to officially de-value its currency, the world financial markets remain calm.
So, regardless of whether you buy into my thesis that the weak jobs number was contrived, there is no denying that the result plays right into the hands of what the global elite were secretly hoping for.
So, welcome to the casino! The house welcomes you to pull up a chair, and place your bets on the next roll of the roulette wheel. The markets continue to gyrate without any consistent direction because the global elites (who control the financial institutions) are trying to keep a weak and sensitive financial system from falling out of balance.
So, we lurch from one crisis point to the next. While the Fed and other central banks talk about a controlled economic recovery, what they really seem to be doing is trying to keep currency crosses moving in a narrow channel so as to avoid a sudden spiral of financial conditions.
NOW, if all of what I have speculated on seems to make no sense, then I ask that you at least consider that the US dollar daily chart shows the buck was hitting the late January down-trend resistance line. That line is also very close to the down-trending 50 day line. So, when the greenback hit that yellow-dotted line on my chart, that was a natural resistance point where a reversal could take place….and it sure did!
Take a look….
So, was the Jobs number a fix? Whether or not you accept the theory of a contrived report, then perhaps we can agree on this: the US dollar chart was set up to reverse, and it was conveniently right for it to do so as far as “the house” was concerned! The Fed saves face because it cannot raise rates in the wake of weak data, and the day of reckoning in the financial markets is delayed yet again.
Strange markets indeed!
I clearly understood why there was a big selloff on Friday morning thanks to the poor jobs number and downward revisions to previous months (referring to the monthly BLS Jobs Report). What doesn’t seem to make sense is why the market rallied back so fast, if we are to believe what almost every pundit and market commentator told us, (since the Fed decided to hold rates at the zero-bound at their mid-September meeting), and that is that the markets were disappointed that the Fed failed to raise rates.
On Friday, we witnessed a capitulation. The Dow went from over 200 points down to finish higher by 200 points. What would change sentiment so quickly when the Jobs Report was so awful?
It was like that Jobs Report never existed Friday morning except to cause some traders a quick loss on their trades. Lol!
What is clear to the profitskey.com is that this is more entertaining than a 3-ring circus! The news media must look like fools for telling us that global depression is at hand as of 8:30 on Friday morning, but only 6 hours later, everything was “hunky-dory!”
This rally looks to me to be a true RELIEF rally! Notice that I bold-print and put in caps the word “relief.” This rally on Friday afternoon was a relief rally because there are many equity traders who are happy to keep 0% interest rates for a lot longer. Yep, that’s right! And if I am right, then this blows holes in the theory that the markets were wanting a rate hike!
Even before the Fed’s September 17th decision not to raise rates, I had noticed that the equity markets were still doing what they had done the past several years. That is, the equity markets fell when the US dollar rose and/or interest rates on the 2 year and 10 year US Treasury notes were rising. This was indicative of a market that continued to equate the Fed rate hike threat as bad news. So, I was firmly in the camp that still believed that a Fed rate hike would be bad news for the stock markets.
But in the days following the Fed no-rate-hike decision, the equity markets were plunging and under great volatility. Sure enough, the most popular market pundits were going on the financial news channels like CNBC, Bloomberg and others touting that the markets were in a tailspin because the Fed failed to raise interest rates. Some of these “experts” literally begged the Fed to re-consider and act quickly to raise rates at the October meeting. I must admit, I was questioning my own belief system–had I misinterpreted the markets actions in the days leading up to the Fed no decision?
I was of the belief that the markets would not take kindly to any rate increase at this time with China in a near recession and emerging markets and commodity producers falling into depressions. Perhaps I had been wrong?
Then, the amazing capitulation in the US equity markets occurred on Friday. The markets rallied 400 points from trough to peak. Suddenly, some people began to say the unthinkable: the markets seem to like that the Fed will likely not raise rates any time soon. My belief system was redeemed! My read of the market tea leaves was correct…and it was all of these pundits who might have been wrong….again!
After all, I have been saying for the past few years on this blog that I don’t believe the Fed will raise rates at all before 2016…you can go back and read my past blogs to find the reasons. All of these highly popular pundits have been getting it wrong the past few years, and I have been right on the money up to now. And keep in mind, I am not even sure the Fed will raise rates in 2016, but I leave that as an open issue to be debated for now.
So, why did the markets collapse after the Fed no decision? I think the pundits misinterpreted the causes of the market selloff. What the markets were reacting to was that China was spinning into a possible recession, and the world’s second largest economy has a great influence on markets these days. That cannot be ignored any more. The fact that the Fed did not raise rates was official recognition of how important China is to world markets. The reaction was related directly to what was going on overseas and not to the Fed’s decision to leave rates alone.
