Interest rates are near a critical juncture

If you did not already read my recent post on the Art Cashin interview, now would be a good time.  In summary, Art thinks that the fed is set up to lose control of the bond market at some point.  He does not speculate on when that might be but I think that if it was 2, 3, 4 years hence then he would not be making such dire warnings today.

Below is the chart of the TNX ETF which tries to pattern itself off the ten year treasury rate.  There are two viable wave counts still in play: the red and the blue as modeled below.

The red count says that an a-b-c pullback has just finished in July and that now we should be getting a rise in interest rates at exactly the time when the fed has vowed to keep them low via money printing operations.  If that happens it will be a resounding vote of no confidence in Yellen.  If the chart breaks out of that resistance and takes the red path then it could well be that the fed loses control of interest rates very soon.  The break out would not likely be at the red circle.  More likely, it would test that line, fall back to perhaps mid channel in an a-b-c move and then break out of the top in a 3rd wave up.  If that happens, expect market panic to accompany the move because Yellen will have gotten labeled by the markets as an idiot who could not keep the herd calm. 

Just as likely, perhaps more so, is that the wave takes the blue path down and hits the bottom of the channel one last time.  This would represent the lowest interest rates that anyone alive will ever see again.  In that case, some would be tempted to load up on 30 year debt at those ultra low rates by buying a big house in an area where prices have been under pressure.   The reason for that strategy would be the low monthly payments.  The problem with this would be that as rates rise the selling prices for homes have to come down.  If people can afford a $500,000 house at 3% they might not be able to afford it at 4% much less 7 or8 or 9%.  The bubbly price of housing will collapse if nobody can afford to get a loan going forward.  Those who buy the $500,000 home with 3% rates will certainly declare bankruptcy if the price of it falls by 50% and they need or want to move.  The northeast is full of crappy little shoebox homes that start at $400k and go up to over a million bucks.  It will go especially hard on them as well as for places like San Francisco and Seattle.

So there you have it.  These chart models indicate that the fed will likely either lose control of the bond market very soon or before June 2014. I think they have to give Yellen a chance to show what she is made of.  That's why I think another wave down (blue path) is tipping the scales at being higher possibility.  Besides, ending diagonals are so common these days that it has to be one of the first chart patters to consider right now when modeling future outcomes.  If this path is taken then it would suggest higher gold and silver prices for at least the next 4-6 months.  When people can't make money off of interest, they turn to gold and silver.