Monday, April 5, 2010

Can the Plunge Protection Team Save the Treasury Market?

This commentary actually is highly correlated to my last post about housing prices.  You might say: "as go bond prices, so go housing prices."  Because the housing market is nearly 100% financed with bonds of some sort, housing prices assume the price movement characteristics of bond prices.  When bond prices tank and interest rates go up, housing prices will tank, as higher interest rates will directly affect the amount of money someone can pay for a home (let's leave aside the growing shadow supply of homes) and focus on the growing supply of Treasury debt. 

The Fed can keep short term rates low by leaving the Fed funds rate at zero (or even take them negative by paying banks to borrow - something we may see once Janet Yellen is safely deposited as Vice Chairman of the FOMC) and by using policy tools to create a flood of short term liquidity (see the $2+ trillion in excess bank reserves sitting at the Fed, which is being used to monetize Treasury auctions right now).

HOWEVER, the long end of the Treasury curve is beyond the control of the mighty U.S. policy makers and Wall Street Mafia thugs.   As our foreign creditors shy away from new Treasury auctions (see the previous 2/5/7yr Treasury auction in which Wall Street had to swallow over 50% of the bonds issued), interest rates will start to move higher quickly.

As you can see from the chart below, the ETF which represents a 20-yr Treasury bond price, is teetering on the brink of a freefall as it flirts with breaking a multi-year head and shoulders formation:

This is not a chart that you want to own and the breach of the head and shoulders formation portends much higher interest rates at the long end of the curve.  And do NOT be bamboozled again by the financial media crowd, namely CNBC and Bloomberg.  Rising interest rates are NOT an indication that the economy is picking up steam.  Rates are rising against the desires and efforts of U.S. policy makers because of the sheer unsustainability of the U.S. spending deficits AND the related MASSIVE supply of U.S. Treasury bonds coming this year.

Oh, there is another way for the Treasury to raise money thru bond issuance:  the Fed can monetize them with the printing press.  Either way the implications are for a much weaker U.S. dollar, much higher interest rates and much higher gold/silver prices.  In fact, I believe that we will see upward movement in the price of gold during the rest of this year that will take almost everyone by surprise.


  1. Yes, and on that note The Loonie is back to parity with The Greenback.

  2. .9968 - oh so close. the yen is being stealthily devalued right now and it's helping prop the dollar.

  3. Dave there is a little confusion about the implication of the rising rates and falling bond prices... I've read in such a scenario investors would shun the bond market and favor precious metals, while some have said its' bullish for the usd as higher rates attract investors.

    Whats the low down here?

  4. Higher rates are occurring because of the sheer size of the the Govt debt, upcoming debt issuance, and the de facto dollar devaluation going on by the Fed.

    When the bottom falls out of the bond market, many large pools of money will rush into gold as a flight to safety.

    The gig is up for fiat currency.

  5. One more point, the financial media clowns will try to argue that higher rates will bode well for the dollar. But that ain't the case. The Fed will be holding Fed funds at zero for a long time. It's the long end the world should be in fear of, and that's where the metals will shine.

  6. Soooo initially this might bode well for the usd??

  7. I don't believe so. If that were the case, I don't think the big banks who control the Fed would be set up with a record long position in the euro and a near-record short position in the US dollar, as per the latest COT report...Do you?

    higher rates will result from less "organic" buying of U.S. Treasuries. THat means the rest of the world is not interested in our bonds or our currency.

    The loony is almost as parity with the U.S. dollar again. The Aussie is heading in that direction. Those are fiat currencies as well, but they are views as commodity/hard asset currencies because both countries are primarily driven by natural resources. What in the hell backs the U.S. dollar besides a corrupt Government overseeing a corrupt financial system?

    Get it? The rest of the world does and that's why the major countries with big reserve surpluses are dumping their dollars and buying gold and commodity currencies.

  8. Higher rates are coming. How this will affect mortgage rates should be clear, but don't ask Calculated Risk.

  9. ROFLMAO. CalculatedRisk is like the high school version of economic analysis. I like the blog for linking data sources. Their housing and economic analysis is so completely sophomoric that it should be embarrassing. BUT, it's a huge notch above that found on CNBC.

  10. Just other day he was taking a victory lap after the end of the MBS program, because rates did not go up much that day. Give it time grasshopper.

    8k tax credit to buy a house + Higher mortgage rates = instant underwater home "owers" tempted by free money. Not a good set up.

    Silver closed over $18, a nice move from $15 or so a while ago. Nice indeed.

  11. $USD drop coming here. It will give the Bonds some breathing space.

  12. @Dave: So you are expecting a return to late 1970s conditions where the dollar tanks and gold soars? (That's what I'm expecting).

  13. LOL gyc. I used to bang my head on CR's door all the time. They are typical "invented here, we're brilliant" people who are lame analysts. A notch above CNBC - maybe on par with

    Keep venting here, I love it!

