Bonds showing strength, for now.

Today, the bond market strengthened which is expected due to the sell off in the equity markets, as I talked about last week. I expect another day of weakness in stocks, and than the perma-bulls will give it another attmempt to push prices up higher. The key is to watch whether or not the major indexes will push through their highs. If so, then the bond market will resume its fall, pushing rates up higher and commodities higher as well.

I want to repeat, that the status quo of higher stocks=lower bond prices, and lower stocks=higher bond prices, is only a sure bet if the economy as a whole is expected to have a normal recession, with a normal recovery, and that the government keeps its spending in check, which none of these is the case.

Remember, that from January 1st till the beginning of March, stocks and bonds were both selling off, allmost in tandem.

Now this is the death spiral that we are afraid of: All of the pundits on the business news, all of the politicians, and all of the experts on wall street have been saying that the economy has hit bottom, and that now is the time to be buying stocks. This same thing happened throughout all of last year, but on a smaller scale. After the Bear Stearns debacle, everyone signaled the all clear horn that the worst was passed, the market rallied, and then more bad news trickled in only to have another big sell off. Everyone on the t.v. would be saying the they expected next quarter, or maybe two quarters things would be getting better. That is the same thing that is going on right now. Everyone is banking on the 3rd and 4th quarters things to turn around.

Let me tell you this. This notion that the economy is going to turn around late this year or maybe early in 2010 is the only thing holding our fragile economy together. The false hope that somehow foreclosures are going to stop, the commercial real estate bubble doesn't pop, job growth will begin to grow, and that the consumer will start to spend again is what gives current U.S. Treasury holders hope that our government will be able to bring in the tax dollars to begin to pay back the debt.

Now I do believe that the largest U.S. debt holders are not buying into this false hope, but they are in a bind because if they were to start to dump large amount of our debt, they wouldn't be able to sell it quick enough to keep from destroying the worth of what they had left. So my theory is that the big debt holders like China, Russia, etc.. will divest out of U.S. debt, putting constant pressure on bond prices, pushing interest rates up higher. Now if you have been paying attention to the news, you should now that the federal reserve has made a commitment to purchase treasuries, in an effort to drive down interest rates to help in the recovery effort. Now if the Fed is purchasing Treasury Debt, and China and the rest of the world is selling it, the fed is going to be forced to purchase at a higher rate if they want to artificially keep down interest rates.

Do you see the vicious cycle we are going into. I am not a pessimist, I am a realist. You cannot create an oversupply of anything, and expect the value of it to remain strong.

I could go on and on about this and I do not have a higher education, and your telling me the people running our monetary system and the people running our government dont know what they are doing?

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Cash21