Treasury bubble?

The market has bounced strongly and did not visit Dow 7,000 – yet. This may still be a head fake, but it appears for now that the sector rotation is positive. Oil and other commodities will continue their spiral as global recession worries deepen, but another interesting development is underway. This one is rather troublesome too.

This is the chart of the 10 year yield. http://stockcharts.com/h-sc/ui?c=$TNX,uu[h,a]daclyyay[pb50!b200!f][vc60][iue12,26,9!lc20]

You can play around with it and change the time frame. Suffice it to say that the yield is now flirting with historic lows. Why does that matter to you?

Well, first of all, the 10 year note is what the 30-year fixed mortgage rates look at. The lower this yield, the lower the rate. Now could be the best time to lock in a new 30-year fixed rate on your house. Or is it?

It appears that the US economy has gone from bubble to bubble and typically, like a cop investigating the mafia, you just need to follow the money.

So first we went through a massive credit bubble where people were getting loans just for breathing. This lead to all sorts of issues including the housing crisis, but has spread to school loans, credit cards, car loans and the like. Commercial paper is completely in the toilet.
Then money went into the stock market, the Dow especially bubbled over and finally collapsed shaving off about 45% in value.

At the same time, the commodities were raging, particularly oil. Hitting 147 bucks per barrel was not only a death knell for the economy, but a speculation train badly derailed. Remember, when oil/gold lead – a recession is absolutely on it’s way.

After that bubble popped, there should have been some kind of recovery period. However there is a rumbling in the treasury market with bonds reaching historic highs. This is where the money is going? What is frightening is that the bond market is an indicator.

When bonds fall, they are afraid of inflation. Naturally, right? Inflation implies that the power of the dollar is weakening and not only is your purchasing power diminished, but so if your capital. Capital is the difference between the poor and the wealthy. Those that can accumulate capital and wealth, enter a welcomed circle of money making money. High inflation destroys that wealth creation and is often the #1 problem that the Fed faces. During Jimmy Carter inflation was in double digits and the economy was devastated. After Reagan left it was in low single digits, but I digress.

So with bonds rallying as they are now, they are suggesting that there is no sense of inflation. NONE. In fact, they are telling us, that it’s quite the opposite. As bonds rise and yields fall, the implied statement is this; We the bond market, are suggesting that in the next 30 years you will not do any better than 3.5% gain on your money. That is a very depressing notion.

Money is essentially flooding the last good market out of fear, panic, whatever. The bailout that is being foisted upon us by the government is playing a role I am sure and the cheap money (due to low interest rates) is promoting this kind of behavior.

This bubble is not sustainable and if it bursts just like other bubbles, we are going to be looking at a world of hurt. With a falling bond market, the signal will be immediately reversed and panic will grip our economy. At some point, our government will start printing money to pay off our loans and if the bond market bursts, we might be looking at hyper inflation. I frankly do not see any other way around this, the printing presses will start working around the clocks. Either that or our great country declares bankruptcy. One or the other. But before we reach a crisis of epic proportions, back to the mortgage question.

Why would I refinance now if all the money is flooding the bond market. 30 year fixed rates are now at 5.5% or so, but where will they be in a week? month? No, I am going to wait.

Here is a great article that explains the macro of it all.