Bonds Signal Inflation Is Coming 16 comments
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While I am looking for a possible stock market correction in the short- to medium-term, what still makes me unsure of this scenario is the movement in the bond markets. The signal that the bond market is giving off through the daily and weekly TLT charts is that of inflation... a very good signal if you are an equity or commodity bull. If the bond market breaks down from these levels, this might wipe out my stock market correction scenario entirely.
The daily chart of TLT below shows a breakdown of the channel range support level, and now two trendlines (short-term and intermediate) serve as resistance levels. What a difference a week makes since previously I was looking for TLT to respect the channel lows, and suddenly it has broken down. It is short-term oversold though, so we could see some rallies (along with a stock market correction). But anything is possible and we could just see a momentum move downwards from here.
The weekly picture shows even a more dire situation for bonds.... a third MAJOR trendline had already been broken in April, and this will serve as a bigger overhang than the prior two resistance zones we mentioned on the daily.
A breakdown in bonds would force people out of fixed income reluctantly, and shift their investments to stocks and commodities as the inflation trade would be in full force. We should thus watch bond technicals closely.
Meanwhile, Jim Jubak has an article on how the details of the upcoming bond auction indicates that the Treasury is getting ready for higher rates:
"First, the package is a very clear effort to extend the maturity of U.S. debt. Right now the average maturity of the U.S. debt as a whole is just 53 months. The Treasury has told bond dealers that it would like to extend the average maturity to 74 to 90 months.
A longer maturity means the Treasury gets to lock in today’s low interest rates for a longer period of time. Extending the average maturity by somewhere between almost two years and about three-and-a-half years is exactly what you’d expect Treasury to do if it was convinced that interest rates were going to start climbing within the next year or so. Time to lock in those low rates, you can hear Treasury Secretary Tim Geithner saying.
Second, those aren’t just any 30-year bonds the Treasury is selling. It’s selling 30-year inflation protected bonds, or TIPS (Treasury Inflation Protected Securities). The Treasury has told dealers that it will replace sales of 20-year TIPS with a 30-year issue."
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This article has 16 comments:
where are alll these investors money coming from. their home equity is gone. their 410k are decimated.
I'm not sure how you conclude inflation is here from a couple of weeks of bond trading, especially with the economy still in dire straits. Higher prices cannot be supported from debt ridden consumers.I believe inflation is many months if not years away.
On Nov 09 07:21 PM MarkMarket wrote:
> Stock market keeps going up even with record unemployment. DJIA 10300
> this week.
> good articles 4 slow news day: financeopinionss.blogs...
LilBob, I have to respectfully disagree with you about inflation being "ultimately a consumer driven phenomena". That isn't the case at all, although it appears to be. Inflation is caused by too many dollars chasing too few goods. Let's take grains for example. When the price of grains is driven up by too many dollars chasing too little grain, the price of flour is going to rise whether the baker likes it or not.
Whether the baker is able to "extract" more money for his more expensive flour out of a consumer who doesn't have enough dollars for a loaf of bread is totally irrelevant. The price of bread is going to go up in an inflationary scenario whether the consumer can afford it or not. In fact, that's exactly what happens... prices rise regardless of the fact that the buyer can't afford to buy the goods and the merchant can't find buyers for his expensive goods, except for the very few who have enough dollars left (while they last).
Consumers have no more power to "stop inflation by refusing to buy" than they have of stopping a train wreck by holding their breath. As difficult a concept as it is to grasp, the two are not related since inflation has nothing to do with the real value of commodities and everything to do with the sheer insanity of the number of dollars the FED has created to buy them with. Those dollars will come into circulation and drive the prices of everything right to the moon, regardless of the you and me consumer.
The only question is "when". I can see a potential scenario developing where the FED pulls the nastiest surprise in years and catches the 98% dollar bears right off guard buy unexpectedly raising rates or applying the proper rhetoric. The stock markets won't like that. Or, the world will suddenly realize that the FED is going to let the dollar drop right off the face of the earth. The stock markets won't like that either and we'll witness the most horrendous situation of all, equities crashing and the dollar crashing at the same time. So regardless of whether it happens sooner or later, which is what Terence Chan is trying to figure out... it's going to happen.
On Nov 09 01:24 PM bartpr wrote:
> inflation has never been good for stocks. witness the 70-80 period.
>
> where are alll these investors money coming from. their home equity
> is gone. their 410k are decimated.
On Nov 09 01:44 PM WD216 wrote:
> Exactly Bartpr, inflation is a disaster for stocks. Terence I realize
> you are too young to remember the 70's and early 80's but both stocks
> and bonds plummeted. You should check your history before assuming.
> So the market can obviously correct and bonds can also drop.
>
> I'm not sure how you conclude inflation is here from a couple of
> weeks of bond trading, especially with the economy still in dire
> straits. Higher prices cannot be supported from debt ridden consumers.I
> believe inflation is many months if not years away.
