WARNING: SPOILER ALERTS!
(Spoiler alert: A journalistic device warning of plot revelations in reviews of films and TV shows – and now of financial crashes).
So let’s get to the spoilers first:
SPOILER ALERT ONE:
US interest rates are rising rapidly. Don’t say you weren’t warned – I have been banging on about this under-the-radar effect for weeks now. Here is the benchmark 10-yr Treasury yield:
I well remember the ‘bond vigilantes’ of the 1970s and 1980s. When inflation was taking off, they kept markets honest by driving bond yields up to the unprecedented heights of over 15% on the 30-yr Treasury. That made sense because bond yields carry a premium for inflation expectations. The higher inflation is forecast, the higher yields are, and vice versa.
But today, with deflation expectations suddenly at centre stage, bond yields are rising, not falling!
What the heck is going on? Eurozone bond yields are at rock bottom while the economy is on the verge of collapsing, yet ‘ultra-safe’ US Treasury yields are rising with a ‘booming’ US economy – and market fears that the Fed will start bump up the Fed Funds rate sooner rather than later (see yesterday’s US Jobs data).
In one sentence: Hedgies have been front-running (buying eurozone bonds at any price) the ECB ahead of their QE bond bids starting this month, while the urgent scramble for dollars has overseas investors selling Treasuries for the green readies.
One major factor is the oil producers needing to make up in dollars the difference between their newly-shrunk oil revenues and their on-going income needs. They are also hocked up to the eyeballs in debt – mostly denominated in dollars! As crude remains under pressure, the scramble for dollars will get even more intense. Watch this space.
SPOILER ALERT TWO:
In a haunting repeat of history, an Austrian bank is bout to go belly up in an unbelievable echo of the 1932 bankruptcy of another Austrian bank Credit Anstalt, which is credited with kicking off the global credit implosion in the depths of the Great Depression. You can read AEP’s piece here.
And here is a potted history of the Credit Anstalt affair here.
Now wouldn’t that be one of the greatest ironies in the entire history of finance? Two small banks in Austria of all places kick off two of the greatest depressions ever? And 84 years apart?
The dominoes are all lined up and ready to roll over.
SPOILER ALERT THREE
Long-time readers of my blog will know that I have been predicting the loss of credibility – and eventual demise – of the world’s major central banks for some time. They have been responsible for transferring wealth on an industrial scale from the 99% to the 1% with their ZIRP and QE operations – and lumbering the next generation with mountains of debt (ref US students, sub-prime auto owners and personal lenders in the vanguard).
When the Big Bear really gets a grip on the stock markets, their fall from grace will be spectacular. The members of central banks will be even more hated than the bankers of today.
And that day seems just a bit closer with the revelation that the Serious Fraud Office in the UK is investigating criminal activity in – of all places – the august Bank of England, no less.
As far as I am aware, this is unprecedented since its founding in 1694.
This is a watershed moment – it is downhill now for central banks. Social mood is now turning negative.
Yesterday was a tipping point in markets
Today was a milestone in the sad decades-long history of inflation (aka currency-destroying) in the advanced world economies. We have all been so enured to seeing prices and taxes rise, rise, rise year after year. It has become a constant of nature. Even central banks have a religiously sacred 2% inflation target – and this will be their nemesis.
But not now. From yesterday, when stocks, bonds, crude oil and gold – the four horsemen of the inflation apocalypse – tanked in unison, I can state that deflation is now taking over the reins. Inflation has been in control since the 1960s and now it is deflation’s turn.
Expect continued declines in asset prices, incomes, commodities, house prices, currencies against the dollar – virtually anything that moves. There will be blood on the streets, make no mistake. And gold/silver will not keep their value against the dollar, so no shelter there – just yet at least.
CASH IS NOW KING.
Gradually, the more aware investors will be cashing out and converting to cash of the folding type – and the preferred currency is the US dollar. I have been extolling the virtues of holding dollars because when the deflationary forces really pick up steam, it is only dollars that will be accepted – most other currencies will be like Confederate money – worthless.
My major long-term target on the Dollar Index is the 120 area (currently 98) with potential for much higher levels.
Farfetched? – it certainly is!
We are used to seeing loss-making internet start-ups in the US reaching pie-in-the-sky IPO valuations over $1 Billion. So move over Silicon Valley, here is our very own ridiculous offering in the UK. Farfetched, which is an online high fashion site, is being promoted as a Billion dollar IPO. You can read the amazing story here.
I couldn’t have thought of a more appropriate word to describe current IPO valuations – mostly of the internet variety – and their business models. It is an echo of the infamous dotcom frenzy at the turn of the millennium, of course. And we all know what happened to that. Perhaps the founders of Farfetched have a very ironic sense of humour, not expecting the world to take them seriously.
On a serious note, it is abundantly clear that signs of the gigantic financial bubbles are everywhere. In the US, both the sub-prime auto loan book and the personal loan securitisation industry have topped the $1 Trillion mark – and climbing. These are loans to the least credit-worthy consumers. Does that remind you of anything that happened in 2007/2008 with the NINJA loans (No Income, No Job, no Assets)?
But the sub-prime auto loan market, which has been largely responsible for goosing auto sales, allowing the pundits to proclaim a renaissance in the car industry, is losing steam. Delinquencies are climbing (what a surprise!) – see here. So now auto loans and personal loans are joining the in-deep-trouble student loans in rolling over.
I just love trading the bonds. My track record is best of all in the Treasuries over the years. And boy, do I have a whale trade on at the moment.
I took 800 pips out of the March trade just before expiry and now have over 600 pips gain in the June.
The bottom line is this: US INTEREST RATES ARE HEADED MUCH HIGHER. Don’t say I haven’t warned you – this has been a major theme of mine for some time. This will devastate asset markets.
The rally off the 2009 low is now complete with a magnificent five up and along my tramlines:
The icing on the cake is the large neg mom div on the hourly, daily and weekly charts. The last flourish failed to hit my upper tramline – another sign of weakness which suggests the next move is down towards my lower tramline target in the 1950 area. Naturally, a decisive break of that would set up my next target – the wave 4 low.
Along with the other three horsemen, gold fell hard yesterday – but is making a B wave prior to a huge C wave rally. Here are my EWs:
I am standing aside for now and looking for the B wave low.
These are very exciting times for a swing trader especially.
Don’t forget, you can follow my trades in my TT Alert service. Details here. We are short T-Bonds, Dow, S&P, FTSE, EUR/USD, GBP/USD, long USD/JPY, and added to positions last week (see previous WWs). We are sitting on large gains.
And if you want to receive my trades in real time as I make them, drop me an email at firstname.lastname@example.org and I will send you details of membership in my VIP Traders Club.
Have a great weekend!