THE ONE CHART THAT SCARES RICHARD RUSSELL
Nothing would derail the Fed’s great reflation/recovery experiment like higher interest rates. Several notable investors including David Einhorn (see Einhorn’s thoughts here) and Julian Robertson (see Robertson’s thoughts here), have expressed their concerns over the potential for higher interest rates. The great Richard Russell of the Dow Theory Letters has long feared a spike in interest rates. In a recent note he explained that the end of quantitative easing has bond investors worried over the future of interest rates. Russell believes higher rates are the next big move in the bond market:
“Older subscribers may remember that I said that the Fed could continue its “quantitative easing” (printing money) until the bond market says it can’t. Below is a daily chart of the 30-year Treasury bond. The bond market doesn’t like what it sees. I view the pattern on this chart as a huge, down-slanting head-and-shoulder top with the bond sitting right on support. The bond appears weak, and if support is violated, interest rates will be heading higher. And that’s the last thing the Fed wants at this time.”
Source: Dow Theory Letters
i agree that long term rates are going up, and that the end of fed purchases of non-treasury securities will exacerbate this trend, which is why i own tbt. but i don’t think the fed thinks this will affect the recovery as much as an increase in short term rates, which they will increase modestly over the next year (likely through an increase in the rate on excess reserves, which seems like the new fed plaything). i view an increase in the term yield spread as good for financials, which is why i am overweight there. if the recovery falters, then a quick switch into the higher long end would make sense. next?
Russell says: higher interest rates is “the last thing the Fed wants at this time.”
I say, therefore, that the Fed will make sure that the last thing they want WON’T HAPPEN. THEY’LL BUY AS MANY TREASURY BONDS AS IT TAKES TO KEEP THE CHART FROM BREAKING DOWN.
CS
Right on Charles; the Fed purchasing U.S. bonds is a new phenomena, something we never heard of before. It is proof positive of the desparate times we are in and the inability of the Fed to do anything about it. They will keep inflating the money supply until they destroy the currency.
James
The Country needs the Fed
Like a Hole in the Head
But can’t the Fed jump in there and manipulate the bond market like they manipulate every other market?
Are you ready for 10 TRILLION DOLLAR BILLS LIKE Zimbabwe?
The Fed has no interest in stabelizing the economy. They created this mess in the first place. Abolish the Fed!
If China’s market corrects thats one less major buyer of Treasury Bonds and I’m not sure the Federal Reserve can makeup the difference. ETF symbol TBT also in my portfolio as a hedge.
while I agree Treasuries are the worst investment, that chart above and the line drawn is the dumbest technical research I have seen in a while. The libe clearly should be drawn connecting all the lows and thus that line is somewhere around 115 short term and 113 intermediate term. It has not happened yet
It seams to be almost unanimous. Everywhere I look it seems EVERYONE is convinced rates have to go higher. It’s Rare that you see such a lopsided consensus. Being long the TBT or the TBF (which I nervously am) looks like a slam dunk. And that is exactly what worries me about being long the TBF. I have rarely seen such almost complete consensus on a market direction prove to be correct.
Well, the problem is four-fold:
1) Everyone incorrectly (IMO) believes inflation is around the corner because we’ve printed money. As regular readers know, I disagree.
2) The next big argument is that we will begin to see net seller of treasuries because US debt is too high. That’s also false. China will continue to be a net buyer and corporations are likely to continue piling into treasuries as short-term cash rates fail to suffice and equities remain risky.
3) The third argument is that investors will demand higher rates due to sovereign debt risks. The USA cannot go bankrupt. They will print before that even becomes a remote concern. As of now, we’re printing, but there is still no borrowing. The two offset.
4) Higher rates would almost certainly coincide with a MUCH stronger economy. Does anyone think this economy is going to experience a robust organic recovery outside of government stimulus? Doubtful.
Personally, I think the curve is likely to flatten from here – not steepen.
