Bonds & Interest Rates
I invite you to inspect the following chart of 10-year interest rates in the US.
If you don’t have a lot of experience with these things, let me clue you in: This is a very scary-looking chart. It’s a classic head-and-shoulders bottom in yields.
If you’re one of those people who’s scornful of technical analysis, don’t be. Now, I don’t pay much attention to complicated stuff like Elliott Wave or Gann Angles, but there are some very basic technical formations that work reliably most of the time.
I had the good fortune of taking out a mortgage when 10-year rates were at 1.9%, which goes to show that the only
time you get to top-tick stuff is by accident.
Now, this is actually not the low in yields. 10-year yields got to 1.4% a few years ago.
Of course, interest rates are even lower in Europe. Take Germany, for example:
I think that these interest rates (which are at 700-year lows in Europe) signify a bubble. Other people don’t, though—they point to x, y, and z as signs of deflation.
I’m very weary of the inflation/deflation argument. A lot of people lost a lot of money betting on inflation when there were obvious signs of inflation (QE). And I fear that a lot of people will lose a lot of money betting on deflation when there are obvious signs of deflation.
I’m a trader at heart, and I try not to get too attached to my views. I pay attention to price. And right now, the price action is telling me that the bond market might be in trouble.
Central Banks Buy High and Sell Low
The first thing you need to know about central banks is that they are the worst traders in the world. The worst.
Probably the most famous example in the modern era was the Bank of England under Gordon Brown’s leadership puking its gold holdings—on the absolute lows, between 1999 and 2002. The idea was they had this gold sitting there not generating any yield, so why not sell the gold and buy paper that would generate some yield?
Whoops…
A less famous example of bad trading by public officials would be the US Treasury’s decision to issue floating-rate debt. Now, if the government has floating-rate liabilities, it should want interest rates to stay low, right?
Whoops…
The all-time lows in rates. To the exact day.
So with all this in mind, don’t you think it’s interesting that the ECB is going to buy European debt—at 700-year-low yields? At negative yields, in some cases?
Central banks do not buy things on the lows. They buy things on the highs.
Of course, the ECB is not trying to make money on these transactions. Which is the whole point!
The Worst Investors in US History Strike Again
Betting on the end of what is a 30-year interest rate cycle is not a productive use of our time. This bond market has claimed the careers of many investors. It reportedly hastened the retirement of Stan Druckenmiller, arguably the greatest investor of all time, who bet against bonds heavily, thinking yields could not go any lower. They did.
Let me impart some wisdom here: The first rule of finance is that there are no rules in finance. Nothing works all the time. My favorite dumb rule of finance is the one that says your percentage allocation in bonds should be equal to your age. So if you are 60, you should be 60% in bonds.
My guess is that if interest rates rise 2%-3%, people won’t be saying that anymore.
You know what I worry about? I worry about the baby boomers. I worry about this generation, the worst investors in US history, who got carried out in the tech bear market in 2000 and got caned in the financial crisis of 2008, and after having been hammered twice in the span of 10 years in the stock market, went all-in on bonds.
Why? Bonds are safe. Everyone knows stocks are not safe.
Now, in retirement, none of these people expect their bond mutual funds to get cut in half, which would happen if interest rates went up about 3%-5%.
Imagine if they did!
The disclaimer to all of this is that I’ve been a bond bear for many years, and I’ve been wrong. But for the first time, I think we have something approaching consensus that yields will stay low forever. People who think interest rates are going up are starting to sound crazy. I am starting to sound crazy. That probably means I’m close to being right.
If 10-year rates get above 3%, the previous high, we will know for sure. If that happens, pick up the Batphone, call the White House, sell everything. Why?
If you are still ignoring charts when they are making higher lows and higher highs, God help you.
Jared Dillian
Gold appears very weak in terms of dollars and so many people now are writing off the goldbugs are just irrelevant as if they were the people who refused to adopt the Gregorian Calendar which made January 1st day one rather than April 1st for the start of every year. Their prejudice against the Pope led people to call them “April Fools” for celebrating New Years on April 1st rather than January 1st.
Yet when we look at our energy model on gold in dollars, it still shows that we are in positive territory, not negative yet. So the collapse to our targets may indeed wait until the timing on the Benchmarks has coming into play as we laid out in the 2014 International Precious Metals Outlook report. The Weekly Bearish Reversal is 11340 and resistance starts at 1171 with support at 1056 for right now.
Now, let us look at gold in Euros. Here we see a spike rally on our energy models and this is warning that gold is topping out in Euros as it seems to flounder in dollars. So caution is still advised here. Once the Euro reaches a temporary bottom, we may then see gold turn back down in Euros rather hard. Here we have Weekly Bearish Reversals at 972, 966, and 958. We are currently trading at 1097 in Euros ($1151 and 1.0490).
Our computer is monitoring everything in every currency on a global basis. It is hard to even say how man y combinations are being considered. What I can say is this is far beyond what any human is capable of doing. We are entering a new era where analysis will only be possible by self-aware systems for the variables are mind-numbing. AND ALL OF THAT DEPENDS UPON LEARNING. This is why we need databases extending back thousands of years. Trying to build self-aware systems with data even just a 100 years in depth is like trying to claim Global Warming is caused by man since they dare not look past 1900 to see if there ever were previous rapid climates changes. You need the full range of data – not just pieces.
