Up, down. Down, up.

Yesterday, the Dow reversed recent declines. It rose 180 points. Gold, too, seems undecided as to what direction to take. It fell $14 an ounce.

We’ll carry on… trying to figure out what is really going on.

The typical post-war boomer has lived with just one complete interest rate cycle. Rates hit a low after the war… as the US faced the biggest fiscal cliff in its history.

The biggest stimulus program of all time – World War II – had come to an end. Millions of soldiers and defense industry employees were out on the streets looking for a job. Most economists and investors thought they’d never find one. They thought the war had pulled the economy out of the Great Depression. Now that the war was over, they expected it would fall back into its depressed state.

And they believed that interest rates – which had been falling for nearly a quarter of a century – were a forward indicator. Instead, they turned out to be nothing of the sort. The low interest rates of 1946-50 reflected the past, not the future.

The GIs went to work. They took out their wartime savings and started businesses… and families. Soon, the economy was booming.

And interest rates rose…

My Life in Bonds

In fact, interest rates in the US rose for the next quarter century… until the early 1980s.

And once again, investors who looked at interest rates for a hint of what lay ahead were misled. The high rates – the Fed funds rate was at 21% at one point – reflected the rising inflation rates of the 1960s and 1970s… not the lower inflation that lay ahead.

And here we are. Another quarter century has gone by – and more! Once again, interest rates are at record lows. In fact, they are now close to where they were when we were born.

That’s a complete roundtrip!

And once again, they tell us more about the past than the future. They are rising. From theNew York Times:

It has been a reliable fact of life for investors, corporations and ordinary borrowers: interest rates, for the most part, keep heading lower.

But all of that may be about to change. For prospective homeowners, the cost of mortgages has been going up in recent weeks. Governments are also facing the prospect of higher borrowing costs down the road, and they are projecting increases to their debt burdens. Savers with money in bank accounts, on the other hand, have the prospect of finally earning more than a pittance on their deposits. […] 

Over the last few months […] investors and banks have been demanding higher payments for their loans, pushing up interest rates and bond yields.

“I think you all should be ready, because rates are going to go up,” Jamie Dimon, the chief executive of JPMorgan Chase, told a financial industry conference at the Waldorf-Astoria Hotel in Manhattan on Tuesday.

As investors brace themselves for a new era of higher interest rates, global markets in bonds, currencies and stocks have experienced spasms of turmoil. On Tuesday, the catalyst for the market’s volatility was disappointment over the Bank of Japan’s decision not to take new steps to address rising bond yields. That heightened worries that other central banks – the Federal Reserve in particular – will soon pull back on pumping money into the financial system.

We have been witnessing a fight between Mr. Bernanke and Mr. Market. We know who will win it. Mr. Market always wins in the long run. But we have no idea when… or how… he will win.

The latest news from the bond market suggests he is hitting Mr. Bernanke right where it hurts. Bond yields will go up. Mr. Bernanke will go down.

But watch out. Mr. Market is a wily and cunning fighter. He never likes to win his battles in a straightforward way. Instead, he dodges. He feints.

He fools us all…

Regards,

About Bill Bonner

Bill Bonner founded Agora Inc. in 1978. It has grown into one of the largest independent newsletter publishing companies in the world. In 1999, along with Addison Wiggin, Bill foundedThe Daily Reckoning. Today, this daily e-letter reaches over 500,000 readers around the globe.

Bill has also co-written two New York Times bestselling books, Financial Reckoning Day and Empire of Debt. He has written or co-written other widely read books as well, and has penned a daily column at The Daily Reckoning for over 12 years. Recently, Bill decided to “retire” from his role at The Daily Reckoning and begin writing his Diary of a Rogue Economist.

Bill Bonner’s Diary of a Rogue Economist is your gateway to Bill’s decades of accrued knowledge about history, politics, society, finance and economics. Sometimes funny, sometimes frightening – but always entertaining and packed with useful insight, Diary of a Rogue Economist can help you make sense of the complex world we live in today.

Why 2013 could be the best year to buy gold since 2008

Quantitative easing, the oft-referenced $85 billion per month shelled out by the Federal Reserve, comes down to the purchase of two kinds of securities — U.S. Treasury paper (bonds, notes and bills) and mortgage-backed securities. The Federal Reserve buys the Treasury paper from the federal government and the mortgage-backed securities from commercial banks. The first is a direct form of monetization (money printing); the second is an indirect form since a good portion of those funds are in turn also used by the banks to purchase Treasury paper. The two together comprise the bulk of what appears on the Federal Reserve’s balance sheet as “reserve bank credit.” At the present that figure stands at just over $3.2 trillion — up about $2.4 trillion since the beginning of the financial crisis in late 2008.

When you superimpose the gold price over reserve bank credit on a chart, it looks like this:

…..read more HERE (including the first paragraph. Also Peter suggests you click & read – This note_

For some perspective on all-important long-term interest rates, today’s chart illustrates the 27-year trend of the 10-year Treasury bond yield (thick blue line). As today’s chart illustrates, the 10-year Treasury bond yield has moved within the confines of a 26-year downward sloping trend channel. More recently, a modest but improved economic outlook in the US has helped to send the 10-year Treasury bond yield higher over the past 11 months. In fact, the 10-year yield has increased a fairly significant 70 basis points (i.e. 0.7%) since its resistance testing, July 2012 trough. In the end, this upward move in long-term yields is something to watch in light of the US economy’s ever increasing dependence on debt.

Notes: Where should you invest? The answer may surprise you. Find out right now with the exclusive & Barron’s recommended charts of Chart of the Day Plus.

Quote of the Day

Events of the Day

June 14, 2013 – Flag Day
June 16, 2013 – Father’s Day
June 21, 2013 – First Day of Summer (North America)
June 24, 2013 – Wimbledon tennis tournament begins (ends July 7th)

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The sell-off in government bonds has gone completely global as concerns over Federal Reserve tapering of monetary stimulus infect the market.

Everywhere this morning, bond yields are up huge as investors dump sovereign debt.

In the United States, the 10-year yield is up 6 basis points to 2.26%, its highest level in over a year.

In the eurozone, French 10-year yields are up 5 basis points to 2.23%, Germany is up 3 basis points to 1.63%, Italy is up 15 basis points to 4.43%, and Spain is up 14 basis points to 4.471%.

Portuguese 10-year yields are up 37 basis points to 6.49%, and Greek yields are up 93 basis points to 10.28%.

Elsewhere in the developed world, the Japanese 10-year yield is up 5 basis points to 0.88%, Canada is up 5 basis points to 2.25%, Australia is up 11 basis points to 3.40%, and Switzerland is up 10 basis points to 0.84%.

Moving to emerging markets, Brazilian 10-year yields are up 14 basis points to 4.03% Mexico is up 14 basis points to 3.46%, Russia is up 15 basis points to 3.90%, and Turkey is up 31 basis points to 4.53%.

Treasuries and emerging market bonds have been selling off in recent sessions, but today, it definitely looks like the purge is accelerating.

Meanwhile, stocks are selling off globally as well. The Japanese Nikkei closed down 1.5% overnight following the latest Bank of Japan policy meeting.

In Europe, stocks have been heading lower all morning and most are trading near their lows of the day. Spain is down 2.7%, and Italy is down 1.7%. France is down 1.9%, and Germany is down 1.7%.

“Stocks across [Europe] are taking a shellacking to the tune of around 2% as rising German bund yields prompt accelerated losses for government bonds around the periphery,” says Miller Tabak Chief Economic Strategist Miller Tabak in an email this morning. “Yields on Spanish and Italian debt are rising to the highest in six weeks. The loss of last week’s lows for equity markets is all too much to bear in most cases and the resilient tone appears to have been snapped like a twig.”

Commodities are getting hit, too. WTI crude oil is down 1.3%, while Brent crude is down 1.5%, and NYMEX gasoline is down 1.3%., Gold is 1.2% lower, silver is down 1.5%, and platinum is down 1.3%. Agricultural commodities are all in the red with the exception of corn and soybeans, which are both flat.

In the United States, S&P 500 futures point to an open down 0.9%.

Meanwhile, the U.S. dollar is 1.9% lower against the Japanese yen, and the euro is down 0.1% against the dollar.

How about that? The Dow rose 207 points on Friday. Gold down $32 per ounce.

What does it mean? It looks like the big surge continues. Stocks go up. Gold goes down.

Our advice: Don’t pay it any mind.

It is like running through red lights. You do it once. Chances are nothing bad will happen. You do it twice… and still the odds are probably in your favor.

