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RVAspeculator (28.42)

Only 2 Billion of government treasury purchaes remain.



October 22, 2009 – Comments (10) | RELATED TICKERS: GAP.DL2

Ironically the start of this bear market rally was kicked off when the Fed started its “Quantitative Easing” program.   In layman’s terms this means the government printing money to buy treasuries.  It is one of the only times in our monetary history that we have done such a thing and if you have been reading this blog for a long time you know that I call this the “Big Red Button” or the “Nuclear Option”.  

I said for a few years that they would only use the “Nuclear Option” if their backs really got against the wall and there was no alternative.  I also said that at some point they would do it even though it would be horrible for our economy.   Well in March that is exactly where they were and as I expected they hit that button.  

In all, the program was somewhat successful in holding rates down for the short run.  The 10-year bond was trading at 3.00% when the program was announced.  (up from 2.00% at the lows)  Even with the massive rally in stocks which would usually cause a large flight from bonds the 10-year today is only trading at 3.40%.   This is because the Fed was pouring in billions in purchases every week from today since March.

Now I see this story on Calculated Risk which says that with the Fed’s 1 billion in purchases yesterday they are left with only 2 billion of the initial 300 billion.

Back in May 2009 I wrote a blog here called:

“Dollar or the bond market Benny, your choice…”

This is what I said at that time, this is when rates started to rise and the dollar first really started to fall.



The people selling the bonds were selling to force the Fed to buy more.  Whenever a market participant makes a bluff like “Paulson’s Bazooka” from last year the MARKET CALLS THE BLUFF.  That is why the yields are rising.

The people selling the dollar on the other hand, were selling because they are AFRAID that the Fed will print money to buy more.

So now the Fed has a choice. 
1. Buy more bonds now and continue the dollar obliteration but hold down yields a bit..
2. Don’t buy more bonds and watch the dollar strengthen but yields rocket higher.

Because I think they are going to chose #1 I covered most of my shorts in real life…  I went heavily short at 888 back on April 30th and today we closed at the same exact level (888).   I still think stocks could be headed a GREAT DEAL lower but I thought the more “sure thing” at this point was gold and gold stocks yet again.  Plus those ultrashorts BLOW and I don't like using puts.   I bought a lot of gold on the break of $930 a few days ago and some of my favorite miners at the same time.

That worked out well, unfortunately I did not have the conviction to hold all of those positions till today but I always hold a good amount of gold.


So now we are at an interesting crossroads.  Really I should have saved the title “Dollar or the bond market Benny, your choice…” for today’s post.   When I wrote that post the Dollar was trading ABOVE 80 on the USDX and the 10-year bond rate was only 3.20% 

Today the dollar is down below 75 and even with all the billions in buying from the Fed rates are just a bit higher at 3.40%.  On one hand the dollar crash has to be getting out of control even in the Fed’s mind at this point.  We have Oil over $80 even though there is practically no demand for it because of this dollar issue.  On the other hand the real estate market has not turned and higher rates at this time would still be disastrous for this economy.

Because of these issue I believe the Fed will wait before this issue a second Quanitative Easing program.   They are going to spend their last 2 billion next week and see how the auctions go without them buying.   I think the auctions will go poorly but if stocks were to roll over a bit the “flight to safety” could keep the bond market from outright crashing.  This will allow them to hold off from a second program.

Either way if the Fed does not issue a second program yields are going to go higher unless stocks REALLY crash (down more than 40%).  Even with a stock market crash I don’t see the 10-year ever getting to it’s December 2008 low yield mark of 2.00% where I called the bottom.

The only way that is going to happen is if they hit the “Big Red Button” again.   If they were to do that though I believe we truly would be at the endgame for our currency.   Seriously if they were to issue another 1 trillion MBS/Treasury purchase program I would be joining the camp of the hyperinflationists.  Currently I am still solidly in the camp of the stagflationists (the guys who are winning in 2009). 

