INTERVENTION VS. MAIDEN FLIGHTSeveral observations are worth noting about the current so-called recovery and the required actions to keep it sustained. Monetary expansion by the Federal Reserve, extended credit for consumption, and bond market liquidity have all been tremendous in magnitude. Federal government tax rebates, and other tax benefits had been equally vast last year. Foreign capital supply needs have been staggering in volume, steady at $1.5 billion per day. Their central banks are now expected to keep us propped, which is seen as positive, with no sense of anything awry. Bond carry trade has been critical in putting speculative forces to work, probably the greatest juggernaut of false power in our economic machinery and production of spendable wealth. The consequence of over-reliance upon bond speculation is that great risk has been created in spring-loaded low interest rates. Mortgage agencies have provided primary pools for new mortgages, for refinances, and for home equity extractions. Large banks and brokerage houses have shown outsized earnings in recent quarters, from a bumper crop in their bond speculation, combined with liquidity-driven stock rally gains. The US Economy depends heavily on consumption, and spending draws on all of the above-cited sources. Residential real estate is the foundation of the inflated economy, which is put at risk if rising rates or declining income leads to stalled or falling housing values.
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AN ECONOMY DEPENDENT ON COLLUSIONThe Greenspan Fed has finally broadened its view when prowling for price inflation signals. For months, they focused foolishly upon the faulty CPI index, where many critical items are ignored, and dynamic scoring sidesteps cleverly the rising components.
They finally admit to rising prices for commodities, energy, intermediate goods (like steel), even scrap items, in reaction to the alarm bells rung by the both the Consumers and Producers Price Indexes. So far they have ignored the import price increases registered. Bond vigilantes are raising dust in their fast ride over the horizon. They had been notably absent since 2001, when accommodation began. No longer. Foreign central banks will not abandon the buttresses behind the bond dikes. The Bank of Japan seems overwhelmed, and might be standing down in their mindless support. The system will limp along without continuation of bond bubbles. The mainstay of intervention "IV" injections might more appropriately stand for "intravenous." Take them away, and policy makers had better be correct that the recovery can sustain itself. Herein lies the risk. Distort the data and hope the crippled, distorted, bloated beast will fly without tethered supports. Public confidence in its airworthiness might be unjustified. If the story of growth and progress is misrepresented, then great risks arise for sliding back into recession.
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In 1994 and 1995, when the Federal Reserve last reversed course, and tightened monetary policy, tremendous havoc reigned over the bond and stock markets. It is loosely reported that $250 billion was sloshing around in various forms of bond speculation at the time. We as a nation have matured, or else grown more wedded to the casino game, eschewing the old fashioned methods of creating wealth. Refer to build it, mine it, grow it, or fish it. We now print it, and apply leverage to the printing press. We celebrate our financial engineering and its output, mislabeled as wealth. Now the derivative pyramid is reported to contain $750 billion in bond speculation.
If one third as much money on the casino bond tables caused such disruption ten years ago, imagine the upcoming disruption when the Fed reverses course and tightens in a new cycle. Could bond accidents be the final legacy of Robert Rubin, the chief architect of the carry trade designed for bonds, the dollar, and gold??? He initiated gold sales for USTBond support, and so far has a patient Mother Nature who knows revenge well.
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Futures contracts and options are the tried & true inflationary tools of elite civil servants standing guard in sentry duty over the colossal coiled bond contraptions. Taking hands off, and entrusting this economy’s maiden flight to the laws of monetary physics will be truly interesting for both observers and participants. Confidence that smooth winds flow in the wake of an unwinding bond market seems badly misplaced. Ironically, gold has indirectly been hurt with early inflationary evidence. Higher rates have lifted the USDollar in a long-term bounce. If the 10-yr TNote yield surpasses 5.5%, it is my opinion that we pass through HELLGATE and lose control.
The result might be chaos within the “bond dollar gold triangle,” where disorder may have begun. Unable to admit their errors, G-7 ministers are once again complaining about currency volatility. If and when events turn sour, we have a handy list of scapegoats to blame. The list starts with China, OPEC, and FOREX currency traders. Few can discern that leveraged monetary inflation as a policy for over a decade is to blame.
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