By: Jim Willie CB, GoldenJackass.com / GoldSeek.com
The USTreasury Bond market breakdown is in progress, all part of the general USDollar global rejection that is taking the world by storm. Of course, residents inside the US Dome do not notice, since they only perceive it as the native currency. From conversations with common folk, discussions with investor types, and general observations for over 20 years, the Jackass belief is that only 5% to 10% of Americans are aware that the USDollar serves as a global financial instrument in contracts, the basis for trade settlement (mostly crude oil), with some extremely important consequences. A major development has begun, much like a metabolic life support system in concert with the Interest Rate Swap derivative contract. For two years or more, the USTreasury Bond market has been deeply dependent upon artificial demand derived from the derivatives. Entire bond rallies have been fabricated with 50:1 leverage, fully supported by the financial network propaganda. Without derivative flying buttress support, the giant USTBond Tower would have collapsed a couple of years ago. Now a new support system has been begun, a dangerous musical chairs long entrenched in the stock market. It has entered the bond market finally. Flash Trading!!
The USFed, the USGovt, and the Big US Banks urgently needed to stop the move in the 10-year bond yield (aka TNX). They needed to prevent a move above 3.0% on the USTreasury yield. They needed to avoid a calamity with both Interest Rate Swaps and USTBond carry trade reversals. They needed to avoid a trigger of sell stops. They needed to prevent the rest of the world selling off USTBonds within their reserves management systems, the foundation of their national banking systems. So the USFed and Big US Banks called upon themselves to place artificial high bids on USTBonds sold among themselves in a circle jerk of Flash Trading. They pushed the TNX below 2.9% quickly in the corrupt process. USFed Chairman Bernanke then backed off the Taper Talk threat, and the USTBonds rushed in a pathetic rally. The Jackass forecasted his retreat exactly, a bluff after a failed trial balloon. The bankers then resorted to the hidden work of computer algorithms. They altered the constructive dynamics of the bond market. They corrupted it one deeper level. The Flash Trade defense is pathetic, and will be revealed in coming weeks. The United States is in the process of being isolated on numerous fronts, as its monetary policy has merged with its military policy, both having merged long ago with its banking policy.
SICKNESS SEEN IN ONE POWERFUL GRAPH
As preface, consider a highly telling graph. No graph better demonstrates the failure of the last five years in monetary policy, and absent USEconomic recovery. The falling Money Velocity means the system is collapsing gradually. The infusion of phony new money is not addressing the key fundamental problem, insolvency of banks, businesses, households, and the USGovt. Putting a $20 bill in the hand of a manager of a broken business does not remove the insolvent condition. It only enables the manager to pay a part-time worker another few hours. The clueless cast of corrupt economists cannot notice, nor admit, that the QE & ZIRP monetary policy (hammer & sickle) is destroying capital by raising the cost structure. The capital destruction comes from businesses losing their profit margin, shutting down a business or business segment, cutting jobs, and putting equipment in mothballs or liquidating it. This is the biggest blind spot to economic policy. Obviously, the economists serve the syndicate, which benefits from toxic bond redemption with free money. The USFed is not engaged in a stuck stimulus, but rather a stuck destruction. The hammer & sickle are symbols of communist Politburo, no difference in contrast to the planned financial structure in the Untied States.
HIDDEN PANIC AT THE USFED
A recent event has occurred, which was brought to the table by an unexpected corner, but a reliable source, who has a banker friend. The bond market has converted into a Flash Trading arena within the bank syndicate to maintain bond prices. This is an explosive development, indicative of unsustainable sovereign bond prices kept up by round robin marked by internal sales within the Federal Reserve banks themselves. Worse, speculation is about to rise that the USFed as a financial firm is suddenly subject to capital rules, with inherent risk of failure. It has stacked up over $3 trillion in impaired assets, much of which are truly toxic. The Taper Talk at the USFed was a ghastly disaster, with financial feces flung in the central bank’s faces. The big new engine that will work to fracture the USFed itself is the reversal of the Big US Bank carry trade in USTBonds. Recall all their boasting about replenishing balance sheets with easy leveraged profits, spouted like junkie morons in 2011 and 2012. It has now backfired to force flatulence into the banker faces in addition to the flung feces. Of course, the financial networks report none of this. The unwind of bond carry trade is a basic phenomenon that any worthwhile bond analyst can observe and anticipate. It is the flip side to easy money gains, namely massive losses.
Two weeks ago, an extraordinary memo was received from a trusted colleague. It could be important in yet unknown ways. The USTBond market is broken, and the USDollar cannot be defended. The memo read as follows. “I spoke with an old banking friend of mine on Saturday who now works as an Executive Officer in the Regulatory Division of the Dallas Federal Reserve. The gist of the conversation was this. There was a panic teleconference among all of the Regional Federal Reserve banks on Thursday afternoon [Sept 5th]. The subject of this emergency teleconference was USTreasury Yields. The perilously low capital of the Federal Reserve was at issue in this meeting, and the fact that they could no longer afford to defend the USDollar at this point. All of the regional Federal Reserve Banks were ordered to unload as many USTreasurys and Mortgage Backed Securities as they could, even though they are selling at a loss, to provide immediate liquidity even at the expense of capital! Eventually, late Friday night a tranche of Treasurys was sold above market price to several Federal Reserve Member banks in order to drive down the yield! You can plainly see this sale on the 10-year USTreasury chart.” Big news! Panic setting in! Unsustainable bond arena! Flash Trading has hit bonds!