Because I think they know at least as much as I do I believe they will hold off on a second Quantitative Easing program and we will get to see the TRUE treasury market over the next few months.

Let’s hope we don’t have to see what happens if/when their back gets to the wall again.

10 Comments – Post Your Own

#1) On October 22, 2009 at 5:58 PM, RVAspeculator (28.42) wrote:

Damn you lack of spellcheck in CAPS...   purchases!

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#2) On October 22, 2009 at 7:28 PM, rofgile (99.20) wrote:

Funny how the market turned around today?  Seems like your call yesterday of a new market top might have been premature...


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#3) On October 22, 2009 at 8:19 PM, RVAspeculator (28.42) wrote:

Really we only retraced a bit more than half of the losses from yesterday.

Of course it was not an encouraging day for the bears.What I am using to determine a breakout is the Russell 2000. 

If you notice even on yesterdays run the Russell 2000 index has not even taken out its high from September 23rd.

On September 23rd Russell 2000 high was 625.31

On October 19th the high was 624.13

On October 20th the high was 623.28

On October 21 the high was 622.69

So here we are a month from the September 23rd high…  The Naz and S&P have made new highs (yesterday) yet the Russell has still not taken out it’s high.

Currently the Russell is trading 613.38 and looks like it will gap up a few points Friday.   I want to see 626 taken out (the September high) before I call this recent top call a failure.  

Anything can happen in this market but that is the proof I am waiting for.  

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#4) On October 22, 2009 at 9:02 PM, XMFSinchiruna (26.51) wrote:

Rec #12 from me.

Rising interest rates would fulfill step #11 out of 12 in Jim Sinclair's formula issued in 2006.

An ecxellent discussion ... thanks for posting!

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#5) On October 23, 2009 at 2:44 PM, jesusfreakinco (28.20) wrote:

RVA- right on...  I am still trying to piece together all these data points...  I'd appreciate it if you took at look at my blog today and gave me some feedback.  I think we are on the same page.


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#6) On October 23, 2009 at 3:14 PM, IIcx (< 20) wrote:

Rec #32 - great insights

There's also a factor in play that will contribute to or eliminate the downward spiral. Foreign currencies are also likely to start printing to maintain exports and support their short term recovery.

If they coordinate, wouldn't that maintain a balance until they all tighten together down the road?

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#7) On October 23, 2009 at 3:37 PM, RVAspeculator (28.42) wrote:

Thanks llcx,

So far they have NOT really done much coordination...  see the Aussies raising rates and the Canadians talking about it and the ECB's recent hawkishness...  If they did all that will do is drive commodity prices even higher and cause inflation because of EVEN more of a flight away from the global bond market.   This would cause the need for MORE monitzation and you see the spiral that would be created if this were to happen.

I do not see this global coordination..  We saw a bit of it in 2008 but in 2009 we have seen quite a bit of pushback as other countries realize that here in the US the imbalances were some of the most extreme.

You are correct though that if we get more coordination it will at least hold the USDX up.

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#8) On October 23, 2009 at 5:17 PM, IIcx (< 20) wrote:

Thanks RVAspeculator,

The “Big Red Button” is a great point "when" they are pushed up against the wall and have no choice.

Is the G20 a "flim-flam" game or are they negotiating like our lame politicians for the "pork". ;)

I don't see a downward spiral because all govs in the world don't have sufficient military to control the consequence.

They are coordinating because they have no choice.

Very scary times :( 

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#9) On October 23, 2009 at 5:45 PM, IIcx (< 20) wrote:

The interesting "Caveat lector" to my last comment is the realization that creative cycles typically more in 100 year spans. The '60s were very creative and the '10s appear to be the opposite. Our country is chocked full of '60s babies with very deep pockets at a point in time when the "Stupid" generation needs a handout.

One way or the other the USA will survive in "'60s style" :)

Best, IIcx 

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#10) On October 23, 2009 at 5:56 PM, IIcx (< 20) wrote:

please forgive the errors: more in 100 year spans. s/b move in 100 year spans.

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