    Ask 'em how much paper they think FNM/FRE/FHA is buying now to replace what the Fed was buying. They probably don't understand that the Fed can play "chicken" like this because the GSE's will become the de facto monetization vehicles...AND those expenditures are "off budget." Obama is not including the money used to support the GSE's in the official budget numbers.

  14. @Live Richly: I'm expecting worse for our system and much higher for gold. we're going to WISH it were the 1970s.

  15. Oh, to clarify, I think we are going to make a stop in the 1970s and then get worse.

  16. When Tanta was gone the site took a step back but weird thing is since CR declined the blogger Treasury invite he has turned very positive on, well, everything. Like I have said, I have read CR since the beginning and when he posted that he had "gone long in March" at the lows that really bothered me. He never ever mentioned positions until that time. The comments section is a facebook meet up page now, not much of value there.

  17. I used to butt horns with Tanta over housing. She was, at best, mildy bearish, but always had forecasts that were WAY too optimistic.

    I think just how absurd and corrupted the whole financing process became, and the selling and appraisal and title work, etc, was lost on most people.

  18. @Lively - there ya go! We're definitely on the same page.

  19. Dave,

    Perfect example of the housing mania is that home I am looking at buying. It was built in 1995 and sold for $55,000, the original owner sold it in 2004 for $305,000. A 5.5X gain in 9 years is just huge but the bankers were throwing money around like monopoly money.

    Joe M.

  20. it's really worse than the internet bubble area by far because at least with stocks you have to put up 30-50% margin. Homes you could buy with no money down or even 125% financing.

  21. Dave, don't know if you've seen this, I'm sure you know the story. I'm really not into conspiracy theories but what else can you call it?

    Thanks, keep up the great work!

  22. Another fine post Dave. Speaking of blogger it would be nice to have a face book type of comment section here it would be easier to commiserate. None the less fine piece and thank you for all you do.

    Platinum is leading the way for sure.

  23. Aman, that's not conspiracy theory. I didn't post on it because GATA has everything on this on its site Several other bloggers have covered this. Murphy read the emails that Maguire had sent to the CFTC outlining who, what, when and how. ALL of the CFTC officials were completely horrified. Gensler looked like a down syndrome baby - HE WAS CC'D ON SOME OF THE EMAILS AND KNEW ABOUT THIS AND LET IT HAPPEN ANYWAY. Gensler and Chilton looked like one of the "wanna get away" Southwest Air ads. It was incredible.

    Here's the full interview. Please listen to this:

    On another note, an I may work this into my post today, I have learned from a very plugged in source that a big investment entity (foreign) bid a big London bullion bank for 1 million ounces of silver after one of the testifiers at the CFTC hearing boasted that they could deliver any amount of silver in one day. The bullion bank failed on its delivery and is being fined heavily by the LBMA. It is the SAME bullion bank that my fund has has problems with silver deliveries from the Comex.

    This isn't conspiracy theory - this live, real-time.

    Thanks for the feedback - I really appreciate it.

  24. Thanks for the feedback Hopium. I really appreciate it.

    I've thought about linking this Facebook and Linked-In etc. Unfortunately, I have to keep this comment process/section simple. I really didn't want to even have the "comment moderator" on but was forced to after I was bombarded by two juvenile assholes who somehow got ahold of my personal information and posted it in this comment section, including a printout of the phone/address information of everyone in Colordado with my last name. Needless to say I received from phone calls from people I've never met with my last name who complained about harrassment phone calls. So I was forced to put the moderator in place. Occassionally the perps test it out.

    I post every comment sent in, except any personally malicious - which are now rare - and numerous spam posts which solicit advertising or cash 4 gold or whatever.

    I like platinum and the PGM's as rate of return plays, but they are not monetary metals. One way to measure gold's possible short term upside potential is to look at the platinum/gold ratio. When gold goes into "bull" mode, we'll see 1:1 ratio - I expect that occur in the next 12-18 months.

  25. Thanks Dave, yes simple is best, again keep up the great work, you do have quite the following
    ( minus the A-holes of course ) "wink"

    Good day to you sir.

  26. Dave, thanks for the reply. This is juicy stuff.

    For kicks I googled "CFTC Andrew Maguire" and there are no MSM outlets covering this, only GATA and blogs such as yours. Not a peep from even the financial sites like Marketwatch, Fortune, or even Kitco for that matter.

    This is absolute proof that the bull is still in the early stages and the general public is completely clueless. Can you imagine this kind of market-manipulating scandal during the tech boom days?? It would be headline news and heads would be rolling.

    That said, I'm starting to think this bull will be much, much different than the others. It won't be about average folks with extra cash trying to make a quick buck in their spare time. I don't see it being nearly that pleasant.

  27. Agree Aman. By the time the general herd of this country understands why they need to own gold/silver, they won't have much money left to buy the stuff.

    This bull is being driven by wealthy families, investment funds, sovereign funds and central banks.