Nuclear Bond Implosion Ahead As Long-term Inflationary Expectations Rise

By: Alex_Wallenwein

The US Fed's measure for long term inflationary expectations may keep it from dropping rates much further, potentially setting off a 'nuclear' bond-price implosion. An only hours-old Bloomberg article details why "Chopper-Bernie" may have to ground his inflation-helicopter much earlier than anyone expects.

In essence, an inflation indicator used by the Fed, and literally signed off on by Alan Greenspan, indicates that bond investors' long-term inflationary expectations are on the rise - and significantly so.

Bond investors have recently been lulled into a false sense of security by the alleged 'fact' that inflation remained so low.

That sense of security is now flying out the window.

It's no secret that we at the Small Business Goldmine believe the Fed has been buying longer-term treasuries and thereby has manipulated what the public uses as its gauge of inflationary expectations. Whether that is so or not, if investors - especially those of the institutional kind - are now smelling inflation in the air, the Fed's buying efforts could be drowned out in a second and a half. The bond market is just that big.

Now, we all know that rising inflationary expectations limit the Fed in how low it can go with its funds rate, so one or the other thing will have to give.

What will have to give is either the Fed's laughable pretense of being an "inflation fighter" (right - like a fuel-tanker truck claiming to be a fire truck!) or it will lose its ability and willingness to lower the funds and discount rates.

Our guess is that we will see the Fed's inflation-fighter image go "poof" within the next few months, and that means we will all get our interest rate crack that we depend on so much - but at a far higher cost than anticipated.

The cost will be very palpable. It will come in the form of literally everything . Inflation, inflation, inflation - and that will mean bond traders and investors will sell, sell, sell.

Ironically, that will have the effect of raising long-term interest rates because bond prices move inversely to bond yields, and yields in turn determine long term rates like those on - mortgages.

Ouch!!

It's ironic because it means that, the lower the Fed will drop its short term rates, the higher the longer term rates will go - and that will stop longer term lending in its tracks.

Note that when we say "longer term", we are talking two-year time frames or shorter here.

Nuclear fissions or fusions usually cause ex plosions rather than implosions, but what is coming will turn that erstwhile principle of physics on its head.

What is coming is a wholesale exit from US treasury bonds, the likes of which the world has not seen. Might as well call it 'nuclear.'

Since the whole financial world rides on debt, the level of which is inexorably connected to interest rates, any dramatic rise in rates will cause debt - and therefore money - to implode right alongside it.

There is only one financial asset that will stand clear from the mayhem and destruction this will engender

Got gold?

Alex Wallenwein
Editor, Publisher
The EURO VS DOLLAR MONITOR

Copyright © 2007 Alex Wallenwein - All Rights Reserved

Alex holds a B.A. degree in Economics and a juris doctorate in Law. His forte is research. In late 1996, he began to research how money is used by some to exert political and economic control over others' lives. In the process, he discovered that gold (along with silver) is the common man's antidote to this effort. In writing and publishing the Euro vs Dollar Monitor, he explains the dynamics of this process and how individuals can harness the power of gold in their efforts to regain their political and financial autonomy.

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is the golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.