From last month's letter:

"But in an age where debt and leverage giveth, what do you suppose will happen when it taketh away? The Yen and the USD appear to be at important crossroads and they hold the keys to near term market events. Being a natural bottom feeder in my trading practices I would be buying Yen and USD here, which means I would be selling stocks, commodities and be guarded on the precious metals. In a future article I will explain why I do not plan to be without at least a core of gold stocks and why I will plan to add to existing positions if they are wood shedded along with most other assets. I also want to keep a close eye on the US Dollar. But for today, I would like to present three charts of the Yen, which I consider the most important potential trigger to what may be radical changes in the investment landscape to come."

Thus far, obviously the Yen outlook has failed to materialize as policy from the Land of the Sinking Currency continues in a business as usual manner. From a risk/reward perspective however, I would still ask "where's the risk... where's the reward?" and count an unwinding of the Yen carry trade as a likely afterburner to the bearish downside should the global liquidity orgy begin to break up in earnest for other reasons.

I still hold and even trade around the "core of gold stocks" and as blog readers know keep a close eye on the US Dollar (current status here). The Dollar is in a bullish falling wedge although we have been anticipating a possible (probable?) decline to the bottom of the wedge and blaring bearish Dollar headlines near long term support before the wedge is broken to the upside. This is a major reason I currently (and tentatively) hold more than just a modest 'core' of gold stocks.

But the bond market is making some serious noise and in Mr. Fukui's absence appears to have said "enough of this, we're outta here" as it begins to withdraw easy liquidity in a flight toward quality. China's stock market is a certifiable bubble, huge global traders have used currency carries to such an extent that liquidity is a lot of things, but one thing it is not is money. It is munny that is so funny that the bond market's return toward sound practice has no hope of ultimate success. They are just denominating themselves in higher quality munny. It can be argued that many established markets are not bubbles and that may be the case, but again if it is denominated in munny created through anything but productive endeavor how can it be anything but a bubble in the purest sense? That is the inconvenient truth of the global financial markets and it is a truth that will eventually see gold reach an upside that could one day make the dot.com bubble look tame. When the day comes that the global currency pyramid falls apart... but we get ahead of ourselves. Gold bugs are right, but when will the numbers prove them right? We remain guarded on gold and downright über-bearish on most everything else. There is a difference between knowing something is a sham and knowing when the average person will know it is a sham.

That is enough lecturing for today. What I wanted to show are some charts of the treasury market. On the blog we have been following the rise in long term interest rates from short and longer term perspectives. Today we will present a few charts for you to consider. With the housing market already on the mat, China in the stratosphere, hedge funds imploding, seasonality kicking in and bullish sentiment RISING, rising interest rates, especially on the long end are definitely not what Wall Street has been looking for nor what it seems most investors are prepared for.

The near term for 10 year yields continues to paint a picture of consolidation after an impulsive up-leg. After downside targets are met, we look for the previous 'over-bought' high to be taken out.

The next chart shows a long term look at the 30 year treasury yield. This is not a pretty picture and in fact argues strongly for what what Bill Gross and Pimco have recently resigned themselves to; confirmation of a secular change in bonds, from bull to bear.

The final chart is a weekly view of another yield curve (we usually look at 10 year / 3 mo. spread which has wildly un-inverted) showing a mild un-inversion. There is some resistance there but overall this is another bullish chart with long rates having bottomed vs. short rates.

The story that the above charts are telling is one of caution. One where the smart investor will question his or her conventional thought processes that were born of the 25 year bull market in bonds, courtesy of the last great fiscal authoritarian at the Fed, the inflation fighter himself, Paul Volcker. The story is that with the casino atmosphere that is a direct result of panic rate policy by the US Fed and other central bankers (after the 2000 bubble burst) and the good old dependable BOJ, "moral hazard is catching" and risk vs. reward has now become toxic.