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Bond Market Has It Right

By: Jim Willie CB,

-- Posted Friday, 8 September 2006 | Digg This ArticleDigg It! | Source:

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Jim Willie CB is the editor of the “HAT TRICK LETTER”


For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market. Articles in this series are promotional.


References and claims have been made lately that the US Treasury market has it wrong, that the long-term yields should be much higher in accordance to the troublesome stubborn rising price inflation. Let me go on record to stand in measured disagreement but in spiritual support. Numerous are my reasons to take exception to notable respectable analysts such as Peter Schiff. He points to rising prices, inflation expectations, economic growth, the USDollar in “The Bond Market Has It Wrong” last month. These are some of the most important concepts at work, especially growth taking precedence over inflation. Evidence is exhibited of price inflation, sluggish growth, and a teetering currency. But so what? Particulars of the upcoming stagflation are the immediate traits of the  story which goes much deeper. The foundation for the government bond market is much more complicated than mere “sentiment” such as inflation expectations, just as the stock market goes beyond consumer sentiment. A wider sweep of factors and their statistics, thus obtaining a more triangularized perspective, is mandatory in order to gain a comprehensive view on the bonds and especially why the 10-year TNote yield cannot surge past 5.0% toward 6.0% in the last many moons. My more complete analysis is saved for Hat Trick Letter paid members, for which theses public articles serve as promotion. A sketch is provided here which frames my viewpoint. Pardon my parade of imagery, sarcasm, and mixed metaphors. My anger, disappointment, and sensed betrayal knows no bounds and cannot be concealed, when considering the pathogenesis directed by our nation of compromised clownish economists.



All analysis must begin with the truth in economic growth, after bullscheiss is removed. It remains astonishing to me that experts in the gold community continue to pay homage to the lies promoted by the USGovt on Gross Domestic Product growth. With no reluctance on my part to be repetitive, or even obnoxious, since it is so critical, the GDP is exaggerated by at least 4%. Its cousin lies is the Consumer Price Index, which is suppressed by at least 4%. Keyword is “lie” here. They are profound countervailing lies. The long-term yield must properly reflect the recession in progress. The Treasury Yield Curve has done so for almost a full year, stuck in inversion mode. The Q2 GDP was formally cited as +2.9% which after passing through the “BS Meter” comes out as a decline of at least 1%, namely recession. One must factor in big differences between the current conditions and those of 1995. The issue is not so much looking at growth stall over price inflation, which is akin to arguing over which sister is uglier, but to ignore their diet, hygiene, lifestyle, fashion, manner, not to mention parental supervision and guidance. Both sisters are a horror show, poster children worthy of milk cartons. Under the surface lies better hints and indications.



In the past it was simpler, since the USEconomy was more a closed system. No more. My contention is that the entire field of Economics has been turned on its ear. Our nation contained lousy economists when the field was easier to diagnose. Now that globalization has arrived, the field has become more complex. The errors are more grandiose. The policy is more fraught with risk. Reading “tea leaves” is more treacherous. Pathways are more treacherous. With each periodic transition, accumulated debt has grown. The new factor on the scene is the monster of Asian competition. Let me be more clear. The USEconomy is at risk of liquidation at the hands of Asia. Monetization sounds like an easy answer to counter rising costs, but it is failing and will continue to fail. The labor cost differential between the United States and China is NOT RESOLVABLE without airtight trade protection. Arguing growth over inflation or vice versa seems like bickering at the dinner table, when the food supply is less than meager and the kitchen floor is sinking. Hey, the USEconomy depends in lunatic fashion upon the consumer. Its entire price structure is so skewed to the point of never to be put in order. The mix of prices is important in this horribly skewed system, not the aggregate level of prices. Economists have totally failed to sort of the components to the aggregate in the last decade, in policy determination, in trend analysis, and in commentary.



