The Next Shoe?

OK, follow me here. I'm going to actually predict something that you will find NO WHERE ELSE on the web. This is me, inching out on a limb. I'll either be proven a genius or a fool:



Please notice a couple of things:

1. The last time TLT swooned badly was late May. That corresponds EXACTLY with the time the IYF started it's sickening downtrend. Actually to be precise the IYF peaked on low volume in late May, then got smacked during the first week of June...let's say the two events were strongly correlated.

2. Let's think about the Fed's pumping up the banking system this week. I've heard two stories: they are buying treasuries (classic repo) or they are buying these crappy mortgages that are imploding all over the place. If they are buying these mortgages, let me offer an aside and say "shame on you!"...talk about misuse of public funds. I can endorse buying treasuries, but not semi-worthless pieces of paper devised by greedy bankers and brokerages. The people that took the risk and used the leverage need to pay the price, plain and simple. Yes, keep the national banking system going...no, do not lower rates, do not bail out these greedy overfed bastards, no matter what Jim Cramer/Larry Kudlow have to say on bubblevision!

But I digress...

3. Financial stocks appear to be way oversold. They could very well bounce, and probably the rest of the market would go with them in a nice relief rally....BUT

4. Treasuries are acting 180 degrees out of phase with the bounce scenario. They are looking tired. Why is this? I'm not sure, but what if (go with me here) the mortgage crunch is becoming less and less "contained" as this crisis unfolds? What if long bonds are also becoming mispriced right along with CMO's? Remember that I think what keeps yields low is a high money supply (liquidity), and then this excess capital getting used to purchase government paper by banks, brokerages and foreign investors. Slowly the liquidity is being forced out of world markets. Who will buy long bonds at such crappy yields anymore? Corporate bonds are getting crushed, driving up yields tremendously, so treasuries at some point are going to have to compete for those Euro, Yen and Dollars...if not, well...

5. Then in addition to mortgage portfolios with hideous losses, banks are going to be holding loads of government paper that is also declining in value! What are they going to do then, especially if they are simultaneously dealing with massive redemptions in their stock mutual funds and hedge funds? Answer: they will have to sell treasuries.

Ergo yields are headed up...regardless of what the Fed says or does. Who the hell cares about overnight rates anyway? It's all talking points and facile arguments.

Ok, I've made my prediction. Let's see how things play out from here.