Bond Trading Trends Warn of Deflation

The current bond trading is NOT consistent with a stock market recovery. This is putting big fears for my projected March/April stock market rebound.

The 30-year treasury bonds have broken the all time low, and currently trading at about 3.3% (for the next 30 years). Is USA heading into a Japanese-style 20+ years recession?

Mish has always been calling for the Japanese style recession. Bob Hoye however, indicated that long bonds will trade some 10% higher! I don’t know any other pundits that came away somewhat unscathed from the recent financial turmoil. I tend to side with Bob Hoye more possibly because his opinions are more consistent with my own forecast. However, the current bond trading is telling a different story, and definitely going against Bill Cara’s repeated call on the trade of the generation: sell bonds and buy gold.

I will be keeping an eye on bond prices. My portfolio is set up according to Bob Hoye and Bill Cara’s forecast. However, it is always possible that their calls are simply earlier by months if not years. From all I can see, both stocks and bonds are diverging away from Bill Cara’s projection, and indicating a Great Depression II.

Comments

[Did U Think...:]

I think it is important to not fall in love with a theory or a model the same way one should not fall in love with a stock or an index. Let the data do the talking and let the charts be your guide. Everything else is noise.

2008 Dec 02 03:34 AM

[John Lounsbury:]

Frugal - - -

An alternative view is that the increasingly historic rise in bonds is a flight to quality in a time of economic turmoil. If that is the case, this period will be known as the great bond bubble of 2008-2009.

The current deflation in real estate, stocks and non-treasury credit instruments is the counterparty to the rise in treasuries. If this deflation is not temporary, low interest rates will last for a long time. This is the scenario that "the Japan 1990 redux to the present U.S." advocates describe.

What scenario is compatible with a great bond bubble? A bottom in stocks and real estate in the near future (say anytime during the next 6-18 months) with a concommitant end to the current recession. The economic rebound will be inflationary if all the money currently being created is more than what is necessary to replenish reserves in financial institutions. Monetary stimulus overshoot is very likely and therefore inflation is probable.

It is very likely that you, Bob Hoye and Bill Cara are correct. You may be early and collect some abuse while you wait to be vindicated, but the likelihood that you will still be wrong in 4Q/2010 is very low.

2008 Dec 02 12:13 PM

[neocon4jesus:]

My Tips bond fund VIPSX has been losing me money.

If it doesn't turn around soon, I'm putting what's left of my "Post Jim Cramer" investments under my mattress.

2008 Dec 02 11:55 PM

[Suziclue:]

It's pretty much common sense that this is going to be a long term downfall. Rebound in March/April is extremely optimistic. I see more declines for the next 5 years. Think about this, the major corporations are still in the process of laying off workers and the affects of those layoffs will not be seen for another year or so when people start to realize they can't afford to live the way they live currently. That will lead to more homes going into foreclosure and more people not spending. The goverment will need to cut back more and more of the next few years as the tax revenue will not be there. Our big crash will continue well into 2011.. A recent survey conducted at this site shows that over 95% of those surveyed believe we have not bottomed!

www.homepricetrend.com

Suzi

2008 Dec 03 04:45 AM