Hey Bond Vigilantes, The Canary Already Died!

If your investment voice is not laughing the association of two unrelated pieces (bond vigilantes and tax deal) of information, then it's time to reread Adam Smith's Wealth of Nations. Smith often alludes to the fact that centralized governments require no vigilantes as their own actions inevitably destroy themselves from within. The secular trend in the bond market, already down in constant currency terms (see chart below), could care less of Charles Bronson of Death Wish (1974) was the leader of the bond vigilantes. The canary in the coal mine** - Sting might be the only one that knows it, without a doubt keeled over in 2001, yet nary a word of caution emanated from this often cited bond market vigilantes. Go figure.

Long-Term U.S. Government Bonds Total Return Index (LTGBTRI) to Gold Ratio:


The tax deal is simply more deficit spending, currency devaluation a la 1934-1940, intended to boost (C) consumption of GDP = C + I + G + (NetX). The Administration is smart enough to know that any attempt to raise taxes, regardless of the popularity of the idea, will quickly translate into lower consumption (C). That’s a huge deal. Personal consumption expenditures still account for greater than 70% of national income (GDP) as of Q3 2010.

Personal Consumption Expenditures (PCE) As A %GDP and Personal Consumption Expenditures As A %GDP Average from 1947:


Headline: Bond Vigilantes May Thwart Tax Deal

The biggest losers in President Obama's deal with the Republican on taxes aren't the Democrats. It's the bond market.

Yields soared in the wake of the plan that will add upwards of $900 billion to the federal deficit, sending bond prices tumbling, especially in the municipal market.

Meanwhile, the engineered panic in gold and silver once again has many within the community watching Death Wish for investment advice. Buy strength and selling weakness creates the churn necessary for connected money to reposition for the next advance.

Silver still looks technically sound despite the bucket shop style operation. Jim mentioned yesterday, three taps and out. That’s what I am watching as well. It’s only a matter of correctly identifying the third tap. The labeling cannot be determined until a breakout of upper channel is achieved.

A clear sign of strength, however, is trend energy. The new highs in REV(E) on 12/06 suggest a healthy bullish trend.

Silver ETF (SLV)


Source: finance.yahoo.com
**Source:youtube.com