It looks like long Treasury Bond is a nice contrarian bet…
The fed will have to continue to buy/monetize about 1-1.5B in treasuries per year for the foreseeable future, since there are not enough buyers out there.
They can do this through various means like buying MBS, or lending short-term
money to banks who will then buy the treasures or some other combination of means.
It seems likely the dollar will be devalued before interest rates are allowed to rise…. and most other countries are doing the same.
1) Everyone incorrectly (IMO) believes inflation is around the corner because we’ve printed money. As regular readers know, I disagree.
This isn’t a problem, this is a statement of your beliefs. This only leaves you with a three fold “problem” so not a great start to your argument.
2) The next big argument is that we will begin to see net seller of treasuries because US debt is too high. That’s also false. China will continue to be a net buyer and corporations are likely to continue piling into treasuries as short-term cash rates fail to suffice and equities remain risky.
-Really? Looks like they sold in Dec. And from all accounts in Jan. Sure they sold small amounts compared to what they hold. But they are still net sellers. And just broke even in Nov. That is 3 months of nothing or selling. I don’t think your #2 holds much water. Japan our other major buyer is broker then we are and back into recession. They spending over 100% of GDP now. That’s healthy. And we’re copying them, or I guess I should say following them into 20 years of on again and off again recession. Great leadership (both parties are to blame).
3) The third argument is that investors will demand higher rates due to sovereign debt risks. The USA cannot go bankrupt. They will print before that even becomes a remote concern. As of now, we’re printing, but there is still no borrowing. The two offset.
-Zimbabwe could not go broke either and they just printed their way out. During one of the worst recession since the great one, inflation stayed positive the entire time. That has never happened before. And that is from manipulated government numbers to boot. Its even worse when you use real numbers. Don’t forget Germany of years gone by either, or Rome, or …. All paper money goes back to its intrinic value, zero. Look up John Law from Scotland. If it wasn’t for our own wonderful Federal Reserve buying up the rest of the auction at the end they would have failed the last several times. That bodes well for us doesn’t it? We’re making up money to pay for debt. If that isn’t the definition of inflation I am concerned. We cannot pay off our debts. By 2020 the federal government admits we will barely pay for the interest on these debts. All the gold in Fort Knox wouldn’t even pay off a trillion dollars of debt at today’s prices.
4) Higher rates would almost certainly coincide with a MUCH stronger economy. Does anyone think this economy is going to experience a robust organic recovery outside of government stimulus? Doubtful.
-Do you have statistical evident that higher rates would “certainly coincide with a MUCH stronger economy”? Because so far you’re just making statements without evidence. Merely opinion. Do you have an economics degree (if so you likely lose credit, since they seem to be the problem)? If not, which is more then fine. Do you have proof of any kind?
Please reply with facts, not just opinions. Thank you.
1) There is no inflation. That is not a statement of opinion. It is a solid fact. There is no borrowing in the private sector. You would be wise to learn how our fractional reserve banking system ACTUALLY works before placing bets on hyperinflation.
If you need a more in-depth response see here: http://pragcap.com/why-deflation-remains-the-greater-risk
2) Your #2 argument is more of the same. Deficit fear mongering from someone who doesn’t understand how fractional reserve banking works. Japan has had a budget deficit for 20 years. The US has almost always run a deficit. Why is this just now scaring you? Deficit spending is exactly offset by private sector savings. That’s how the system works. The budget deficit doesn’t matter so your Japan argument is bunk. China has no choice but to purchase treasuries unless they decide to buy high risk US assets which they wont do on the back of their sovereign wealth fund debacles. Regardless, corporate demand for treasuries remains very robust.
3) China doesn’t “fund” our debt. Neither does Japan. Again, you don’t understand how monetary operations actually work. Comparing Zimbabwe to the US is apples and oranges. How is the US economy at all similar to Zimbabwe? And Germany and Rome? How does the US in a floating rate exchange system compare to the economies of Germany and Rome? Again, apples and oranges.
