Friday, May 1, 2009

Ben Bernanke – Bond Market Bozo…

I know that I’ve been neglecting fans of the good old rock and roll lately, so I’m going to give you a some Santana to set the mood and to let you know Nate’s still on the job, and that somebody's winning, right now I think it's the bond market vigilantes...

Santana – Winning:

Way back in early January I wrote about how the bond market was peaking and presented my case clearly: Bond Market Hide & Seek – A Domed House & 3 Peaks...

It appears that I correctly labeled THE peak, as it has now been 3.5 months and global intervention and Quantitative Easing (QE) have not been able to keep long term rates in the bond and treasury market at those extreme lows. As I said in that article, once the Fed lowers their target rate to zero, you know you are near the end.

As the following chart of TLT (20 year bond fund) shows, we experienced a parabolic rise followed by a parabolic collapse. The collapse was indeed halted via intervention for about 3 months, but it has now resumed with technical breakdowns occurring since Bernanke and the FOMC failed to announce further actions or a larger pool of money to buy our own debt with phony trumped up dollars. You can see that we have now retraced more than 78.6% of the last parabolic rise, and places the odds high that we will retrace all of it:

Here’s a one month chart showing how fast the selloff and breakdown is occurring in bonds over the past few days:

And the ten year is nearly as bad.

Remember, most fixed mortgage rates are tied to the ten year rate. Although mortgage rates are at historic lows, as seen in this chart by the fed, they are at those lows only because the fed has been buying up hundreds of billions worth of near worthless Fannie and Freddie mortgage debt:

While conditions in the bond market here are oversold, returning prices up and rates lower will now require very difficult tradeoffs, but a short term bound could happen at any time making a levered bet on the bond market risky. Those tradeoffs would include letting the equity market go in order to preserve low rates.

These rates are NOT sustainable, so I would suggest that if you haven’t refinanced real estate that you should do so immediately.

Now, a lot of people think that with rates this low, it’s time to BUY real estate. The exact opposite is true. The general rule is that you should sell real estate when interest rates are at or near historic lows and you should buy when they are at historic highs. Look at this chart of interest rates and think about it:

Had you bought real estate in 1980 at the peak in interest rates and sold recently, you would have done terrific, especially if you would have sold like I did in 2005. Since about the year 2000 rates have been held artificially low courtesy of your morally and ethically challenged Federal Government. But think about the interest rate equation. Buying a home, if you can afford the financing, at a high rate of interest means that you will be buying when PRICES are low. Yes, your payments are higher, but if you are financing then you refinance when rates are low, like now. But what you don’t do is buy real estate when rates are low because that’s when prices are high. Once interest rates come up again, people will not be able to afford as much house and prices will continue to fall.

No, your government does not have the power to force rates low forever. They have reached their limit NOW.

And I’m not the only one who thinks so. Check out Mike Larson’s latest update from just this morning:

Sayonara Treasury Bubble!

by Mike Larson 05-01-09

You’d think that after the dot-com bubble … the housing bubble … and the bubbles in commercial real estate and private equity, investors would have learned their lesson.

Nope! They did the same stupid things this fall …

• They chased long-term Treasury prices higher and higher (just like they chased Miami condos and,

• They drove prices to loftier and loftier levels,

• And they relied on the Fed to save their bacon.

And now, they’re getting their heads handed to them! Long bond futures have plunged a whopping 20 points — from 143 in mid-December to less than 123 yesterday. The yield on the benchmark 10-year Treasury Note has exploded from a fall low of 2.06 percent to 3.11 percent this week — a gain of 51 percent. Key technical levels are giving way all over the place.

Fortunately, you had the market’s playbook. You were told in no uncertain terms — right here in Money and Markets — that the Treasury market was caught up in a huge bubble, one that was destined to pop.

As I said in early December:
“The truth is the U.S. government is going to have to flood the market with a wave of Treasuries the likes of which the world has never seen. And just like any other market, the bond market reacts to supply and demand.

“Too much supply and not enough demand should drive prices lower.

“Bottom line: There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching.”

