Interest rates again. Jan17 2010

Hamilton

ST louis fed 1

This never ceases to fascinate me. We all know that the governments around the world manage, manipulate, interfere etc etc depending where you come from, in one way or another. This may or may not be happening in the stock market but it is definitely and overtly happening with interest rates. In fact this is the main instrument given to the Fed in 1913 at its creation to avoid the panic of 1907 and other real and potential financial debacles. The Fed was created basically as a government form of JP Morgan and a few other players that were then the cartel. Today the Fed looks to be more neutral and influential and with the likes of Greenspan the view has taken hold that the Fed. can actually control interest rates. I do not think so, so get ready for 7% rates on the 10-year.

Nikkei 225, Japan. Jan. 2010

Hamilton

Nikkei 225, jan 2010

Ford May 9

Ford Jan 10 2010

Look very closely and try not to think ! The top chart is that of the Nikkei 225, pretty hard to get on the internet so I could not get the length I would have liked, anyway way back when in the 70ties the Nikkei was well under 1000 so the projected low on the top ( semi-log ) chart is not that outrageous in that context. No different from Ford going from 50 to 1 and way less  volatile.  This could be ,in EW lingo, a diagonal triangle and if correct do not buy Japan as some recommend at this point. It would be like buying Ford at $5 when you could have bought at $1. By the way, this pattern is exceptionally reliable and consequently more often than not an excellent predictor!

TSE the two most obvious alternatives, for the moment.

Hamilton

TSE Jan 13 2010

TSE Jan13 2010 #2

It has never been entirely clear to me if the rebound from the lows was in fact a simple A-B-C structure or an A-X-C . The former subdivides is two 5-waves patterns with an intermission in the middle, the latter is in fact twice that  but the same size, a-b-c X a-b-c.  The difference is immaterial for those that are not overly interested in EW per se.

In any event the outlook in both  scenarios is about the same, top already in or at about 12100+, time of arrival late Jan. early Feb, or top in just 2 days ago.

US 10-year bond, yield. Jan 13 , 2011

Hamilton

US 10 year bond , yield. Jan 13 2010

Just to hammer home the interest rate headwind factor, here is the 10 year bond on a yield basis ( resonates a little easier than price basis).  This is not EW, just my version of H&S analysis, a methodology I acknowledge not being at all well acquainted with. There is , however, also this tendency for markets to behave in a very symmetric manner and just on that basis alone there is something to worry about. We are all familiar with the phenomenon that often bad news actually is good news and v.v. .For instance if job numbers are real bad (bad news) the market shoots up as if it was good news. This is because interest rates are so low that the value of anything ,derived by the discounted cash-flow method, is operating in the parabolic range where the slightest decrease in rates tends to far outweigh the immediate negative effects of the “bad news”itself. Now 10 year rates are already up about 150 basis points from the lows of a year ago (2009 was the worst year for Gov. bonds in a lifetime, also one of the best for corp. bonds!) and are therefore no longer operating in that highly sensitive range. Nevertheless the impact can be considerable should rates actually move to 5.30%, up another 160 basis points. Put in a different way, if financial and real assets are properly valued today, they will be overvalued by about 30% tomorrow. If the yield curve does not just rise but also flattens that 30% is a material understatement.