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Trading Lessons

US Treasury Bonds: Fuse to Light the Bonfire

Interest-Rates / US Bonds Jan 30, 2018 - 06:18 PM GMT

By: Jim_Willie_CB

Interest-Rates

Many are the metaphors used to describe the agent that initiates a major crisis. Light the fuse, or pull the trigger, pull the rug out from under the room, or pull on the string for unraveling the sweater, these are commonly heard. What comes soon is the Bonfire of the Vanities, a term the Jackass prefers since irony is thick. Hardly the burning of objects deemed as tempting toward occasions of sin as in the 15th Century. In the present-day case, the burning would be of the massive piles of paper assets the US Federal Reserve has been illicitly supporting for the past several years. The bonfire would be of falsely valued heaps of paper. If truth be known, the Quantitative Easing was put in place in 2012 when the big US banks were all in danger of failures. They required amplified liquidity infusions in order to prevent these giant silos of insolvency from entering financial failure. Their huge bond holdings were supported. Generally, when insolvency meets illiquidity, big failures occur. The USGovt and USFed colluded to prevent the entire set of Wall Street banks from failing like Lehman Brothers did. They all had the same ugly insolvent traits. Few tell the story correctly, but Goldman Sachs and JPMorgan suffocated Lehman to death. Lehman did not fail without help. Like Chief Justice Scalia, Lehman was suffocated in a bed of unpaid bond sales. What comes next is a nasty corrosive dangerous sequence of financial market crises, where pumped paper assets suffer notable declines. It will include the stock, bond, and currency markets. The last times all three suffered simultaneous declines was 1979 and 1987. Add soon 2018.


GLOBAL SYSTEMIC LEHMAN EVENT
What comes next is what the Jackass has come to call the Global Systemic Lehman Event. For ten years, the Powers that Be, namely the banker cabal, have been supporting the entire global bond market in almost exactly the same manner as they supported the mortgage finance market in 2005 through 2007 before it erupted. The subprime bond market crisis of 2008 will be repeated, but on a global scale which includes major sovereign bonds. Recall that Greenspan justified the off-loading of risk, and Bernanke justified the asset backed bond market as sound. They were both wrong, both heathen heretics. It can accurately be said that these top-rated sovereign bonds are all subprime, with horrendous fundamentals led by grand deficits and economic recessions.

The entire Western world bond market and stock market has subprime traits. The worst offender is the United States, with its $550 billion annual trade deficit, expected to go over $600 billion this year. The USGovt deficits have been running regularly at over $1.0 trillion each of the last three years, despite fanciful adjustments and clever line items in perverse one-off attempts to conceal reality. New military budget additions and tax reforms will ensure a larger federal deficit this year, unless and until the nation enjoys a renaissance of re-industrialization with 100 thousand new businesses formed and several $trillion invested. Not likely.

WARNING SIGNALS
Warning signs are numerous. Consider the Money Velocity index, the flattened Treasury Yield Curve, the junk bond index, the pension fund shortfalls, the business defaults, the high leverage in big bank bond portfolios, and the growing automobile bond market travesty that features a full repeat episode of the subprime mortgage market. The USFed is more guilty of heretical monetary policy with each passing year. In the last several months, they have seen fit in their dim vision to support (rig) the actual measures that give warnings and alerts, like the VIX volatility index. For the last two years, the central bank has been buying US stocks with both hands using their Wall Street partners in collusion. For the last four years, the central bank has been supporting (rigging) the Treasury Inflation Protected Securities (TIPS) bonds, in order to silence the price inflation warnings. Of course, the USFed justifies their actions in silly ways, but they are trying desperately to conceal the vicious chronic economic recession by putting fingers in the dike holes. As partner in crime, the Euro Central Bank has been supporting corporate bonds, like in a division across the Atlantic Ocean of criminal labor initiatives. All the while, the standard economic statistics for economic growth, price inflation, and unemployment continue to be grossly falsified. The Fascist Business Model has not only gone haywire, gone totally mad, but broadened its reach. Next comes a reality check.

