The Bomb, er Bond Market
Just like the previous cycle we illustrated above which was 1966 to 1982 bull market in things, swinging to a 1982 to 2000-2007 market in paper. Now we are moving into the initial phases of the 1966-1982 cycle. Where paper turns to trash. US Bonds and Treasuries actually topped in June 2003, and have formed a broad top on all fixed income indexes since that time. Secular trend lines initially established in 1984 have been broken and after a brief rally to test the break down point the declines are set to begin again.
These long-term breakdowns have already broken down in European Bonds, led by the German Bund, which is a 10-year note, the correlation between the US and German bund is over 90%. Yield curves are steepening and are set to do so more in the future as the Federal Reserve lowers short term interest rates to SAVE the financial system from "ARM" ageddon (see previous Tedbits archives at www.TraderView.com), exasperating the inflationary implications. And the long end tumbles as the foreign bidders are set to be attacked by the protectionists in Washington, and the Federal Reserve as it tries to cushion the American economy from the unfolding weakness by accelerating money and credit creation.
Inflation adjusted Tips bonds while a good idea in a deflationary world of the 80's and 90's will kill the governments balance sheet in the near future, runaway interest expenses will force the Fed to print the money, as fewer and fewer buyers step to the plate as the era of guaranteed confiscation dawns anew. Bonds are entering a phase of "Capital destruction" and the buyers will come from the Central bank printing presses to defend the asset based financial systems operating in all the major capitals of the world.
Nothing has astounded me more than the sheer volume of issuance the fixed income markets in the developed world has embraced over the last five years. There are lots of bubbles out there, but they are dwarfed by the credit and bond bubble. It doesn't matter what is sold, junk, whatever, investors have had an insatiable appetite for these perceived as risk free assets. There is no fear of the risks (of defaults), and these assets are severely mispriced to reflect the real risk inherent in them. Junk bonds used to pay 5 to 9 % over the risk free treasury rate, this is a exercise in math as the compounded returns on a successful purchase quickly takes the risk out, for example using the rule of 72 a bond yielding 12-14 % repays the principle in 5 ¼ to 6 years. Now they are priced 2 to 4 % above the risk free rate and the time frame to more safety is postponed to a much later date. Negating the ability to quickly recover principle as was previously the case. Credit ratings of most of the borrowers has steadily declined during this period. The risks are severely mispriced. Take a look at this chart credit spreads between junk bonds, corporates and government treasuries in the last several years;
This is an illustration of the investment assumptions of safety that has increased during the time of the 'Greenspan era" of Central banking creating the moral hazard of the assumed rescue provided by the "Greenspan put". It is a story of MASSIVE miscalculation. Miscalculations of the reliability of the central banks and finance officials in creating "prudent", "fuduciarily sound" money and credit growth. There are many things you can call the recent World wide acceleration of the supply of money and credit, but "prudent", and "fuduciarily sound" are not any of them. Institutions, pension funds, hedgefunds, central banks and individual investors have flocked to these investment vehicles based on this assumption of "BAILOUT" by the central banks. So the biggest money in the world is in at the top and will be need of imminent rescue. The main stream bond purchasers are set to be cracked as the assumption of bonds as conservative investment vehicles is turned on its head by the recent money and credit creation that has turned the idea of prudent central banking on its head.
Looking at the weekly technical charts of the bomb er Bond market, it is an epidemic of head and shoulders tops, fast approaching triangle breakdowns, trendline failure on the trendlines since 1984, etc.
If you look at the daily, monthly and Quarterly charts they too are all top patterns with head and shoulders all over the place, low volatility is a sign to look for patterns, and the patterns are all there for the astute chartists among us.
Like the proverbial flock of Sheep, fixed income Investors are about to be "FLEECED" as the value of their holdings undergo steep capital losses through the market or from the central banks and government treasuries printing presses as they print the money to buy them to prevent the collapse of the fixed income and credit based economies they underpin. To take down this supply from all the sellers, the fiat-based currencies will be printed far in excess of the insanity that is currently practiced to keep economic expansion rolling. Releasing kazillions of dollars into the economy of the world.
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Just as mom and pop were killed by Greenspan's lowering of interest rates on savings to 1 percent, they are now set for round two as the longer term and more risky instruments they then embraced to get to any return at all are now set to decline dramatically. A one two punch so to speak. Improverishing the investors who hold them and the "REAL" value of their income return. These Investors will sit at home or in their offices with the belief their money is safe in their government bonds, while at night the value of the currency they are denominated in undergoes "cloning" on an unprecedented scale. They will realize what is transpiring eventually, but by then it will be too late.
An additional reason they must hold bond yields low is the unfolding credit crunch in the subprime, and the "ARM"ageddon unfolding as outlined in a missive by Bill Gross at PIMCO. Using charts outlining credit standards rising and and another outlining Case-shiller home values he postulates that interest rates MUST decline by at least 60 basis points to prevent a additional loss of 20% in home values, and that the federal reserve will do whatever is necessary to head off the additional loss of value, as they don't want to pay the bill for this type of debacle. The systemic problems would be much bigger than the inflationary consequences. It's fed to the rescue, the Bernanke "put" is born. It was actually born last May/July. It is a compelling essay, check out PIMCOS website. Breakdowns in the bond market here are untenable.