On Monday and Tuesday, we will have to watch for follow-through by the Bulls to see if this reversal is real. Once again, this reminds me of an adage I sometimes state on the Ace “Talking Stocks Forum”: “You can choose to believe what the market pundits say, or you can choose to follow a fact-based (technical analysis) strategy like we do at www.AceStockTrader.com . ”
In a free market, it’s your choice.
My belief is the Fed will be foolhardy to raise interest rates in September, with China dumping its treasuries. By selling their US assets, China is forcing interest rates higher, especially on the 10 and 30 year treasuries. The only reason the long bonds aren’t rapidly losing value is that we are in the grips of a new bear market, and stock investors are fleeing to the relative “safety” of bonds. Yet, bonds are failing to reach new highs because of the overseas selling of them.
By the way, China’s dumping of US treasuries has created QT….Quantitative Tightening! In other words, China has acted ahead of the Fed!
But this is QT in the worse way possible because selling tons of long bonds into the open market can create huge pressures on the debt and credit markets as well as equities–in effect, market disequilibrium! In the past, when the Fed raised rates, they would sell short term treasuries into the open market….but never long bonds! This QT by China with the long bonds is doing the work of the FED by raising rates (on the long end of the curve) even before the FED can act at its mid-September meeting. However, the sale of long bonds creates undue pressures on mortgage markets and other longer term markets in this country.
And China holds a lot of our treasuries ( and they can disrupt markets if they sell a lot of these). This is why I own one call on TBT….and I may buy more.
And I am keeping a close eye on gold because investors could suddenly lose confidence in owning bonds…..that could cause a dumping of the dollar and nearly all other assets….so, I suggest to keep an eye on gold for any sudden breakouts.
It’s no secret by now that recent comments by the Federal Reserve’s Chairman about “tapering” bond purchases has triggered significant turbulence in stock, bond and commodity markets around the world. The imbalances have been triggered by sudden withdrawal of carry-trade financing of simple, profitable trades–trades that are profitable only so long as the Fed remains “status quo” in its stance with quantitative easing.
The Fed’s official announcements have never wavered on the $85 billion a
month purchases…Chairman Bernanke only suggested “tapering” during Capital
Hill testimony when put to the question by a Congressman–and followed that up a week later at a news conference by stating that tapering
would only occur IF market conditions continued to improve with the
word IF emphasized.
So, for one thing, it seems that on the surface, markets over-reacted since the Fed has not done anything yet to slow down bond purchases from it’s $85 billion a month pace. The second thing to consider is that even when the Fed does start to taper (as soon as September according to some prognosticators), that it will only be slowing down its purchases to a smaller monthly number; it almost certainly won’t be ending its bond purchases “cold turkey.”
Yet, the world markets reacted to this tapering speculation as if the Fed had not only ended its bond purchases, but was out-right raising interest rates. Of course, Fed officials were wheeled out in the past few days to calm markets by telling the world that short-term interest rates would remain low (near zero) for an extended period of time.
Well, I say, of course!
(Image of the Federal Reserve Building, Washington, DC)
I personally believe that most people, including a number of market pros, do not really understand Fed policy or the complexities of how the Fed conducts its policy. A Case in point were the comments by esteemed money manager, Ron Baron on CNBC-TV this past week. Mr. Baron said he attended a private dinner where former US Treasury Secretary Tim Geithner spoke. According to Mr. Baron, the former Treasury Secretary said that the Fed would not end its QE (including tapering) for about 5 years.
When questioned about this, Mr. Baron was fairly certain that Geithner meant that tapering would not end for 5 years. Of course, most Fed watchers, including myself, were almost certain that Mr. Baron had misinterpreted the Secretary’s remarks. More likely, Mr. Geithner meant that the Fed would not raise short term interest rates for about 5 years and/ or begin to unwind its previous bond purchases of US Treasuries and Mortgage Bonds. As far as tapering goes, it would be almost reckless of the Fed to continue its quantitative easing program for 5 years. For one thing, the Fed’s balance sheet would balloon to a very dangerous point. Indeed, some Fed watchers (myself included), already worry that the balance sheet of the Central Bank is too large. It’s capital-to-debt ratio is more stretched than that of the world’s most shaky banks (at roughly a 2% ratio currently).
Second, another 5 years of quantitative easing (QE) would surely cause huge disruptions in world markets by continuing to prime an artificial carry-trade as well as exporting inflation to other parts of the world that may not want our exports of dollar cash infusions. Politically, the Fed would not be able to continue its QE program for as long as 5 years without incurring the wrath of many of our trading partners.
Now, I am not here to try and sound smarter than Ron Baron; the guy has proven to be an investing genius, by using a fairly simple formula over the years. He invests in under-valued companies that have strong cash flows and are priced with low earnings yield. His fund has returned handsome gains through smart investing, low turnover costs, and compounding returns. It’s not that this formula is something new, but few money managers have had the convictions of Mr. Baron to carry through with their investment plans in unwavering fashion and reward investors.Yet, the comments of Ron Baron about Fed policy seems to point to an interesting observation: even many professional money managers and otherwise smart financial types don’t fully understand how the Federal Reserve works or how it carries out its policies.
Tapering itself, concerns withdrawing (slowly) the bond purchases of longer-term debt instruments. This is why the 10-year treasury note and 30-year bond’s interest rates have spiraled higher in recent days, as they are long term bonds. Many forms of long term financing, such as mortgages, longer term corporate bonds, and auto loans with several years of payments have reacted negatively. However, shorter term financing, such as 30-day and 90-day corporate money market instruments have barely budged.
In other words, tapering affects longer term debt financing. This longer term debt is subject to bigger swings in the value of the bonds, because, a 100 basis point move in the interest rate on a 30 year bond reflects higher interest rates for up to 30 years, which is offset by a lower bond price over 30 years. (The prices of bonds and notes fall when yields rise, and vice-versa.) Contrast this to a one-year note where the interest rate affects the price of the note for only one year.
Now, another thing to understand is that before the Fed can begin an exit strategy (which means raising interest rates as the economy improves and also to control inflationary pressures), it must first end quantitative easing. This means the Fed must taper its bond buying program down to zero new purchases of long term bonds and continue with only its long term program of buying and selling short term notes.
However, The FED is trapped with a very limited EXIT STRATEGY–it’s
only tool for exiting its low interest rate strategy is to use Excess Reserves on deposit with its
member banks–the Excess Reserves strategy, though brilliant, has never
been tested in the real world. It is basically an unproven theoretical
strategy that the FED will use only if it’s back is up against the wall
in having to raise interest rates.
This leads up to the observation that the Fed likely floated a trial balloon recently to see the reaction of the world markets to the threat of pulling back the punch bowl a little. As we have seen, the markets have reacted rather violently to the loss of the QE stimulus, if even done slowly over many months. We have already seen how just the mere
suggestion of TAPERING has caused huge sell-offs in places like Japan
and the Emerging Markets where the Yen and Dollar Carry-trades help to
support the leverage in those markets.
Another observation: if the Fed allows
long-expiration interest rates to climb, then this raises the US
Treasury’s borrowing costs. Even with today’s very low interest rates,
the interest payments are the 4th largest item in the US’s
“budget”; imagine what would happen if interest rates on the 10 year
were to double to market fair value at 4%!!!
Through all of this exercise, there is one thing that is apparent… and that is that the Fed’s continuous stimulus of the US economy (and the world economy through the carry-trade function), has put markets in the precarious position of massive upset and dislocation at the very thought of ending “the sugar high” created by the US Central Bank.
The more I look at it, the Fed has no choice but to begin to taper its bond purchases, no matter how slight, to get markets use to the idea that they cannot always have a crutch to prop them up. Otherwise, the capital system of finance we as Americans have long known and which affects our daily lives in so many ways, is doomed.
What’s also worrisome, and little talked about by the financial media, is the Fed balance sheet. No one ever asks how the unthinkable could occur, but what would happen if there were “a run” on the bank–not just any bank, but a run on the central bank? Could it happen?
With an estimated less than 2% capital-debt ratio, what would happen if the depositors of the Fed’s capital were to suddenly demand their money back? I guess that amounts to understanding who the investors of this capital are?… which I assume are its member banks in the reserve system.
The Fed is all powerful, and the member banks always fall in line when the Federal Open Market Committee (FOMC) sets policy. Yet, I ask, what would trigger such an event? Is it unthinkable? It’s such a complex subject that no one seems to have an answer, or at least, no one who knows is willing to offer an answer. At
any rate, I think some members of the FOMC are beginning to pressure
Mr. Bernanke into curtailing his QE program before we have to find out
what could happen to the Fed’s own capital if it had to suddenly sell
some of its assets (bonds) before they reach maturity. A bankrupt
central bank would be the technical result.
Perhaps the answer is purely academic, because the Fed will always have its printing press and can create as many dollars and as much “capital” as it pleases.
