The chart below tells the story of what is to come in 2010. The red line is the 7 - 10 year US Treasury ETF, IEF, the blue line is the 10-year US Treasury yield, and the green line is the rising US dollar ETF, UUP. The term is 3 years and they tell us the real story. Our government capped the first week of the year with a sterling rally festered by lies about low inflation and 'revised' job creation numbers for November. They claim December saw losses of 85,000 which came as a surprise. We all know all government numbers are total poppycock blunderbuss babbling nonsense. Unwilling to give in to negativity, the PPT no doubt ushered a nice rally to the indexes in the final hour of trading. Now for the real story.
The only reason the US is still breathing is the Asians have loaned us the money for a respirator. We could only accept the loan as long as interest rates stayed on the floor. That necessitated our Asian friends to buy more than their share of our debt. This is shown by the red line of Treasury buying. The rally of '09 required low rates and the Asians needed our spending. But, everyone knows this story has an ugly ending if allowed to continue. Most of the ugly will fall upon the lenders.
So we look to the blue line. This is the rising US Treasury yield. If your boat is leaking a gallon of water every minute, you have to bailout at least that much else the boat eventually sinks. The US debt addiction has required a few trillion a year in debt issuance to keep the illusionary effects of 'recovery' in place. Somebody has to bail all that debt out of our house else we drown. However, the Asians only have a bucket so big and are losing the ability to bail out all of our rising debt. Thus, bond yields are rising and bonds are falling. Uh-oh. It looks like the Asians are going to have to swim for safety because it is becoming more and more apparent that our debt boat is sinking. The 10-year US treasury yield now looks poised to me, to be headed towards a 5% yield in this coming year. We can't afford our debt at 3.5% so how can we afford it at 5%?
Enter the green line - the rising dollar ETF, UUP. It is still sinking. This is quite remarkable considering that the rest of the world is swirling around the debt toilet bowl with us and currency is weak everywhere as affirmed by gold trading at over $1,100 per ounce. The Chinese are now staring at the abyss. They have stocked up to the tune of a trillion of our debt and they are now watching it dissolve in their vaults. Worse, their currency is still loosely pegged to ours so they are seeing the same double digit inflation as the US currently experiences. I calculate my own personal inflation rate at about 25% as our government has become useless to the core in telling the truth about anything. So what will the Chinese do this year? Will they keep buying our debt to hold down our interest rates so we can continue to borrow so we can buy the stuff they make that we used to make? If they do, they no doubt know that this will continue to erode the currency's value. So, they lose. If they don't buy our debt, interest rates in the US rise to the moon and we will have to cut back our spending. So, they lose. They are staring into the abyss. There is no way out of the 'greenspanning' that started in the late '90's. The Fed continues to reign idiocy upon the idiot-wannabes in Congress and no one has the guts to stop the insane borrow until we explode mentality that prevails.
I will repeat this every week. Some people think we are better off now and the TARP programs saved us from bankruptcy. If so, the US debt was $4 trillion in 2004 and now it is $12 trillion 6 years later. If this is true, then let the economics books be rewritten. The way to solve unrepayable indebtedness is to borrow more money. You have to be even stupider than our Congress to believe that. We now spend 3 times more on debt interest payments than we do on education at the federal level. We are, as a nation, clueless idiots as we allow the current set of incompetent nitwits to rule us. We had better enjoy our cluelessness because pretty soon, we won't even be able to spell it.
The bottom line is this. The only way to control our interest rates is to buy more of our bonds. Bonds are bought with US dollars and the dollar has to rise. If the dollar rises, it kills the inflationary effect on the Dow and stocks fall. 2010 is the year that we will find out if Bernanke is willing to drive the bus into the abyss with the Chinese riding in the front seat.
Chart courtesy StockCharts.com