Gold and What Moves it.

TrimTabs' Charles Biderman explains what the current bond market and volatile real estate market have in common

 

Bubbles are a popular way of describing unsustainable high prices. Stocks and bonds are at bubble levels just the way housing values were before they collapsed in the last decade. Bond prices are as high as they can get, since interest rates are about as low as they can get. As interest rates started going down in 2008 bond prices went up. And as interest rates stay down, the best and safest corporate use of free cash flow is to shrink the overall amount of shares, rather then making anything resembling a risky investment. So more cash and less shares in the hands of the institutions that own 80% of all US stock has meant ever rising stock prices.

 

Up until the past four years, stock and bond prices traded in some sort of relationship to the underlying economy, to corporate earnings growth, stuff like that. All that matters now is that central banks keep buying back bonds from banks and that the banks use the newly printed money they get from the government to keep buying enough new government bonds to keep the game going.

 

How else can the US government keep funding a $100 billion monthly deficit? Banks currently have $1.3 trillion on deposit with the Fed. Where did the banks get that $1.3 trillion? The Fed printed that money and used it to buy bank loans and bonds. What did the banks do with that money? They gave $1.3 trillion back to the Fed. What is the Fed doing now with that cash? The Fed is now TWISTing $40 billion monthly into 10 year- mortgages. It is also printing another $40 billion per month to buy treasuries back from the banks – at a nice profit to the banks. The banks now have $40 billion more each month to fund the US deficit. And all this at virtually zero interest rates! ...