Tags: ECB | traders | bond | gold

Traders Need to Stop Front-Running Central Banks

By    |   Wednesday, 25 March 2015 08:23 AM

It is impossible to know what is real any more.

First, I would like to thank Federal Reserve Chair Janet Yellen (maybe a first for me) for doing the right thing last week when the Fed decided to remove the word "patience" from its policy statement and decided to make the rising of rates more data dependent. No raising of rates in April for sure.

Yahoo! Woohoo!

The stock markets soared, the U.S. dollar plunged and bond yields collapsed as traders started buying stocks and bonds. Heck, even gold (the most manipulated commodity in the world) rose from the ashes.

What stunned me was that the traders were celebrating what the Fed had said over a year ago when they had announced that quantitative easing (QE) would end and rates would go up depending on data. How that "depending on data" became "interest rates will be hiked in June 2015" is yet a mystery to me. The Fed was clear that based on the unemployment rate falling below a certain level and inflation rising to a certain level, interest rate hikes are likely to start.

How did that become June 2015? How did anyone know that unemployment would fall to the Fed's defined rate and inflation would rise above 2 percent by June 2015?

You see, there is not a single person on Earth who would have known that 12 months ago. It was the trader community that had gotten on the bandwagon for a rate hike. They needed to drive their trades in a certain direction to make money. They were instructing the Fed on what to do and when. They wanted to write the script for the Fed.

Traders live for the day or maybe for the week. They could not be bothered about the macro effects of a rate hike or a stalled rate hike. All they want to do is know which way to trade and be the first one to trade. All they can think about is their next bonus check.

Let me give you an example. Back in the days, the 10-year bond yield was a proxy for the state of the economy. A yield of 4 percent was a signal of the economy being healthy and growing at a nice rate of about 4 percent. Now one just does not know if the current yield of 1.9 percent is actually indicative of 2 percent growth or just massive manipulation of the asset class.

The European Central Bank (ECB) did announce their QE program back in February. A few months before that, the U.S. 10-year bond yield was sinking and fell below 1.8 percent and went lower. This was certainly not a sign of great health. Out of the blue, and for no apparent reason, the 10-year yield started rising and soared to more than 2.3 percent. And now it has collapsed to 1.9 percent and will likely fall further. So what is going on with the most deep and liquid asset class in the world?

My dear reader, the traders were front-running the ECB here. As soon as they sensed blood in the water for the ECB, they started selling U.S. bonds and buying European Bonds. The U.S. yields soared and the European yields collapsed. Knowing that ECB would have to buy bonds once they announced QE, traders bought European bonds by the boatloads to be able to sell it to the ECB at a profit when the ECB came to the market to buy. European bonds being in small supply allowed the traders to manipulate the market. Now they are selling bonds to the ECB and pumping money back into U.S. Bonds. U.S. yields now sag and European yields do not rise as ownership is changing from bank traders to the ECB.

Little did they think of the effects their manipulations would mean on a macro basis — ruin a poor person from a mortgage application, deny pensioners from the sliver of income they have left or anything human.

With such heavy manipulations in the deepest liquidity markets in the world, an average investor is nothing but cannon fodder for the mega banks. So what does one do in times like this?

Even though it is a highly manipulated market, gold has always stood the test of time — 5,000 year and counting. The more you suppress this holder of value asset, the more violent will be its rise someday. Just like a coiled up spring. I will continue to buy physical gold even if it takes a few years for it to rise eventually.

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It is impossible to know what is real any more.
ECB, traders, bond, gold
Wednesday, 25 March 2015 08:23 AM
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