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Graham Summers Weekly Market Forecast (Bond Bear Market On Way Edition)
The most
important piece of news announced last week was the Fed’s release of the
schedule for its second round of QE 2 bond buying. All told, the Fed intends to
buy $105 billion worth of bonds through January 11, 2011. The purchases will
occur practically every other day and are broken down into $6-8 billion
increments.
Now, the Fed
has made it clear that it intends to prop stocks up at ANY cost. The issue is
that there may in fact be a HUGE cost of doing this. Indeed, we are currently
get major red flags from long-term US Treasuries which have broken support and
are heading south in a major way:
What you’re
looking at is a 9% collapse in prices in a little over three months. On an
annualized basis, this would amount to a 36% drop in Treasury prices in one
year. This in turn would correlate
with interest rates EXPLODING into the double digits.
Could this
happen? Well there aren’t a lot of support lines between where we are now and
this future outcome. As I write this, long-term US Treasuries have just taken
out support at 125 and are now resting at MAJOR support at 122.5 A break here
and we’ve really only got two more support lines (117.5 and 115) before we
officially enter a bear market in bonds:
To visualize
what a collapse in bond prices would do to interest rates, consider the below
chart depicting the yield on the 30-year Treasury. As you can see, we’re not
that far off from seeing a MAJOR spike in interest rates.
This would
result in a debt implosion worldwide, particularly in the US. Imagine if
mortgage rates went to 10%. Imagine if the US was suddenly paying 10% on its
debt (we’re then talking about interest payments of $1+ trillion per year).
Imagine what would happen to the $180+ trillion in interest rate based
derivatives sitting on US commercial bank balance sheets.
KA-BOOM!
This is the
BIG story for the financial markets going forward. Indeed, at the prospect of a
bear market in bonds, stocks are virtually an afterthought as most corporations
would soon be in bankruptcy with interest rates at 10+% (profit margins would
disappear).
Thus
Bernanke is literally in a corner here. The only justifiable claim for a
“recovery” in the US comes from stocks prices being higher (thereby increasing
household net worth). However, if he continues to engage in QE to do this he
runs the risk of kicking off a bear market in bonds, which in turn would
DESTROY the US economy AND bankrupt the country.
Will he go
this far to maintain his policies? Who knows, but at this point we’re not far
off from seeing US Treasuries take out their multi-decade trend-line:
Forget
stocks, this is the most important development to monitor going forward. If
Treasuries break down in a major way the destruction will make the 2008 debacle
look like a picnic.
Good
Investing!
Graham
Summers
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Pure nonsense. The 30 year yield will be below 3% in a few years.
To find out more about the Imminent Collapse of the U.S. Economy, watch this video "PUMP AND DUMP HORROR SHOW, END OF U.S. EMPIRE PONZI SCHEME" at (http://www.youtube.com/watch?v=Pf7e7xAm77w).
by Anonymous
This feels like late summer 2008, when the Dow went like a rocket from 10000 to 14000 within a few months and we all know how that ended. I'm all cash now because I'm terrified by what is going on. I think we are headed for a huge CRASH sometime in 2011 or 2012. This time the Gov is so much in debt that it can do nothing and we will slide into the Greatest of Depressions.
Well, he could destroy the Euro instead. That might buy Bernanke another six months.
... just sayin'
You know it is just high time that the Mainstream Media roll out headlines about panic in the eurozone. I wonder what it will be tomorrow.....
Italian prime minister steps down
Irish likely to block bailout
panic on the streets of London as violent riots turn to absolute chaos
volcanoes spontaneously erupt, threatening everything and everyone
Santa Claus found dead in Frankfurt
Spain eats Portugal, Greece said to be hungry too
Run for your lives!
but aren't bond yeilds rising because the jobless, summer of recovery, green shoots, EPS accretive, record cash on the sidelines, margin expansion, low interest rate, FED treasury buying, government debt fuelled economic recovery is strengthening? thats what CNBC tells me? they even said that bond yeilds and interest rates rising are proof of the success of QE2 becuse the bond market is now factoring in stronger growth? it doesnt matter if the benank's stated aim with QE2 was to lower interest rates, the commentators have now changed their mind and risng rates are good and that higher interest rates are just as good as lower interest rates.
You is crazy Mr. Summers.
Yea.. end of the corrupt financial system... wait a minute - I live here !
I have a question. Why is the trendline not connected to the 2000 low? I guess I dont understand what causes the choice to connect the trendline to one low vs. another. If the trendline had been connected to 2000 low than the trendline would have already been broken in the past and it did not cause an implosion.
So, where and when is the Rubicon?
What's to say that the 30Y does not find support at the TL, as it has since 95?
This whole QE thing reminds of the advent of the atomic bomb. The Americans had it first and then many followed.
China seems in no hurry to slow having backed off of widely speculated rate hike.
Who wants interest rates at 10% except shorts, and then they all suddenly turn into rich democrat liberals or wealthy compasionate god loving/fearing republican conservatives.
Looks a lot like too many with too much at stake in this deal.
Nice article.
Dear Zero Hedge: please don't let this Graham Summers clown post anymore. His analysis brings nothing new or interestingt o the table and is typical perma-bear stuff. I say this despite the fact that I agree with him 75% of the time.
FIRE IN THE HOLE!!
Now I was always told that stocks and bonds are not supposed to be perfectly correlated and that's why diversification across stocks and bonds works. It's not unusual for bonds to go down when stocks go up is it?
Correlations change. They are not fixed relationships; they change due to a variety of factors. As an example, speed of movement is one such factor. That is why you see everything get highly correlated during high speed waterfall declines.
Many articles written about a root cause of the most recent crises was some errant math related to mortgage defaults that used correlation as a fixed relationship.
So, no, its not unusual for bonds to go down when stocks go up, but it is unusual for stocks to go up when bonds go down. But seriously, they have gone through cycles of positive and negative correlation over the decades. Bond investors need to study 1994 very carefully to be sure they are somewhat prepared.
But... But... ...I thought Oz was all powerful?!