Governments can read charts, just as we do, so I can tell you someone at the US federal reserves open market operations in New York are all over this potential Bomb, er bond scare. It will be front and center in this weekends meeting of the G8 central bank and finance ministers. I promise. Watch open market operations for big unidentified buyers which will be your governments at work as you work and sleep. You can see them now, just ask the Mogambo Guru or Greg Weldon.
Look for commercial buyers to get aggressively long in the commitment of traders reports. Primary treasury dealers, big "Money center" banks and wire houses will be big buyers with quiet government guarantees in hand before they begin their buying sprees. For the fed it's just a computerized journal entry to move money right onto their balance sheets. Every G8 Central bank in the world will join these plunge protection team efforts, as the dollar is their reserve currency as well and it sits on their books as US treasury securities for the most part. Just think of the moral breakdowns these central bank and finance officials have undergone over the last 20 years, when they have evolved from semi responsible bankers and stewards of the monetary systems to reckless money and credit creators, would be market manipulators, with total disregard of the people who place their wealth and savings in the currencies they are fuducuiariliy responsible for. A total surrender to political goals rather than long-term economic and monetary responsiblities.
"The inflation solution" is far far superior to government officials than financial system and economic difficulties, as these bankers and ministers look out below into the maws of a credit crisis that will dwarf their "subprime considerations", which in comparison will be a walk in the park. They can't let this trendline back to the early 80's fail very much as the systematic sellers will emerge in force as their computers put on the trades without the benefit of consulting the groups that wrote them (or the central banks and treasury operations around the world). The dollar is breaking down versus the Euro as we go to press, gold is breaking out against every asset class I can identify. The little guy holder of these Bond instruments will be damaged even more as the real inflation rate spirals higher and higher and his yields stay in the 4 to 5 % range, Inflation running at 8% on a bond that yields 5 or 6 is a loss of 2 to 3% a year, compounded annually for the duration of the note!! What a loss, and it is occurring as we speak.
It will be sell, sell, sell as billions of dollars of steepening trades are instituted, outright sales and hedging operations for hundreds of billions of bond holdings will provide further momentum to the emerging moves lower from this massive top. This top is the inevitable result of the Bretton Woods agreements in the early 1970s when we all were taken off the gold and sounder money policies which were practiced previously to that era. The helicopters are firing up as we write this. Talk about a "Finger of Instability" this is it in spades ("fingers of Instability" in the Tedbits archives www.TraderView.com ). They have enough money to put this breakdown off into the future (they just have to print it), look for them to do so, the alternative is "UNTHINKABLE", so look for inflationary money printing and central bank and finance officials to prop up your bonds through market operations during the day and steal the money for it at night right out of your bank as their printing presses and computers hum away!!! The Greenspan "PUT" is alive and well… Kicking the can down the road, creating new and bigger moral hazards for our children, future investors, politicians and central bankers to deal with…
In conclusion, Investing is now all a big game, understand the rules and roadmaps and make a fortune, if you don't you will have a tough time of it. Learn the techniques required to thrive, or be the victims of who do. Wall Street has powerful allies on "Capital" Hill (misspelling intended, LOL). Hank Paulson is Wall Streets "Man on the scene", in DC. They will keep the game of abundant liquidity going till the systems finally break, but I believe this is many years away barring a big political miscalculation out of Washington DC, and Brussels and that is quite possible. When politicians are pandering to the voters figuring out how to buy the most of them. If you are looking to diversify your portfolio with top quality alternative investment managers please give me a call or visit the website and request a consultation.
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Tedbits is authored by Theodore "Ty" Andros, and is registered with TraderView, a registered CTA (Commodity Trading Advisor) and Global Asset Advisors (Introducing Broker). TraderView is a managed futures and alternative investment boutique. Mr. Andros began his commodity career in the early 1980's and became a managed futures specialist beginning in 1985. Mr. Andros duties include marketing, sales, and portfolio selection and monitoring, customer relations and all aspects required in building a successful managed futures and alternative investment brokerage service. Mr. Andros attended the University of San Diego, and the University of Miami, majoring in Marketing, Economics and Business Administration. He began his career as a broker in 1983, and has worked his way to the creation of TraderView. Mr. Andros is active in Economic analysis and brings this information and analysis to his clients on a regular basis, creating investment portfolios designed to capture these unfolding opportunities as the emerge. Ty prides himself on his personal preparation for the markets as they unfold and his ability to take this information and build professionally managed portfolios. Developing a loyal clientele.
This report may include information obtained from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made to ensure its accuracy or completeness. Opinions expressed are subject to change without notice. This report is not a request to engage in any transaction involving the purchase or sale of futures contracts or options on futures. There is a substantial risk of loss associated with trading futures, foreign exchange, and options on futures. This letter is not intended as investment advice, and its use in any respect is entirely the responsibility of the user. Past performance is never a guarantee of future results.
Ty Andros - TraderView
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