Tuesday, December 15, 2009

Rock, meet Mr. Hardplace…

Nothing says it better, really, than the data out this morning. PPI showing rising inflation driven primarily by speculation in energy, contrasted against the Empire State Manufacturing index which fell FAR short of expectations, falling from its recent high of 34.57 all the way down to just 2.55.

Yet, since that report was compiled oil has fallen from its recent high of $82 all the way back to $70, nearly a 15% fall.

But the real action is still in the dollar and in the bond markets where the dollar continues to race upwards and bonds, on the long end of the curve, continue to break down in price, up in yield (higher interest rates).

That is a VERY damaging situation for a debt saturated society, it won’t take very much of that action to place tremendous pressure on those who still hold debt, and that would be nearly everyone, especially our own government. But their fast and loose barrowing days may be numbered as the TIC data showed that foreign demand for our debt is waning greatly.

So, let’s take a quick look at the TNX, the ten year Treasury Note fund. Below is a 3 month chart showing the leap in yield today (lower price). It has broken upwards out of a pattern that is targeting about a 4% yield:

Doesn’t sound too bad, right?

Well, now let’s zoom out to a 2 year chart and you’ll see that a 4% yield breaks the big double neckline of an inverted Head & Shoulders pattern. Breaking that neckline will confirm a target that is up around 5.8%! That would be a tremendously large move, again, especially considering debt saturation:

The chart of TLT, the 20 year bond fund, shows a similar breakdown with a bearish flag broken:

And when we zoom out longer term, there is another, even more ominous, head and shoulders formation in play here as well should prices go below the double blue neckline at about 90. The target on that break would be all the way back down at 63, a tremendous increase in rates would result, certainly not undeserved considering the risk that our leaders have built up into our debt backed money system:

Both these breakdowns coincide with a breakdown in the 30 year bond fund. This follows the least successful 30 year auction in recent history just last week. Below is a chart of the 30 year US bond fund, there is a very clear, as of yet unconfirmed Head & Shoulder pattern there as well:

The latest flag formation in the 30 year has already tripped new bearish targets in the Point & Figure diagram, this is showing a target of 94 which would obviously mean that the H&S pattern in the 30 year is in play.

30 year P&F:

All in all, this is exactly what happens when you create a system of money that is backed by debt. Eventually the debt stacks up and the velocity of money crashes as all new money must be used to pay back prior debts, while at the same time the new money adds even more debt – STUPID. I’ve been pointing out this rock and a hard place for quite some time, I even identified the top in the long bond and talked about the parabolic rise and coming collapse in this article - Bond Market Hide & Seek – A Domed House & 3 Peaks... - written almost exactly one year ago.

And here we are, bonds sliding and producing new lower targets. This is the same thing that happened during the Depression… stocks rose, everyone thought they were saved, then corporate bonds began to continue to melt down, eventually the price of all debt rose and the real economy went down and down, falling to pieces during wave ‘C.’

Velvet Revolver - Fall To Pieces: