US TREASURY BONDS ON THE WATCHLIST?
February 25th, 2010 by Leonard
Before you get too comfortable in your equities lounge chair take a peek at the Monthly US Bond Chart later in this piece.
On Jan 6th, I projecting that, irrespective of whether the market went further up near term, the E-Mini S&P needs to break into the low 900s. Here was that chart.
The market went a little higher after that call and then took the tumble on problems in Euro-land with looming Greek bond defaults resulting in a falling Eurodollar.
To date, the lowest point of the recent fall has been 1040.75 followed by a rally back up to the 1100 levels. The situation with Greece is still fluent and unsettling.
I have not changed my view. I don’t expect the market to roll over easily, but still see the downside projections into the low 900s for the E-Mini S&P irrespective of whether the market moves higher.
Bullish traders have been enjoying a free pass with the Ben Bernanke proxy hedge fund calling the shots.
The Clock May Be Ticking for Mr. Bernanke
The “Great Experiment” may be running out of time. Bernanke, acknowledged as an authority on the Great Depression is attempting to use the lessons of the 1930s as a treatise on how not to conduct Fed policy.
The paradox is that in the1930s as well as now, the experiment is similar in many ways including the expected political obstructionism from the beneficiaries of the pre crash markets.
The general thought is that stimulus was not big enough in the 1930s and therefore the economic malaise dragged on for much longer than anticipated.
A Perfect World We Do Not Have
In a perfect world we would be able to see whether Bernanke’s theories work. But theories are often created in vacuums, void of the miscalculations that abound when dealing with the complexities of government agencies, politicians, and the unnatural forces of displacement.
Moving through a process like this requires political will and the cooperation of many agencies including congress…..Good luck there
The wealthy are mostly concerned about deflecting the taxes that will likely be coming their way. The corporations want the “free market” to reign again (easy money) ha ha. The general populace is gritting their teeth, stuck in their anger, and the under 25 year olds just wander around from one lousy shopping mall job to another, making $9 to $12 an hour, for 30 hours a week (if their lucky). Many live at home with their parents and neither they or their parents are necessarily crazy about that idea.
Game Delay
Mr. Bernanke could say that his program is being dragged into the ground by the inactions of Congress, and that political self preservation, and dysfunctional obstructionism are playing chicken with the Feds time table.
It is causing a game delay and creating an oversupply of Bonds for sale to cover government debt as economic growth is lacking.
Normally Bonds can go up in value when an economy is sluggish, bringing interest rates down. With interest rates at all time lows they can rise just to normalize the system, but the timing of that is touchy. Bernanke raised the discount rate shutting down the free money at the discount window and forcing the banks to borrow from each other.
The US Bond Chart Pattern to Watch
With Equity markets at a wall of resistance the US Treasury Bond charts are forming a major topping pattern that if completed could pose a problem to the stability of our fragile economy as well as for global banks.
The almost 2 and ½ year old Head and Shoulders top pattern is about 4 months away from completion. Lots can happen in that amount of time. See chart below.
If this pattern is completed, and validated, we will see higher interest rates slamming right into a very large round of Alt-A mortgage loan resets expected to expand over the next few years. That could pressure the housing market again and bring equities down in a continuing deflationary contraction. Call it what you want, but displacement will be a troubling, surprising and elusive factor that will continue to disturb the best laid plans.
So what could cause bond prices to move downwards forcing interest rates up?
An overheated economy?……………….but we are not there yet.
A global debt crisis? ………..Possibly
A global governmental debt crisis, with an oversupply of bond issuance could drive interest rates higher and bond prices lower as bond buyers fold their arms, and keep their hands in their pockets.
Potential Dollar Madness?
This could cause for the dollar to become the safety haven of choice for investors. That could in turn further wreck the equities markets as the dollar carry trades unwind and while interest rates spike higher.
The US Treasury Bond market needs to reach the approximate price of 112-00 around mid to late June in order to complete the pattern. Validating the pattern means moving lower through the 112-00 neckline, coming back up to test the 112-00 area and then falling into distribution patterns down into the 82-00 area.
Yes I know, we are so accustom to a controlled interest rate environment that it’s seems impossible for this to happen. Yet the pattern is in formation and even if it withers and fizzles, it would be remiss to ignore that it at least exists.
The good news is that we will be able to tell if this scenario is unfolding by simply watching the bond prices. Any moves above 124-00 between now and mid to late June will generally invalidate the pattern. In that case you can just credit me with a vivid imagination.
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