by John Galt
December 9, 2009
Yes, the Bananas, upon threatening to kick the snot out of another mascot again as pictured above demanded equal time tonight. So instead of our regularly scheduled rants about the markets they wish to offer something of a warning, of great importance, and a follow up to a previous thread on the bond market:
To say that today is a reason to worry, well, that’s an understatement. The 10 year auction indicated something that many blew off as “year end” nonsense. I view it as something dangerous and different that the Treasury and Fed will never admit to publicly:
That the world is tired of investing in a loser and the process of rotation out of the long end and into the short term has accelerated.
The results say it all:
This was not a good auction and even old Rick Santelli gave it a grade of “C”. Thus why the concerns about tomorrow’s 30 year auction and how the yield curve has steepened because the 1-3-6 month maturities have dived and the long end is spiking up (Chart courtesy of FINRA):
If the long end cracks 4.80% then 5.00% watch out as the cheap money for mortgages will dry up overnight and the cost of loans to small business, something the administration is touting will be horrible for the statistical recovery.
The one month yield chart on a weekly basis best reflects the gravity of where we are compared to where we were and why this “rally” in equities is about to come cratering down:
The three month chart is much the same message with the bananas screaming “oh crap” and the large institutional and foreign SWF”s stuck with dollars are piling into the short end of the curve:
Lastly, the 30 year yield chart, this time on a daily time line indicates we are within striking distance of the higher yields which means demand for our long dated toilet paper is coming to an end. A break above 5% and I would expect a fast, furious and damaging move to above 7.2 to 7.6% within a year:
Once we cross that “Line of Death” I have drawn on this chart be very, very scared as to what is next. This means the low volume we have seen the past five months in the equity markets is not a fluke. It means the very tentative rally in the U.S. Dollar might just be a technical bounce and nothing more. It means that if the foreigners continue to threaten default, especially in Eastern Europe and the weak sisters of the EU, the Dollar will continue to have support but the long end of the U.S. bond market will have reduced bids as those nations will sell their U.S. holdings to attempt to raise capital and cash for the home front, not wishing to gamble at Casino Federales Reserve any longer.
Buckle up, everything is point to a wild ride in the first four months of 2010. And the data does not look good for the “Obama Miracle” which he wanted to tout going into next year’s election season.