However, the two biggest warning signals are the flat yield curve and the rising long-term bond yield for USTreasurys. To begin with, imagine a supported (controlled, rigged) bond market for the 10-year USTreasury Bond Yield with the full power of the QE bond purchase program. It is failing to stop a widely recognized recession warning signal. This time it is from a rising short-term bond yield, combined with a rising long-term bond yield simultaneously. The USFed rate hikes are responsible for the short end, while global USDollar rejection is responsible for the long end of maturities. The Jackass has been adamant, and mostly (not completely) alone in heralding that the QE might be financial stimulus but it causes capital destruction in an unavoidable deadly manner. QE is wrecking the USEconomy on Main Street while providing a party-like atmosphere on Wall Street.

FUSE, TRIGGER, STRING
The fuse to light the financial market bonfire is the USTreasury Bond market, in particular the long-term maturity. Much of the various market run-ups over the course of the last two to three years have been predicated upon the ultra-low interest rates. They are kept down by USFed pressure, using QE with strong support by the Exchange Stabilization Fund (ESF). That is the multi-$trillion fund managed by the USDept Treasury, for the purpose of controlling several very important financial markets in the West. There are no free markets anymore, not since 9/11 and the installation of the fascist bankers at the helm. They committed the terrorist crime, sacked the World Trade Center giant bank, installed the Patriot Act, captured the $700 billion TARP Fund, and have controlled the USGovt ever since. It is all a crime scene, a coup d’etat, with cover provided by the lapdog corrupted press networks. Former actor, wrestler, and governor Jessie Ventura tried to run a cable show to reveal the 9/11 crimes, but his life was threatened and he quit the program.

The ESFund is the control center for fabricated USTBond demand, using the nifty Interest Rate Swap contract. It balances short-term versus long-term securities, and coupon versus cash types, to create mythical bond demand. The USGovt steps in to declare wondrous bond rallies, like in 2011 for that historic rally which was built upon $8.5 trillion in IRSwaps clearly evident by Morgan Stanley on the OCC Reports. The Office of the Comptroller to the Currency reports are rarely read by market mavens, but it shows the rigging very effectively. Lastly, the rise in the stock market usually indicates an imminent economic revitalization and growth period. But QE distorts it all. The typical Fed Valuation Model calls for higher stock indexes as a result of low interest rates. In past cycles, the model was effective, but that was before QE and the multi-$billion bond monetization program that has been firmly in place for six years. The entire set of big Wall Street banks join the bandwagon, and rely upon the faulty valuation model. We were told QE would be temporary, like for six months. The Jackass instantly declared in 2011 that it would be permanent, just like the Zero Rate Interest Rate policy. Third World fundamentals and absent bond buyers dictated desperate measures. It should be noted that the QE bond program is unsterilized hyper monetary inflation. No bond removal is done as compensatory drainage. It is pure inflation of the worst kind, deemed good by the heretics behind the curtain.

LIT FUSE IN PROGRESS
The USTreasury 10-year yield is on the verge of a breakout. Interest rates are rising, and could cause tremendous damage, starting with the stock market. The USFed balance sheet is loaded for massive losses, from USTBonds bought at low rates. If and when TNX goes above 3.0% on the all-important bond yield, the S&P500 and Dow Jones Index will turn down hard and scream of a major stock market decline. For yet another rare moment in US history, the US-based stocks, bonds, and USDollar will all go down in unison. No counter-balancing will be seen this time, not in this correction from historical abuse. Maybe not all in unison at first, but later soon for certain. The great QE unwind is upon us, within view. It has even been given a name in the financial press recently, Quantitative Tightening. The policy of tightening after such pervasive monetization of financial assets is lunatic and certain to cause a crisis.

Look for Gold & Silver to be the object of safe havens as the financial crisis elevates in pitch. Both precious metals already have begun to respond very favorably, with Gold comfortably over the $1300 level and Silver comfortably over the $17 level. Both precious metals have endured a long basing process, amidst unspeakable corruption in paper gold and paper silver games framed within a grand charade. Neither can be held back any longer. The Global Financial RESET will be urgently put into motion, jumping up a gear in activity and intensity. Ironically, expect in several months that the East will be invited to help stabilize matters. They will comply, but on condition the Gold Standard is re-instated.

