The Bond Vigilantes Will Soon Begin to Ride Again

Submitted by Deepcaster:

The Bond Vigilantes will begin to ride again soon. And notwithstanding The Fed’s ongoing open-ended commitment to be buying (now over 70% of) U.S. Debt, which has temporarily suppressed rates, but cannot do so forever.  Central Banks have added $5 Trillion! to the monetary base since 2007. This cannot continue without dire consequences.  Consumer Prices would have to double from here (i.e. increase 10%/yr for 7 years) to keep up with monetary base increases.

Going forward we are likely to see an intensification of trends already developing, i.e. increasing stagflation. That is, we are seeing an increasing economic contraction coupled with increasing inflation.

 

Key Markets Guideposts & Wealth Shelters (Faux & Real) into 2013

 

“Now, with the “fiscal cliff” looming at year-end, at least partially as a result of last-year’s failed deficit negotiations; and with the U.S. Treasury indicating that the next increase in the U.S. debt ceiling will be needed around year-end; deficit reduction issues (taxation and spending) will be coming to a head quickly, along with questions of renewed economic stimulus.

 

There is no reason to expect that renewed efforts at federal budget deficit reduction will result in anything more than the usual smoke and mirrors, further increasing, not reducing, long-term U.S. sovereign-solvency risk.  In reality, the U.S. economy has not recovered, and no recovery is pending.  Consumer liquidity remains severely impaired, and broad business activity continues to falter anew.  As a result. the actual federal budget deficit going forward will be much worse than the relatively rosy numbers being used as the basis for government negotiations.

 

Accordingly, global market reaction—to a severely deteriorating outlook for U.S. fiscal conditions—increasingly should reflect massive flight from the U.S. dollar and movement into gold and the stronger Western currencies.”

 

“September Trade Balance, Presidential Election”
John Williams, Shadowstats.com, 11/08/2012

 

 

Insightful John Williams’ Key Insight is that, going forward we are likely to see an intensification of trends already developing, i.e. increasing stagflation. That is, we are seeing an increasing economic contraction coupled with increasing inflation (already at 9.6% in the U.S. e.g. per shadowstats). This inflation is now hidden from us in Bogus Official figures.

 

But the Prices for Essential Assets, such as Food, are harder to manipulate. Increasing Prices of Essential Food Commodities are now close to those which ignited Food Price Riots in 2008, which continued through the “Arab Spring” and are continuing today.

 

But key food stuff production is expected to fall from 2011 levels, by 5% for wheat for example. Yet 870 Million are malnourished worldwide, according to the UN FAO and world population is increasing by 80 Million per Year.

 

And Crude Oil Prices remain stubbornly above $85/bbl for WTI and over $100 for Brent; with the consequent Economic Dampening Effect.

 

No wonder that fewer than half the companies reporting earnings for Q3 beat their revenue estimates. The economic contraction is starting to bite. Yet understandably, the demands of the sorely pressed citizenry, especially via the Eurozone and the U.S., for Safety Net Subsidies is growing and is a growing Tax on Budgets.

 

“Everybody’s worried about the fiscal cliff. But there’s a much bigger cliff coming up, and it’s the “Entitlement Cliff.” In the four years since Obama took office, entitlement participants have grown exponentially.

 

“Medicaid has grown from 46 million to 56 million people.

 

“Disability beneficiaries have grown from 7.5 million to 8.8 million people.

 

“Food stamp recipients have grown from 32 million to 47 million.

 

“On top of the above, about 40 million Americans aged 65 or older on Social Security and Medicare are receiving benefits. Add the numerous smaller entitlement programs to the total and the expenses are mind-boggling. All together, half of the nation now receives entitlements. On top of the massive entitlements programs, we have the interest on the Federal debt, which is currently $220 billion.

 

“One danger will come from the “bond vigilantes.” As they survey the nation’s entitlement situation, they are going to want higher interest payments on Treasuries. This will skyrocket the interest cost on the Federal debt, and push Uncle Sam into a compounding pressure cooker. This, in turn, will put further pressure on the US’s credit rating.

 

“The implications of these statistics are frightening. Expenses of $2.2 trillion for 120 million entitlement receivers comes down to $18,000 per recipient! Talk about mind-boggling problems.”

 

“Richard’s Remarks”

Richard Russell, dowtheoryletters.com, 11/16/2012

 

 

Russell is right. The Bond Vigilantes will begin to ride again soon. And notwithstanding The Fed’s ongoing open-ended commitment to be buying (now over 70% of) U.S. Debt, which has temporarily suppressed rates, but cannot do so forever.

 

Central Banks have added $5 Trillion! to the monetary base since 2007. This cannot continue without dire consequences. And, as Bill Bonner notes, Consumer Prices would have to double from here (i.e. increase 10%/yr for 7 years) to keep up with monetary base increases.

 

The Fed has increased the Monetary base threefold in the last four years. But to dampen the increasing inflation it would have to sell those trillions of bonds back into the Market. But who wants to buy bonds in an inflating economy?