….more from Martin Armstrong:
Governments Are Broke Now they Are Turning People Against People
TECHNICAL SCOOP
CHART OF THE WEEK
Is the Euro the Titanic? The question may be rhetorical but oddly, there are comparisons. The Euro “set sail” on January 1, 1999 to great fanfare as it replaced the European Currency Unit (ECU) which was a basket of the currencies of the European community (EU). Up until the Euro came into being, the members of the EU continued to use their national currencies. The ECU was an accounting unit only. Only 19 of the 28 EU members use the Euro as currency. Two of the most notable exceptions of EU members who do not use the Euro are Great Britain who continues to use the British Pound and Sweden who uses the Swedish Krona. The Euro is also used by the institutions of the EU as well as four mini states that all lie within Europe (Andorra, Monaco, San Marino and Vatican City).
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
One could argue that the Euro hit the “iceberg” in April 2008. That was the peak at 1.5980. The financial panic of 2008
saw a rush into the US$ as a safe haven but as 2009 got underway the Euro began to climb again as everyone believed that while there was some rough times ahead the worst of the crisis was over. But the Euro zone was developing too many systemic problems. The population was aging, the birthrate was stagnant, and immigration was a problem primarily because immigrants were for the most part poorly integrated into the broader population. In addition, the EU has too many regulations coupled with a rigid labour market and overly large public sectors. The EU itself is a centralized bureaucracy with a number of different councils, commissions and agencies. The EU is governed by an elected Parliament with the number of seats each country gets is based on population. Germany, France, Italy and Britain dominate the European parliament
But what really dragged the Euro zone down was failure to consolidate all of the member’s debt. While they created a central bank, the ECB, central banks that had been an integral part of each individual member not only continued to function they could continue to act as a central bank. The central bank of each country in the EU is member and shareholder of the ECB. Once again, Germany, France and Italy dominate the ECB as the largest economies. The Bank of England (BOE) is not a member because Britain does not use the Euro. The ECB is responsible for monetary policy for the zone but does not have the powers of the US’s Federal Reserve. The financial strength of each country varied sharply from strong countries like Germany, France and Britain to weaker countries like Greece, Portugal and eventually the eastern European countries that joined the Euro zone later following the collapse of the Soviet Union.
The EU and the Euro currency are dominated by Germany and to a lesser extent by France and Italy. Britain is also a dominate economy as a member of the EU but Britain does not use the Euro as currency. Germany as the dominate economy, effectively uses the rest of the EU to export its goods to. Using the Euro Germany received the equivalent of a devaluation of its former currency the Deutschemark. Not so for many smaller peripheral countries where the switch to the Euro meant effectively a huge appreciation of their currencies. Strong export countries like Germany, Italy, the Netherlands, Sweden, Norway and Denmark thrived while others in an attempt to catch up to the standards of the stronger European economies borrowed money when what was needed was huge structural reform.
The Eurozone crisis or the Euro crisis as some refer it got underway at the end of 2009. The crisis is also referred to as the European sovereign debt crisis. After piling up huge loans without the accompanying structural reforms to their economies and suffering the after effects of the 2008 financial panic a number of EU states were unable to either repay or finance their debt without a bailout from the ECB, the IMF and the EU commission. These three were nicknamed the “Troika”. The states faced sharply rising interest rates, huge structural deficits, and mostly a high debt to GDP ratio. The countries most impacted became known as the PIGS (Portugal, Ireland, Greece and Spain). Others soon joined them (Cyprus, Italy). Of late I have been reading that Austria could be the next Greece.
The Euro’s “sinking” phase was underway from 2009 to 2014. Whenever the ongoing Euro crisis appeared difficult to resolve the Euro fell. When short-term solutions appeared to be found the Euro rose. Interest rates were lowered, refinancings took place, countries had to undergo structural reform and austerity in order to try to stabilize themselves. Contagion also spread as Italy and some of the smaller peripheral eastern European states began to suffer as well. Eventually even France was coming under pressure as the French economy has shown signs of sliding into recession.
The Euro zone is falling into deflation. Consumer prices have turned negative in a number of Euro zone countries. A number of countries have moved to negative interest rates. There is an estimated $1.7 to $2 trillion worth of bonds in the Euro zone trading at negative yields. Even German bonds are trading at negative yields. None of this is a positive development and suggests that the Euro has considerable further to fall.
Politically Greece and the risk of the “Grexit” is not the EU’s major potential problem any longer. Polls show that a referendum on Great Britain remaining in the EU could fail. The British Pound has been hit hard on this news. It has raised talks of the “Brexit”. But could there also be the “Frexit”? Ok I haven’t actually seen that term as I just made it up (“Frexit” – France exit from the EU and the Euro). In France, the xenophobic far right National Front headed by Marine Le Pen is leading in the polls and could form the next government. The National Front wants to pull France out of the EU and the Euro and return to the French Franc. There are a number of nationalist right wing parties in Europe and many of them are anti EU and Euro. All have been gaining in popularity.