>
>
> by the way, inflation will be here so long as the Fed keeps its foot on the money-printing accelerator pedal... it's their only way out of this mess, to create another bubble<
The FED is creating a lot of money alright, but it's not being loaned out. When that money, which from what I understand is mostly sitting on the books as "reserves", finally gets loaned, it then starts to multiply at an exponential rate. Let's say the bank of Terence Chan loans Northern Dancer $10M. Northern Dancer deposits that $10M in a bank somewhere, and as soon as he does that, his bank can then loan out 90% of it or $9M to a different customer. In effect, the bank has just created another $9M out of thin air. When the customer who borrows that money deposits it into a third bank, that third bank can then loan out another 90% of it or $8.1 million. And on and on and on. That's what adds to the "velocity of money" and really gets the money flowing. Until that happens, inflation doesn't really amount to much. But when money starts to once again move around quickly, watch out.
So the bottom line is that even though we haven't seen inflation yet to any great degree... it's inevitable that sooner or later we will, and it's going to be massive. I don't really see it happening soon though. That money the FED is creating has to be loaned out. Instead of loaning it out, I don't have much doubt that the banksters are the only people getting it for their own greedy use, and they're having a lot of fun with it in the dollar carry trade, at the expense of holding America back. The banksters don't give a damn about America as long as they personally can line their own pockets. If the American people ever decide to take them to task for their traitorous ways, I want somebody to email me. I've never seen how a gallows actually works.
Inflation will come, but it can be 2 to 3 years away. It's certainly not going to be pretty when it arrives. If you go back to the 70's and early 80's with inflation peaking at near 20%, the things that benefited were land, gold, silver, copper, coins, stamps and art. In otherwords, thing you can feel and touch, it's security in that environment. Stocks are not. During those inflationary years US stocks were basically flat and actually down some if you go back to the late 60's.
Also check other countries stock markets during inflationary times, you will see that as inflation rises stock do poorly.
On Nov 10 01:32 AM Northern Dancer wrote:
>
> LilBob, I have to respectfully disagree with you about inflation
> being "ultimately a consumer driven phenomena". That isn't the case
> at all, although it appears to be. Inflation is caused by too many
> dollars chasing too few goods. Let's take grains for example. When
> the price of grains is driven up by too many dollars chasing too
> little grain, the price of flour is going to rise whether the baker
> likes it or not...
We seem to be arguing both sides of the same coin Dancer. You are absolutely right about too many dollars chasing too few goods. But also, any good ultimately has to have a consumer to purchase it, or that good is inherently worthless. The use of aggressive leveraging of capital to drive up futures shares can temporarily increase costs, but if consumers revolt and reduce their consumption of goods significantly then prices will eventually fall back down again. That's why I often mention the (much hated by some) Threshold of Elasticity concept-which refers to the price point at which a good which was initially thought to have inelastic demand characteristics begins to show significant signs of increased demand elasticity. Just look at what happened to gas prices in the summer of 2008, after pump prices reached a nationwide average of around 3.85 a gallon, consumers turned to car-pooling and park and ride lots and nationwide fuel consumption dropped by around 4%-which eventually resulted in gas prices falling by around a dollar a gallon. Aggressive leveraging and futures-trading can only push prices up for so long before customer revolt annihilates asset values. We also have to contend with what I call the "Burnt-Finger Effect", which refers to when a run up in prices leads to lingering consumer resentments agains producers that results in a steady decline of the Threshold of Elasticity price point for a given good. American consumers are angry right now and we really are living in an age which bears significant similarities to the "Trust-Busting" age of the early 20th century and the first Roosevelt administration. The notion that market prices are independent of consumer behavior is a potentially dangerous one, and contributes to the formation, and spectacular destruction of market bubbles.
> We seem to be arguing both sides of the same coin Dancer. <
Yeah, we're not really that far apart in our perspectives LilBob. I think the angle I'm coming from is more related to the fact that the consumer is at the bottom of the totem pole and as such, he really doesn't have any control over prices other than in his reluctance to buy at higher prices. But I think the day will come that prices begin to rise on the commodity front based not on demand, but on the sheer quantity of dollars that will eventually emerge as "velocity of money" really gets going. So what I'm envisioning is a case where manufacturers will have no choice but to pay more for their raw materials and "attempt" to pass them on to the consumer.
You're absolutely right that consumers might revolt as in the previous case you detailed, but my view is that some day, perhaps too soon, the consumers' reluctance to buy will no longer have any effect. The result will be that the poor manufacturer will in fact not be able to sell his pricey goods. He will in effect be forced to cut back production.
>The notion that market prices are independent of consumer behavior is a potentially dangerous one, and contributes to the formation, and spectacular destruction of market bubbles.<
I agree with this statement 100%, but that's my very point. I believe we're actually facing that very scenario and that we're probably headed for the bubble destruction you speak of. We're basically on the same page here. Maybe my viewpoint is at the extreme edge of it though because admittedly I really am talking about the extreme scenario.
Cheers!
.
On the otherhand, Inflation caused by an overheated economy that has reached full employment and utilization, struggling to keep up with demand, driving wages and prices higher and higher--Thats the inflation Ben(ee) and the Jets are afraid of.... but wish they could start a little of.
All theory aside--what we face economicly as a nation and a world is unprecedented--as are the measures being carried out to counteract the effects of unwinding $500 Trillion worth of unregulated derivatives (as the cosmic banking cowboys think of new ways of cheating and all the new social engineering gets funded). God help us all--we are in this together and it is going to be a long haul out of here.
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