Bonds have defied Ben Bernanke

Dec 10, 2010

Baltimore, Maryland

As were the days of Noah, so will be the coming of the Great Correction 38 For as in those days before the flood they were eating and drinking, marrying and giving in marriage, until the day when Noah entered the ark, 39 and they did not know until the flood came and swept them all away, so will be the coming of the Great Correction..

Apologies to Matthew 37

- Sent to us by a Dear Reader

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Gold + $9.

Dow - 2.

What more do you need to know?

Well, what you OUGHT to know is that the bond market may finally be cracking up.

"People are getting at the speed of the rise in yield," says a 'strategist' quoted by the Financial Times.

Bond buyers are leaving the scene of Bernanke's crime. They are packing up and moving out.

The yield on the 10-year note hit 3.33% on Wednesday...a full percentage point over its October low.

Whoa. The bond market is the biggest, most important market in the world. What would cause a 25% move in so little time?

Bernanke pledged to low bond yields (raise bond prices) back in August. He said he would buy $600 billion worth of US government bonds with money he was going to print especially for that purpose. And another $250 billion more with money he got from selling those mortgage backed monsters he acquired in the Panic of '08-'09.

You'd think that a guy with $850 billion in his pocket could pretty much name his own price. But central planners always seem to run into a ditch. Even with their eyes wide open and GPS on the dashboard.

Here we are almost at the end of the year and what have bonds done? They've gone down!

They defied Ben Bernanke and all his ilk. They thumbed their noses. They turned their backs and dropped their pants!

We're beginning to feel a little sorry for Ben. He's like a rich kid in school with a flashy car who still can't get a date.

Oh, the humiliation! Oh, the shame of it!

Wait a minute. We're not going to waste a minute of sympathy on the little creep. He got himself into this mess - against our advice. He should be grateful they don't castrate him. Or run him out of town on a rail.

Lucky for him they don't do that any more.

The Great Correction, mentioned above, is still on-going. Unemployment numbers actually got worse in the latest reading. So did homing pricing. As for retail, holiday-inspired spending, the figures are mixed.

As near as we can tell, de-leveraging has a ways to go. A long ways. Say, 7 years?

Maybe longer. That's how long it OUGHT to take to squeeze the debt out of the system.

But Mr. Bernanke, the aforementioned little creep, is making it a lot harder. As the private sector squeezes debt out, Mr. Bernanke pumps it in. That's why we're seeing such crazy anomalies. It's a correction - yet commodities, emerging market stocks, collectibles, oil, gold...all are flying off the shelves and out of the wells.

Did you see what happened to Audubon's bird pictures? A book of them sold for $14 million at Christies. Okay...he could draw some cool fowl. But $14 million worth? Our guess is that the price tells us more about Mr. Bernanke's cuckoo money machine than it does about the bird man.

And look at what is happening in Australia...below....

And the strangest anomaly has got to be the rise in interest rates. Whatever good Mr. Bernanke thinks he is doing is surely undone by rising rates. Now, he can print all he wants. He may make an even bigger mess of the economy, but he won't be able to get interest rates down that way. He prints...the feds spend...and rates rise, squeezing the real economy even harder.

Rates rise like Noah's floodwaters. Make sure you've got an ark.

*** We should have more thoughts. But to tell you the truth, many of our thoughts went out of our head on our recent round-the-world trip. You need constant air pressure in order to maintain thoughts. And regular hours. Start getting up at midnight and going to bed at noon; thoughts have a way of disappearing by late afternoon. If they were ever there in the first place.

One thought that disappeared somewhere over the pacific was this:

The suntanned country must be close to getting burnt.

Australia is booming. Prices are high. It cost $38 for breakfast in the Crown Towers hotel. Even so, you could have only one cup of café latte. You'd have to pay extra for another one.

Our total bill for 3 nights was over $2,000. Impossible? Well, we thought so too. But when you throw in a bit of laundry...transfer from the airport...and breakfast for a friend, not to mention a consumption tax of $184, you end up over 2,000 bucks - without even a single dirty movie.

The boom has been going on Down Under for the last 19 years. Not even the Great Correction is stopping it. Each year, it sells more dirt to Asia... from 40% of its exports 10 years ago to 72% today. It should probably just sell all of Western Australia to the Asians and be done with it.

Meanwhile, the Ozzies enjoy their boom...raise their glasses...and throw raw meat on the barbie. Our colleague's house in Melbourne has risen 200% in price since we sent her there 4 years ago. And it's still going up. Converted shipping containers, transformed into mobile homes, sell for as much as $1 million. And truck drivers in the mining areas earn more than $100,000 a year.

How long can this go on? We don't know. But our advice to our colleague was simple enough:


*** From the Daily Bell:

"The problem with where America is now is that the country has been built on one lie after another for the past decade and the lies show no signs of slowing down."

*** And here's the Bloomberg report on the tax deal. As you will see, Congress will do 'whatever it takes' to continue spending money it doesn't have, including ignoring a law it passed last February:

"Congressional Democrats and Republicans are preparing to set aside their budget constraints as they negotiate the extension of income tax cuts scheduled to expire this month"

"Their plans to declare a budget emergency as they approve the extension of tax cuts will override a "pay-as-you-go" law that was structured to limit Congress's ability to finance higher spending or tax relief by expanding the budget deficit."

"Extending all income-tax rates for two years, along with renewal of business tax breaks, relief from the alternative minimum tax and other moves such as expanded unemployment insurance could add about $750 billion to the deficit over the next decade, about $300 billion of which is beyond the deficit- expansion which the "pay-as-you-go" law would allow.

"For all the campaign-trail rhetoric about deficit reduction and recent attention focused on a bipartisan fiscal commission, Republicans and Democrats alike say the so-called "paygo" law won't be a procedural or political obstacle to extending all of the tax cuts without offsets in spending. "

"The paygo law, signed by President Barack Obama on Feb. 12, generally requires that tax cuts or increases in mandatory spending be offset by spending reductions or revenue-raising measures. The law allows Congress to exempt about $1.5 trillion if needed to extend many of the Bush-era tax cuts."

"That paygo law is just used to increase taxes," said Senator Orrin Hatch of Utah, who is in line to become the top Republican on the Finance Committee next year. "It doesn't make a hill of beans what the difference is as far as cutting back on spending and the overregulation that these Democrats have brought to this country."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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