In the end, the real result may some day be played out in the currency markets when other countries of the world become fed up with Fed policy. Based on recent strength in the US dollar and the fragility of world markets, it seems that day of reckoning has been delayed for a much later date–or at least that’s what the market pundits want us to believe. My concern is that in this fast-paced computer-driven financial world we live in, the world capital markets themselves may suddenly choose to dis-obey the voices within the government (and quasi-government) institutions that guide monetary policy. Value is in the eye of the beholder after all.
Anyway, I apologize for daring to think the unthinkable.
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With the Fiscal Cliff situation looming for the USA toward the end of year 2012, I have been doing a little research on the subject for a white paper project. This led me to come across an interesting site called the National Priorities Project (nationalpriorities.org) which is an excellent interactive site about the Federal government’s spending and revenues. The site is a real eye-opener for those of us who wonder where all that money goes that our government spends.
One thing that catches my eyes is that interest on our national debt is our fourth largest expense item at 6.76% of the projected 2013 Obama budget. When one considers that the US Treasury is paying out the lowest interest rates in 60 years, this should be raising some concerns as to what we will do when the day comes that interest rates return to their historical averages–or worse! For example, the 10 year Treasury Note now pays out at about 1.65% interest…but historically, over the last 50 years, I would say the going interest rate for this note was around 4% to 6%. If one assumes an average of 5% for the 10 year, and perhaps 2% or so for the 1 year notes (which now pay about 0.3%), then interest rates would triple or more from where they are currently.
Does this mean that the cost to service our debt could triple if interest rates return to their historical norms? Well, I guess the answer is, “it depends.” For example, some debt is probably long term debt at a fixed rate of interest and may not fluctuate much.
Yet, even if we assume there are some long term fixed payouts in our national debt, even a doubling of the payouts could push US interest debt on our Treasuries to around 13% or more of our total annual government budget and leaving it closer to the annual cost of our military’s overall budget. Also, one would have to assume that if interest rate debt is consuming a larger part of the annual outlays, then the percentage of some other expenses such as the military could suffer cutbacks.
The prospect of a large increase in the service of our national debt should clash with fiscal austerity as many people are pushing for smaller deficits in 2013 and beyond. We cannot continue to roll over our interest payments or re-structure then forever without coming face to face with some tough decisions. At such point, would the Federal Reserve defer to just printing more money (like Quantitative Easing) just to ease the pain and circulate enough money to pay down the debts? If so, imagine what that might do to the value of the US dollar? Or to future interest rates, especially if the major ratings agencies should lower the US’s high ratings.
A significant drop in the US’s ability to re-pay its debts would only cause more money printing, I fear. Or do we just walk away from our national debt at some point? Good luck with that, because it would crush the value of the American dollar and cause great pain to the American people!
Ultimately, I do believe that the Fed and most other central banks plan to print–and print!– more money to try to monetize our way out of the sovereign debt fix that so many countries are now involved with –but they will only do that after they see that other programs just aren’t doing much good. When their backs are against the wall, the world’s central banks, led by our own Fed, will choose the easy way out–print more money!–even if it should bring on a large dose of inflation. The Fed and most central bank leaders fear deflation more than they fear inflation. Inflation is like a hidden tax–most people don’t see its effects day to day but only notice it over time. Deflation is easily seen right away in fewer jobs, depressed wages, lack of growth, and of course lower prices which few can appreciate since they aren’t earning much money! Given the fears of deflation, most central bankers realized that inflation is an easier animal to deal with in keeping the masses satiated enough not to throw our government leaders out of office. However, that’s a subject for another day.
All in all, this site offers a lot of interesting interactive displays on the Federal Budget. I don’t know much about the supporters of the site–it seems to be formed by some independent-minded intellectuals looking to better educate Americans on what goes on in Washington. I suppose some would say this is a “commie liberal” site but I try to remain objective, and what I see here is pretty much not politically motivated–just the hard facts. But even if a reader is suspicious of the site by its intellectual tone (which I know some people affiliate with liberalism) of the site, I still think everyone should keep an open mind and evaluate the data that is here objectively, whether or not one agrees with “the tone” or message of the site operators.
The US equity markets remain in correction, and the the surprise big
trading loss at JP Morgan (NYSE: JPM) reported on Friday and the
resulting Fitch downgrade on Friday night has sent a new shiver into the
The lowering of reserves in China this weekend may send a temporary
stimulus into the Asian markets, but this also gives strength to the US
dollar at a time when US growth is slowing.
