Stocks, Bond Yields, & The Dollar Surge On "Good News Is Good News" Jobs Report

The "gold will tank on jobs report Friday" trade worked again like a charm.  This is a gift from the precious metals price manipulators.  Buy the dip.

http://www.zerohedge.com/news/2015-02-06/stocks-bond-yields-dollar-surge-good-news-good-news-jobs-report

Evidence QE 2.0 is not working

The Fed instituted QE 2.0, a plan to purchase $600 billion of US Treasury securities, in order to suppress interest rates and stimulate an economic recovery.  The bond market isn't behaving, as the vigilantes are coming to the realization that Bernanke's injection of liquidity is purely inflationary, which will dampen growth, as the USDollar is debased.  Hence, yields are rising, exacerbating our humongous debt problems.  His war on deflation will eventually create hyperinflation, in my opinion.

Click on image to enlarge.

See disclaimers in the side bar.

Disclosure:  no position in US Treasury bonds.

http://www.cnbc.com/id/40564296

Economist Nouriel Roubini on Wednesday voiced concern over a compromise on extending tax cuts struck by US President Barack Obama and Republican leaders, saying the agreement could expose the US to bond vigilantes who will drive up bond yields.

Bond vigilantes – the term was coined by economist Ed Yardeni in the 1980s to describe major investors who demand higher yields to compensate for the perceived risks resulting from large deficits - could derail the country’s precarious recovery, some economists say.


 Chinese central bank adviser Li Daokui said on Wednesday the fiscal health of the United States was worse than Europe's, and that the dollar had so far been shielded from trouble because markets are still focused on debt-laden European countries.

US bond prices and the dollar would fall when the European situation stabilizes, Daokui said.

Here is my previous breakdown of long-expiry US Treasury bonds:  http://gregnguyen.blogspot.com/2010/07/httpwww.html

This is what I did in an attempt to hedge against rising bond yields (and interest rates):  http://gregnguyen.blogspot.com/2010/01/bubble-in-treasury-bond-market.html

Note the usual disclaimers in the left side bar and disclosures in the linked blog entries.

Global bond rout deepens on US fiscal worries

http://www.telegraph.co.uk/finance/economics/8190059/Global-bond-rout-deepens-on-US-fiscal-worries.html

Agreement in Washington on a fresh fiscal package has set off dramatic rise in yields of US Treasuries and bonds across the world, threatening to short-circuit any benefits of stimulus. The bond rout raises concerns that the US authorities may be losing control over events.

China hints it could dump U.S. bonds

http://www.moneynews.com/Headline/China-Fires-Shot-Over/2010/09/14/id/370164

The Chinese dumping US bonds will cause yields and interest rates to soar, which will unravel any hopes of a US economic recovery. Is Congress really thinking this through in accusing the Chinese of currency manipulation and threatening to impose import tariffs? My short answer is no.

Japanese sovereign debt soaring

Previous blogs rang the alarm bells on Japan's growing debt problems, while all the attention was focused on Dubai and Greece.

The financial news media is finally catching up to the massive debt levels in the US and Japan.

http://news.yahoo.com/s/afp/20100425/bs_afp/japaneconomydebt_20100425225204

However, the article misses some major points. What will happen going forward? How is the Japanese central bank able to issue debt at such artificially low interest rates, when their solvency is in question? Why haven't the bond vigilantes punished the bonds by bidding up higher yields? Who has been buying these Japanese government bonds, and creating the huge demand required of zero-interest rate policies from an essentially insolvent government (one would think investors would demand higher yields from a bankrupt country)? For bond investors, it is a bad bet to tie up your savings for years with little to no return on investment. Yet, buyers have stepped up to the fixed-income window for 20 years.

The answer is two-fold. Firstly, the Japanese have had competitive export industries, despite equities and real estate markets collapsing since 1990. Corporate profits have been vibrant, keeping the overall economy afloat (which, by the way, is a trait the US economy isn't fortunate enough to share, as our economy is 70% consumer-based).

Secondly, Japanese citizens in the past, have been big savers. They have for years methodically saved at least double-figures of their annual incomes, so the Japanese government had a willing citizenry to buy Japanese bonds for their retirements.

But the head winds are forming, and the aging Japanese population is not saving as much as they have in the past. They are becoming more "American-like" in this aspect, although a large portion of this non-saving trend is due to demographics. This pool of savers is disappearing, so Japanese bond auctions will experience a dearth of buyers. This can only mean higher yields, as buyers will demand higher returns to take on the increased risk of funding a government which is no longer creditworthy. And this will ultimately lead to a death (debt) spiral, as new debt is issued to pay off rolled-over old debt.

This will either result in a technical default (which is a rapid debasement of the yen caused by hyperinflation of the printing press), or actual default, where the government declares they cannot make payment on their obligations. When the world's biggest economies declare default, the effects on the financial systems will be catastrophic, as credit markets will seize up. Liquidity in capital markets will collapse, as counterparty risk intensifies.

