We are at a critical junction in markets, and our favorite guest blogger Yves Lamoureux advises on the change of trend. He has made recent prescient calls in other markets too, such as Japan. Earlier this year he called a change in stocks, and predicted the current blow-off run to new highs. Here is his view on the bond market:
In nature, there are seasons. In the affairs of men, there are seasons. And seasons in finance? Mentioning cycles in markets hurts the fragile sensibilities of so-called objective investors, however.
A wise investor knows it is not wise to follow the herd. We have come across what we believe represents the crystallization of crowd consensus on interest rates. The cover of The Economist dated September 22 shows the Fed on a small legged horse with the headline “Living in a low-rate world.”
It caught our eye, having correctly presented our case of the next wave of a credit event on July 5 at the very top of the bond market
We maintain our view that coming bond losses will be brutal, and we timed the bottom of real rates on the 10-year to perfection late 2012 (see our appearance on Yahoo Finance on 22 January 2013). Consider this chart:
Fear not, stockholders, because this time the Fed will come to the rescue by buying shares, a prediction we put forth more than one year ago.
A few will remember our track record on these matters. One year before the Fed started buying bonds, we predicted that the Fed would do so. Our business is one of making correct predictions, not endorsements.One year ago we predicted a Trump win and to wit that he was going to be credited by jump starting the economy.
Hope you are following the big picture of debts accumulation.
It is all part of the big picture. Bonds are going to continue to tumble past 2020, like we said back in the interview with Jeff Macke. As you see, our work often has a big lead time. It is advantageous to big money managers who need time to adjust and prepare. We have been bullish on stocks for a long time. In essence we have been front-running the market waiting for that point in time when the Fed starts buying our stocks.
For regular readers, it’s been on our radar for a long time and just recently did the Fed say that buying stocks is in its toolbox.
The same was done on the bond front. One year earlier, our forecast of the Fed buying bonds was met with a yawn because we were alone in this view. We were long bonds and they rallied strongly while everyone was outrageously calling for coming high interest rates that did never materialized.When the Fed started buying bond with their operations it was easy to unload our bonds at much higher prices.
On to the more technical aspects of our work
Our view has been that from 2011 onward, there’s compressing fear regarding bonds in terms of sentiment. In other words, each price drop is met with less reaction as we move forward in time.
It is at odds with price and behavior that are always coincident.
The apex of such behavior merits the cover of The Economist, and the timing was perfect. Away we go!
Consensus seems to be surprised by the strength of the rise in interest rates, or inversely, the drop in bond prices. Most observers admit being caught off guard but will willingly offer the view that this is a bottom.
Unbelievable. We strongly dissent!
Note that from late 2012 up to today we have traced a perfect wave 1 and wave 2 in 10-year real rates. It appears we have begun the cycle of a wave 3.
For fans of wave talk, this represents the most dynamic of waves, and it will lead in our view to substantially higher rates coming in 10-year and 30-year bonds.
We had written in June of 2015 about the term premium and showed how abnormally compressed it was because of the intervention of central banks. You can hold down anything for long time, but when the uncoiling comes it is more devastating and equates to actually what is unfolding with bond prices.
Our attempt to describe what is going on is simple: the cost of money is going up, or to say it in another way, real rates are going up. We will not hide that we have been a staunch bull on the US dollar as one of the implications of rising rates.
Precious metals saw an echo bubble and have resumed their bear market.
Our Trump prediction did re-enforce the view of how things will continue to shape up: Main Street may finally see some economic gains at the expense of Wall Street!