Continued unrest in Europe, including new demonstrations in key European
cities this weekend puts the European economy and its currency under
In the short term, it appears that the US dollar will continue its new
move higher this upcoming week, and in this day and age, a stronger
dollar actually serves to hobble the US economy due to its large
deficits and debt situations. It’s the wrong medicine for a reserve
currency that represents a country with huge imbalances in trade and
debt with the rest of the world as well as debt within its own borders.
In short, ACE suggests staying mostly to cash and other liquid
investments. If you’re invested in stocks, stick with high quality
stocks, particularly ones that have positive cash flow and pay dividends
and have relatively low PE ratios. ACE does believe that a bounce may
occur in the markets later this week as the Facebook IPO approaches.
However, the bounce may be short-lived.
ACE also suggests that this is a good time to accumulate new positions
in gold and silver (GLD, SLV and CEF come to mind as well as physical
coins) even though the precious metals are in a precipitous fall at this
time– ACE believes this is a temporary phenomenon and that 12 to 24
months from now, the precious metals may well double or triple in price
from today’s levels, relative to the US dollar.
ACE also suggests that starting long-term positions in the TBT
(Proshares Lehman Ultra Short Treasury Fund 20+ Years) is a wise
strategy now that bond yields are depressed and continue to fall. ACE
has invested in 2013 LEAPS, and may also choose to buy 2014 LEAPS in the
coming days as the price of TBT continues to bottom. The 2014 LEAPS are
the wiser strategy, but the 2013 LEAPS could deliver huge gains too if
the FED resorts to QE3 later this year or if Congress and the White
House choose to extend many of the Bush tax cuts which expire late this
year, in an attempt to goose the economy–with an election in November,
anything is possible. A simple investment in the TBT shares would make
sense for those who choose not to play the options.
So far, from a technical perspective, the pullback had been constructive
in that the key long term Moving Average lines on the major indices
remained supportive until late this week. Now, the SPY chart shows a perceptible negative direction in the benchmark 50 day moving average with the price trapped underneath. The Dow Industrials chart shows its key 65-day moving average line has flattened, which is generally a slightly negative situation. Further, a lot of destruction of growth
stock charts has occurred in recent weeks, and so one must remain
vigilant and conservative in this environment. Expect a bounce in the markets as the Facebook IPO approaches, but also understand that the bounce may be one final chance to close out profitable trades. ACE will continue to monitor the situation in the coming days for any change in forecast.
FOLLOW-UP: The market sold off in dramatic fashion, though it did find a weak bounce near the Facebook IPO launch date. Gold did manage its single biggest daily gain shortly after this blog posted. Nice calls, Ace! Editor.
A white paper released by the San Francisco Fed in April regarding a Quantitative Easing strategy used back in 1961 by the JFK administration is making the rounds of some pro traders and institutions. The gist of the white paper is that the FEDERAL RESERVE would buy longer dated treasuries rather than shorter ones. The idea is to stimulate long term borrowing needs of businesses and home buyers (through mortgages).
The lack of stimulus to short term treasuries might slow down the carry-trade which also stimulates the risk on trades such as gold and commodities. This past week, we witnessed a sharp drop in longer dated Treasuries and we also saw gold and other commodities including oil take a hard spike downward as the short end of the yield curve began to rise some. When the short end of the curve rises, that gives strength to the US $ relative to other currencies.
During the middle of this past week, I saw the downturn in OIL coming on my momentum charts, and I quickly bought some calls on DUG (an ETF that double-shorts oil) and I realized 200% gains in only 24 hours. However, I wasn’t as quick to catch the reversal in gold, and I got caught with some losses on some gold plays that I had set up only a couple days earlier.
Indeed, though the charts helped me to spot these big moves in the markets this past week (including the big downturn in equities which I called “a major sell” on Monday, August 1 prior to the 800 pt drubbing in the Dow for the week), what I did not understand was why these events happened as they did.
Now, it becomes a little more clear to me that at least some explanation for these dramatic changes can be placed on the possible circulating discussion on a QE3 strategy with resemblences to a 1960s strategy known as “Operation Twist.” Such a strategy would be designed to strengthen the US dollar, at least in nominal terms, lower imported inflationary costs of commodities and imports, and stimulate growth in long term business strategies. The actions of the markets this week seem to dove-tail very closely with the strategies as mentioned in this white paper. Yet, though no such strategy has been formally announced, we should know that the markets often anticipate the moves of the Fed or other agencies ahead of the time. As I have said, this white paper was apparently on the lips of some traders at the big houses this past week–they apparently placed their bets early before the FED should make such an announcement, which could occur at their annual Jackson Hole meeting later this month?