We saw this happen in 2008, but now the risk of sovereign default is much higher, as toxic derivative assets were transferred from banks to government balance sheets. In other words, the Fed bailed out banks, auto companies, government agencies when they went belly up. Who will bail out the Fed? The level of non-performing assets and debt will eventually overwhelm most developed countries, as it has already Iceland and Greece, and the contagion will spread across Europe as debt levels grow to unsustainable levels.

All central banks, including the Fed, and the IMF will print even more currency in an attempt to stave off defaults, but this will only exacerbate the debt problems, eventually resulting in a currency crisis.

Interest rates rising

http://dollarcollapse.com/articles/now-start-watching-interest-rates/

As you can see, the US is dumping what used to be a year’s worth of debt onto the market in four days. And because so much existing debt has to be rolled over continuously, we’ll do the same every week for, apparently, the rest of our lives.

Sovereign debt and central banker self-delusions

http://www.zerohedge.com/article/just-how-ugly-sovereign-default-truth-how-self-delusions-prevent-recognition-reality

Behavioural psychology applies to central bankers, regulators and politicians as much as it does to investors. In promising to ‘fiscally retrench tomorrow’, finance ministers are exhibiting the behavioural phenomenon of overconfidence in their future self-control. The bitter fiscal medicine required to stabilise debt levels won’t become more palatable today relative to tomorrow until the bond market makes it so. It can only do this through higher yields. Thus, Ireland and perhaps now Greece lead the way. For the Japanese it’s too late.

As the housing bubble inflated, Bernanke in a quite staggering display of logical sloppiness, concluded that the risk of a housing collapse in the future was small because there had never been one in the past ? Weren't they then guilty of "framing" their analysis in a way guaranteed to preclude an uncomfortable conclusion? If you don't expect to see something, you're less likely to see it. Similarly cringe worthy logic was used when sub-prime rolled over, and Bernanke concluded that there was no risk of contagion to the rest of the economy because... er... there had been no contagion to the rest of the economy yet... wasn't this textbook "recency bias" whereby the importance of recent events is over-weighted?

It probably was, and it probably demonstrates that central bankers are as prone to be as systematically silly as the rest of us. Indeed, just last year a study by yet more of Bernanke's "best and brightest" concluded that “monetary policy was not a primary factor in the housing bubble”. I don?t want to pretend I?m any kind of behavioural expert, but isn't this the well documented "attribution bias" by which people attribute positive outcomes to themselves, but negative ones to others?

So here we are today, with regulators rounding on investment banks, hedge funds and tax havens, apparently in denial of the reality that the problem was not the regulations but the regulators. After all, heavily regulated institutions like Fannie Mae and Freddie Mac were at the epicentre of the crisis.

Oscar Wilde said he could resist anything but temptation. But doing something you know you shouldn't is easier if you can convince yourself that this will be the last time you indulge, that you won't do it again. So we convince ourselves that since we'll be strong in the future, we can still indulge today. Whether it?s smoking, eating too much or going to the pub instead of the gym, we delude ourselves into thinking that we will take the more difficult path next time.

Apparently heroin addicts can become so drug dependent their bodies cannot withstand the shock of withdrawal, and failure to continue taking the drug triggers multiple organ failures. I just wonder how apt that analogy is to our governments' debt dependency today. As long as governments think that taking these difficult decisions to end the addiction will be easier in the future than it is today, they will never take the decision "today." At the very least, there will have to be a sufficiently large bond market "event" to force the issue.

At some point, sovereign governments and central bankers will have to withdraw stimulus programs. Will they have the political will?

US Treasury bills

In his December letter to investors, Bill Gross, manager of the PIMCO, the world's largest bond fund, laments his cash's 0.01% yield. Gross says at that rate of return, it would take 6,932 years to double his money.

Take into account the ravages of inflation (and taxes) over time, and the rate of return is negative. It's equivalent to giving the US government money, so they can hold it for you. To make matters worse, that US government is also bankrupt.

The only consolation is the holding period for Treasury bills is 3 months. But to tie up your money for 30 years, only to have it yield 4.3%, is insane to me. But that's exactly what buyers of 30-year US Treasury bonds were doing several months ago. Inflation alone wipes out bond investors. Even with a weakening economy, if demand for long-dated US bonds remain tepid, yields have to increase to attract demand. We saw that last week.

A weak economy results in low bond yields, but any uptick in economic activity would cause yields and interest rates to rise, causing bond prices to decline. That's the bubble I'm expecting to burst: long-expiring US Treasury bonds.

Dennis Gartman on CNBC

Dennis Gartman, the respected commodities expert who pens the widely read "The Gartman Letter", and who can been seen on CNBC every day, called a top on gold at $930. When gold surged to $1050, he said he was still bearish on gold, yet he had reversed course on his own trade, and had gone long due to technical momentum (presumably after losing a ton of money shorting gold at $930). He also declared gold was in a "bubble"--even as he confessed he had gone long--and that he just didn't understand why gold had rallied so high and so fast. Today, in overseas trading, while America gluttons on turkey and dressing, gold is threatening $1200.

