The Truth Behind The ‘Big Money’ and The Bond Market (PLW, C, GS, JPM, MS)

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July 21, 2011 2:10pm NYSE:PLW

Joseph McBrennan:  Bill Gross admits he was wrong. Here’s what his mistake tells us about the U.S. bond default threat.


Bond king Bill Gross was wrong. He didn’t actually come right out and say it, but the manager of the world’s largest bond fund company, PIMCO, did a 180.

In January and February of this year he (unknowingly) followed the crowd he once led. He fell victim to the cries that governments were heading for massive defaults.

We took the exact numbers he and the media quoted and told you it was a buying opportunity. The bond market has steadily risen ever since.

The PIMCO chief’s theory was that once QE2 was worked fully into the economy, we would see inflation. He also concluded that once QE2 was withdrawn, bond prices would drop.

Both are very logical assumptions based on the normal economic environment of the past 30 years. Unfortunately, nothing has followed the norm.

Bond yields rise when the price of the securities drop. When the price jumps, yields drop.

Look at the PowerShares 1-30 Laddered Treasury ETF (NYSE:PLW) chart.

PLW Chart
View Larger Chart

It shows Mr. Gross was wrong to sell in January and February. Fortunately he was smart enough to jump back into the bond market in May and June.

Now, as great a story as it is that Taipan Daily readers out-traded one of the world’s greatest bond gurus, that’s not what I’d like to discuss today.

In one manner or another, I’ve traded bonds all of my adult life. It is definitely NOT because of the crazy wild swings in the bond market, or the excitement found in these debt instruments. Nothing could be further from the truth.

The stuff I trade is boring.

What I love about the bond market, and why you should pay very close attention to it, are the signals it provides. The phrase canary in the coal mine is the perfect analogy.

With that in mind, take another look at the chart. The value has hung steadily at elevated levels over the past three weeks. That, of course, is the exact time frame one politician after another has warned of a U.S. bond default.

Before we take another step, I’d like to remind you of what a default is. It means a missed principal or interest payment on a debt — in this case, Uncle Sam’s debt.

Let’s look at some of the 18 banks and security dealers that are designated as “primary dealers” of our government bonds. You’ll find Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Merrill Lynch, Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) among other very high-profile company names. The complete list may be found here.

If you believe that these 18 banks, which are allowed to buy and distribute government securities at a near-guaranteed profit, are completely independent of the government, you can stop reading here.

However, if you recognize these names, and also recognize that they have their claws deep inside our government, then we can continue.

The following will sound like a conspiracy theory. So be it. It is what it is.

These 18 firms, with few exceptions, have direct access to the very highest levels of governments. I could, without much reservation, describe them as financiers of the government’s borrowing, but they already completed the purchase of our government.

You may think I’m exaggerating. Let’s look Goldman Sachs’ ties to the White House. Here are just a few of the positions held by former Goldman employees over the past few years:

Ambassador to Germany, Treasury Secretary’s Chief of Staff, Deputy Director of the National Economic Council, Advisor to Treasury Secretary, Chairman of the President’s Foreign Intelligence Advisory Board, Commissioner of Commodity Futures Trading Commission, Under Secretary for Economic, Energy and Agricultural Affairs of the State Department, Treasury Secretary (Paulson)…

The list does go on but I don’t want to continue. It sickens me. Just understand these banksters are well connected.

The strong prices shown in the bond market, the reason PIMCO has returned to buying, and the idea that the Treasury bond market is an insiders’ game, should tell you one thing…

There will NOT BE A DEFAULT by the U.S. Treasury market.

The big-money insiders say all is well, at least with the U.S. Treasury market.

The bond market dwarfs the equity market. In fact, it is the biggest market.

This market is too large to hide anything… that’s its beauty.

The debt market telegraphs everything. Think about which markets tanked first in any of the PIIGS. It wasn’t equity markets. Their debts led the way. The crash of ’08 was led by junk debt markets falling first.

The canary in the U.S. debt-ceiling showdown is singing beautifully from the bottom of the pit. The insiders are buying and supporting this market.

As crass as it may be, the politician warnings are nothing more than b.s.

Finally, there is one other thing the insiders are telegraphing with their actions.

This one will be harder to swallow.

If you’ll concede my point on the insiders running the show, or, at the very least, having access to the government and Fed’s playbook, you’ll see an inconsistency with a very popular argument.

I’m talking about inflation.

If the ones that drive the debt market continue to buy bonds, their providing us with a great deal of information in a very subtle way.

Bonds are hypersensitive to inflation. Any whiff of it sends bond prices down and, conversely, interest rates up. The largest players, PIMCO, are buying bonds.

We received quite a bit of feedback when we suggested deflation was worthy of consideration. Many concurred with our opinion that we may be whipsawed by deflation then inflation or hyperinflation.

Some just called me “nuts.” (Thanks, Peter M. from the U.K.)

There’s no argument our government is doing everything in its power to inflate. Unfortunately for the politicos, the market is far bigger than Washington.

The U.S. Treasury market has a clear message. Pay attention to it.

Written By Joseph McBrennan For The Taipan Publishing Group

Joseph McBrennan is the Editor of free financial market e-letter Taipan Daily. He comes from at least five generations of investors and traders on both sides of his family, dating back more than 150 years. He brings to Taipan Publishing Group over two decades of experience in the investment banking business.

For a quarter-century, Joseph has specialized in the creation of fixed-income investments, more specifically, debt instruments for municipal finance. He is better described as a financial engineer rather than the more common term of investment banker. Joseph has also worked extensively in the derivative market, and has been credited with numerous “firsts” in terms of creating unique financial tools and the corresponding security investments they become.

Article brought to you by Taipan Publishing Group, http://www.taipanpublishinggroup.com/.


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