But keep it up, and unless you were born by the light of a full moon on the seventh day of the seventh month in 1977, you’re bound to run into trouble.

Stay tuned…

A Private Meeting

We shared our latest insight with members of our family wealth investment advisory service, Bonner & Partners Family Office. We were meeting, as we do every summer, at our family home in northern France. (If you are interested in what we’re about… and how to apply for membership… you can email our member liaison, Emma Walsh, at ewalsh@bonnerfamilyoffice.com.)

As we explained, a system is doomed when more people have an interest in continuing a mistake than in correcting it.

The Fed, in our view, is making a colossal error. It believes it can fix the economy as though it were repairing a garbage disposal. Just get out the tools and go to work!

That’s how Paul Krugman describes it. He thinks the economy is a machine… and economists are mechanics. And if the economy isn’t running right, it’s only because the economists haven’t fixed it properly.

So, we are supposed to believe, the Fed is jauntily tinkering, using the tools of ZIRP and QE to make the economy run better.

This is a huge mistake… but not an unpopular one. It makes it possible for the feds to finance huge deficits and pass out $100 bills out all over town.

The money goes to people who vote… write opinion articles for The Wall Street Journal… and hire lobbyists. The longer the situation goes on, the more zombies there are… and the harder they are to stop.

Zombie Feeding Frenzy

As the money flows, the organizations that get it are corrupted by it. The Associated Press reports on a zombie feeding frenzy by the military:

The Pentagon has been paying hundreds of millions of tax dollars a year to people and companies that don’t deserve it, but its financial management shortcomings are so severe that it’s made little progress in halting the errors or even measuring their magnitude, according to a report released by a Senate committee Thursday.

Although the Defense Department reported making over $1.1 billion in overpayments in fiscal year 2011 to military personnel and retirees, civilian defense workers, contractors, and others, investigators from the Government Accountability Office said that figure is not credible due to missing invoices and other flawed paperwork, as well as errors in arithmetic.

The U S Army Corps of Engineers, for example, has spent $256,000 since 2009 on an automated overpayment-detection program that has recovered just one improper payment of $20.79, GAO said.

To be even handed with Pentagon accountants, wasting a billion dollars or two out of a $700 billion budget doesn’t seem so bad. But as Everett Dirksen once put it, “A billion here, a billion there… pretty soon you’re talking about real money.”

Another recent article told us that there were more Pentagon contractors in Afghanistan than soldiers. The grunts might have all sorts of misbegotten and inappropriate motivations. But the contractors are clearly in it for a simple reason: money.

And from Defense News, we find that, as the wars wind down, the Pentagon continues to wind up:

The size of the Pentagon’s vast oversight organizations grew by more than 15% from 2010- 2012, despite efforts to pare down the US Defense Department’s bureaucracy, a Defense News analysis has found.

On August 9, 2010, then-Defense Secretary Robert Gates said the Pentagon needed to cut staff sizes. He made this task part of his efficiencies initiative – an effort to save hundreds of billions of dollars through better business practices. The military services’ incentive for accomplishing these tasks was that they would be able to get back some of that money to reinvest in other priorities.

But almost three years later, staff sizes within OSD, the Joint Staff and COCOMs have grown, prompting a new round of calls from senior Pentagon officials and defense observers to truncate the so-called “fourth estate.”

The Joint Staff, for example, grew from 1,286 people in 2010 to 4,244 people in 2012, a 230% increase.

“The problem is the bureaucracy is more resilient than even the most powerful secretary,” said Arnold Punaro, a retired Marine Corps major general, consultant and member of the Defense Business Board.

Defense secretaries come and go. Zombies just keep coming.

Regards,

Bill

P.S. We haven’t opened membership of Bonner & Partners Family Office for about 18 months. We try to keep the group small. We also try to keep membership slots for likeminded people only. The group’s mission is to protect family wealth over generations. Hardly something that appeals to the “masses.” But a number of loyal readers have joined… and it’s been a pleasure to welcome them into my family’s “inner circle” of advisors… recommendations… and gatherings.

Again, our member liaison, Emma Walsh, has details. Although we can’t guarantee there being slots available… Emma will be happy to place your name on a wait list. Here are her details again. Email address: ewalsh@bonnerfamilyoffice.com. Phone number: 1 855 849 2885.