4) Higher rates imply higher inflation. In today’s deleveraging/deflationary environment that is only likely to occur with strong rebounds in employment and borrowing. Stronger borrowing and employment will only occur if the economy rebounds. Just study any deleveraging period in the history of man. Investors hoard cash due to private sector weakness. Borrowing remains low as consumers fix their balance sheets. It is what it is.
The hyperinflationists are wrong without a huge rebound in the economy. That’s just how our monetary system works. You can argue with it, but the facts are the facts.
You said hyper inflation I did not. I was relaying the federal governments released numbers that show inflation during the last 2 years even with energy and food removed. Which is unrealistic. But its still positive inflation during the entire period. Unless the government numbers which are pushed down already are wrong.
I also understand fiat money quite well thanks. Each auction the price for the US to get further and further into debt is going up. I guess that is false too right? Yeilds are not going up to new records each week? Oh sorry, the US Treasury numbers says they are.
If every penny saved last year in the US was used to buy US debt issued by the Treasury, we would still have to borrow over 600 billion from other people. If you look at the recent US Treasury auctions, according to the US Treasury the Fed (SOMA) made up more fake money to buy 11% of it. Foriegn government purchased the least amount in years (if not ever I forgot which it was, either way I don’t call it good). The auction nearly failed until an undisclosed entity purchased all the remaining debt, approx 40% of that days auction. Which was by most accounts, the Fed again though we’ll never really know. Corporations also purchased a new record low amount too and what they have is mostly moving to 2 year treasuries not 10+ year like they used to do.
But of course, I’m clueless and you’re all knowing. Again you just said your opinion about inflation. But if you look at the core CPI from the GOVERNMENT they say there is inflation (granted low and I never mentioned hyper, only you have). Incase you don’t believe me the numbers (history and current) can be found here: http://www.bls.gov/cpi/
No China funds our debt. According to the , I used the term correctly. They supply us the money which in turn we spend on their “products” and a few other countries. China doesn’t have to buy our debt, as the last 2 months have shown. They flat out didn’t, infact they sold it. Again for your convience you just flat out ignored this easily verified fact. And just stated your opinion as fact (or the word of God?)
I read the article you posted a few weeks back and I didn’t discredit it, I just felt Casey’s was more believable to me. I fear future high inflation (below 20% like we had in the early 80s) more then a temporary deflationary period either now or in the near future.
I am, likely obvious by now a austrian economics guy as I like things to make logical sense. I see Japan now (last 20 years) and stagflation of the 70s as proof that keynesian economics failed completely. Japan is once again in a recession and they’re going to pump more cash into the system to get them out… Zombie banks sounds like a great way to go. Though I think we’re there already. I prefer sound, real money. Instead of losing 95% of MY wealth to inflation in under 100 years (thank you Federal Reserve) and most of it in the last 40 years.
Awesome. I apparently missed a ” or >, go me! I appologize, thought I looked it over. But I guess only 5-6 minutes on a reply and review gets you a few mistakes now and again.
Michael, I’m just telling you the facts. Please read the following and feel free to let me know what you think:
http://www.newdeal20.org/?p=6338
http://mpettis.com/2010/02/what-the-pboc-cannot-do-with-its-reserves/
http://www.huffingtonpost.com/l-randall-wray/the-federal-budget-is-not_b_457404.html
I’m going to have to read those links tomorrow, have to be at work around 4:30am to change out a refer unit at a Safeway tomorrow and its 11pm now. But I just got this in an email (I’m behind) and its ironic:
http://consultingbyrpm.com/blog/2010/02/are-consumer-prices-collapsing.html
Sorry for not linkifying it, didn’t realize how late it is.
They’re good reads. Have a good night.
I read most of the first article (long and I just got back from Vegas…wow its depressing there). All of the second and the third. First one was pretty good. Last two, really needed some work imo.
Second one stated near the beginning that there was no way China could not buy US Treasuries. Well that has been proven false the last 2 months same with Japan (sold in Jan).
