Exit Strategy for the Coming Bond Collapse
July 11th, 2009
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The International Forecaster Bob Chapman says Economy In Turmoil Cant Be Fixed With Farcical Regulation.
“The Fed and the Treasury had hundreds of billions of dollars for banking, Wall Street and insurance companies, but they couldnâ€™t allow borrowers, facing foreclosure, a break. That would have staved off two million foreclosures and preserved $300 billion in equity. Congress couldnâ€™t help average Americans, only the rich. We are in the greatest financial crisis since the early 1870s or the 1930s. These people have ravaged the financial and economic world and they are still in complete control of the system. That is because they have bought Congress and they have created a revolving door between NYC and Washington. Last year, banking, securities and investment firms gave $154.9 million in political payoffs. Real estate interests stuffed $136.7 million into politicianâ€™s pockets; commercial banks gave $37.1 million and hedge funds $16.7 million, for a total of $345.4 million. This is why campaign contributions have to end along with lobbying. When are Americans going to wake up to what is being done to them?
It is only a matter of when before there will be insufficient buyers of Treasuries to fund bond issues. We believe this has previously happened from time to time and that buying by the Fed from offshore accounts has held the market up. This we believe is why the Fed doesnâ€™t want an audit. When foreign central banks stop buying, the Fed will monetize more and more as they are currently doing. They will be buying $3 trillion worth of Treasuries, Agencies and CDO toxic waste from banks over the next three months.
On June 5th, we saw the 2-year and 10-year Treasury yields spike as the Fed lost control of the market. We noted the actions at that time. It wonâ€™t be long before most long dated paper, that is over 5 years, will have to be monetized in a very big way. That also means interest rates will continue to move higher. We believe the treasury will be in the market for $1.2 to $1.5 trillion. That means the Fed may have to buy $600 billion to $1 trillion in Treasuries. They have already committed for $300 billion. It is hard to know exactly what this private corporation is up to because much of what they do is in secret. As rates rise it becomes very difficult to finance mortgages. At a 5.5% mortgage rate, 80% of pending and future mortgages cannot be consummated.”
It is a matter of time before confidence is lost in the US public sector’s ability to manage this economic crisis. What we saw in rising interest rates in June was just an appetizer. The current rate on 30 year US Treasury Bonds as of July 10, 2009 is 4.29%. The Fed has, thus far, done an excellent job of keeping rates in check. For those who don’t believe rates can rise significantly from this level, consider the 15% interest rate on the 30 Year back in September of 1981. It can happen again, and probably will. If China and Japan slow down in their Bond purchases, and the Fed actually has to monetize $500 billion to $1 Trillion in bonds, there will be panic in the bond markets as investors begin to fear the possibility of serious devaluation of the US Dollar and a loss in confidence of the US government.
I suspect that bonds will not go to 15% right away, and we will see swings for the next several years as confidence in the US deteriorates, progressively moving interest rates higher and higher. Look for 30 year Bond Rates in the area of 5.0% – 5.5%Â and the DJIA at around 10,000 as an exit point for all US equities, and perhaps even global equities as suggested by Gerald Celente in the near term (if this rally rebounds later this summer and moves that high). Mortgage rates will be so high that it will put serious pressure on the housing market. You’ll also be looking at a significantly overbought equities market, and money will beginning flowing from the stock market back into bonds looking for safety. Anyone left in the market once the sell off begins will be destroyed over the next 6 – 12 months following the start of the re-collapse.
Consider inverse Long Bond ETF’s as an opportunity for not only preserving wealth, but increasing it, when government issued bond prices collapse. Inverse ETF prices right now seem quite reasonable given the above forecast. However, uncertainty in the market rally/correction dictate caution. Ideally, investors would want to pick up Inverse Long Bond ETFs prior to an upward breakout in the equities market, but this is probably going to be difficult to time perfectly. If the stock markets recover, recent bond movements suggest that interest rates will begin to rise, as well. If the current correction continues, interest rates, and thus inverse Bond ETFs, should continue to drop. Be sure to have a good feel for where the current trend is headed before stepping into any investments.
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Date: July 11th, 2009
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