We have had many readers email this week and ask how it is possible that the 10 year rate is approaching 2% in the aftermath of a US downgrade by S&P.
Besides the massive rush out of the perceived greater risk of the Euro on European banking crisis fears, the MAIN reason that the 10 year can seemingly defy reason by rising after a major debt downgrade is INTEREST RATE SWAPS. The majority of the $1.26 QUADRILLION (that's quadrillion, as in 1,260 Trillion!) OTC derivative market is INTEREST RATE SWAPS USED TO ARTIFICIALLY SUPPRESS US INTEREST RATES TO PERPETUATE THE PONZI! (Thanks Blythe for inventing the Credit Default Swap before commencing silver manipulation)
Jim Willie does an excellent job in addressing and explaining this issue in his latest.
Notice the Gold/Oil ratio over the past three years in the above chart. The ratio has returned to a post-Lehman high level. The extremes are back. The financial sector damage, dislocation, and abuse are evident in the crumbling sovereign bond market, the wrecked big US bank stocks, and the discovery of Gold as the true safe haven. Do not be fooled by the knee-jerk pied piper response to flee the frying pan and find the fire, as investors moved from stocks to USTBonds. They are sheeple in boats led by a powerful application of leverage by siren calls to the rocks ashore. Last week, it was mentioned the gigantic $9.1 trillion additional Morgan Stanley application of Interest Rate Swaps. They exploit the artificially low short-term USTBill yields and create phony demand in long-term USTreasurys like the 10-year and 30-year maturities. The demand is artificial but felt with impact in a TNX approaching the magic 2.0%. When it reaches the milestone, shrill calls will come of an asset bubble. The investor community incorrectly believes that actual money is flowing into USTBonds as safe haven. They are fooled by the powerful Interest Rate Swaps applied by the big US banks, the agents of the Syndicate. The only massive asset bubble in existence is the USTreasury Bond. It loudly proclaims USEconomic recession also, just like Chairman Bernanke's admission following the FOMC meeting this week. More still, the chart contradicts the myopic focused Deflation concentration that ignores the monetary inflation consistently and errantly. They earn their Knucklehead label every passing day, from being half blind. My contention is that none of them is very intelligent.
The USTBonds and UKGilts will most assuredly continue their rallies toward 2.0%, proof positive of a broken manipulated controlled market having no bearing on reality. That reality extends from an historically unprecedented flood of debt securities supply, rampant price inflation, strained auctions, and heavy reliance upon the USFed for the last resort bid. The entire world has been watching the US central bank print money, buy debt, and avert the disaster of failed auctions that has plagued other major industrialized nations lacking the luxury of counterfeit money operations. A strong ugly rub has hit the UKEconomy and European Economy. Their central banks print money to cover their deficit, to redeem toxic sovereign debt as last resort, and to stimulate their swooning economies. The end result in stronger price inflation in the United Kingdom and European Union. They cannot pawn off their newly hatched debt to China and other export nations that accumulate toxic paper. Check the Big Mac hamburger combo index to monitor price inflation. It is $8 to $9 in the US, but $15 to $18 in the UK and EU. It is only $5 to $6 in sunny/rainy Costa Rica.
The most important featured message from the FOMC meeting and Bernanke's speech was that he painted a powerful recession picture. He admitted the recession in clear terms. He promised 0% rates for two more years, an admission of failed policy and wrecked system. No central bank in history has ever admitted such failure indirectly. It was not enough, as stocks will resume a powerful downward trajectory, seen in stark fashion on Wednesday. The stock market will decline until the USFed announced a broad new QE3 with features directly to support the failing US Stock market. That decision will also be unprecedented. Gold senses it and rallies into breakout territory.
My firm forecast is that QE3 will be announced. The so-called QE2.5 powered by the positive effect on mortgage bonds that releases $25 to $40 billion per month will prove woefully inadequate. Mortgage rates are falling, rendering bonds more valuable. The USFed exposes its own vested interest in lower bond yields, the likely master hand behind the Interest Rate Swap lever. The QE3 needs another $1.0 to $1.5 trillion, as the mortgage benefit will be shown as inadequate. My firm belief is that the next QE3 will be admitted to provide strong S&P stock support. The USFed might declare the stock market to be a vital element that supports the USEconomy and confidence levels. The other more hidden motive for QE3 is to prevent USTreasury auction failures. Low bid action at 3.0% yields will be worse at 2.0% offered. The QE3 will be seen as a necessary evil, an urgently needed alternative, a perilous road that must be taken. Worse still, QE3 will be taken with full knowledge that QE3 will not stimulate the USEconomy at all. The discredited and defensive USFed will look for moral support at Jackson Hole at the end of August. From the banker bunker will come QE3, just like QE2 which was also fully denied until urgently required. In fact, that QE3 will be intended to boost stocks will be obvious to all, the main priority being to stabilize the financial markets on a global level. Foreign central banks will pressure the USFed, despite the risks. In doing so, the USFed will admit that they have routinely being intervening in the US Stock market.
Click here for more from Jim Willie's latest Hat Trick Letter:
