When I was a very small boy, I marveled at the older kids that chewed bubble gum. They would manipulate their chaw of gum to manufacture a huge spherical bubble sometimes exceeding the circumference of their heads in size. Invariably, the eventual pop implosion left the kid with a remnant mess of disheveled gum in hair, eye brows, nostrils and literally everywhere, 100% of the time!
The massive pop implosion always is preceded by distortions. The greater the distortion, the more the mess! The first distortion is the skewed indirect correlation between the bonds and the S&P futures. Ordinarily, for every 2/32 move in the bonds an offset indirect move of one point is recorded in the S&P futures. The year of 2012 has seen this ‘rule of thumb’ relationship obstructed, the more manipulation, the greater the implosion mess. Currently, the numbers dictate an immediate 3 to 5 points decline in the bond prices to neutralize the distortion even if the S&P futures were to remain stationary.
The second distortion is the pattern movement of the bonds. Typically, the 30 year bond future trades in an ebb and flow pattern. Movements are up 4 to 8 ticks with a retreat of 4 to 8 ticks. Lately, the movements are abnormal trend moves of 21 to 32 ticks without the ebbing of the 4 to 8 ticks. This is a distortion that also will be corrected. This blatant manipulation accelerates the ‘pop’ implosion, gum everywhere!
The third distortion is the complacent sentiment. Recently, the Fed announced QE unlimited. This announcement was about one month ago, but the bond prices did not reach new 2012 highs. Instead, prices made a lower high with the most favorable environment the Federal Reserve has created. My conclusion is that I am watching the show-off kid blowing the biggest bubble to draw the most attention to his bubble blowing talent. My eyes grow bigger as the bubble expands. Ben Bernanke is that kid and his bubble is about to ‘pop’ implode!