The chart above shows a picture of the most incredible bull market in U.S. Treasuries the world has ever seen. From its low point on February 9, 1982, when the 30-year bond hit 14.80% to the present, amazing profits have been made by owning U.S. Treasuries. (Note: The gap in the chart occurred within a period of time during the Clinton years when the U.S. stopped issuing 30-year Treasuries.)
A hugely artificial and manipulated economy has enabled the rich to get richer at the expense of the middle class, with the Fed pushing down rates, creating one bubble after another, and creating an illusion of wealth throughout the land.
But there are limits in markets and, alas, not even the gods of money at the Federal Reserve can control markets forever. There has been speculation by many mainstream types over the past couple of years that the Fed is approaching that point, but the work of Michael Oliver, the results of which are displayed on the charts above, suggests we are perilously close now to the moment of truth in which Janet Yellen sprouts Pinocchio's nose and a complete loss of confidence in existing institutions and including the U.S. dollar results.
The chart above was published by Michael on July 3. His momentum work (bottom of the two charts) projected 170 as a point at which, if exceeded, would confirm a "blow out" in the 30-Year U.S. Treasury market is underway. And indeed that happened. The T-Bond did close above 170 at the end of June and now even on a day like Monday when the stock market exploded higher, so did T-Bonds, which closed the week at 176 30/32! That's quite a move in just one month. It seems Michael has hit another nail on the head.
And now also, take a glance at Michael's chart of TLT, the 20-Year U.S. Treasury bond. It too has now signaled a blow off according to Michael's work. What was required was for TLT to exceed 142 this week and indeed it has done exactly that. It closed the week at 143.60.
So what's so bad about this acceleration or blow off of the U.S. Treasury bull market? What's so bad is that there is a limit as to how high the Fed can push T-Bonds up (rates down). As with all markets when hitting their limit, it reverses course and there is nothing that can be done to stop the reversed trend. And when there is a blow off top, the reversal can be equally as violent.
So from what I observe, it seems we are getting very, very close now - perhaps only weeks away - from the end to the most phenomenal bull market in history (that being the highly manipulated bull market for U.S. T-Bonds). And that means interest rates may be about to rise and there won't be anything the Fed can do to stop that. Imagine interest rates rising in a global economy addicted to trillions of dollars of monetary cocaine that is manufactured from trillions of dollars of debt that cannot be paid.
So here is the way I see things unfolding.
- Based on Michael's technical work in addition to the concerns voiced on July 1 by Alan Greenspan about an emerging inflation problem, I believe interest rates are getting very close to a reversal that the Fed will not be able to control.
- When rates start to rise, the stock market will start its inevitable bear market and we will start to see a massive escalation of defaults sending panic into the credit markets. It's very possible what we see this time will be much worse than the 2008-09 episode and there won't be much if anything central banks can do to stop this run because sovereign risk itself will become impotent.
- The population will demand the Fed "do something" and it will try by printing so much money there is no language to describe it. Question: When you surpass trillions, what is the word used to describe the next group of zeros? But with rates rising even more rapidly now and with business grinding to a halt, there will be loss of confidence in the Fed, and the dollar will be trashed.
- An ounce of gold will remain an ounce of gold. But when measured in worthless dollars it will rise to levels hard to fathom by any person of sane mind at this time.
This is not at all what any person in their right mind wishes for. But as Alan Greenspan said on Bloomberg, history is replete with examples that show when countries get themselves into the bind we are in now, a serious inflationary problem results. What makes it confusing is that prior to a sudden rise in inflation, things appear relatively calm and there is no apparent threat of inflation on the horizon.
But there is a point at which inflation is lost and people dump the currency in quest of any kind of tangible asset they can get their hands on. Throughout history the most logical assets to attempt to exchange worthless currency for have been gold and silver coins and bullion.
Although the Fed, Obama, and all in the inner circle continue to tell the American people that the U.S. is in good shape, the fact that the Treasury Bills continue to fall to historic lows suggests otherwise. If we had a strong economy, rates would be on the rise. Instead, we are seeing the fear trade take U.S. Treasury rates to increasing heights and in fact, as Michael Oliver points out, we are now approaching a very dangerous "blow-off" phase. It's a very dangerous phase because as noted above, such blow offs turn suddenly in the opposite direction, just like a ball thrown in the air reverses direction the moment it reaches its zenith.
Now, if you think only a few of us "kooks" are talking in such cataclysmic terms, here are some thoughts titled "It's Not Business as Usual," that Doug Kass of Seabreeze Management Partners Inc. had to say on Thursday morning in an email he sent to his clients:
Here are some of my early morning thoughts:
The more dire the creditworthiness, the more central banks are buying up a country's sovereign debt.
Sovereign credit downgrades are multiplying at a record pace in 2016.
Many countries with a limited possibility of paying back their debts (unless their currencies become materially devalued) are offering 10-year yields that are equivalent to or even lower than what the 10-year U.S. Treasury currently pays.
European banks' leveraged balance sheets are stacked with overvalued and potentially toxic sovereign debt, while their holdings of troubled, nonperforming loans are expanding.
The contagion risk is obvious, as is the counterparty risk associated with European banks' enormous and opaque derivatives books.
All of the above illustrate the ludicrous condition that global fixed-income markets are in, with investors pricing bonds based on liquidity conditions rather than creditworthiness.
Trust me - this will eventually come to a screeching halt, and with it could come an epic implosion in our equity and fixed-income markets.
Will this ultimately impact the valuation of, say, Bristol-Myers Squibb (NYSE:BMY)? You're damned right it will!