Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
Top Ten US Dollar Risks - 27th Mar 17
The Popularity of Gambling and Investing Amongst Students - 27th Mar 17
Is Political Betting on the Rise? - 27th Mar 17
US Stock Market Consolidation Time - 27th Mar 17
Russia Crisis - Maps That Signal Growing Instability and Unrest - 27th Mar 17
Goldman Sachs Backing A Copper Boom In 2017 - 27th Mar 17
Foundation – Fall Of The American Galactic Empire - 27th Mar 17
Stock Market More Correction Ahead - 27th Mar 17
US Dollar Inflection Point - 27th Mar 17
Political Week Presurres US Stock Market - 25th Mar 17
London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - 25th Mar 17
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate - 25th Mar 17
Unaccountable Military Industrial Complex Is Destroying America and the Rest Of The World Too - 25th Mar 17
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17
Physical Metals Demand Plus Manipulation Suits Will Break Paper Market - 20th Mar 17
Stock Market Uncertainty Following Interest Rate Increase - Will Uptrend Continue? - 20th Mar 17
Precious Metals : Who’s in Charge ? - 20th Mar 17
Stock Market Correction Continues - 20th Mar 17
Why The Status Quo Is Under Increasing Attack By 'Populist People Power' - 20th Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

Bond Market Bombshell - Deflation Rules!

Interest-Rates / US Bonds Jun 15, 2015 - 01:14 PM GMT

By: Clive_Maund

Interest-Rates

DEFLATION RULES! - because periodic recessions, necessary to rebalance the economy after periods of growth, cannot be put off forever by the short-term expedient of printing money. The result of such corrupt and evasive practices is that the deflationary forces build up to catastrophic and overwhelming proportions leading to economic collapse and depression. This is the point that we have arrived at now. Why can't governments keep the game going indefinitely by printing more and more money? - because the debt grows and grows until it becomes apparent even to dull-witted bond / Treasury holders that they are never going to get their money back, so they start selling and the selling snowballs into an avalanche, driving interest rates through the roof. Bond and stockmarkets crash and the economy sinks into a dangerously deep depression, all because governments stubbornly refused to do the right thing all along, and interfered with and obstructed normal market forces, culminating in their idiotic and ruinous QE, ZIRP and now even NIRP.


Of course, the mainstream financial media are trying to portray the recent trend of rising interest rates as a sign that the economy is recovering, saying that it is increasing demand in the economy that is driving rates up. If this is so then why is the Baltic Dry Index, which is a measure of shipping rates, at rock bottom depression levels, and why are commodity prices near to their 2008 - 2009 crash lows?? No - the reason that rates are going up is that bond holders have finally seen the writing on the wall and woken up to the fact that governments around the world not only have no intention of honoring their debts, but are incapable of doing so, even if they wanted to, so why should they hold on to piles of ultimately worthless paper that don't even yield anything in the here and now? This is why bond and Treasury prices have been dropping, and notwithstanding any short-term bounce to alleviate the short-term oversold condition, look set to go into a self-feeding downward spiral that will drive rates sharply higher, turning the Fed into an impotent bystander. All this looks set to happen with a rapidity that will surprise many people and catch them off guard, particularly those who complacently assume that the long uptrend in many stockmarkets is set to continue forever.

Alright, so what is set to happen and what will drop and what will go up? Bond, commodity and stockmarkets look set to crash, with the rising rates associated with falling bond prices ripping the rug out from under the stockmarket. A wild "dash for cash" would be the result of this that will drive the dollar to possibly dizzying heights, like 2008 on steroids. Eventually, after this "swansong" rally, the dollar will crash and burn, especially when China - Russia roll out their gold backed new world reserve currency, an event which could trigger a war. Gold and silver will likely get caught up in this maelstrom and drop to new lows, despite imminent positive seasonal factors, but will later emerge into spectacular bullmarkets, and it will be important for any investors wanting to buy physical gold and silver to aim to do so ahead of the crash bottom, because after the turn it will be almost impossible to buy physical, and also to keep in mind that governments can be expected to pass laws enabling them to forcibly steal your gold and silver - so give some thought to where you are going to store it.

Our tactics therefore involve 2 main planks - cash: the US dollar, and bear ETFs, in bonds on any bounce and in stocks immediately. The more daring may consider out of the money Puts, and you should "swing until you hit", rolling into the next series until the plunge occurs. We hold off buying the Precious Metals sector until this last takedown has run its course, which will likely see gold drop to the $850 - $1000 area and silver to about $10. Then we come out "guns blazing" because the ensuing rally in gold and silver is likely to be spectacular, dwarfing what occurred in the late 70's.

Let's now quickly review some relevant charts.

We start with the 13-year chart for TLT, which is a good long T-Bond proxy. On this chart we see that despite the recent sharp drop, predicted on the site in the last Bond Market update, it still hasn't broken down from its long-term uptrend. The later stages of its bullmarket advance were of course fuelled by ZIRP, but since interest rates can't go much below 0, it is pretty obvious that this bullmarket has run its course, especially with rates looking set to rise in the face of Sovereign defaults. It is therefore expected to break down from this long-term uptrend to enter a bearmarket.

iShares Barclays 20+Year T-Bond Fund 13-Year Chart

Next yields. Yields have risen sharply over the past couple of months as bonds have dropped in price. This is a process that looks set to continue, even if we see a short-term pause, and to accelerate...

20-Year US Treasury 13-Year Chart

The Baltic Dry Index, which measures shipping rates, is at rock bottom economic depression levels, indicating that global trade is weak and contracting, with the risk of more trade wars. This is a sign of deflation at large...

Baltic Dry Index 13-Year Chart

Likewise the commodity index chart shown below hardly indicates a robust world economy...

CRB 13-Year Chart

The US dollar is now at a very interesting juncture. In March its parabolic uptrend peaked and it burned out temporarily. At the time and soon after we had thought that it was done, and would go on to drop away, but given the prospect for a mass exodus from bonds and stocks, it looks set to become the beneficiary of a massive "dash for cash" that could drive another strong dollar rally. Technically, this is certainly possible as it is still above a rising 200-day moving average which means that arguably its trend is still up, and the reaction of recent months has allowed its earlier overbought condition to completely unwind.

US Dollar Index 13-Year Chart

Looking at recent dollar action in more detail on its 1-year chart (dollar index) we see that a consolidation Triangle may be forming above its rising 200-day moving average, which is now coming into play and could power another major upleg from here. This of course would be bad news for commodity prices, including gold and silver which would be tipped into another downleg.

US Dollar Index 1-Year Chart

Bondmarkets are expected to enter a confirmed a bearmarket soon, the first for many years, triggered by a wave of selling ahead of Sovereign defaults leading to more steep rises in interest rates. This will cause bloated stockmarkets to crash and commodities to drop further. The torrent of funds liberated as a result of this selling can be expected to flow into the US dollar, sending it sharply higher again. If this scenario prevails then the way to go for investors is cash and bear ETFs, with the eventual aim of switching into Precious Metal sector investments as they approach downside targets, for the ensuing rally in gold and silver should be massive. Physical metal purchases should be made ahead of the bottom, as physical will likely be very hard to source hard after the turn.

By Clive Maund
CliveMaund.com

For billing & subscription questions: subscriptions@clivemaund.com

© 2015 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

Clive Maund Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife