the bond bull can go on indefinitely and is the source of depression

[grapejelly]

Antal Fekete's latest essay has some interesting points. Sensible or lunacy? Can you explain what he is talking about?


Click here for the full Antal Fekete article (http://www.financialsense.com/editorials/fekete/2008/0211.html)


Why is this important? Because it gives away the secret of the deadly deflationary spiral. It is wrong to describe Fed action as cutting interest rates. We should think in terms of the Fed halving them. The bull market in bonds can go on indefinitely under the regime of the fiat currency. People assume, wrongly, that the Fed will run out of ammunition when the rate of interest is approaching zero. The bond-bull will run out of breath. Not so. The Fed will never run out of ammunition. The lower the rate, the smaller cut will do. The Fed can halve interest rates any number of times without ever reducing them to zero. The bond-bull will never run out of breath.

“Gigolo of science”
The trouble is that the bond-bull is the root cause of depressions. Falling interest rates create capital gains for bondholders, yes, but these gains do not come out of nowhere. They come right out of the capital losses of producers. They are the very stuff out of which depressions are made. The serial cutting of interest rates by the Fed is the grave-digger of the economy: it causes wholesale bankruptcies in the producing sector. The large-scale dismantling of the producing sector in America during the past twenty-five years is a direct consequence of the regime of falling interest rates. Production stopped as a result of the financial sector siphoning off capital from the producing sector. Industrial jobs were exported as there was no capital left to support them at home. This shocking truth was never investigated by mainstream economists, sycophants of Keynes. They did not want to expose the gravest error of their idol in confusing a low interest-rate structure with a falling one. Keynesianism is the gigolo of science (Ayn Rand).

[grapejelly]

the article makes I think some extremely important points:

The derivatives tower is just a layered pyramid of “bond insurance”, so-called. Nobody asks the question whether insuring bond values is possible in principle. As I have stated, it is not. Insurance means spreading the risks over a larger population than that needing compensation. Insurance is the very opposite of gambling where the player wants to increase his risks in the hope of a large payoff, not to decrease it.
Now think of an inverted pyramid delicately balanced on its apex. The apex represents the bond market (layer 1). The next layer is bond insurance (layer 2). But since the value of bond insurance is inherently even more unstable than that of the bond, it is in need to be insured as well (layer 3). And so on it goes. The pyramid is growing at an exponential rate as the need for reinsurance keeps increasing.
There are several problems. First of all the whole idea is hare-brained, much the same as the idea of “operation boot-strap”. A soldier, no matter how strong he is, cannot lift himself by his own boot-straps. Similarly, you can’t insure bond values without an anchor. The second problem is that the slightest hitch at any layer will bring down the house of cards. The principle of insurance assumes that no tornado will destroy all the insured homes simultaneously. The same assumption cannot be made about bond insurance. The volume of outstanding bond insurance is much higher than the existing supply of bonds. It is even larger than the existing money supply (and goodness only knows that it is very large.) Therefore it is a physical impossibility to compensate insurance-holders in case of global trouble. If any doubt arises at any level about the validity of the insurance policy, the whole Ponzi-scheme collapses. The Derivatives Monster is meant for simpletons.

[Lukester]

Grapejelly -

I've been following your posts about the "bond bubble" and agree, it's an interesting topic. In line with that I also noted and read Fekete's article above yesterday and was thinking of posting it. It was a fascinating read.

[godraz]

I've been reading and pondering over Fekete's articles for a while. In my estimation the guy is brilliant. I don't always fully understand all that he writes about, but his articles strike me in some intuitive common sense fashion that offers a supreme counter point to all the economic mumbo-jumbo nonsense adhered to in the fiat based financial world.

As to this bond market racket I wish I could explain it. The bond market as rigged is beyond my compprehension or why anyone would play it, except that it is making someone tons of easy money!

[JoeSixpack]

Surely there must be some broader concepts behind this articel which only regular readers know ?

Otherwise its really not making too much sense.

[Starving Steve]

Antal Fekete's latest essay has some interesting points. Sensible or lunacy? Can you explain what he is talking about?


Click here for the full Antal Fekete article (http://www.financialsense.com/editorials/fekete/2008/0211.html)


Why is this important? Because it gives away the secret of the deadly deflationary spiral. It is wrong to describe Fed action as cutting interest rates. We should think in terms of the Fed halving them. The bull market in bonds can go on indefinitely under the regime of the fiat currency. People assume, wrongly, that the Fed will run out of ammunition when the rate of interest is approaching zero. The bond-bull will run out of breath. Not so. The Fed will never run out of ammunition. The lower the rate, the smaller cut will do. The Fed can halve interest rates any number of times without ever reducing them to zero. The bond-bull will never run out of breath.

“Gigolo of science”
The trouble is that the bond-bull is the root cause of depressions. Falling interest rates create capital gains for bondholders, yes, but these gains do not come out of nowhere. They come right out of the capital losses of producers. They are the very stuff out of which depressions are made. The serial cutting of interest rates by the Fed is the grave-digger of the economy: it causes wholesale bankruptcies in the producing sector. The large-scale dismantling of the producing sector in America during the past twenty-five years is a direct consequence of the regime of falling interest rates. Production stopped as a result of the financial sector siphoning off capital from the producing sector. Industrial jobs were exported as there was no capital left to support them at home. This shocking truth was never investigated by mainstream economists, sycophants of Keynes. They did not want to expose the gravest error of their idol in confusing a low interest-rate structure with a falling one. Keynesianism is the gigolo of science (Ayn Rand).

Some things which the Fed needs to think about, if there is any thinking going on in those twelve district Federal Reserve Bank buildings in the U.S:

1.) Didn't the troubles in the economy really hit the fan when "The Maestro" decided to experiment with a 1% interest rate policy after 9/11?

And how many months did "The Maestro" keep interest rates at 1% and IGNORE the real estate bubble, the bond market bubble, the stock market bubble, the carry-trade bubble, the creative finance bubble, among other bubbles?

2.) Wouldn't leaving interest rates at a steady 5% have been a better Fed policy than to have tinkered-around with interest rates to please Wall Street?

3.) What is the similarity between Japan and the USA? What economic thinking ( or lack of it ) lead to the Fed following the same apparent interest rate policy as the Bank of Japan?

4.) Why does the Fed not set interest rates at 3% over the rate of urban inflation? Wouldn't this be a fairer policy for everyone: producers, savers, borrowers, bankers, etc?

5.) Shouldn't the Fed concentrate on one achieveable goal: BRINGING INFLATION DOWN TO ZERO, OR EVEN A NEGATIVE NUMBER?

6.) Isn't Dr. Marc Faber correct when he says that the Fed has chosen a monetary policy to penalize savers and investors in order to reward pure consumption? ( When oil is $105 per barrel, why do we need more consumption? )

7.) What benefit does dollar-devaluation have for the U.S. when most manufacturing industries have already left the U.S? Wouldn't a strong dollar policy be better in the long run? And where is the bottom in this dollar devaluation?

8.) Why would the Fed follow the same discredited economic policies that have caused inflation and stagnation throughout Latin America for decades? ( What am I missing here? )

9.) If devaluing the dollar by 27% (to 0.73 on the dollar index currently ) is so wonderful, wouldn't devaluing the dollar by 54% be twice better? And wouldn't a 90% devaluation work miracles for the economy?

[Lukester]

I browsed through a recent sample issue of Robert McHugh's Technical Indicator publication this morning and chanced on an interesting reference to the "continuing bond bull market" which he forecasts to run in tandem with a gold and silver bull market.

The analysis seems sharply counterintuitive. I've been in agreement with Grapejelly that at least on fundamental terms, US long bonds would rationally suggest they were in a bubble, or soon to be in a bubble. But I have a lot of respect for McHugh (although he is an Eliottician!!) so when he says otherwise it's intriguing. I vaguely recall having read this as also iTulip's viewpoint (long rates will continue to fall?). Can't recall where I read that recently.

The sample McHugh issue is from this past month (February) and is crammed with charts (lots of to-me stultfying wave counts!), however as it's so recent it's actualy quite worthwhile to review.

The point relevant to this thread however being, that the long bond will (surprisingly, to those of us who assessed it on it's apparently stinking fundamentals) remain in a bull market! Don't know whether the analysis is correct or not, but it's very intriguing.

So the point is, the notion that a bond bull market and a gold bull market are fundamentally antithetical is not always "actionable" advice because it may be an imperfect truism. On occasion that truism will not hold. McHugh says that truism will not apply in the next five years.

So having assumed bonds remain in a bull market, one can still distinguish their relative merit by the fact McHugh goes on tyo note he expects "another near-50% devaluation of the US B0nar, down to a wretched 40 on the USD index. How much of a bond bull market must we require then in bond prices, to conpensate for this disintegrating denominator?

The full PDF issue of his sample newsletter from February can be obtained here - (warning, endless miles of charts.)

https://www.technicalindicatorindex.com/newsletter/bpdf/TII%5FNewsletter%5F777A%5F2%2E29%5F7055475115%2Epd f

Or by going to www.technicalindicatorindex.com (http://www.technicalindicatorindex.com) and looking for the free sample issue.

291

292

293

[grapejelly]

we aren't in a bond bull so much as a government bond bull...spreads are widening rapidly and long rates are actually not falling, or are rising...I think rising gold prices *are* antithetical to rising bond prices. So I don't expect the current situation to hold for non-government bonds. I expect long rates to spike upward defaults go from historically low levels to historically high levels.

[Lukester]

Grapejelly -

That's pretty much my own view exactly. I posted the McHugh article for a slightly different perspective. He's a quite accomplished technician. I think also it cannot be lost on McHugh that the fundamentals underpinning the US long bond stink, and he implied that the bid under long bonds was indeed very much underwritten by active Govt. "engagement" (a charitable term for attempted manipulation).