The Euro began its “death” spiral back in March 2014 when it topped at 1.3950. Today the Euro is trading under 1.06 and falling. The decline has been rapid and appears to be picking up speed. The Euro formed what appears as a descending triangle pattern prior to the collapse. The triangle pattern suggests that the Euro has the potential to fall to objectives at 0.82. That is still another 24% from current levels.
There are many saying that the Euro is doomed. That may be. Forecasts for the end of the Euro range anywhere from 2018 to 2022. If the Euro were to collapse because of countries exiting the EU and the Euro it would go down as one of largest currency collapses in history. What the cost to the EU and the Euro zone plus fall out to other countries and global markets is unknown. But the collapse of a currency such as the Euro cannot be idly dismissed. Other currencies have collapsed such as Zambia and Zimbabwe. But their impact was largely local. The Venezuelan Bolivar could well be headed for collapse as well. Its collapse could be felt beyond Venezuela.
A collapse to 0.82 would not be the end of the world for the Euro. In 1985, the adjusted Deutsche Mark expressed in Euros fell to the equivalent of 0.58. That set up the Plaza Accord of September 1985 to bring down the high value of the US$. The new introduced Euro fell to near 0.83 in July 2001. And that was not long after the introduction of the Euro in January 1999.
Given negative interest rates in the Euro zone it should not be a surprise that Euros are being sold for US$. The question is where are the US$ going? The US stock market and bonds have both been falling of late. While gold prices have fallen roughly 3% in US$ so far in 2015, gold is up over 10% in Euros. Gold is also up just under 7% in Cdn$, just over 1% in British Pounds and flat in Japanese Yen. Gold in Russian Rubles is surprisingly flat so far in 2015 but remains roughly doubled from where it was on December 31, 2013.
The Euro has support at 1.05 and 1.00. But a breakdown under 1.00 could start a panic. The simple reality is that the Euro zone remains a mess with too many countries struggling to meet their debt obligations if even they can. Couple this with the desire of some to exit the EU and leave the Euro. No matter what the ECB does to try and mitigate this, events could potentially overwhelm the central bank. The central bank wants to inflate and instead they are getting deflation.
Meanwhile the US$ continues to soar and already there is considerable grumbling in the background. The sharply rising US$ is hurting exports and it is negatively impacting the profits of its multinationals as they have over half their earnings in foreign countries. A rising US$ rather than exhibiting strength is most likely signaling coming deflation in the US as well.
Already recent PPI and CPI releases have turned negative. And despite the so-called strong jobs report numerous other economic numbers are actually sliding. The US’s two main competitors, Europe and Japan are both sliding into recession and deflation. China is slowing and they have a very vulnerable banking system. The US is not immune. The US$ most likely has further to rise before there are cries to bring it down. That has happened before in 1985 and 2001. Should this time be different?
The Euro is slowly dying. It has been a slow death. Like the Titanic, it initially appeared to not be a problem and assurances were given that things were under control. But eventually the people on the Titanic realized that the ship was going to sink. It was at that point that the panic began. The recent collapse of the Euro is a signal that things are not under control and indeed could be getting worse. The death of the Euro? It remains possible given everything that is developing or underway. But like the Titanic the real panic will not hit until towards the end. The Titanic’s end came swiftly? Will the Euro do the same?
Copyright 2015 All rights reserved David Chapman
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Here are today’s videos:
Gold Rally To The Trend Line Charts Analysis
Dow Dome Of Dome Charts Analysis
Silver Bull Wedge Barely Alive Charts Analysis
GDX Rally To The Gap Charts Analysis
GDXJ Ray Of Hope For The Bulls Charts Analysis
SIL (Silver Miners ETF) Key Battle Charts Analysis
Thanks,
Morris
Friday, Mar 13, 2015 Super Force Signals special offer for Money Talks Readers:
Send an email to trading@superforcesignals.com and I’ll send you 3 of my next Super Force Surge Signals free of charge, as I send them to paid subscribers. Thank you!
Summary:
China boasts the most trading partners of any nation (124).
Dr. Faber believes the PBoC may have accumulated thousands of tons of gold bullion reserves, in anticipation of a gold backed Yuan / renminbi.
The modus operandi includes the gradual weakening of the Yuan, to the benefit of the manufacturing and exporting sectors, followed by the introduction of a gold-backed currency.
The resulting Yuan devaluation will be offset by the increased value of the massive PBoC gold stockpile.
The theme of corporate share-buyback announcements is emblematic of an equities market bubble.
Dr. Faber expects emerging market equities to outperform US shares, presenting an opportunity for wise investors to reap rewards via foreign shares.
Diversification is the ideal panacea for market uncertainty / volatility.
Dr. Faber distributes his funds among cash, real estate, stocks, bonds and precious metals (25%).
Eventually, precious metals holders could be vilified for their windfall profits and targeted by unscrupulous officials.
Therefore, it is advisable to relocate gold investments to safe havens located in Asia.
….also from Marc:
The US Market is the most Expensive Market
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