More Craziness and Where It Might Lead

Gold and US Treasuries continued their rallies last week as stocks declined.  The yellow metal rallied 1.11% while the usually more volatile silver advanced .88%. 

The Dow Jones Industrial Average fell about 1.5% while the Standard and Poor’s 500 declined 1%.

The chart below is a chart of an exchange-traded fund that tracks the price action of the US Treasury Long Bond.  Note from the chart how parabolic the run-up has been.

We have drawn Bollinger Bands on the chart.  This indicator was invented and refined by John Bollinger.  It is a useful indicator to provide an analysis of a particular market.

When prices reach or exceed the upper Bollinger Band, they are overbought.  Conversely, when prices reach or exceed the lower band they are oversold.  Observe from Chart One that the US Treasury long bond is really overbought as prices no exceed the upper Bollinger Band.

Another observation from Chart One.  The wider the spread between the upper Bollinger Band and the lower Bollinger Band, the greater the volatility in a market.  Examining Chart One, given the spread between the upper Bollinger Band and the lower, we conclude that this market is very volatile.

Narrow Bollinger Bands, reflecting periods of low volatility, often precede breakout moves in price which can be either up or down. 

In this case, the move was a dramatic upward one.

The US Government Bond market, along with the gold market are in breakout rallies, as I have been suggesting would likely occur for most of this year.

While predicting when a breakout might occur is precarious, the market fundamentals have been favoring this for a long while.

Interestingly, the yield curve is now almost completely inverted.  The 30-Year US Treasury Yield fell to a record low last week, falling below the 2% threshold before closing the week just above 2%.

The one-month US Treasury bill closed the week yielding 2.05%, higher than the 2.01% yield on the 30-year bond.  Historically speaking, a yield curve inversion has been a reliable predictor of a looming recession.

One thing is sure.  The financial and economic times in which we live are quite simply crazy.  If you don’t think so, perhaps you don’t have a clear understanding of current world financial and economic facts and circumstances.

As I have discussed in the past, more than $15 trillion of world government debt is currently yielding negative interest rates.  That means that when you loan the government money for a period of time, at the end of that period, you get back less than you loaned or invested initially.

In the Country of Denmark, the second and third largest banks are now offering mortgages at negative interest rates.  (Source:  This from the CNBC article reporting the development:

Jyske Bank A/S, Denmark’s third-largest bank, announced on Monday, Aug. 5, that it is offering 10-year mortgages at a rate of negative 0.5%.

Another Danish bank, Nordea Bank Abp, also said that it will begin offering 20-year fixed-rate mortgages with 0% interest, as well as 30-year mortgages at 0.5%.

No, the banks are not working for free, loan fees still allow for a banker to make a profit.

No matter how you slice it though, this is crazy.  It goes completely against the basic rules of finance.  Which means it won’t go on forever. 

If you’re looking for a prediction, I’ll reference the words of the late economist, Herbert Stein, who said: “If something cannot go on forever, it will stop.”

Yet, at the present time, negative interest rates are the “new normal”.

Even former Federal Reserve Chairman, Alan Greenspan, is jumping on the negative interest rate bandwagon.  This from another CNBC article (Source:

Former Federal Reserve Chairman Alan Greenspan said nothing is stopping the U.S. from getting sucked into the global trend of negative-yielding debt, Bloomberg reported Tuesday.

“There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,” Greenspan said in a phone interview. “There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, besides being a certain level.”

With global central banks engaging in unprecedented monetary easing, a record $15 trillion of government bonds worldwide now trade at negative yields. As uncertainty reigns, investors are looking for a safe haven for their money, even if it means getting back less than they gave.

If you’re looking for a reason for the gold market rally, that’s a good one.

In an investing climate like this one, owning some tangible assets makes sense.

But why would an investor even consider making an investment in a government bond when that government is fundamentally insolvent only to get back less than they invested?

A piece published on “The Daily Torch” offers a plausible explanation (Source:

So, then a better question might be, under what circumstances would holding a negative interest rate bond be a good idea?

During the high inflation period of the 1970s and 1980s, high-interest-rate bonds were used as a safe haven asset to guard against inflation.

So, in a deflationary environment, the reason to hold bonds would be to offset even greater asset price decreases elsewhere. For example, if inflation was at -4 percent, holding a -2 percent bond could make sense in order to offset the deflation. Or if you purchase the bond with a -2 percent yield, and then the going rate drops to -3 percent, you could make money by selling the -2 percent bond, because it had increased in value.

That validates a forecast that we have made for a long time.  Ultimately, negative-yielding bonds would only make sense to own if the purchasing power of the currency were to increase.  That happens when there is deflation.

History teaches us that high debt levels lead to deflation.  That’s where we were headed when the Fed engaged in quantitative easing or money creation after the financial crisis.

Bottom line:  As Thomas Jefferson predicted more than a couple of centuries ago, we will have inflation, followed by deflation when private banks control the issue of our currency.

 “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”

                                                          -Thomas Jefferson

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