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Where Have The
Bond Market Mavens Gone?
By: Greg Silberman
December 13, 2007 (GoldAndOilStocks.com) –
We’ve been puzzled by the Bond markets performance in the face
of a highly inflationist Fed. Where have the bond Mavens gone?
When it comes to markets we deal in probabilities. At any
given time, there are multiple factors affecting the market,
some bullish, some bearish. It’s up to the subjective
judgement of the analyst to determine which factor(s) will
dominate and hence the direction he/she thinks the market will
move in. As such we are always dealing with probabilities.
One market which has seemingly defied those probabilities is
the Bond market. Next to Gold, Bonds are supposed to be the
inflation hounds of the finance world. Their ability to sniff
out inflation became famous in the 70s when the term Bond
Maven was coined. The Bond Market Mavens were a counter
balancing force against an inflationary Fed. That is, the Bond
market would punish the Fed with higher interest rates at the
smallest hint of an increase in monetary inflation.
Contrast that with the current situation where the Fed is churning out 10% more
currency each year (at least that’s what we think it is as the Fed no longer
publishes M3 statistics) and the Bond markets response has been incredibly
benign:
Figure 1 - Bond Yields heading lower in a hurry
What to make of it?
Interest Rates have been falling through the floor whilst the Fed and Central
Banks around the World print like mad. The currency market gets it – the Dollar
is in a free fall - the commodity market gets it - most commodities are at or
near all time highs.
So what’s wrong with the Bond market? Where are the Bond Mavens?
Honestly, we have no idea. Maybe they see deflation ahead. Maybe, due to the
credit crunch, the panic for quality has overwhelmed the flood of new money. Or
maybe the Fed is just monetizing the debt. Whatever it is, the Bond market
Mavens are Dead or at the very least completely Silent!
We just heard an observation by analyst Gary Dorsch from SirChartsAlot that
attempts to explain this phenomenon.
Per Gary, the Bond Market Mavens have been replaced by the Oil Mavens. OPEC and
non-aligned Oil producers have taken up the position as counter balance to the
Fed... and we may add Gold has also assumed that mantle. Every time the US
Dollar falls (as the money supply expands); it is met by higher Oil (and Gold)
prices.
Figure 2 - Perfect inverse correlation between the Dollar (blue) and Oil (red)
and Gold (green)
We think it is a mistake to dismiss the Bond markets signal as manipulation or
the like. Instead we continue to see the epic struggle of deflation (Bonds)
meeting Fed induced inflation (showing up in Oil and Gold).
Far from being a counterbalance to the Fed, the OPEC countries seem complicit in
this arrangement and will not prevent the Fed from going about its business as
long as they can maintain the real price of Oil. And so far $100 Oil has not
caused an economic meltdown but merely pushed strategic holdings e.g. Citigroup
the way of the Middle East.
In our opinion, this game of Fed engineered growth (the 100 Dollar Bill drop)
will continue only until the Bond market says it’s enough through much higher
interest rates.
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