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Tuesday, December 19, 2017

Daily update 12/19 Get Ready for Great Bond Bust of 2020

Sell the news?

People started selling right from the open.  After a mid day bounce and the House passing the tax cut bill they sold some more.  Breadth was -63%.  New highs dropped way down to 157.  New lows picked up considerably to 37 (once again elevated).  SPX closed below yesterday's low thus increasing the odds yesterday was an exhaustion gap. 

The futures closed back below the upper channel line after a brief period outside.  A trip to the 20 SMA seems likely.  Possibly a trip to the lower line as well.

The green count slipped right back below 50.  Not exactly a confidence builder for further upside in the near term.

HYG still has not recovered above its 200 SMA.  This has the tendency to snap back pretty quickly if it is going to.  The fact that it has not is shifting the odds to bears on this one.  This should not be a problem yet.  If it picks up speed on the downside then it might eventually bleed over into stocks.

The market got extremely extended and some people decided to take some profits even though the tax bill passed a major hurdle.  That has been going on so long I have a hard time believing it is not pretty much completely priced in by now.  I would not think there would be much selling pressure into year end with the tax changes coming next year.  On the other hand, buyers might be sitting on their hands because of the overbought condition.  It takes buying pressure to hold markets up.  You might have heard the old saying markets can fall of their own weight.  If buyers step back prices could fall some on light volume.  I still expect some pent up selling in Jan.  That should lead to one more good buying op.  I expect the U.S. economy will continue to benefit from natural disaster reconstruction for most of the first half of the year.  What happens in the second half is quite fuzzy.  The FED will probably raise rates again and will be shrinking its balance at a faster rate.  The ECB will cutting back the size of its QE program.  The global economy may be slowing down to top things off.  It seems likely we will see more volatility next year.

This is an interesting article and theory on the long running bond bull market.  Get Ready for Great Bond Bust of 2020

The “global savings glut” is perhaps the most famous theory behind the three-decade slump in bond yields. That glut has stopped growing, and will start shrinking in a few years, in a potential game changer for markets, Gavekal Research Ltd. analysis indicates.

 What propelled the glut was demographic patterns in big economies that saw a surge in the share of people aged 35 to 64, which tend to be years of high savings, Will Denyer, an economist at Hong Kong-based Gavekal, wrote in a report this month. When those demographic patterns reverse, the implication will be potentially “big rate rises” and the risk of a “major fall” in global equity valuations, he wrote.

A simple calculation of the outlook for the “capital provider ratio,” -- measuring the number of 35-to-64 year olds divided by the number of people outside that bracket -- suggests that the world’s saving propensity will drop in a decade’s time, according to Denyer. A more refined measure looks at weights for narrower cohorts of people -- just five years -- which would capture the implication of a greater number of 60-to-64 year olds (who are saving less) than 46-to-50 year olds (who save “a lot”), the study showed.

In the more refined analysis, saving propensity falls rapidly after 2020.

Obviously the CPR is highly correlated to rates, but as the old saying goes correlation does not necessarily mean causation.  On the other hand, it is not hard to imagine that the baby boomer population bubble has had major effects on the economy which will continue through retirement.  I am not convinced rates are going to be headed much higher any time soon.  The great depression greatly lowered private debt levels.  That rise in rates in the 60s and 70s came with much lower debt/GDP ratios in both public and private debt then we have now.  This is true all around the world.   A global increase in rates will cause all kinds of havoc on the global economy which in theory would send rates lower again.  It seems to me we would have to have a big debt cleanse similar to the great depression before we could see a sustained increase in rates.  We might have seen the ultimate low in global rates already though.  We could hang near the bottom for several more years.  Eventually it does seem likely we will see higher rates if this chart means anything at all.


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