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End of The Game

An historic, generational change in the bond market may be under way. Over the last few days and weeks, “something has happened,” as yields have smashed through several key resistance levels with ease as they rose from a formidable base on the charts.  
We are now entering a period where a huge argument will go on for months between the forces of distribution of both stocks and bonds (institutional mouthpieces and their unwitting lackeys) and those who pay attention to the ebb and flow of the underlying forces of supply and demand. Bears will continue to be ridiculed and beaten down in the financial infomercial media, and on the message boards, but I think that in the end, they are likely to have the upper hand.

There is one reason and one reason only why bond prices are falling. There is more supply and less demand. This change in demand is critically important because the source of the change is foreign central banks reducing their rate of accumulation. Any reduction in that massive continuous subsidy will result in an inexorable rise in yields month after month, quarter after quarter, year after year.

As Russ Winter noted today, the FCBs barely showed at all at the 10 Year Note Auction this week. This is almost unheard of. They usually take down 45-60% of the 10 year. This follows a week where they made the second largest cut in their holdings at the Fed in a year. They almost never reduce their holdings. They are usually buyers of between $5-10 billion on balance.

I’ll be on the last leg of my trip on Thursday. I hope to have access to a compuker Thursday evening to check the Fed’s foreign custody holdings. If they are down again, or even up just a little, they could be ringing the death knell for US financial hegemony. If the FCBs are not buying $250-$300 billion of US paper every year, the prices of all US financial assets will fall.

This is a very simple concept. It is the single most important driving force behind the bull market in stocks. Without it, the game is over. It’s no longer the Fed we have to worry about. The watchword is, “Don’t fight the FCBs.”

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