More important, WE HAVE NOW SEEN THE BEGINNING OF FLASH TRADING ON USTREASURY BONDS!! A grand round robin closed circle selling program will be relied upon in desperation to maintain price, just like with NYSE stocks in Algorithm Trading. The internal trading volume will grow and dominate the system, just like with the stock market where 80% of NYSE volume is from the perverse Algo Trading. No computer based trading like with Algo Trading is regulated, as the computers run wild. The dangerous times and the instability of bond markets will become major spectacles and news items. The risk will be transferred to stocks, which rise in value from more QE volume flowing into asset purchases, but which fall in value from creeping bond yields. Great instability will be a regular fixture in the US Stock market, and possibly many other national bourses around the world. The next several months will see some important bond market events and likely outsized derivative losses, complete with revelation of USTBond market rigging devices.
REVERSE OF USTBOND CARRY TRADE
Make several conclusions right away. Panic has finally hit the USFed. They cannot defend either the USDollar or its obverse USTBonds, the trading vehicle. They are both at improper high valuations. Rising interest rates will next cause more sales, the dreaded convexity to come into play. The big US banks must unwind their leveraged USTBond carry trade, based upon the bond futures contracts. Watch big US banks sell their leveraged positions that in the past three years provided them supposedly easy profits. The positions are locked in high leveraged structures. The breakdown of the USTBonds and USDollar has begun, a long process having come full circle after the highly destructive ZIRP & QE, both engrained in monetary policy.
The breakdown in the currency and sovereign bond will be aggravated by Interest Rate Derivative dismemberment and colossal losses. The USTB & USD duo breakdown is the visual impact and reaction to the gradual geopolitical isolation of the United States. It was seen in a glaring glimpse with Syria, a call to war, a refusal, and the US looking like a deceptive player with blood lust. The world is reacting to misguided monetary policy maintained by the USFed that supports the Western banks (in toxic bond redemption) but causes nasty problems across the world (in higher food prices). As the USFed and its devoted big US banks conduct bond trading among themselves, the left hand selling to the right hand, it becomes more evident that the USTBond asset bubble is being revealed. The irony is that the aggravating factor is the big US banks unwinding their bond carry trade. Their leveraged sales will result in over-shoots in the bond yield, called Convexity in the trade. Beware of Convexity, and its destructive impact!
USFED INSOLVENCY SCRUTINIZED
Normally the USFed has avoided the need for capital, in justification of its own solvency. It has not been subject to financial requirements, since not an operating financial firm. It is instead a financial fortress standing as headquarters to coordinate bank activity within a vast crime syndicate. Back in 2009, the USFed broke from tradition, by offering a small interest yield for big US bank excess reserves. Doing so raised many questions. The Jackass concluded soon afterwards that the USFed was insolvent, and desired the assets from big nearby banks to disguise and obscure its insolvency. Capital is of concern only when a liquidity crunch is anticipated. Therefore, the USFed appears very worried about a liquidity threat, perhaps from vast demands of USTreasury Bond redemption, perhaps from a breakdown of its own Primary Bond Dealer team.
The game must have changed recently and suddenly. One must speculate that perhaps the USFed balance sheet might eventually be wound down, causing some deep damage. The USFed might suddenly be scrutinized as a financial firm, where it is suddenly subjected to capital rules with risk of failure. Conclude that the USFed received a phone call from a higher power like Basel. As footnote, bear in mind that the public has long maintained an incorrect perception that that the USFed can defend itself from insolvency by padding its balance sheets with assets. This is not correct. This belief of infinite creation of electronic wealth to ward off deep insolvency is a baseless myth. They can add assets with equally offsetting debts, net zero. The USFed is going down the tubes into the sewer, next door to Fannie Mae.
USA CONFRONTS HOT MONEY RISK
The USFed is trapped. It has two lousy alternatives, to continue bond purchases within Quantitative Easing or to taper the QE bond monetization volume. Both result in total wreckage and systemic failure. Continuation is a slow death. Tapering is a quick death. They will choose the slow death, and deny the capital destruction effects all the way to an economic depression. Back in 2009, the Jackass was loud and vocal about the USFed being stuck with no Exit Strategy. At that time, they were trying to extricate themselves from the ZIRP corner, the zero bound interest rate. My forecast was for its continuation almost forever, since damage to the USEconomy would otherwise be quick, and rising borrowing costs to the USGovt debt burden would be intolerable.
The point was also made that the longer ZIRP is in place, the more likely it would remain as permanent, since a huge amount of bond purchases were being made, all to suffer big losses in a backup of rates. Worse, continued ZIRP would affect asset prices, which they could not afford to undergo a correction. In 2011, the USFed began the QE initiatives marked by bond monetization. The QE program itself was a correct Jackass forecast, denied openly by the USFed for months. The point was made that buyers of USTBond issuance would vanish, and the teetering USEconomy would not generate indigenous wealth to save in USTBonds. In 2012, the Jackass was loud and vocal about the USFed being stuck with no Exit Strategy from that destructive disastrous monetary policy again, as in ZIRP Forever and QE to Infinity. Both forecasts are being seen to come true. The FOMC meetings and recent Bernanke speech highlight their plight, no options, no exit, no relief, stuck with destructive monetary policy which cannot be halted or even reduced. In fact, QE to Infinity will be ramped up, with double the volume of USTBond purchases in the next several months. The foreign nations will diversify out of their USTBonds held in reserve, and foreign corporations will dump outright USTBonds, in what will become the grandest vote of no confidence toward US-UK bankers in modern history. The USFed must sop up the supply. The alternatives are truly horrendous.
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