Rates of Interest

As the 10-year to T-bill yield curve chart makes clear, we are not in Kansas anymore.  We are in Wonderland and as you can see, in Wonderland interest rates and their interrelationships are at the center of events.

Last week the bullish case reasserted itself across financial markets, but to argue that policy makers are doing anything better than pumping future distortions into the system is crazy talk along the lines of ‘the world is flat’ or… ‘the above chart is flat’.

Last week Ben Bernanke clarified for people that yes indeed the Fed will eventually taper its QE bond buying operation while making clear that Zero Interest Rate Policy (ZIRP) will remain as is.  I think that the average market participant is starting to settle in and get comfortable with the terms of our ‘Taper to Carry’ (T2C) plan, which sees the banks benefiting from borrowing short and lending longer.

Free market interest rates are rising, the Fed is apparently going to stand aside but keep an inflation mechanism in place with open-ended ZIRP.  It is yet another stroke of genius by the Fed because after all, most people – professionals, retail, media – have been absolutely obsessed with the ‘will they or won’t they?’ question surrounding a QE taper.

It’s a diversion.  Global T bond supply and demand fundamentals will decide the rates of interest on bonds throughout the yield curve.  But ZIRP has been so taken for granted, so deemphasized by the media, mainstream financial professionals and policy makers themselves that it seems as though the Fed is considering tightening with the ‘taper’ talk when in reality, it is laying the groundwork for the next phase of the ongoing inflation operation.

T-Bonds, Gold & Lunatics

The 10-year Treasury bond has made a big picture (monthly) signal the likes of which we saw when gold broke down in Euros for example.

 “I am not going to pretend I like the chart of gold in euros.  I do not care for it.  But gold will be broken below the weekly EMA 100 and the green dotted line and not until.”

The weekly chart of Gold-Euro below had just breached the first important moving average and put us on alert, despite the outwardly apparent inflationary macro backdrop as a media bull horned “currency war” was heating up.

Moral of the story?  Respect big picture chart signals despite what we think we know.

So the 10-year bond is now making a bearish signal with very important implications on the macro backdrop.  That is because a bearish bond means bullish long-term yields.  Meanwhile, the Fed commits to hold ZIRP against this rising yield tide.

In other words, the Fed is committing to maintain an unnatural and inflationary dynamic in a brave new world of financial system micro management.  Call the Fed the Red Queen, the Wizard of Oz or…

Call the Fed a dispenser of blue pills if you want:

“Never send a human to do a machine’s job.”  –Agent Smith, the Matrix

So with longer term yields naturally rising vs. ZIRP-pinned T bills, this measure of the yield curve is rising (daily chart above), which promotes an inflationary interpretation.  Why is this important?  Well, take the monetary metal for example, with its correlation to TNX-IRX using a monthly log scale chart:

Interest rates are being manipulated if you define manipulation as an artificial pressure exerted upon something toward desired ends.  Per my Mac’s dashboard dictionary:

Manipulation: “handle or control (a tool, mechanism, etc.), typically in a skillful manner”

The key word is control.  Control freaks dominate today’s Federal Reserve.  I know that there are people who would brand this as the ranting of a lunatic doom and gloomer.  But this is the same type of ranting that was publicly uttered by this particular lunatic from his first public utterances in 2004 right into the 2008 crisis.  The lunacy continues to the current day because my view is that things have not been repaired through policy.  On the contrary, distortions have been intensified most notably by the duration of ZIRP, especially now, against a rising yield tide out along the curve.

So just for the sake of argument, I am a lunatic.  As I write this segment on Saturday morning a good friend of mine sent me a link to this gold-bearish view http://is.gd/Qrqbns along with a note: “Another mainstream opinion? I hope he is wrong!” to which I ask ‘why’?  Should we not wish for Mr. Edelman http://is.gd/L54Uwd to be 100% correct in his gold bubble assertion?

Unless you are a gold cult member, you do not want to live in a world where gold is so popular or necessary in helping insure one’s financial situation.  You want to live in a world where markets perform in accordance with natural laws of supply and demand, rewards for productivity and penalties for waste and misallocation.  Oh and maybe you want to live in a world where savers are not so harshly penalized.  ZIRP targets little old Grandmas and forces them into the risk pool, after all.

Gold bugs did not do much complaining when the correlation broke in the second half of last decade and gold kept rising despite a declining curve (as Alan Greenspan tightened policy on the Fed Funds).

Ultimately, gold (monetary insurance) was forecasting deep troubles ahead for the financial system as the yield curve finally caught most people by surprise when it became widely known that the system could not be allowed to deleverage.

Hence the coming of ZIRP, which blue pill poppers far and wide would believe is the fix, and a normal economic input.  ‘It’ll all be okay’ dream the Kool-Aid drinkers as they click the heels of their red ruby shoes (man, this segment just won’t quit with the metaphors, mixed or otherwise).