Reply #1: WrapUp by Mike Hartman

[ozymandius]

Financial Liquidity, Interest Rates & Commodity Prices

The broad stock indexes have struggled in the red throughout the morning with earnings season off to a bumpy start. Alcoa’s earnings came in lower than expected yesterday after the bell and this morning Monsanto disappointed with bigger losses than expected following a surprise increase in revenue for the quarter. Revenue for Monsanto grew by 9% to $1.39 billion and analysts expected a loss of 21 cents per share, but the company actually lost 27 cents per share. With the Dow Industrials hitting new highs, the big-cap stocks appear to be priced for perfection. Earnings season is off to a difficult start.

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Some analysts believe the worst is over for the real estate markets, while many believe this is only the beginning of bigger problems for real estate. My take on the overall situation is that the Fed will use the housing weakness, the bond market rally, the correction in commodity prices, and whatever else they need to FAKE a deflation in the first and second quarters next year. This will give them a green light to open the floodgates of liquidity with lower interest rates and a big increase in the supply of money. They know they must inflate or die! I do not believe our policy makers will allow the deflationary pressures that have persisted in Japan for the last decade. Furthermore, I believe the bond market has been deliberately ramped higher, especially on the long end of the curve to provide a soft landing for the housing markets. To get a good perspective of the EXTREMES we are facing in order to push interest rates lower, please check out this short article by Pinank Mehta, “An ‘interesting’ Picture Of The US Bond Market.” Statistically, it’s pretty tough to argue with what he has to say:

“THIS IS THE MOST ALARMING PICTURE I HAVE SEEN IN THE FINANCIAL MARKETS SINCE SOME TIME.”

The points to note are:

• The current Long "Open" Interest in 10-year US treasury bond is greater than SIX Standard Deviations (12 SIGMA)!!!!!!! (The odds of a 6-Sigma event are one in 500 million or 1.37 million years, so it will be exponentially higher for a 12 Sigma event.)
• This level is unprecedented.”

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Notice how “traders” are lowering bond prices just prior to the auctions in order to increase demand for the scheduled debt sales. I have noted this pattern in the U.S. Treasury market for quite a long time. Tomorrow, Japan’s Ministry of Finance will sell $2 trillion yen ($17 billion) of five-year notes. ALSO PLEASE NOTE the same exact thing happened in U.S. Treasuries. The last few days Treasuries have sold-off thereby increasing the yields to make our debt auction more attractive tomorrow when the U.S. Treasury will sell $8 billion in ten-year TIPS. For me it’s comical to hear the U.S. financial press suggest Japanese traders are lowering bond prices to make their debt auction more attractive, but something like that could never happen here in the USA where the invisible hands of the free markets set the prices. Now go back and look at the chart of unprecedented record open interest in bond futures….Six standard deviations from the norm is statistically enormous!!! It tells me some outside entities are using some massive leverage to “influence” our supposedly free markets.

http://www.financialsense.com/Market/wrapup.htm