Monday, December 13, 2010

Signs The FED is Failing on its Ill-Fated Mission, Bond Markets Imploding Like the Metrodome´s Roof

12/13/2010 Cochabamba, Bolivia – Pop in your mints…
We have spent the past couple of days attempting to get our wits about us.  After a 24 hour excursion to the southern hemisphere in multiple airplanes in between sea level and La Paz, which boasts the highest altitude commercial airport in the world, to Cochabamba, our home away from home.  You will forgive us if we are seeing things upside down.

Today we see that Bolivia was the only nation not to sign off on the climate pact in Cancun.  One thing we love about Bolivia is that it refuses to go along with the rest of the world.  Bolivia did not sign off because they did not feel that it went far enough to protect the "pachamama", or mother earth.  Oddly enough by not signing off on the deal, it could become home to anyone seeking a "pollution haven" similar to a "tax haven" in the bahamas.  We pray this does not happen but the speculation will help us prove a point about the effectiveness of government action.  Try to stay with us.

What we are witnessing we can hardly believe.  Not because it is happening but because in a strange way we were able to predict it.    We tried to communicate what we saw coming by using words like "Armageddon", by showing footage of "Mega-Maid", and other strange tactics.  As certain as we were of the logic of what we saw, we did not quite believe that it would come about so soon.  It used to be that once we were sure of something the only sure bet was against it.  Now, we cannot even be guided by trusting our own incompetence.  What to do?

What gives rise to this musing is that the Bond Market appears to have begun to implode.  Please, we beg of you, give us one reason for it to rise!  What possible reason could there be?  Yet for some odd reason, over the past year, bond prices defied gravity.  We are now seeing that the law of gravity is in full effect.  

The Metrodome in Minniapolis was kind enough to give us a visual aid for the word "collapse" over the weekend.  A short video of the event courtesy of Fox:

If you have been following The Mint, you will recall that in early November the FED promised to lauch a program that has become known as "QE2" in which they pledge to print $600 Billion dollars out of thin air and buy US Treasuries to ensure the low yields to which the US Economy has become addicted.  We ask, if the money to buy the Treasuries comes out of thin air, what does that say about their value?

As if on cue, yields on the 10-year Treasury Bond, one of our key indicators here at The Mint, have risen roughly 25% since the announcement.  Why the rise when the FED, the most powerful force in the financial world, has its guns trained on lowering the yield?  The answer, we offer, lies in the fact that you can always count on the government to do the wrong thing at the wrong time when it comes to the economy.  Just as England sold its gold reserves in the year 2000, an event that effectively marked the beginning of the bull marke in gold, so it appears that the FED is making (or may have already made) its largest investment in Treasuries right at the tip top of the Bond Market.  Now, even though they pull literally EVERY STRING in the Bond Markets, the FED cannot seem get yields lower.

You see, fellow tax payer, more than careful analysis or trust (in our case mistrust) of your own gut feeling, you can always count on governement intervention having the exact OPPOSITE effect of its stated goals in the long and sometimes short term.  The reasoning for this is complex but we will boil it down to this.  Since government action almost by definition means confiscation and redistribution of property from those who have it to those who do not, a predictible pattern emerges.  When the masses plan to take something by sheer force, those who created that something are often clever enough to foresee that the jealous use of force will eventually be used to confiscate it from them.  Because they are clver, they move to protect themselves covertly and completely from the planned confiscation.  

Or stated, more concisely, great minds will always triumph over great force.
Stay Fresh!
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Key Indicators for Monday, December 13th, 2010
MINT Perceived Target Rate*:  5.25%
Unemployment Rate:  9.8%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,410
M1 Monetary Base:  $1,905,100,000,000
M2 Monetary Base:  $8,779,900,000,000

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.