USTBonds: Black Hole Dynamics

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USTBonds: Black Hole Dynamics
by Jim Willie CB - Hat Trick Letter
Published : June 06th, 2012

Keywords : 10 Year Bond - AIG - bailout - Borrowing Costs - bullion - B-Wave - Central Bank - China - Collapse - COMEX - Commercial Paper - commodities - default - Fannie Mae - Federal Reserve - financial repression - Gold - Gold Bullion - Gold Cartel - gold demand - Gold eagle - Greece - hedge - India - Japan - lead - Merrill Lynch - Monetary Policy - Naked short - Newspaper - oil - Reality - Recession - recovery - Russia - Silver - Switzerland - Vault - Willie - ZIRP -


Man-made financial phenomena imitate nature, but more importantly they are subject to the powerful laws of economic nature. The Wall Street financial engineers have built vast structures, which tragically are crumbling and soon will fall to the ground. Vast illusory wealth will be lost, never truly garnered. The fiat currency system has required tremendous efforts not only to build the financial skyscrapers ever higher each year, but also to provide support structures that prevent their topple. With the aid of the subservient press, an illusion of wealth, prosperity, and stability has been fashioned and defended. It is all being blown away by the powerful storms known as the global financial crisis. The term has even earned an acronym for the popular lexicon GFC. My alternative view is that the global monetary war is in full swing, World War III with the USDollar at the epicenter of the conflict and pecuniary violence. A few years ago in June 2005, the Jackass penned an obscure article entitled "Financial Market Physics" just for amusement. Thanks to Vronsky and his intrepid work, the Gold-Eagle archive still lives (for old article CLICK HERE). In it was described momentum, pendulums, traction, leverage, resistance, support, inertia, coiled springs, meltdowns, high versus low pressure differentials, flow dynamics, imbalances, and the infamous black hole. The final concept is of extreme relevance today.



My objective is to explain how the crumbling USTreasury Bond tower has an effect on the ground. Last article dealt with the inevitable collapse of the tower, since its support buttress in the Interest Rate Swap has begun to rupture. My best source claims a trigger mechanism has been pulled from deep within the USTBond/IRSwap system managed by JPMorgan. The collapse is assured. It cannot be stopped. It will continue until its conclusion. In the wake of the collapse are dynamics on the ground, at the site of the tower. A grand black hole will be formed, complete with tremendous power to suck down all assets. The process has already started, sucking down weak sovereign bonds and junk corporate bonds. My purpose will be to describe the process from the top down, then the bottom up, as lost faith in all things paper gathers like a gigantic storm that covers the entire earth. The great power is seen an the following image, a great piece of Fotoshop work in itself. Money vanishes in the hole. Notice how in the past few years, grand bank aid has come, $trillions tosses at the banking structures. Yet they are still insolvent, in ruins. The money went into the Black Hole, which should include Fannie Mae and AIG in a wider focus.










The tremendous power in nature for similar anomalies can be seen in a gorgeous water hole, whose location could not be verified with a little research. Also the awesome beauty of the inter-stellar black hole has been captured probably by the Hubble telescope. The intense gravitational field traps all matter, all wave elements (such as transmissions), even light itself. Black Holes in nature occur when a star dies, its mass collapses, to produce a gravitational field beyond what can be managed in a stable system. That star is the USDollar core and revolving USTBond system, which are collapsing. Some scientists believe alternative universes lie on the other side of such voyages through the eye. The water that descends into the hole goes into the ecosystem, recycled, maybe purified, only to emerge elsewhere on the other side. If only the Western bankers could be forced to travel through the astronomical eye, suffer the crush, and emerge in another world far enough away not to harm the population. Could the light flashes be dragon breath on each side? The poles could be viewed as producing future Gold demand.












JUNK BOND RELEASE VALVE



The top has many forces. The impaired higher risk bonds are shed like yesterday's trash with newspaper wrappers (prospectus filings). In the Hat Trick Letter May report, the topic of widening junk bond spreads was exposed. Mistakenly in my view, the Seeking Alpha author describes the junk bonds as offering good value, only because their yields are higher than before. Those yields will go higher still, much higher, corresponding to much lower values. In the process of shedding the high risk bonds, investors will turn to the supposed safe haven of USTreasury Bonds. The author points out that in the last month alone, the situation has worsened. He wrote, "As I mentioned in a recent article, high-yield spreads to Treasuries, as measured by the BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread, recently reached a new high for 2012, now at 7.17%, up 123 basis points in the past month alone." It has risen 17 basis points so far in June alone, in only three active trading days. If still rising, the junk bond value continues to fall. He went on to compare to historical levels, without paying much attention to the acute risk of the spread widening considerably further. The junk spread can move fast, as seen in the last crisis chapter. It went from 3.73% in January 2006, to 5.92% in December 2007, to 21.8% in December 2008. It could repeat such exaggerated moves in the current crisis. See the Seeking Alpha article (CLICK HERE). The multi-year chart shows the early stage of another eruption.










A closer view was given just a couple weeks ago. Notice the divergence process underway, as the junk bond yield index moves up and up, but the USTBond index moves down and down. In the last couple weeks, my forecast of a 1.5% USTBond yield on the 10-year came true. That was one of the easiest calls in my memory. The trajectory on the junk yield (in blue to the sky) continues to go higher, while the trajectory on the USTreasury yield (in brown like feces) continues to go lower. Next will come the more mainstream corporate bonds, tomorrow's potential junk bonds, which will be sold off in favor of the USTBond for perceived safety. We are already starting to hear the chorus on the favorable performance of USTreasurys, the lone winner in the crowd. The financial press anchors and analysts simply do not comprehend that the USTBond is the final asset bubble, how its rise means the failure of other assets, how the implosion has its epicenter powered by 0% by the USFed itself. The faith shown to the USFed has become a more desperate hope. Ignored has been the 30-year USTBond. If its yield goes from 2.65% currently to 2.0% as is likely, a ripe 15% profit can be gathered. Not bad in today's ugly climate.



THE PRIMARY QUESTION WITHIN THE CRISIS SETTING SHOULD BE: WILL THE SYSTEM IMPLODE BEFORE THE 10-YEAR YIELD REACHES 1.0% ???










DISTORTED MONEY MANAGEMENT



An interesting little exchange occurred this week between the Jackass and Tyler Durden, the crack analyst editor at Zero Hedge. My point was that he misses the point of capital destruction from the ZIRP policy of enforced 0% as official rate. He argued two excellent points that did sink into the stubborn Jackass brain stem. Artificially low interest rates enable consumers to spend improperly and unwisely. The setting was prepared by an unusually enlightening debate between Rick Santelli and Gary Kaminsky on CNBC, the official Wall Street public address system wall with loudspeakers. They argued that the now status quo financial repression identified by low interest rate and QE environment are not good for the USEconomy. How true!! But this spout of wis