Most are
sunk in contemplation, and hopelessly clinging on to the ever- changing era of
big government spending.
Central
bankers and big financial institutions are borrowing money from the FED at
rates near zero, and then reinvest it into the ten year or thirty year notes, which
are paying 2% to 4%. From the standpoint of any financial institution, it is logical
and also more profitable than say, lending to a risky borrower.
Quantitative
Easing was- and is now-the Fed’s response to this credit crunch, BUT!- with
money being created out of thin air! And this new infusion of liquidity will
inevitably flow back to the same institutions that initially purchased these
long term government debt instruments! Overall, the hopeful consequence is to
saturate the debt market and encourage creditors to invest elsewhere-- i.e. business
owners, entrepreneurs, and the everyday consumers.
Bond prices
and their corresponding yields have an inverse correlation. If prices
rise, then yields will fall. When the FED intervenes it creates the illusion of
demand, making prices go up. In theory, their intent, is for bond holders to cash
out with a profit, then consider loaning really-where there is MORE RISK.
Interestingly
enough, this theory is only a theory, not a solution. When the government
increases spending through measures of stimulus plans, the budget deficit will
soar. This debt, however, must be repaid and consequently, higher taxes will
largely fall on the wealthy, but also on the middle class because most, if not
all will receive reduced payouts. Higher taxes will also cut back consumer
spending, forcing companies to operate with fewer employees. The result is
higher productivity because one worker is doing the job of two, or three in the
extreme.
This all will
come at a time of rising inflation because despite the Fed’s efforts to keep rates
(yields) low, their plan is failing. International creditors are quietly
fleeing from bonds because of fears of a possible default. They will focus internally
on the growth of their domestic economy. Bond holders will take their bread and
butter back to their homeland to focus on the very products that create organic
growth and exports for all.
Mind you,
the technical picture must accommodate this inevitable outcome. And as we all
watch from a far, the bond market is cracking, but has not imploded, at least
not yet. I suspect that this sideways bearish pattern will ultimately give way
in the early part of 2013, and at the same time initiate its Bear Market in
full effect.
TLT- Weekly Chart (click to enlarge)
We have a
major turning point approaching in all markets, not just bonds. The
corresponding cycles for stocks and Gold, both long and short, will manifest
into a decouple process that- I have long maintained!
Investors
should be prepared for the coming tax hikes and rising long term capital gains,
which together hold little to no incentive for owning stocks. This will be the
true culprit for a worsening stock market, actually a Bear Market; while the
media misdirects you with political theater to alleviate the worries of going
off the fiscal cliff.
S&P 500-
Daily Chart (click to enlarge)
As for the
Dow Jones, it too doesn’t look very promising either.
The
Dow Jones- Daily Chart (click to enlarge)
But there
will come a time, a time long before the Fed downsizes its balance sheet, if unemployment
ever reaches 6.5%. A time far removed from improving GDP or the presumption of
an economic recovery. A time when bearish conditions seem extended indefinitely
and there is no end in sight! In the same breath investors will rush out of
bonds and enter the only non-government asset that in the times of pervasive gloom
outperforms any other market---GOLD!
Gold- Daily Chart (click to enlarge)
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Darah