Why does everyone believe the CPI plus PPI rule the day and govern long-term Treasury yields? Sure, the Employment Cost Index (ECI) is also watched, as is average hourly earnings. Fine. Conventional wisdom points to rising ECI as indicating more tightening ahead by the US Federal Reserve. That makes no sense either. Long-term rates must reflect erosion to capital in a systemic sense, the tangible economy system, as it pertains to current and future. Wages still have not caught up, as US workers are locked in a multi-year severe recession, the likes of which we might not have ever witnessed before. Wage growth is much more essential for household survival nowadays. The debt burden acts so much dead weight ballast on the household ships at sea. It raises the pressures on households. Prices have risen in the wrong places, named COSTS, and prices cannot seem to rise in the right places where people live and work. That is the key problem. The greater threat is of continued corporate liquidation outside the financial sector, AT THE SAME TIME as price inflation lurks and bites. And now the housing market decline has launched, surely without a champagne bottle christened by a irrelevant luminary or clueless starlet or clownish politician. The housing stall and reversal is a tidal change, whose shift has taken the long-term TNote yield down 50 basis points since June. Housing which falters has the power to pull the plug on prices, even as the USDollar which weakens has the power to lift costs even more. Currency matters are fully analyzed in the September Hat Trick Letter report, in detail each month. Without question, the Bank of Japan and Euro Central Bank are bending over backwards to lend a hand to the frustrated US Federal Reserve.



The USEconomy is no longer a closed system. In my analysis, in plain language, China and India have combined to ruin the US Reflation initiative, no ifs ands or buts. They have tossed the proverbial shoe into the USFed machinery, thus rendering it dysfunctional. Chinese manufacturing and Indian services have not only conspired, but they have succeeded in placing an “iron ceiling” on wages in much the same way that Eastern Europe placed an “iron curtain” on migration, commerce, and information during the Cold War. In a sense a new Hot War wrought by globalization has wrecked USFed policy effects. US politicians have no idea of how severely they have harmed the Middle Class and the domestic corporate landscape. They have bought time while importing lower costs, only to undermine the system. The Treasury Yield Curve absolutely reflects these factors. The typical “cost push” dynamic, once reliable and predictable, has simply been crippled and cut off at the knees. How many times are we to hear “The Fed is pushing on a string” or “Companies cannot pass along higher costs, so they lay off people, install more equipment, or give up and outsource to Asia what they can” or something to that effect. China controls the rigidity of the string and the height of the price ceiling! The USFed is merely in charge of the music, the supply of liquor, and water flow into the leaking swimming pool.



The investment community insists on asking dumb questions like “Is inflation winning, or is deflation winning?” and “Have we averted deflation successfully?” My usual answer is that inflation is prevailing in the financial sector, but deflation is prevailing in the tangible economy where it counts most, WAGES. The CPI and PPI are the noise, but the valid thermometer lies in the wage structure. Without mincing words, wages are on the verge of a depression. Sadly, most wages, as punished as they are, have depended upon the housing market and home equity extraction. That is soon to come to an abrupt end. The other side of the current disaster holds the other key. Most tangible real economy price inflation lies ON THE COST SIDE. The bond market senses this. The long-term 10-year TNote yield must reflect and does reflect sick wages and ever-present cost inflation. The centerpiece of this cost structure is energy and industrial metals (not just copper). Higher costs act like a giant tax on the system, working to suppress the economy like a giant wet blanket, or to drain the body economic of its blood while strapped to a table. Long-term rates validly have stayed low, since the systemic price dog is trapped inside commodities, the province of the cost world. Unlike the 1999 tech telecom stock bubble, the bond bubble has many more support girder ramparts. They will not break easily or quickly. Watch the strain now that the housing market is unraveling. This is a main featured topic in the September Hat Trick Letter report, due out in mid-month. In the past, my analysis expected a rise in long-term rates. But the power of the Asian iron ceiling on prices has proven overwhelming. Call me a convert. The failure of the USFed reflation is more starkly clear. When costs can be passed along with more ease, the long end of the bond market will reflect the change, but not until then. Trade protection could trigger change.



To say workers have lost control of negotiation with management is an understatement. Labor has been decapitated by new Asian juggernauts. The trend is clear. US workers are required to cooperate with outsourcing (at times even training replacements), to coordinate usage of more advanced machinery which displaces them, to manage more individual subordinates, to work longer hours, to suffer cuts in health benefits, to accept more miniscule severance grants, to watch unions vanish or grow toothless, and TO BE GRATEFUL. This segment of the story covers workers, not the boastful bourgeois Brahmins who heap huge wages and lofty compensation packages on themselves like so much aristocratic perks. The systemic attempt to generate price inflation is derailed at the worker connection. Exploitation is the name of the game in capitalism, which curiously has been forgotten. The object of exploitation has shifted with the new paradigm, namely us in the developed inflated aging world.



