Friday, August 13, 2010


We've had quite the debate lately as to whether bonds are in a bubble or not. I actually think they were in a bubble, but the bubble has already popped.

First off know that bond cycles tend to be very long and reverse very slowly. So we aren't going to see bonds just collapse like a stock market crash and all of a sudden we have interest rates pushing 15%. That just doesn't happen in the bond market.

Know also that 25 to 30 years is about as long as a bond cycle ever lasts.

Now take a look at the following charts.

That is a 29 year bull market, complete with a final parabolic move out of the trading range on the Fed's ill fated attempt to artificially control long term rates.

I have news for you, when ever the government tells you it is going to force the market to do something you can pretty much get on the other side of that trade with virtual impunity. (Remember what happened when the SEC banned short selling in financials) Markets are just too big for anyone to change a secular trend. Any attempt to do so will just hasten what would have happened anyway.

As you can see Bernanke did just that. The Fed's attempt to control long term rates just accelerated the final move resulting in the bond market immediately reversing and now even after a year and a half interest rates are still 140 basis points above the "Bernanke bottom".

I believe the recent rally over the last few months is the initial echo rally (a bear market rally) that will top and roll over before making new highs.

Ask yourself, would you lend money at 4% for 30 years to a country that is actively trying to debase it's currency and is so deeply in debt that we will never be able to pay that debt off without even further currency debasement? Don't forget you would be buying into a market that has been in a steady uptrend for 30 years.

Of course you wouldn't.

I know there are plenty of analysts that will argue for the continuation of a 30 year bull, but then those same people expected the tech bubble to continue for eternity and these are the same analysts who had convinced themselves that there was a shortage of real estate in `05 & `06. At secular bull market tops the masses will always be able to manufacture nonsense reasons for why the bull will continue indefinitely. At secular bull market tops common sense gets thrown out the window.

Human nature never changes. I can also guarantee that the top of the gold bull will be no different. If you think bond bulls, real estate bulls or tech bulls were ridiculous I can assure you they won't hold a candle to the absolute insanity that will reign among gold bugs when the secular gold bull tops.


  1. if there were a real bull market for US bonds, why would Bernanke need to monetize it? Private Capital would buy like they did late 80s

    Now if you can get free money like some and play spread along the curve, fine, but if you gotta toil to get you money, then ?????

  2. Toby, are you in Bob Pretchers camp now ?? Next thing you will be talking about bond vigilantes!.
    Doesnt the fed have the ability to buy unlimited amounts of treasuries? and to drive interest rates down to what ever they want...indefinitely ? "At the expense of the excahnge rate", is the normal response. But, would there not be plenty of trading partner-central banks who will hapily lend support to the US dollar, by simply printing their own currency and buying US dollars. For that matter, can't the Fed use currency swaps to buy US dollars?. Anyways, isnt a fall in the US dollar the Elixir that Ben needs just now...with such high unemployment inflation should not be a concern...increased exports, decreased imports...just perfect.
    Could the recent events in Europe be used as a perfect example?: ECB prints euro to buy Greek bonds etc, Euro falls in value, central banks provide support to Euro ( I assume), lower currency stimulates demand....etc.
    If you stand back from it a bit you see, QE driving rates DOWN and lots and lots of note printing. Lower rates and, eventually, higher inflation....which means lower real interest rates... doesnt that= Gold Bull.??

  3. The problem with printing to hold bond rates down is that it eventually destroys the currency. There really is no magic fix for what ails us.

    Certainly we could see competitive currency devaluation as all countries rush to devalue their currency ahead of their neighbor but that just leads to currency crisis. We already saw that in a minor way in the Euro this year.

    I tend to think the cancer that started in the Euro has now begun to spread into the dollar. The 2 month collapse in the dollar isn't a normal corrective move. We will know for sure if the dollar quickly rolls over again and breaks below 80.

    And yes all this money printing will be great for gold.

  4. I dont usually disagree with you,Tony- but I just want to say that thatchart didn't look like a parabolic ,blow-off top type of end pattern.IT dDID break above the channel line and return within, but that can lead to a steeper climb at times, and a new steeper trend begins. See oil, and nasdaq blow-off tops , they ramp way above the previous trend to a blow off top. This chart doesnt look THAT steep( to me)in relation to the whole time frame..anymore than the way GOLD broke the bottom of the channel line at the same time in a sell-off ( which did NOT end the Gold Bull). Thx

  5. With rates at 2 1/2% at the time how much more of a parabolic move do you think there could be?

    Do you think rates will go negative?

  6. I agree with your commentary , to clarify my last post...look at gold chart from 2000 through 2006..MANY called the may 2006 a huge parabolic blow off top and it blasted out of the did , but now the trend is higher and the channel steeper. Please see that chart. I believe currency is being destroyed and will have to be changed (possibly due to hyperinflation In time??)...I agree with your commentary...but the chart ?? Look at gold 2000 to 2010. Many called may 2006 the blow off top end for gold...but it just changed the channels steepness. thx-Robert

  7. Certainly bonds don't look like gold. Gold is a much thinner and more volatile market.

    But unless one thinks interest rates will go negative there is a limit to how parabolic a bond chart can get.

  8. sorry toby, I accidentally called you tony in my other post, my bad. Great articles and commentary! Robert...but you can call me rupert?? haha

  9. Hey anon remember this post form June 30th

    "Why do you keep circle-jerking?

    Posting on markets you've insisted you don't even trade in.

    For the upteenth time:

    So, stop wasting time and web space."

    What happened? I thought for the umpteenth time: WE ARE DOING DOWN DAWG.

    Sorry I just couldn't resist having a little fun at the trolls expense this morning.

  10. I've never been able to understand how the conspiracy theorists can come to the conclusion who owns what in the futures market.

    There is nothing in the COT reports that labels who owns what. The 4 largest shorts could very well be miners hedging positions.

    The market does follow a logical path of larger and larger hedging as price rises followed by lifting of the hedges as price drops.

    Nothing unusual in that that I can see.

    If there was price suppression going on I would expect to see shorts expand massivley as price drops to force price much lower.

    That never happens though does it?

  11. Isn't temporary deflation with continued currency debasement exactly what the Wiedman's discussed in "Aftershock"? Leads to hyperinflation, equity/bond market collapses with gold/silver rising proportionally...they even discussed the new world currency that has evolved to our current status and which will be made complete by the monster dollar/debt crisis tsunami that approaches. Anyone remember the bond crisis of fall, 1998 and gold's march upward from there?

  12. This all sounds like the Wiedman's "America's Bubble Economy" (proven 90% accurate two years before '08-'09) and much more like their follow-up "Aftershock" which details the collapse of the remaining two bubbles (dollar and US gov't debt). First, deflation with massive Fed QE quickly moving to inflation then roar upwards and equities/bonds tank as the world repudiates our debt and finally, we as a country do as well. I'm seeing common themes in all of this....

  13. View from 20000 feet-
    The Fed is supplying unlimited funds essentially for free to the banks, and that is holding up the markets.
    Few others are buying as I hope you have noticed. An election is coming.
    The Fed will use QE - they will not stop- but are creditors are watching.
    This will end badly for us.

  14. China now prefers to buy japanese and euro bonds. So the fed has to buy treasuries, no help from China financing US deficits from this date on.
    How is that to affect the value of the dollar?
    I think that gold is going parabolic!


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