So this is a guy who can barely admit he was totally wrong on gold, costing followers millions of dollars, and now he can glibly declare gold is in "bubble" status--without even looking at the fundamentals of not just the recent rally, but of a DECADE-LONG BULL MARKET IN GOLD?

What about US Treasury bonds? The trillions of IOU's being issued by an insolvent government will come due at some point, and that is not a bubble? What if the creditors of that debt reject taking on that risk at yields of 3%, and demand 15% before even considering buying more Treasuries? What about that bubble? Rising interest rates will tank bond values, much like they did in the early 80's when inflation and deficit spending were out of control. Deficits are much worse today--in the trillions, with a "t".

And what if the US government itself defaults on its borrowings, unable to fund even the interest on that debt? What will happen to the asset values of hard commodities? How high could gold or oil climb in dollars?

Yes, the Fed's quantitative easing will yet again create asset bubbles. But as usual, the investing public will get fleeced again because the bankers are pointing at the wrong "bubble."

NVAX shares continue steady advance

Shares of Novavax, a virus-like particle (VLP) vaccine manufacturer, continued its steady climb today amid continuing concerns about the mutation influenza strains. FDA approval is several years away, but NVAX's novel approach to manufacturing recombinant vaccines has given them contracts to work with the National Institute of Health (NIH) and commercial commitments in India (with parrtner Cadila) and Spain (with partner Rovi).

http://www.scienceprogress.org/2009/08/influenza-vaccine/

NVAX's VLP manufacturing platform accelerates vaccine production, reducing ramp up time from 6 - 8 months to 4 weeks. Facilities cost are also reduced by 90%. Yields are increased due to elimination of egg-based manufacturing process used by traditional vaccine makers. Most importantly, the VLP process could potentially enable the production of a "super vaccine", which provides immunogenicity for all mutated strains of influenza.

Disclosure: I am long NVAX shares.

Taking profits

And in these skittish markets, I'm not ashamed. Took some profits on TBT, up 50% due to rising 30-year T-bond rates (TBT is a double short ETF betting on rising bond yields and declining bond prices). It gapped up today and could break out, so I kept some on the table. But with a 50% profit, I had to take some off the table. If the Fed goes through with quantitative easing and monetizes that debt, they could temporarily drive bond prices up and yields down. Long-term, I'm still bearish Treasury bonds, so I will wait for another good entry point to buy TBT. But with volatile markets, you take your winners and cut your losers. Buy and hold won't work going forward (it didn't work in the last decade either).

Also, I cashed out partial positions in a uranium stock (up 25%), and of course DNDN this morning for a better than 300% pop. Notice I said "partial", as I am merely taking some profits, but letting the house money ride. Most professional traders average in their buys, and average out their sells, because no one can buy at the absolute bottom or sell at the absolute top. Don't blow your wad with one initial big trade. And don't get discouraged if the price drops a little as soon as you buy, or goes up a little when you sell. Knowing when to sell is as important as knowing when to buy.

The reflation play is still intact, and I will be looking to buy into dips on hard assets (commodities, precious metals, energy). We are in the throes of a bear market rally, but I certainly don't want to stand in the way of stampeding longs. When I hear talk of the beginning of a new bull market, I'll know this rally would have been a head fake, at which point I will buy some appropriate puts. If I miss the big decline--oh well. NOT losing money in this market is like a win.

I also want to get liquid and keep my powder dry, as another biotech opportunity is presenting itself. This may not be another DNDN blockbuster, but FDA approval seems imminent. Stay tuned.

China has been furtively buying gold since 2003

There's a rule of thumb investors should consider: when a country's central bank or sovereign fund managers publicly state their intentions, bet on them doing the exact opposite. A few months ago, the Chinese Finance Minister was questioned on what their plans were for their surplus reserves. He basically said they were going to continue purchasing dollar-denominated assets, namely US Treasury bills and bonds. His mock rhetorical question: "What else are we going to buy--gold?"

Well, it's been now confirmed by this Reuter's article that is exactly what they have been doing--on the sly.

http://www.reuters.com/article/ousivMolt/idUSTRE53N18T20090424

Note the last portion of the article on the second page:

"The comments indicate that China will buy more gold as reserve to improve its foreign reserve portfolio. This is a trend," said Yao Haiqiao, president of Longgold Asset Management.

Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tons.

"It's not a matter of a few hundred, or 1,000 tons. China should hold more because of its new international status, and because of the financial crisis," he said.

"The financial crisis means the U.S. dollar value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage."

The European Central Bank recommends its member banks hold 15 percent of their reserves in gold, but among Asian nations the percentage is far smaller, said Albert Cheng, World Gold Council managing director for the far east.

My comment: if the Euro central bank is recommending their member banks hold 15% of their reserves in gold, would it not be prudent for individuals also? And if China continues to buy gold in lieu of US Treasury bonds, what are the implications?

My long position on gold and silver just got more bullish, as did TBT, a double short on 30-year Treasury bonds (a wager bond prices will drop accompanied by a rise in bond yields). Again, believe what they do, not what they say.