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Imagine a country such as
Venezuela announced that it was bailing out an investment bank, then just
days later said it was nationalizing its mortgage industry, and then just
days later that it was bailing out its biggest insurance company, and then
just days later its government pledged 700B$ to inject into its failing
banks, and then just days later its stock market fell 20%. Would you feel
comfortable having your money invested in such a country, in its stock
market, in its bond market or in its currency?
I hope you answered
“No” or “Hell, No!” to the above question! So why
should you feel any different about the situation if the country is called
“America”?
I am going to show you that the US Bond market is on the brink of collapse
and with it will come the collapse of the currency, just as you would expect
to be the outcome of such ridiculously inflationary policies in any other
country.
Figure 1 US 10 Year Note Price
and MFA
In figure 1 the 10 Year US
Treasury Note price is shown in black. The Market Force Analysis (MFA) is
shown in red. From 2000-2003 the MFA was rising and in a bull trend
identified by the trend channel labeled “1”. The bond price
was generally rising (falling yields). In late 2003 the MFA exited the
channel and entered into a declining trend labeled “2”. The bond price
as a consequence was falling (rising yields). In early 2007 the MFA fell
rapidly and exited the lower side of the channel. This seemed to be signaling
an imminent rapid decline of the bond price. But then in mid-2007 the first
news broke of sub-prime mortgage problems. There was a sudden rush to
“prime” and safe debt in the form of Government Treasury debt. The
MFA did a reversal and entered into a new rising trend labeled “3” and the 10Y
note commenced a strong bear market rally. In early 2008 the MFA exited this
trend and has been tracking sidewards suggesting a topping process. Ominously
the bond price has made a pronounced double top and is looking ripe for a
collapse. As the stock market had its worst week in history the financial
press reported on short term treasuries rallying as the initial reaction of
investors was to rush into “safe haven” treasuries. The 10 year
note tells a different story. It initially rallied on Monday October 6 to 118
but by the end of the worst week in stock market history it had fallen to
113.5. Hardly indicative of a safe haven play!
All the bailouts and “recapitalization”
plans of the Treasury and the FED are highly inflationary and require issuing
massive amounts of Treasury debt. The bond vigilantes are waking up. They are
going to dump bonds like they have gone out of style. Bond prices will drop
like a stone (as indicated by the black arrow in figure 1), general equities
will drop more and the dollar will nose dive.
This highly inflationary
scenario will make money rush into the tiny precious metals market and
explode their prices due to paltry supply. The lack of supply of the metals
will mean that money will have to spill into anything silver or gold such as
the mining equities. Money will also flow back into commodities because the
money leaving the bond market and the equities markets will be just too large
to be accommodated anywhere else.
On Friday October 10 as the
stock market selling intensified and 10 Year note prices were falling CNBC
Rick Santelli was saying this was a sign the credit market freeze was easing!
This was as the LIBOR-TED spread reached an all time high!
What is more likely is that bond
holders were waking up to the certain hyperinflation coming as a consequence
of the largesse of the government’s massive rescue plans.
Many analysts are incorrectly
talking of deflation. Falling stock markets or falling housing markets do not
contract the money supply. The government’s bailouts and
“liquidity” injections on the other hand increase it. John
Williams shows at shadowstats.com that the money supply is expanding at 14%
and when the government guarantees all bank deposits and probably all
interbank lending I can’t imagine what it will be!
Imagine that instead of living
through this nightmare yourself you were watching this complete financial
drama unfolding in Venezuela.
Who in his right mind would predict that Venezuela would experience
massive deflation as a result of creating massive amounts of money and credit
out of thin air? So why is it different for America? The laws of economics
are not country specific.
Because the Cartel hit gold and
silver in the middle of the night on Thursday October 9 many started invoking
deflation theories. This is nonsensical and the bond market is about to
confirm it!
We have seen the mega-shorts on
TOCOM reduce their shorts in gold and silver to next to zero. They know what
is going to happen to the prices of precious metals!
Many investors are starting to
think that after this stock market rout and with a G7 package things will
begin to improve. That is not the way things work! 20 years of excesses with
even more monetary excesses about to be heaped upon us as a “rescue
package” do not get unwound in 5 days. This is just the beginning. The
bond market is the biggest market in the world (if we ignore the ridiculous,
unregulated casino peddling OTC derivatives!). When the bond market heads
south the money that has to find a safe haven somewhere else is in the
trillions. Just a small percentage of this capital will blow the precious
metals to unimaginable levels.
The authorities keep saying that
they will “use all tools available to them”. They only have
one…it’s an electronic version of the printing press. They will
spin it in many different ways using jargon like “increased
liquidity” and “injection of capital” and “buying
equity stakes” and “buying toxic debt” but it all
translates to “create more money out of thin air”. Gold and
silver and the mining equities will be the place to be and soon thereafter
commodities in general.
Clarity will come when the
metals reach new highs and at that point a child of six will be able to say
where to invest. Of course, that is the greatest incentive for the Gold
cartel to prevent new highs being achieved! But new highs are already being
achieved in the retail market and on e-bay. The silly manipulation on the
COMEX will soon end. You can help it end if you buy a contract and stand for
delivery or buy gold and silver through goldmoney.com.
Adrian Douglas
Marketforceanalys.com
Adrian Douglas is proprietor of the Market Force Analysis newsletter (www.marketforceanalysis.com) and a member of GATA's Board of Directors.
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