It’s also a curious thing to me how this discussion of possible Operation Twist strategy suddenly occurs as the S&P ratings agency has downgraded US debt from its pristine AAA status. Could it be that the FED plans to deploy this strategy soon to allay the concerns of bond holders of US debt?
…And could such a strategy derail the efforts of speculative traders who have been anticipating another downward spiral in the US $ which should feed the risk on trades? Only time will tell, but I see that I may need to better fine-tune my strategies on a weaker dollar…I will be paying close attention to the movements of the US $ and commodities, including gold, in the coming days and weeks.
My most recent momentum charts switched suddenly to weakness in gold and oil and to dollar strength about the middle of this past week…let’s see if the momentum shift continues?
If it should continue, it goes to point out one thing I continue to believe, and that is the shrewd strategies of Ben Bernanke and his Federal Reserve strategists, who have done more than any other organization on the surface of the Earth to keep us from falling into a world-wide depression these past few years. Though their efforts and strategies are reviled and repudiated by many, we should understand that Bernanke is a scholar of the Great Depression, and his moves and counter-moves are designed to keep us from falling into the abyss once again.
Only time will tell….!
Tick-tock…tick-tock…goes the countdown clock toward the August 2nd date when the US Treasury has said it will no longer have enough money to pay all of its bills on time. The raising of the Debt Ceiling for the US government is the issue at hand…and now, suddenly it’s becoming front page news.
For many weeks, I have warned that we would be coming up on that date with financial Armageddon without any political resolution…I encouraged investors to consider moving at least a portion of their Cash Sweep Accounts or any of their money invested in CDs, savings accounts, money market funds and bond funds and move those funds into foreign-based investments including Swiss Francs (the ETF symbol is FXF), the Australian dollar (symbol FXA)* or gold/silver bullion (my favored fund is under Amex symbol CEF and secondarily into ASA or GLD, though I have some reservations about GLD).
I have had people tell me I have lost my sense of direction in the markets….others have called me “a goof” and have said that it will never happen! The US will never default on its loan obligations…and they have told me that the US dollar is not about to lose its reserve currency status for at least another generation.
Some investors (and “enlightened experts”) have told me that if there were any trouble with the US suffering a technical default on its bonds, we would be seeing rising yields and a rush out of bonds…they point to actions that are just the opposite…bond yields have fallen in recent weeks and bond prices have risen to 2 year highs. They proudly proclaim that “the smart money” is not running in fear of US Treasuries, but rather, its embracing them.
Their argument is a good one! ..and up until now, except for some substantial gains I have experienced in some gold trades in recent days and some decent return on my sizable, but “temporary cash sweep account” investments in FXF and FXA, since starting a buy program in both several weeks ago…the so-called experts have been right. Financial armageddon has not occurred in the US…and those bond yields are historically very low.
Indeed, there has been talk swirling about, mostly from the conservative “tea party” side of politics that a technical default by the US would be “a minor event”…and that such an event might make for a great tactical weapon in forcing the hand of the Democrats and Obama to give in on spending cuts in a more meaningful way. Such speculation, trumpeted by Congressman Paul Ryan and encouraged by the likes of Representative Cantor and many other tea party supporters, puts forth the notion that a technical default by the US would be only temporary and would do more good in flushing out the same old game of spend, spend, spend by the Democrats.
…at least this is the notion being bounced around!…and as the pollsters have demonstrated, the idea of a forced technical default has the support of the majority of American citizens.
Indeed, the citizens reason, why should the government be allowed to spend beyond its means and act like a drunken sailor with a credit card, when the rest of us are held in check with our own household debts and expectations of maintaining some semblance of money management?
What the public doesn’t quite seem to grasp is that “high finance” of the likes run by our Federal government is not one that can operate well under the same rules of finance that apply to individual households….moreover, what particularly perturbs me is that many of our elected officials in Washington (read “Tea Party”) are also operating under the same notion that a balanced budget must be forced upon our government…and that the only way to cure the economy’s ills is to drastically cut spending.
It is the naive understanding of the general public…and the equally naive thinking of some members of Congress that makes for a particularly scary situation that we face as the August 2nd deadline approaches.
To you, dear reader, do you understand what a technical default might mean for the US’s standing in the world? Do you, dear reader, understand that a default could have very serious consequences for every American? Every man, woman and child in this fair land of ours? Do you know that 97% of money market funds in this country are invested in US treasuries? Why? Because they are supposed to be as safe as grandma and applie pie!