The third article claims in point 5, that the dollars value has not fallen. That is completely false. A dollar from 1913 had 96% more purchasing power then a dollar today. Easily looked up fact. The US dollar has steadily gone down, until recently, gone down vs the Euro over time. Its not that things cost more then back in the day. Food is cheaper then ever (and worse for you), clothing is cheaper. Cars are cheaper in dollar terms when taking into account inflation. Inflation just robs from savers.
I prefer logical money…aka sound money. I also am not a fan of central planners being mega banks (aka the Federal Reserve) who just make a mint off of us peons. We’ve had more recessions/depressions since the Federal reserve then any time before it. We’ve suffered from higher and higher rates of inflation. For nearly a 100 years in this countries past we had less then 1% inflation over that WHOLE period. But we also boomed and people became wealthier. Wealth, real value to their lives. Today and for the last decade the average wage of an American has gone down, not up.
Anyways sorry for the delays. Got stuck at that job then had vacation.
Hello TPC, outstanding website and excellent exchange of views between
you and Michael. Note: does the Fed really loose any sleep because the neckline
is broken on the $USB chart? Followup: Does anyone really believe that the
“Presidents Commission on Working Markets” showed genuine concern proping up
the SPX at critical support points? Will the Fed continue to print in a deflationary economy and buy its own created debt instruments? In my modest
lay opinion “Yes” to the above three onerous questions. The very troubling
problem for many of US is who eventually is owning these Treasury obligations?
The American Central Bank is notg owned by its citizens so who gets the
interest payments on these T Notes? If ‘fractional’ banking is a just and reliable
way of money creation why is there such a mountain of deleaveraging of this
created money taking place, ie. credit crunch? I am just so totalled puzzeled
by the apparent mis- management of our countries account balance sheet.
There are many questions being asked and few if any being answered by elected/
appointed officials in the banking sector. Why is GoldmanSachs (GS) now a fully
charted Federal bank? Will Citigroup freeze any saving acct holders withdrawls?
Why were the TARP funds diverted from their originally conceived usage? Why is
ex-Secretary Paulson not being asked many, many questions by the House Banking
Committee? Thank You for the opportunity to post. Klauden-
I very much enjoy reading this website. – great information but more importantly diverse opinions.
I am not sure whether we will see deflation or inflation but I do have to say I lean towards the inflation camp. More likely a mixture of both – but why inflation? I think everyone looks at this phenomenon wrong. Most and seems to me yourself equate inflation with monetary velocity when I think it is much better to simply look at it simply in terms of supply and demand. When you have a growing supply of dollars(I cant see any argument that shows we do not have this now) and a lower demand for dollars(your point that the banks are not lending fits in here) you have inflation.
Simply inflation is when you have the supply of dollars growing much faster than the demand for those dollars. Forget velocity – I personally thought that was dis-proven some time ago.
I think I made my supply and demand point twice above. I apologize – its late
How can you increase risk (by buying MBO and “toxic-assets”) and not increase return?
By buying the portfolio of assets at the 100% face value. You are right, there has to be a high return associated with these toxic assets which you would get by buying these toxic assets for pennys on the dollar.
I disagree, this is the last thing the fed would want at this time. Surely the last thing they would want is a terrorist act or some thing that prevents them from getting into work, because that would disrupt their ability to go and try and do their job?
I am not saying that is the last thing they would want but I feel those things are more last than the bond market declining.
JMHO.
Inflation / Deflation seems to be a very discussed topic. What I see happening is deflation with OUR ASSETS – stocks, bonds, real estate, etc., and inflation on consumer goods – gas, food, toothpaste, etc. due to this monetary inflation caused by printing and buying dollars by our government.
So in short, what you own becomes less valuable (i.e. your assets), while at the same time the things you needs to live on (i.e. food, gas, etc) get more expense.
Sounds like being between a rock and a hard place to me…