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Friday, June 14, 2013

Bond secular bear market?

Both Bill Gross and Dennis Gartman are proclaiming the 30 year bond bull market is over.   Here is the long term monthly chart of the 30 year rate.

Since the grand bond bull market started in the early 80s the 30 year rate stayed below its 100 MA (white line).  Before I would be willing to say the bull market is over I would want to see it get above that 100 MA and stay there.  Lets zoom in some.

We can see a possible double bottom on the chart going back to 2009.  It also broke above the 18 SMA, went back and tested it from above and moved up again.  In the short term that would seem to be bearish for bonds.  Bonds made a slightly lower high double top over about a 4 year time span in the early 80s.  A lot has been written about the large amount of inflows bond funds have seen over the last few years.  That certainly is something that often happens at the end of secular bull market.  We saw huge inflows into equities in 2000 as that secular bull was ending.  Gross and Gartman have been around a long time and are proven to be pretty smart traders.  They really could be right.  However, the most startling end call came from the Federal Reserve Bank of Dallas President Richard Fisher.  He said "We've had a 30-year bull bond market...At some point secular markets change."  I can't recall any other FED official proclaiming the beginning or end of any secular move in anything.  He is noted to be a hawk, but still that is somewhat like Greenspan's "irrational exuberance" comment.  That is essentially somebody from the FED telling people to sell bonds.  Does that even make sense for him to do?  What is the motivation since everything the FED is doing is supposedly to keep rates down?

The current move up in government bond interest rates is global in scope.  It is actually more acute in emerging markets.  If it continues it will put a lot of pressure on all the governments with huge debt levels.  That happens to be most of the world outside of Africa.  Check out this map.


With a break of the monthly 18 SMA it is clearly possible rates could continue higher.  Interest rates rising because of economic strength usually favors economically sensitive stocks.  If that really is the case then the stock market should end the current correction at some point and move higher.  When I look at the economic data as a whole and not cherry pick it is difficult to say the economy is truly getting better.  I just saw a story on TV today saying IBM was laying off again.  IBM hates to lay people off.  They only do that as a last resort when earnings manipulations no longer meet targets.  Believe me that company is very good at manipulating earnings.  On top of that the emerging market stocks are breaking down again.  Those economies are supposed to be the engine of global growth.  Why are the stocks breaking down?

The bond market has a history of being one of the first markets to know something.  Maybe it knows global growth is going to improve despite the lack of signs.  What if it is something else though?  The break down in gold makes me wonder if a deflation scare or event is coming.  In that case it could be bond investors are worried about the global economy getting weaker and making it more difficult for governments to make good on their bonds.  These two scenarios are very different.  The first would be good for stocks, the second very bad.  It is important to figure out which scenario the bond market is discounting.  At the moment it looks like scenario two to me.  The first clue that it is really scenario one should be new highs in the stock market or at least some signs the global sell off in stocks is over.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.