Unfortunately, I have only limited space to say all that needs to be said on this subject…but I can summarize matters by refuting some of major points of the Tea Party leaders and their crowd and of the so-called experts of high finance who say that there is no worry in the markets about a technical default….so without further ado, let me try to explain the flip-side argument to each of their points:
1. “It will never happen! The US will never default. They will come to some kind of agreement.”
Re-tort: This is all I have heard for many weeks, yet here we are only days away from a technical default and neither side seems ready to give in to the other side. I have already won this argument…those who questioned this warning of mine with such “vim and vinegar“, go ahead and eat your hats!
2. “It’s just political posturing…okay, maybe this thing goes down to the wire, but one side or both sides will eventually cave into demands…and the debt ceiling will be raised for the time being.”
Re-tort: Oh??? Okay, though that hasn’t happened up until now and both sides still seem far apart, let’s just assume that they do extend the debt ceiling by August 2. Do you think the problem will be swept under the rug? Let’s face it, if an extension of the debt ceiling is granted, it will probably be viewed as a band-aid and a further kick of the proverbial can down the road…if so, do we face the stark reality of the ratings agencies like S&P, Moody’s and Fitch down-grading the US debt anyway? And if and when our AAA credit rating is lost, how much will interest rates rise in this country?…that will be like a burdensome new tax on the citizens of this country!…and unlike a Washington imposed tax, most of this tax will be sent to our creditors overseas! Interest rates will rise on mortgages, credit cards, car loans, etc!…Americans will encounter a whole new series of cost increases in an economy that is anything but robust as it is…. And what about the many states in our union and their own credit ratings which are backed by the US AAA rating?…and what about our financial institutions that rely on a AAA sovereign debt rating of the US government? Banks, insurance companies and many pension funds are heavily invested in US treasury paper.
3. “Oh, so what if the ratings agencies say our debt is down-graded a notch? This has happened before to many sovereign nations, and little damage has been done in most cases.”
Re-tort: But this isn’t just any nation defaulting…this is the largest government economy on the face of the earth that would default!
Do you accept there is a law of gravity? If yes, then you should know there is a financial law of sorts that says that the US treasuries are the safest place to invest one’s money on the face of the earth. US bonds are supposed to be like the sun rising every morning! Like the law of gravity! They are “there.” They are dependable…always!
BUT, with a technical default, it would be like Dorothy discovering that the Land of Oz is ruled not by a great wizard, but rather by a droll little man hiding behind a curtain! The let-down would cast a funky spell over our creditors…and destroy the faith of investors worldwide!
4. “The so-called financial experts from top think tanks in Washington to the veteran hands on Wall Street point to the fact that the yields on US treasuries have held steady, and even dropped in recent days as if to say that the bond market does not view the US Debt Ceiling debate as a threat
Re-tort: OK, they seem to make a good point…but wait, one major reason the US treasuries have gone up in price (and yields have dropped) has to do with the equally bad credit situation in the sovereign nations of Europe. So, scared money has to go some place…and I believe a lot of that scared money doesn’t really know WHERE to go? …so, like Pavlov’s dogs, that scared money does what it has learned to do in the past…seek the safety of US treasuries…they’re still safe, right?
BUT, this specious argument misses some key warning signs…for one, the US dollar has continued to erode against the Euro…if Europe is in such dire straits compared to the US, then why is the Euro at near historical highs against the dollar?
And why is the Australian dollar at such strong position against the US dollar? Could it be that the Australian dollar of a country with vast natural resources is viewed as a proxy for China’s vibrant economy? (Conversely, notice that the Canadian dollar–sourced from another vast resource-rich country– is much weaker than the Aussie dollar, because Canada’s major trading partner is the US!)…and as manipulated as the bond market has been in the US the last couple years, can we really count on the bond market to tell us that everything is going to be all right? I think the bond bulls are missing the signals coming from the currency markets! If all is right with the US economy and our sovereign debt, then the US dollar should be strengthening against other currencies, especially the euro…but this is not what we see!
5. “Look, if the technical default causes a freeze up of credit or in some way causes money markets and bond funds to lose value, the FED will step in to provide liquidity…just like they did in September of 2008!”
Re-tort: This argument is a favorite of the economic experts from the finest think tanks and universities across our land–that somehow, if things spiral out of control, the man who saved the economy once before, Ben Bernanke, will show up on his white horse again–ready and willing “to prime the pumps” with lots of liquidity! Of course, liquidity is a nice little word for saying that the Fed president will be printing lots of money…and we all know that the US debt is backed by the full faith and credit of the Federal Reserve.
However, just like the US treasuries are now being called into question as AAA paper by some ratings agencies, what leads us to believe that the rest of the world will still accept the Fed as the only financier in town? What is that the FED owns that gives it it’s special powers?
If I may borrow that Land of Oz analogy again, what happens when our largest foreign creditor, China, pulls back the curtain on Ben Bernanke? What will it find?
Loads and loads of debt paper is what it would find…money that is owed by our US treasury to the Fed…money that could be called in as “due all at once because of a technical default”…well, does our Treasury have $14.3 trillion laying around that it can pay off this debt all at once? Not unless the Fed prints off that much…and what would China, Japan, and Russia, three of our largest creditors say to that?
Also, consider the largest holder of US treasuries is not any foreigner at all, but our own Federal Reserve…and the Fed also owns lots of damaged mortgage paper that it has accumulated the past couple years to try and stop the hemmoraghing of our banks, pension funds and financial
institutions…what will the world think if it begins to question its faith in a central bank that owns nothing but debt paper, most of it US debt that can’t be paid back overnight or even 20 years from now…which goes to point up the fact that the FED draws its power and strength from the world’s faith in it as the depository for the world’s reserve currency.
But what if that faith is suddenly shaken as the curtain is drawn back on the Fed’s pile of debts?
Could China play its trump card in year 2011? I never thought that such a moment could come so soon!…but it is China that holds a very strong, positive balance of trade…it is China’s government and its citizens who own so much gold…and have few debts (though there are surely some debt-ridden banks in China, the aggregate debt situation of these banks pales in comparison to our overall debt exposure in the US)…
It is China that has a burgeoning military that already threatens the US dominance of the Pacific rim nations…it is China that is owed so much money from the US (and other creditor nations too)…and if the US defaults on its debts, China has the wherewithal to “write off these debts” and still have a much better financial position than that of the US once a technical default happens.
Which all goes to point out how critical it is that the US government at least reach some sort of temporary extension of the Debt Ceiling in the next few days…otherwise, I can guarantee you that things will not be pretty here in the US.
Again, the argument goes that the Congress and the President would not be so dumb to let our government default on its debt–but I believe that there are roughly 80 to 100 members of Congress who don’t understand how world economics works…and I worry that our own president does not fully understand the situation at hand either, though I am sure his advisors have warned him.
Those who up to now have ignored my calls of seeking safety in foreign currencies, foreign bonds (or bond funds) or in gold and silver, I say, you may be the ones left standing on a street corner in the proverbial barrel on suspenders… but I hope not, dear reader!
I hope I am wrong about this bad feeling I have…I hope for once that the majority is right…and I am wrong…for if I am way off base, I think I will still have money left when I bail out of the Swiss Franc ETF and the gold bullion funds…and you can say “I told you so.” Yes, I would welcome hearing that once...to know that the American Dream is still intact?…rather than being on the precipice of a 21st century dark age where the ruling countries of the world will be led by communist leaders. I cannot fathom a world led by such a ruling class…for the future of our children and grandchildren!
*post-script 7/23/11: Some currency traders I have listened to recently suggest that the Aussie dollar will fall rapidly on a US debt default or downgrade. My reasoning for including the Aussie $ in this protective move has to do with its trade connection to China. In other words, in a worse case scenario, my thinking has been that money would seek safety in Asian assets, which the Aussie $ is the only “western” currency that is closely intertwined with China and Asian trade. The currency experts speak of a Aussie short against the Swiss Franc, but curiously they do not mention a US $ short against either. Keep in mind that FXA (and FXF) are currency ETFs that are priced in US dollars, and so they are a play on the US dollar against the Franc and Aussie buck. This being duly noted, and the fact that I am not a currency expert, only speaks of how much uncertainty there is out there for the right protective strategy. However, if enough currency traders are of the opinion that the Aussie $ might collapse, I would suggest lightening the investment in FXA and staying more to gold and FXF.
I’m looking again at the benchmark 10-year yield chart…it broke under the 200 dma line today. Technically, the benchmark yield has entered a BEAR Market which means the converse is that the Benchmark Note has itself entered a BULL MARKET.
As you can see from the chart, it crossed under the 200 day in December when stocks were also rallying, but at that time, the FED had greater control over yields as Quantitative Easing was still in pretty full effect. The December reading was more artificially contrived.
Today’s reading reflects more the current market lanscape and less manipulation by the Fed.
As I’m sure you know, a BULL MARKET in US Treasuries is usally a BEAR MARKET for stocks….this correction is possibly going to drag on longer than many traders expect???
Let’s keep an eye on this–oftentimes there is a re-test of the 200 line in the early days of the first break below that line!