DIRE CHART PATTERN
The Jackass adds a few points, first on the technical chart and then on the pessimistic viewpoint toward the vile banker sector. Notice a severely dangerous looking chart, with a Head & Shoulders reversal pattern evident, and a slight upward bias in addition. A secondary H&S reversal has reached completion over the last several months, adding propulsion for completing the major H&S reversal. The secondary pattern hit its 2.7% yield target. It is a highly reliable pattern in general. The recent move above the 2.60% key resistance level  with gusto could continue to provide impetus in pushing the USTreasury 10-year yield (TNX) above the 3.0% level. That would cause severe problems, and issue loud dire signals. It would pop and pinprick the S&P500 stock index and the Dow Jones Industrial Average. They are an accident waiting to happen.

The Head & Shoulders reversal target calls for an upward move in the neighborhood of 3.4% to 4.0% incredibly, as the great unwind is near, for both stocks and bonds. The more conservative 3.4% target pertains to the basic H&S pattern without considering its upward bias tilt. The more aggressive 4.0% target pertains to the more liberal interpretation when taking into account the positive upward bias evident in the entire chart for four full years. Refer to the two long parallel lines at the neck and shoulder levels, each with upward slope. Either way, the move toward the 3.5% area will cause tremendous grief and lead to significant publicity. Expect a major stock market decline, together with a major bond market decline, the worst of both worlds. Two declines simultaneously under the King Dollar banner will signal ignominious light.

The fundamentals ride directly beside the dire technicals. 1) The USGovt deficits are rising fast, better described as exploding higher. The trade gap is rising also to truly dangerous levels. 2) The USGovt stands at risk of shutdown over the debt ceiling issue. Foreign governments are moving away from the USDollar in bank reserves AND in trade payments. The USGovt continues in its sanctions, enforced via SWIFT channels. 3) The Eurasian Trade Zone is seeing major coalitions forming, with a united front toward the return to the Gold Standard. 4) As the Petro-Dollar continues is fracture and demise, the broken pieces like Saudi Arabia will take up alliance with China. Sales of Saudi crude oil in RMB terms will be a major event, coinciding with a USDollar index decline and a TNX yield sudden rise.

WALL STREET SCUM CENTER
The Wall Street controllers will lose control in a magnificent QE unwind. They built a gigantic monster, using the QE largesse at the USFed. They have produced multi-year unsterilized hyper monetary inflation, whose bitter consequences are soon to arrive. In no way can they clear up six years of QE with tons of hidden actions, in the biggest QE extravaganza of monetary abuse in modern history. The USFed balance sheet is poised for magnificent wreckage, possibly leading to its bankruptcy and final end of debt slavery rule. For them to add stocks and crude oil to their list was insane, deadly, and reckless, with huge consequences eventually. The time is like right now!

TREASURY SPREAD SIGNAL AS FOOTNOTE
The last time the USTreasury Yield Spread went almost totally flat was immediately before the 2007-2008 subprime mortgage crisis. It served as the key signal, and accurately so, for what was to come in the following several months. The same warning signal is now flashing red, but it is not being given much attention. The record setting stock market, and quick advances by 1000 points, and new era are catching the headlines. Market internals defy the ballyhooed story. This too will end badly. In the busy chart below, the purple series is the Fed Funds target rate. The black series is the spread between 2-year yield versus 10-year yield. The blue series is the spread between 5-year yield versus 30-year yield. Both are heading toward zero, where the red alarm will flash with sirens for all to hear.

Get back to me in a year’s time to see how effective this entire collection of warning signals is in forecasting a crisis, dead ahead. They were very accurate and effective in the year 2007. The Jackass expects the same here and now. China and the Eurasian Trade Zone will take great advantage of the unfolding financial crisis to usher in the Gold Standard. It will become their standard for trade payment and infra-structure project payment. In response, they will revise their banking reserves system to reflect this change. They will shed USTreasury Bonds, add Chinese Govt RMB-based bonds, and add Gold bullion. The Gold Standard will first arrive in trade payment, then in banking reserves management, and last in currencies. It is finally happening after a long wait and much preparatory work in the East.

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by Jim Willie CB
Editor of the “HAT TRICK LETTER”
Home: Golden Jackass website
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Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at  www.GoldenJackass.com, which includes a Squirrel Mail public email facility.

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