not saying this is going to happen, but I am suggesting we need to keep
a close eye on things next week. Normally, on days when the long bonds
(10s and 30s) are auctioned, the news media tends to get very negative
and this drives people to a risk off position (sell stocks and buy
bonds), which is precisely what the US Treasury and Fed want people to
do. As soon as the auctions are over, the news tends to lighten up, and
stocks start to gain again. That’s been a persistent pattern for over a
However, that game is based on the FED having control
of the bond market, especially on the longer end (10s and 30s again),
where the FED is the main buyer of these bonds. Conspiculously absent
from these auctions has been many of the foreign buyers, like China and
Japan of late–leaving only the FED as the main institutional buyer.
Why? Because the FED is holding down rates to artificially low levels
and no one with any sense wants to hold bonds for 10 year or more if
they are not priced to the market.
What’s interesting in the past
couple days is that the TLT is falling out of bed! I am short the TLT
as many of you know, and I predicted that the 50 day line would hold,
and it has….it has gapped down the last two days. If the move can
break the neckline, then the bond market will be in real trouble.
a bust in bonds could lead to a serious sell-off in stocks, thus
breaking the correlation between bonds and stocks (typically, the
algorithms assume that as bond interest rates rise, stocks rise)….
chart is rather a slow moving one compared to many stocks. The move
that is going on there could take two or months to complete. That would
get the FED past the election on November 6th. Of course, there is the
Fiscal Cliff bunch who believes that treasury interest rates will drop
like a rock the last couple months of this year as the prospect of
AUSTERITY looks Americans dead in the eye (higher taxes and spending
cuts at the same time).
I agree with the Fiscal Cliff fear mongers,
except they are forgetting that there is also a Credit Cliff situation
about the same time as the Fiscal Cliff when the Congress and White
House must decide to raise the debt ceiling again–everyone seems to
forget about the debt ceiling. Ultimately, I think the government
leaders will blink and kick the can down the road again….this will be
the impetus for the great bond bust and gold’s next major breakout–but
probably there will be a sharp pullback in equities first for the Fiscal
Cliff (and a likely bond bounce at the same time), and then everyone
will wake up and realize the Credit Cliff is the bigger problem…only
it will be too late. This December and January period could be the most
VOLATILE period of trading any of us will ever witness in our lifetimes.
However, we have to remember that on the long bonds (10s and
30s), the FED is really the only major buyer of them these days. China
and Japan, normally big buyers of these in the past have suddenly
dropped out. The FED is buying these bonds with printed money, as many
of us know. The bond market might suddenly leave the FED exposed if they
back off from buying any of them….actually, it will be the CURRENCY
Markets that will eventually call the FED’s bluff….dollar collapse
likely if and when that happens. Got Gold?