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The "Bloated" Bond Bubble
The Fiscal Cliff theater was great 'off Broadway' drama, but the real show for traders took center stage Sunday December 16th in Japan. The curtain went up for the newly elected Prime Minister of Japan as the star actor in the unfolding global fiat currency drama.
"We think this could be the beginning of a fresh reflation cycle for the global system, combining with the US recovery to mark a turning point in the crisis,"
Japan’s curse as creditor nation with $3 trillion of net assets abroad is that safe-haven flows cause the yen to strengthen during a crisis, tightening policy in a "pro-cyclical" fashion when least wanted, this time due to the Fukushima nuclear disaster and Europe’s sovereign debt saga.
In the last 90 days the US, EU and now Japan have announced "unlimited", "Uncapped" monetary policy with UK's soon to be bank of England Governor, Carney indicating he wants inflation & growth targeting also when he assumes the reins.
The Fed's action are about the debt market and financing the US debt. All announcements have had this as a planned and timed goal.
The goal has been to get interest REAL interest rates as low as possible, and the expected duration to be as long as possible.
The result have been much harsher than the official chart (above), when inflation is realistically factored (below)
OBJECTIVE: A 1.0 - 1.2% 10Y US Treasury Yield
This has been a long term strategy since Paul Volcker initiated major changes in Fed Policy
It has placed the world's fiat currencies on a race to debase.
Our analysis which we have been calling throughout 2012 is that we are headed to 1.0 to 1.2% on the 10 Year US Treasury. The pattern below corroborates this outlook with an interesting analogy.
Market have reacted to this strategic and obvious debasement by:
1- Stampeding, relentlessly into the Bond Market and creating a disturbing potentially destabilizing bond bubble.
A bubble that could pop with a disappointing post Fiscal Cliff debt ceiling resolution and consequential downgrade of the US debt.
2- Pricing PE Equities equivalent to High Yield Junk
We can expect the MACRO DRIVER$ to be:
This chart shows what we presently anticipate . "THIS IS A MAJOR INFLECTION POINT.
REMEMBER: Financial Repression is at work here and US Bond Yields and Interest Rates MUST be further reduced.
We presently expect the 10 Year US Treasury Bill to eventually break below 1% which supports the potential target shown above.
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This article was originally published in the January TRIGGER$ Webzine for subscribers
Gordon T Long
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments.
© Copyright 2012 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.