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Albert Sung is the author of Correlation Economics, monitoring breaking economic news on a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at Ashland, a... More
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Correlation Economics
  • U.S. Bonds Hit 8 Month Low 3 comments
    Jan 3, 2013 5:13 PM | about stocks: TLT, TBT

    U.S. bonds have finally broken down and from here on it's only going downwards as resistance is broken.

    The funny thing is that Ben Bernanke has shot himself in the foot by telling everyone he's going to stop buying bonds at the end of 2013. The result, everyone flees U.S. bonds today. I guess Jim Rogers' call for a collapse in bonds was a hit right on the head of the nail.

    (click to enlarge)

    Chart 1: 10 year U.S. bonds

    The even odder thing we saw today is that the U.S. dollar went up 1% against the euro which is very contradictory. Normally the U.S. dollar goes down when the bond market goes down as seen in this correlation. So I think this is a temporary phenomenon. U.S. dollar strength won't last long with a weak bond market. Max Keiser is even predicting the end of the U.S. dollar in 2013. I think he's onto something.

    => http://www.youtube.com/watch?v=thx47NcPRPM

    If the Federal Reserve really were to stop buying U.S. bonds, bond yields would spike, mortgage rates would spike. The debt burden would increase tremendously with higher yields, which will bring interest payments much higher. If interest payments go higher, the budget deficit will increase when social security, defense, health care, education and pension spending isn't cut. Higher budget deficits asks for higher taxes to reign in the budget deficits and that will make stocks decline. That would lead to the start of a depression era.

    You would think that the U.S. dollar would strengthen, but how can a currency strengthen with an exponentially higher debt burden and higher interest payments? It can't. First, the bond holders need to lose big before a recovery can even start. The only true safe haven will be precious metals.

    Stocks: TLT, TBT
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Comments (3)
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  • dieuwer
    , contributor
    Comments (2420) | Send Message
     
    I think the FED is bluffing. If they really stopped buying bonds, the US would immediately enter into debt-deflation spiral ala Greece.
    3 Jan 2013, 08:52 PM Reply Like
  • Katchum
    , contributor
    Comments (548) | Send Message
     
    Author’s reply » I think the FED may test the market response. :)

     

    And it wasn't pretty, bond yields going up. I was surprised gold went down, because bonds and gold are the complete opposite of each other, one is deflationary, the other is inflationary. If bond yields go up, that means inflation is near, so gold should do well.

     

    By debt deflation, you need to know that debt will be repaid by the little savings people have. Debt will go down, but savings will too. The problem is that there is much more debt than savings in this world due to fractional reserve banking. So at the end of the debt deflation, the only thing that is left over is debt, which won't be repaid of course.
    4 Jan 2013, 11:14 AM Reply Like
  • dieuwer
    , contributor
    Comments (2420) | Send Message
     
    Yes, the paper price of gold went down...
    I suggest you visit this forum and read "2013
    Year of the Window", http://bit.ly/Z3reCs
    4 Jan 2013, 11:24 AM Reply Like
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