Tags: oil | taper | Fed | gold

Final Nails in the Taper Strategy

Wednesday, 17 Jul 2013 07:41 AM

By Ashish Advani

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Last week, I wrote to you about the fact that the Federal Reserve will have to change its mind and not taper its bond-buying program. Prior to that, I had written to you about the manipulations in gold prices and how that will come to pass.

I love it when a plan comes together.

Since its bottom of the slide, gold has risen about $120 dollars per ounce, or about 10.5 percent.

Since the peak of the panic to dump bonds due to talk of tapering, the 10-year note yield has come down from 2.8 percent to 2.5 percent, again a 10.5 percent shift in just couple of weeks or less.

While the markets are not acknowledging that the growth story is stalling again, many signs are now evident.

First, we have the democrats eating humble pie. After the much-fought-over and debated, overhyped Obamacare, they are now backtracking. They have delayed the employer mandate by one year because they know that the additional costs of insurance will crush any fledgling recovery we may have.

So they are not sure of the recovery.

Next we have the Fed itself. In the latest public outing last week, Fed Chairman Ben Bernanke, who started this whole charade of tapering, had to back pedal. As he was not sure if the economic recovery was quite there or not, he had to put the kibosh on the surging dollar. Any hopes of recovery would get additionally hard if the U.S. dollar would get too strong, so he came out and explained how we had all gotten it wrong and that he would support bond buying as long as needed.

He is now not sure of the recovery.

Finally, the last straw is the surging oil prices. If we all suspect the growth story — China is growing but at a pace that would make it the slowest growth year in 28 years, Europe is stagnant, Japan is a hope with a loud prayer — why is oil surging? What demand expectation is making oil surge? In any case, the higher oil prices will begin to crush the economy if we have one that is growing. So we will see growth stagnate for sure if prices stay high.

Here is my two cents: Traders at large banks have to make money every day. That is a must. (I know you saw that Citibank, JPMorgan Chase, Goldman Sachs and Wells Fargo all made record profits last quarter). In order to make money, the traders have to pick asset classes and pump it up, making profits on the way up, and then dump it, making money again on the way down. That is what they do.

If all the monies came out of the bond market, where did it go if not into the equity markets? I assume that some of it went to stocks, since we have all time highs. But the surge in stocks is not quite convincing.

Gold and silver were just dissed in a major way, so it cannot be time to pump it up again. So which asset class has not been manipulated for some time now? Oil has been hanging around the $85 to 95 a barrel for much of a year, if not longer.

Voila! There is your asset trade that will get pumped up and then dumped. If the major banks could have colluded on collateralized debt obligations back in 2006-08 and colluded on Libor for over 10 years, it is not entirely beyond acceptance that they work with each other as they pick up assets to play with.

Soon they will dump this asset, as the oil market cannot go completely against economic reports, which are fading. At that point, the dumping of bonds trade will be old and we will be rushing back into bonds just as the Fed gives up on its tapering story.

It is contrarian to go and buy bonds today, but I am convinced that this story shall soon unfold.

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