 

Daryl Robert Schoon’s brilliant analysis describes why Capitalism is suffering a Paradigm Shift.

 

“The bankers bet that sufficient credit can reverse an economic contract ion is no longer on the table. This does not mean central bank credit will tighten. Just the opposite will happen. Monetary easing will continue until the very end. Central bankers are trapped. The end game is now underway….

 

“The world has entered a paradigm shift of immense proportions; and the collapse of the bankers’ economic world is a part of that shift. The bankers’ credit fueled a 300-year global expansion which transformed the world. The bankers’ credit, however, has now become debt which increasingly cannot be repaid….

 

“Prior to capitalism, the underlying economic dynamic was supply and demand. However, in economies fueled by the bankers’ debt-based bank notes, the relationship between credit and debt becomes equally, if not more, important than supply and demand….

 

“After gold was removed from the global monetary system in 1971 and after initial inflationary concerns were addressed in 1980, embedded constraints on monetary and credit growth no longer existed. The attendant rise in debt is noteworthy – as will be the consequences.

 

“What central bankers did not anticipate from the explosive growth of credit was the resultant levels of massive debt. Fixated on growth, central bankers miscalculated the inevitable effects of the unrestrained increase in monetary and credit aggregates on their heretofore successful ponzi-scheme of credit and debt.

 

Credit is the zygote of debt; and since debts constantly compound in capitalist economies, unless controlled, credit will inevitably lead to fatal level of debt. This is not rocket science. This is common sense.”

 

“2012: The Tipping Point: The Results Are In: THE BANKERS LOST

Daryl Robert Schoon, via LeMetropoleCafé, 11/20/2012

 

Observing how Central Banks, the Mega-Banks Cartel, and their Captive Government’s cope with ‘fatal levels of debt” is arguably the Key “Factor” to consider in Markets Performance going into 2013.

 

Complicating and worsening the scenario are the Manipulations of Key Mega-Banks, which seek ultra-profit maximization regardless of the wider destructive consequences. Consider:

 

“In the summer of 2011, I wrote a four-part series entitled “Economic Rape of Europe Nearly Complete”. In that extended piece; I detailed how the combination of three malevolent forces was decimating the economies of Europe one-by-one.

 

“Through the relentless fraud/manipulation in Euro debt markets, sadistic “austerity”, and so-called “bail-outs” which just bury these insolvent economies even deeper in debt; the Western banking cabal is systematically looting these nations.

 

“The manipulation of European debt markets was (is) accomplished through the fraudulent rigging of the credit default swap markets; combined with the complicity of the Big Three ratings agencies and the West’s media Oligarchs.

 

“The bankers manipulate credit default swap prices higher, simply by piling-on massive bets that a particular Euro-zone nation will default. The propaganda machine immediately shrieks that “risk” has now increased for this debt market, and then the accomplices in the ratings agencies comply with a ratings downgrade – immediately driving interest rates higher.

 

“With the massive debts being carried by these economies, any increase in interest rates automatically makes the economy significantly less solvent, turning this tag-team of fraud into a self-fulfilling prophesy. With the banksters literally capable of manipulating Euro zone interest rates to any number they desire, as a matter of simple arithmetic it is impossible to “bail out” any of these nations – by lending them more money.

 

“The moment more bail-out dollars are released, the banksters immediately drive interest rates even higher. Thus all the bail-out dollars are siphoned-out of the economy in the form of higher interest payments to the Bond Parasites, meaning all that each “bail out” accomplishes is to pointlessly pile on more debt.

 

“Meanwhile, as more and more of every revenue-dollar is sucked out of these economies by the debt-market fraud, Austerity is literally nothing less than economic suicide. In economies already starved for capital, Austerity is the precise equivalent of a doctor putting a severely anorexic patient on a diet.

 

“The empirical evidence is overwhelming. In every European economy which has inflicted Austerity on its population, the rate of economic contraction has accelerated, and the size of the budget deficits has grown larger instead of smaller. Since the entire raison d’etre of Austerity is to (supposedly) shrink these deficits, it is nothing less than deliberate suicide to continue this policy, and serves no purpose except to free-up more dollars to be paid out as interest payments to the Bond Parasites.

 

“This is the real impact of the new “unlimited bond-buying” announced by the European Central Bank, since (as the dust settles) we now see there are strings attached to yet more loans to these economies. Specifically, the ECB wants to strip these nations of what little economic sovereignty they still possess, and be able to mandate increasing levels of Austerity with each new round of suicidal bond-buying.”

 

“ECB Bond-Buying: The Rape of Europe Continues”
Jeff Nielson, via LeMetropoleCafe.com, 11/12/2012

Clearly, several Eurozone countries (and not just the PIIGS) have reached, or will reach Debt Saturation. (Indeed, the USA and Great Britain have arguably reached Debt Saturation as well.) That is, no reasonable level of economic growth will allow the Debts to be repaid, ever.

 

Three alternatives remain for the Debt Saturated Sovereigns – Partial or Total Debt Repudiation (a la Iceland), Voluntary Creditors’ Debt “Haircuts,” or Currency Debasement through Monetary Inflation, or some combination thereof.

 

Clearly the Central Banks have chosen the third alternative, but as we have demonstrated here and elsewhere, that inevitably leads to Price Inflation, which the Real Numbers (as opposed to Bogus Official Ones in China, the USA, and elsewhere) show is already occurring.

 

Rising Food, Energy, and Precious Metals Prices in recent years demonstrate this effect. This is why Deepcaster continues to recommend Investments in these Sectors – see Notes 1, 2, and 3 below – since these are Assets which serve both as Wealth Shelters and Profit Sources.

 

In conclusion, the long-term uptrend in these Sectors will continue. [But the Energy Sector will be especially volatile with month-long downtrends and uptrends. Yet over the long-term the Uptrends will dominate.] In sum, these three provide the best Wealth Protection and Profit Potential given that Price Inflation will surely continue.

 

Continue, that is, if and until the Central Banks’ Money Printing stops. Then … Massive Deflation.

 

And, by the way, one closing observation regarding Wealth Protection. There is increasing evidence that the Obama Administration will soon begin a push to de facto confiscate 401K’s and IRA’s by forcing their owners to buy U.S. Treasury Bonds and/or Government sponsored annuities. Whether or not this is true, we do think it advisable to consider the pros and cons of shifting assets from such “paper” stock accounts to physical Gold and Silver, as well as agriculture investments.

 

 

Best regards,

 

Deepcaster

November 20, 2012

 

Note 1: The world’s population increases by over 200,000/day. That’s net births over deaths. That’s one heck of a large potential market increase for Goods and Services, provided that the increasing population has the Purchasing Power to acquire the goods and services they need and want.

 

Since not all desired goods and services can be acquired, people have to prioritize. Thus some goods and services get bought and others not.

 

Our High Yield stock recommendation last week makes a product essential to a Sector which is the very top priority when it comes to purchasing decisions. And its recent yield is 8.8% to boot.

 

And perhaps best of all it is very well situated to be profitable regardless of general economic and financial conditions.

 

[And for those very sophisticated Investors who like to sell covered calls or naked puts, the high option premiums on this High Yield Recommendation could make that very lucrative.]

 

And we issue a Markets Warning last week regarding a substantial impending Market Risk for Traders and Investors.

 

To see our High Yield Recommendation and Market warning read our recent Alert “8.8% Yield in Top Sector Reco; & Markets Warning! & Forecasts: U.S. Dollar/Euro, U.S. T-Notes, T- Bonds, & Interest Rates, Gold, Silver, Crude Oil, & Equities” posted in ‘Alerts Cache’ at www.deepcaster.com.

 

Note 2: The recent Markets sell off resulting from “Disappointment with the post-Election Stalemate” and more Negative Eurozone Developments is a realization of our oft-repeated Caveat: we are in a primary Bear Market, and therefore subject, at any time, to Events causing Market Takedowns. This is primarily because the Real Economy is still quite unhealthy in the US, Eurozone, and yes, in China. It is bottom bouncing. We have repeatedly documented there is no Real Sustainable Recovery. Any and All Markets are subject to Takedowns at any time.

 

Moreover, a recent confirmed and reconfirmed Hindenburg Omen – reflected in an Ominous Jaws of Death Pattern on the Charts — indicates the probability of a Major Market Crash in the next few months is substantial – at least one in four.

 

However, some technicals are still on a “Buy” and Equities Markets are oversold short-term.

 

What next?

 

Deepcaster addresses this question and provides forecasts through year-end and into 2013, in Deepcaster’s recent alert, “Key Asset 400% Increase Probable; Post-Election Forecasts: U.S. Dollar/Euro, U.S. T-Notes, T- Bonds, & Interest Rates, Gold, Silver, Crude Oil, & Equities” in ‘Alerts Cache’ at www.deepcaster.com.

 

One Forecast is for a probable price appreciation of 400% in one Key Asset in the next few months. Regarding Buy Recommendations aimed at profiting from the impending Fiscal Cliff and likely Political and Fed reactions see Note 3 below. And regarding our High Yield Portfolio please see Note 3.

 

Note 3: There are Magnificent Opportunities in the Ongoing Crises of Debt Saturation, Rising Unemployment, negative Real GDP growth, over 9.0% Real U.S. Inflation (per Shadowstats.com) and prospective Sovereign and other Defaults.

One Sector full of Opportunities is the High-Yield Sector. Deepcaster’s High Yield Portfolio is aimed at generating Total Return (Gain + Yield) well in excess of Real Consumer Price Inflation (9.64% per year in the U.S. per Shadowstats.com).

To consider our High-Yield Stocks Portfolio with Recent Yields of 10.6%, 18.5%, 26%, 15.6%, 8%, 6.7%, 8.6%, 10%, 8.8%, 14.9%, 10.4%, 15.4%, and 10.7% when added to the portfolio; go to www.deepcaster.com and click on ‘High Yield Portfolio’.