Friday, February 26, 2010

Look Out Ben, Rates Likely to Surge

What a surprise. Consumer confidence is down! The recent economic weaknesses are shining through causing havoc on the markets. Such market movement really drives home the total disconnect between Wall Street, Economists, Politicians and the everyday public. Hardly a day goes by where I don't talk to someone who tells me that they've never seen it this bad. So many are discouraged and feel helpless. The fear is pervasive, as it has been for many months now. How can it be that Wall Street has been so confident. I guess when you make millions and millions each year, you lose touch with reality.

But I had expected some weakness in rates this week as I am a strong believer in the three-week testing mechanisms that the market so often displays. It's hard to make a strong surge through the 3.8% mark on the 10-year notes without some kind of testing of recent low levels. I believe that this is what is happening this week. It appears that we are making a strong basing action here, positioning ourselves for a push upward.

It's no surprise that consumer confidence is low. The job market's weakness has been continually understated. It seems that the whole bailout package was intended to bolster the banks and hopefully, give confidence to the public. But the public has no confidence, not only in the financial system but in our political system as well. But none of this matters. The markets are still being driven by trillions of dollars of new money being injected into the system but this cannot last forever. While Ben Bernanke wants to keep rates low and will do all he can to do it, in the end, the markets do what markets do. At some point, even the Federal Reserve and the Government will not be able to keep rates down.

The trillions of dollars have been bolstering a lot of economic numbers. GDP projections are for upwards of 6% growth! How can bonds realistically be rising? How can interest rates be falling? This cannot be reality. How does an economy eke out a 6% growth and interest rates languish? At some point, the investing public and holders of debt are going to rebell, pushing rates sharply higher.

They have kept interest rates low for years now and in the end, holders of the long bonds are going to be punished. It's too bad for those who had sought a safe investment in one of the mightiest countries in the world. But business and market cycles are inevitable. No matter how much the government and Federal Reserve have tried to manage the ebbs and flows of business, like Mother Nature, you can only tinker for so long and then Nature unleashes her force.

The three-week test of the low has been a very reliable indicator over time. While nothing is fool-proof, one only need to look at the trends. There is a persistance for upward rates. The only way that the government is going to be able to stop it is for them to come out and tell us that in reality, all of Obama's efforts have been in vain. But that's not how the administration puts it. They are basking in the glory of supposedly heading off another depression. But as our leaders' past efforts have only led to more and more bubbles, I'd bet that perhaps the final bubble has been forming and when this bubble bursts, we will be happy that we had been positioning ourselves for the upward spikes in rates.

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