In the 1970 decade, we endured the K-Wave autumn. We did so in a closed system, when China was asleep and India was struggling to feed itself during embryonic days of establishing its post-British democracy. Reflation engineered and dictated by the USFed was a snap, so often repeated that the procedure earned the label of the Business Cycle. Of course, that is a misnomer if there ever was one. It was the Credit Cycle. More is covered on this important topic in my September issue for newsletter members. Future USFed actions will be increasingly based upon desperation, no more likely to be successful. Gold awaits that futility.



Sadly, tragically, horribly, refusal by long-term yields to rise is a reflection of the failed reflation initiative, the massive unremedied structural imbalances, chronic deficits, and the inability for US wages to avoid backslide onto the slippery slope. Be assured, the USFed does NOT WANT to see long-term rates head to 4.0% again, nor to become more inverted. We have entered a new phase, a far more treacherous and dangerous phase. The housing market has begun its decline. It is actually accelerating in its downturn. The USFed, being the blind heretic alchemists who preach in sequential mythological chapters, are slow on the draw, using an Old West term. The big risk to the commodity market is for the USFed to disappoint and fall short of responding quickly and vigorously enough. They must answer the Kondratiev Trumpet and inflate even more rapidly. The central banks are limited in their power and reach. Below one can see they have opened the money supply flood gates. Unfortunately, two realities remain. They must inflate much more in order to prevent a recession which assuredly would feed upon itself. Their efforts will continue to be unsuccessful, counter-productive, and futile. A failed reflation will continue to fail, for the same reasons. Paradoxically, good reasons exist for the USFed to cut rates and for them to hike rates. We analysts have been talking for three years about the upcoming bind for the USFed and monetary policy, how they will work themselves into a policy corner with no ammunition and no viable options. WE ARE HERE.



The onset of the housing bear market sent long-term interest rates below 5.0% where they will continue to fester, as a vivid reminder to the banking community of the USFed’s failure. They arrogantly (in public view) proclaim they must inflate our gargantuan debts away, as though that were possible. They arrogantly (behind closed doors) strive to monetize the rising energy costs, which has also failed. What? More deficits, more imbalance, more recycle into long bonds, still no remedy? With heightened frustration will come more war. With further systemic breakdown will come political earthquakes toward greater state power, curtailed liberties, and a shred of the US Constitution. One might go so far as to say that freedom might be a luxury for a financially bankrupt nation. Our USGovt might continue its path toward agent bound by insolvency but also bound by the need to seize money.


So many details lie between each point made. Authorities have had their chance to replay the path toward the Great Depression. How are they doing so far? LOUSY. In their frustration, for all to see in the next few months and next couple years, the USFed and its hapless partners occupying other central banks will print money and print money and print money until the cows come home. Only it will come home to buy bonds instead. Gold will go through the roof in response to a banking crisis extended from housing, not price inflation. Gold will take off only when the USFed officially “crosses the line” and proclaims a newfound EASING BIAS. That will mean they have lost control, simultaneous with a housing decline gathering momentum. Price inflation and deflation are the sideshows, NOT the main events.




From subscribers and readers:

“You seem to be ahead of the curve. A lot of these other folks seem to be on the curve, then come the shills who seem to be behind the curve. As though no one had ever hypothesized this stuff months if not years ago. You and very few others were reporting on stuff going down, 'future seeing' some half a dozen months ago. This is the truth as how I see your abilities viz-aviz the rest of the clowns, shills and hustlers out there.”

   (Joe Z in New York)

“You should know that I purchased your newsletter based on the absolutely fascinating mp3 files I have found of your various interviews through FMNN and Financial Sense. Yours are the best interviews (when I can find them) and my favorites. Peter Schiff is good too, but he doesn’t have the depth or wide-reaching coverage as yours.”

   (Mark B in Florida)

“This letter describes in detail the mechanics of the corrupt system we live in, supported by current economic developments in a manner that is simple to understand. Read this newsletter to understand the dynamics of competing currency regimes, resource wars, why our leaders appear to be milling around in confusion (they are!) and most importantly, how to make money off of

it all.”

   (Carolyn S in British Columbia)

“Your ability to dissect seemingly unrelated and complex issues and then reconstruct and convey them in a usable make sense fashion is absolutely unparalleled. Over the last 3 years I have watched you emerge as THE preeminent financial commentator in the marketplace today.”

   (Jeff K in Colorado)


Jim Willie CB is a statistical analyst in marketing research and retail forecasting.   He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at

-- Posted Friday, 8 September 2006 | Digg This Article | Source:

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