What are the biggest stories in the market today? Consider the following . . .

1. Warren Buffett makes his single largest acquisition ever with the $34 billion purchase of Burlington Northern

2. Ford posts surprisingly strong auto sales

3. Royal Bank of Scotland becomes the biggest banking bailout yet with another injection of capital

4. Johnson & Johnson announces plans to layoff 7% of its global workforce

Each of these developments is truly meaningful. Interestingly enough, numbers one and two are decidedly constructive while numbers three and four are clearly quite bearish about global prospects. Despite the magnitude of these stories, in my opinion, they pale in comparison to developments in the precious metals and bond markets today. What is happening? Let’s navigate.

The Treasury yield curve is steepening dramatically today with yields on longer term notes and bonds rising by 6 to 8 basis points, while shorter maturities are unchanged. A snapshot of the Treasury market is provided by WSJ Market Data.

Why is the curve steepening? What does that mean? What are the implications for other markets? All great questions. Let’s navigate further.

In my opinion, the Treasury yield curve is steepening as hints of a second economic stimulus package work their way through Washington. I definitely sense growing unease and anxiety over the state of the job market. The story about layoffs at Johnson & Johnson only adds fuel to the fire.

A second stimulus will only build upon the already out of control fiscal deficit which will need to be funded by increased government borrowing. As our borrowing needs increase, the demand for the funds will drive the price for the funds ever higher. The price is the interest rate on Treasury notes and bonds.

Why would the curve be steepening, though? Why aren’t rates on short maturity bills and notes also going up in sync with the longer term notes and bonds? The rates on shorter maturity Treasury bills and notes is most heavily influenced by Federal Reserve policy. It just so happens Fed governors are meeting today and tomorrow and assuredly they will leave their current policy unchanged. That policy is one of very easy money with a Federal Funds rate of 0-.25%.

The prospects of (1) another economic stimulus package; (2) a continued policy of very easy money supported by an accomodative Fed; and (3) a steepening curve with a rise in long term rates, all collectively point towards a greater likelihood of inflation. What segment of the market gives us a hint as to inflation? Gold.

What is gold doing today? Rallying in a big-time fashion. Gold is up 3% on the day as Bloomberg reports, Gold Climbs to Record as India’s Central Bank Buys IMF Bullion:

Gold jumped to a record after India’s central bank bought 200 metric tons of the metal from the International Monetary Fund, heightening speculation that there may be more official purchases.

Gold futures for December delivery rose to a record $1,087 an ounce on the New York Mercantile Exchange’s Comex unit and traded at $1,084.20 at 1:28 p.m., up $30.20, or 2.9 percent. A close at that price would be the biggest gain for a most-active contract since March 19.

“This will encourage other countries and other investors, especially Indians, who are big buyers anyway, to jump into the market,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois.

The Reserve Bank of India paid $6.7 billion for the bullion, which it bought from Oct. 19 to Oct. 30. It was “the biggest single central-bank purchase that we know about for at least 30 years in such a short period,” said Timothy Green, the author of “The Ages of Gold.” “The only comparable event was the U.S.’s steady purchases in the 1930s and 1940s.”

Now what was going on back in the 1930s that would have prompted steady purchases by the U.S. government?

Oh, no. I’m not going there. That thought is a little too ‘depressing.’

What do you think?

LD

  • elaine

    As for gold, I own a few shares of GLD & it’s doing well, also own a few shares of ABX (I’m learning the hard way) mining stocks basically just mirror the general market. FDR confiscated gold & it could happen again. I’ve said this before but it seems appropriate to repeat in this context: cap gains on bullion is 28%, it’s risky as a hedge. Actually I suspect owning 18 or 24k jewelry is more enjoyable. The 12 or 13 Trillion dollar national debt is unsustainable, all the Keynesians are just whistling past the graveyard. Almost everyone I know personally is in total denial about this crisis, they will not discuss it (like that’s going to make it better) guess it’s why I come here to kick it around. So far, lots of opinions but no solutions. If we escape a depression it’ll be a miracle. I don’t believe we’re outta the woods.

  • elaine

    I doubt the FED rate will go up in any meaningful way before the 2012 elections. With banks borrowing at 0% to .025% lending at 4.9%, paying out 1.6% on CDs & less than 1% on savings accounts (already being outstripped by inflation at 2.6%) Treasury, the FED, & the Prez seem willing to sacrifice a decade’s worth of senior’s savings to scramble to meet their goals. It’s the ole greater good argument. In 2011 Grandma will pay 20% tax on her dwindeling savings…thanks Hillary, Buffet, Obama. $10,000 @ 1.6% =$160 -20% cap gains tax=$32, which means Grandma gets to keep $128 bucks for loaning a bank $10,000 for a year!!! yippee. Meanwhile her Medicare payments & insurance have already outstripped her “profit.” Another example of Obama rewarding work not wealth.

  • Brodie

    foxyladi, you’ve got that right! That’s what China did & it worked. That’s pitiful.

  • Diana L. C.

    As usual, I have little knowledge about things financial. I will be quite concerned if they do a second stimulus bill.

    Does this mean that now is the time I should round up my meager stash of unwanted jewlery and send it off for fast cash?

    🙂

  • the first stimulus would have worked,if they had given that money to us,
    we would have stimulated the heck out of the economy

  • Peggy Sue

    I suspect proposing a second stimulus bill will be the breaking point. Last night’s exit polls revealed the biggest concern for voters was the direction of the economy and rising unemployment. Regardless of the WH spin, Obama owns this mess now and you’re not going to convince people that spending more taxpayer dollars is going to turn this faltering economy around.

    I think Obama missed his chance to rein in the banksters [instead he’s rewarded them] and get a handle on our rising, unsustainable debt.

    Another Stim Bill? Await the howl.

  • Docelder

    A second stimulus will only build upon the already out of control fiscal deficit which will need to be funded by increased government borrowing.

    Other peoples money is the secret sauce for the democrats. They believe that if they only had enough of other peoples money they could do anything. If only. Democrats have their be’s, do’s and have’s backwards. They think if only they have what the wealthy have, then they could be wealthy themselves and do as the wealthy do. It doesn’t work that way. If you do what wealthy people do, then you will become wealthy and after becoming wealthy, then you will have what wealthy people have. This goes for individuals, for families, for communities and for nations. Wealth can’t be artificially granted or legislated. It doesn’t work that way. India is a nation of hard workers and they are doing productive things. China is a productive country doing things which produce wealth. They are in many ways what we once were. They are what we are abandoning. We were never wealthy just because we were Americans, but because we produced wealth. That is past tense.

  • Craig Della Penna

    Sounds like the other shoe is untied and coming loose…