The Fed: Market Participant or Market Manipulator?

The Fed’s digital money printing has had a varied effect on the U.S. dollar. We aren’t seeing runaway inflation – so the greenback hasn’t collapsed in value. But the banks’ hoarding of Fed cash is also delaying the major wave of deleveraging that should boost the dollar.

Taken together, the U.S. dollar is stronger than it was eighteen months ago, but weaker than it was two years ago. It’s mostly moved sideways with a somewhat bullish bias since bottoming in mid-2011.

But Treasury bonds are no such mixed bag. The Fed’s actions have pushed T-bond prices higher and higher… and higher. Take a look:

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This chart shows 10-year Treasury bond prices back to 2007. As you can see, they’ve really only moved in one direction: up!

At the bottom of the chart is RSI – a common tool to measure when a market is overbought or oversold. Usually, when a market gets overbought prices correct lower.

But during strong trends, like we’ve seen in Treasury bonds over the last several years, the market can stay overbought for long periods of time. It usually happens when the market’s natural negative-feedback loop is broken. Typically, higher prices weaken demand… subsequently leading to a drop in prices. That’s not happening here and it’s all because of the Fed.

The Fed isn’t in the market to make a profit, so it’s willing to pay higher and higher prices for T-bonds. That is breaking the negative-feedback loop and sending bond prices sky high.

The Fed is not a “natural” market participant – it’s more of a market manipulator.

Eventually, the bond market will crack and prices will plummet. But not until the Fed gets out of the way.

If you haven’t done so already read the Survive & Prosper issue on “Banks Are Hoarding Their Excess Reserves From the Fed”



Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.