Now, let’s talk about why this is happening … where we’re headed next … and what the implications are for you and your investments.

The Biggest Debt Binge
In World History

The immediate catalyst for this week’s bond market break? The Fed’s refusal to increase the amount of Treasuries it has committed to buy. The Fed said at a policy meeting several weeks ago that it would purchase up to $300 billion in Treasuries, and it didn’t alter that target at this Wednesday’s gathering.

But I believe the problem is MUCH bigger. For starters, as I mentioned in my Money and Markets column last week, the Federal Reserve has been backing up the truck and buying every crappy piece of paper it can get its hands on. Lousy residential mortgages. Crummy commercial real estate loans. Toxic CDOs, credit card bonds, student loans — the Fed is buying or loaning money against anything and everything!

I warned that at some point, this would be viewed as bearish for the dollar. I also said it would only add to worries about the perceived credit quality of the U.S. itself. We’re starting to see the dollar get clubbed now and clearly, U.S. debt is getting trashed.

It’s not just the Fed, either. The U.S. Treasury is doing its part, too. Indeed, we’re borrowing and spending the country into oblivion!

This week alone, Treasury sold a record $26 billion in seven-year notes, a record $35 billion in five-year notes, and $40 billion of two-year notes. Next week, we’ll get a record $71 billion in longer-term debt issuance.

Total net borrowing needs for the second quarter are now up to $361 billion. That’s up 27-fold from $13 billion a year earlier and more than double the previous estimate of $165 billion.

We just learned the Treasury will start selling 30-year bonds every month, as opposed to eight times a year. And speculation is running rampant that the U.S. will soon start auctioning off 50-year bonds! All this issuance is needed to fund a federal budget deficit that’s projected to hit at least $1.75 trillion this year and $1.2 trillion in fiscal 2010.

The Implications For You …

First, I’ve implored you to dump long-term bonds for several months now. If you followed that advice, you saved yourself a world of hurt. The average long-term government bond fund has already lost 11.2 percent in value this year, according to Morningstar, and we still have eight months to go!

Credit spread tightening has helped diversified, long-term bond funds perform better. But even they’re showing year-to-date losses, on average.

My advice remains the same: Get the heck out of the LONG-TERM part of the bond market while you can. Stick with SHORT-TERM Treasury bills. They are not subject to the same price risk and credit concerns as longer-term notes and bonds.

…Meanwhile, if you’ve been waiting to refinance your mortgage, I wouldn’t hold off any longer. The Fed has been trying to manipulate the bond market in order to hold rates down. But the cumulative “sell” decisions of investors around the world are starting to overwhelm Bernanke & Co.

Thirty-year mortgage rates are still hovering in the high 4 percent area. But they’ll climb if bond prices continue to tank.

Until next time,


The bond market Bozos of Greenspan and Bernanke espoused the Keynesian deficit spending mantra during down cycles but forgot that the other half of that equation which is that you must save money during the upcycles if you wish to even the cycles out. Simply printing during economic dips only leads to more economic distortions and digs us deeper and deeper into debt. Just remember that every time you hear the word “credit” you are in fact hearing the word DEBT. Our marketing based politically correct Alice in Wonderland World doesn’t like labeling things in a negative light. And that’s a big part of the problem. Can’t tell little Johnny that he can’t sing, you might bruise his ego. Of course encouraging off tune Johnny to sing only distracts him from gravitating to the things he is really good at. Funny how that works. Real praise for real performance. Real criticism when it’s deserved.

Well, sorry to the p.c. crowd, but this economy is riddled with debt, broken morals and ethics, a one way rule of law, math that does not work and is IMPOSSIBLE to pay back and I really don’t care if that brings you down. It must be dealt with NOW and by adults who can both tell and handle the truth!

Hey, at least Joe the Plumber here can sing the truth while another economic Bozo simply grins behind him – how true. And truer words were never sung, “…we owe our souls to the Federal Reserve.”

Two Trillion Tons - Sung by Joe the Plumber:

Now I know that a bond market collapse is not a funny subject matter, but you have to admit Joe the Plumber pretty much nailed it!