Monday night Jim Sinclair wrote the following:
Interest Rates And The Government Bond Market Are One And The Same
February 4, 2013, at 4:56 pm
by Jim Sinclair
My Dear Friends,
This little email may be the singular most important market relationship you need to understand as we make our way through market being manipulated everywhere by special interests both government and private in unison either by plan or planned accident.
Interest rates and the government bond market are one and the same.
You cannot predict higher interest rates if you also predict QE to infinity. QE is the non economic purchase of government and other debt securities. Therefore as long as QE expands to meet the size of bond offering, the bond market will stay bullish and interest rates will not rise significantly.
If you adhere to the prediction of higher interest rates then you are saying QE will cease or contract significantly. As long as QE is increased, as it just has been, bond bears will continue to get crushed.
You cannot separate predictions on interest rates from predictions on the conditions of the US Treasury market. Interest rates and the government bond market are one and the same.”
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To this I say yes and no. Yes, “official interest rates” ARE the government bond market but, what about interest rates on municipal, corporate and mortgage backed bonds? And what about the interest rate that us “expendables” have to pay? Theoretically the Fed can (to a great extent they already are) BECOME the bond market. They can print and issue Dollar credits in any sum necessary to provide the Treasury funding for ANY amount of borrowings. But what will happen when foreigners get so pissed off that they sell everything they’ve accumulated over the last 30 years?
Yes I know, the Fed can just conjure up another $8 or $10 trillion to absorb this supply and go merrily down the road. But this is “theoretically,” the practicality of the situation may be more difficult. You see, the assumption is that we are talking some $16-$17 trillion in total debt. What happens with the notional value of Treasury derivatives totaling well over $200 trillion? Yes, it will be printed but how credible is this? Again, theoretically this CAN be done and it surely looks like this is the pathway and WILL be tried but good luck in the real world.
The Achilles heel in my opinion will be the teeny tiny Silver market. Central banks can still conjure up enough gold to deliver, silver is a different story. It is not held by any central banks and has been in supply and demand deficit for over 20 years. Where the Treasury market can be held together with “supply” of new Dollars, silver delivery will eventually not be made and “default” will occur. The obvious Ponzi nature of the system will then be exposed for even the most mentally challenged. Gold and silver ARE money. They compete with Dollars which is why their prices are suppressed. What will happen when either of these become so scarce that there is none?
So let’s look at “interest rates”, as Jim says, “they can’t go up.” Does this matter? Well yes because if rates go up in the U.S. they will go up for all sovereign nations and we already know that debt service is unsustainable at higher rates because of the gross underlying amounts relative to economic activity. But wait, do they REALLY matter in the U.S. Treasury market? They used to but in reality it’s a moot point now. It’s a moot point because when all is said and done you must look at “value,” REAL value.
Here we have a market that is totally self contained. The Fed issues Dollars to fund Treasury debt who continually must borrow more to pay the interest (never principal) back so the Fed must continually issue more Dollars so that the (debtor) the Treasury does not default. One big happy circle! But, what is the REAL value of all of this? In essence it is zero because the basic premise is a fraud! One big giant Ponzi scheme if you will, …aaannnnd what must by definition happen to any Ponzi scheme? They ALL fail no matter how grand, intricate or all encompassing.
Let me explain this in another manner. If inflation is running at 10%, 20% annually or 100% per month and interest rates are at zero %, what is the real “value” of your 10 year Treasury bond? If the real value of a Dollar is little to nothing then what is the real value of your income stream of Dollars? Jim is simply pointing out that in “nominal terms” Treasury bonds will be propped up until the very end and that “bets” on “nominal or official” interest rates rising is a poor one.
I mentioned in the previous line “until the very end.” The very “end” is when the system ceases to function. The “end” is when “we are the world” has a total banking holiday. The “end” is when you wake up one morning and your Treasury securities have NO value and thus interest rates finally went to infinity which by definition they must as “QE” goes to infinity! In other words, rates may not go up but that doesn’t mean that your bonds haven’t declined in real value and all of a sudden reflect this reality when it counts the most! It will count the “most” when bare naked reality arrives. This will all be so obvious, blatant in your face and “how could no one have seen this coming” …AFTER the fact.