10-yr UST 2.9110% crushes Dow and S&P500 rallies.

10yr UST



S&P500

Dow

Yes, the fog has descended. With yields rising the Fed's idea to propel stocks upward is failing miserably, even though we are at two days of the $600billion buy up of US Treasuries by the Federal Reserve. The plan is going haywire

from Reuters:

A rise in 10-year Treasury yields to a three-month high pushed the dollar, with the Wall Street Journal reporting that a group of Republican-leaning economists was launching a campaign calling for the Federal Reserve to drop its plan to buy $600 billion of Treasuries.

So we have some internal disputes occurring namely the Republicans who correctly are concerned with long term ramification of printing excess liquidity into the system, debasing the US Dollar and leading the US economy further into inflation.

From Market Watch

NEW YORK (MarketWatch) -- U.S. stocks struggled to hold their gains late Monday as Treasury prices fell sharply, denting cheer that came with a jump in retail sales and after Caterpillar Inc. announced a sizable acquisition.

"Treasury's are getting splattered and 10-year yields are at three-month highs; if rates are going up, it's not a good thing for equities. This is the Fed's worst nightmare," said Peter Boockvar, equity strategist at Miller Tabak.

The grinner's in all this are the foreign debt holders, whose currencies have been over bidded on a weak USD, a somewhat sigh of relief. But major stock sell off's (globally) which could speed up towards the end of 2010 may lead to a further monetization from the Fed, still this should be offset with confusion, turmoil and internal disputes at the direction of the US ecomomy. Europe and China will also add to the tensions (economically), that may further lead to economic/trade conflict/s.

The fog of war falling over the markets may only get worst as the global economy reaches closer to it's tipping point.

Market volatility will be extreme towards the end of 2010 and into 2011

The markets are entering a 'Fog of War' - Yields going upwards after the Feds QE2

As discussed in Contrarian play on the upcoming Permanent Open Market Operations (POMO) by the FED ala 600billion buy up of US Treasuries and Risk aversion coming back (update 2) - Ireland bailout looming I was correct on the contrarian view on the beginning of the Quantitative Easing 2 and the warning signs from April/May/June 2010 when yields on short term to long term bonds went upward and stocks were sold, despite the Feds constant monetization of US debt. Although incorrect in my counter view on QE2 was that gold would rally.

The general belief of the QE2 effect (on stocks and UST yields) from blogs, to various commentary was that QE2, in it's beginnings which occurred on 12th November 2010 would propel stocks into a hyper buy-up on the back of POMO operations and send yields downward. As we are now all aware what did occur after the 1st day of the Feds QE2, yields moved up, stocks were sold off. This is the fundamental dilemma that sometimes what we think should happen actually doesn't happen, much like Nicholas Taleb's Black Swan theory for the markets. Essentially what we are looking at is the markets reacting to inflation expectations with the very real chance of cyclical inflation returning and retuning hard, with nice doses of risk aversion from both Europe and China. The simple explanation of US yields (apart from the major jump on the 30yr UST) moving slightly upward, whilst the Fed attempted to crush yields on short term US debt, is why would you want to hold it US debt (short/mid term) as yield payments decrease: say China?

The other factor too, this reminds me of the fantastic documentary The Fog Of War, is that you can run statically models, charts and try and calculate a percentage of what is needed to get the desired effect. The problem of course is the unpredictable and psychology of emotion and changing environments that if you cannot adapt to, you are lost. This happened in the Vietnam War, when the US government utilized advisors, the Fog of War discusses this re Robert McNamara (the former US Secretary of Defense). McNamara and others thought they could calculate an outcome for the Vietnam conflict; of course they failed and hence the term the Fog of War. So it's the adaption that is missed on unpredictability

What we may be entering now within the markets is a sort of Fog of War and unclear patten emerging that is occurring from geopolitical/and or political tensions. If Brazil's Guido Mantegasaid that we are now in a 'currency war', then conflict (defined by the term 'war') in the markets could extend into other aspects, such as trade protectionism and so on. Mix this with a descending 'fog' and expectations or statistical modeling to try and figure out the cause and effects will be rendered useless.