Over the years of market watching, one can easily become very cynical as they observe the machinations of the international banks that run the financial system of the US. The manner in which their reports are issued, the timing involved, the reactions of the various markets, all lead me to believe that nothing should ever be taken for granted when it comes to the primary dealers and their cozy relationship with the Federal Reserve.
Those of you who have been watching the bond market are no doubt aware by now that they have been getting whacked of late. Over the last month, they have dropped over 6 full points. In the process of so doing, the bonds have been telegraphing inflation fears related to the out of control US government spending and easy money policy known as QE. The former necessitates huge supply of Treasuries to fund the deficits while the latter provides the demand.
The problem has been that the bond market is not cooperating with the Fed’s intentions. They want the long bond market moving higher, not lower. In effect, the market has short circuited the effect of QE.
Now, how to stop this rapid descent in bond prices? Enter the primary dealer known as Goldmach Sachs, the plague upon the US financial system. Goldman issues a report today crowing about high crude oil prices slowing down the economy and stiffling demand for commodities and what not. They then go on to advise their clients to dump their long commodity positions. Meanwhile the Dollar continues to descend violating a major chart support level in the process only barely managing to recover that level before the close of afternoon trading in New York. However, bonds rallied sharply forcing a sizeable short covering burst as traders had been positioning for the inflation trade.
So what do we have when the dust settles? The crude oil market drops sharply down from its recent peak near $113 and bonds settle nearly a full point higher erasing half of the losses of the previous week. The Dollar however is still weak.
If you are the Fed and want to see your QE program be successful, you cannot have long term interest rates continuing to rise nor can you have energy prices continuing to soar. But what can you do short of actually stopping QE dead in its tracks, something which if you do, will crater the stock market. Why enlist your pals over at Goldman and agree to release their “client recommendation”.
Presto – problem solved. Crude gets hit hard and bonds rally. The Dollar? Well that will have to wait for another day.
Look at the chart below and see the regions I have noted and compare the price action of the long bond with that of crude oil. Observe that for the last two weeks of February of this year, the surge higher in crude oil was being viewed as a deflationary occurence by the bond market, a tax on economic activity, which would slow economic growth. Bonds rallied sharply during that time frame and while the Fed was not pleased to see the spike in energy costs, at least they had the satisfaction of watching bond prices move higher and longer term interest rates move lower.
The problem began in the middle of March when crude oil, not content to sit at $100, went on to spike higher into new ground surging from just below $100 all the way to $113. By then the bond market noticed the move and began connecting the dots and selling off as traders braced themselves for the inevitable inflation outburst associated with soaring energy prices. Whether it was trucking, shipping, railroads, Fed-Ex, UPS, etc; anything requiring energy to move goods was going to be impacted. These businesses had to pass through the higher energy to their customers or end users with the result that the upward price pressures would filter through into the economy. As the bond market sold off and energy stayed firm, the QE program was becoming useless.
Call me cynical, but after looking at the price chart and noting how the rise in crude from mid March onward corresponded directly with a move lower in the bonds, it is evident that the bond market WAS NO LONGER viewing the rise in crude as a deflationary factor as it had done so a month earlier, but was now firmly pricing in the rising price as an inflationary event.
Today we suddenly get Goldman telling the world that the bond market has it all wrong and that the rising crude oil price is going to again be deflationary. Thus the recommendation to sell commodities, gold included, which has the effect of dropping crude lower and moving the bonds higher.
We’ll see how long this “new” mindset sticks around or whether Goldman has singlehandedly managed to enforce a new psychology on the market place. Either way, the Fed is no doubt quite pleased at what they saw today, with the exception of perhaps the action in the Dollar. They can deal with that another day.
The Biblical plagues that beset Egypt did not include Goldman Sachs but the locusts that devoured all that is valuable and consumed it upon themselves have a lot in common with this privileged insider which makes its living by preying upon the wealth of others.
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