Yves Sees The End of the Great Bond Bull Market - With a Risk of Hyperinflation

I have posted a number of articles of Yves Lamoureux, President at Lamoureux & Co.. In Oct 2009, he predicted the 30 yr would fall to 2.5% when most pundits - including the then-inestimable Bill Gross -expected a rise to 5%. Yves was right, and I christened him the New Bond Guru. On Friday he published his new prediction, that the Great Bond Bull Market from 1982 is now over.  Summary:

Bonds have tended to act as expected as risk preference shifted. However, bonds now have neither a credit risk premium and nor an inflation risk premium. Our proprietary model is clear: treasury paper of 30 years has the correct valuation of 3.50% and above. That is the level we would feel confident as buyers.

He makes an intriguing additonal observation, of a type of hyperinflation, but not the type that is commonly bantered about, a Wiemar-Republic style inflationary collapse. Instead, as we risk more of a deflationary environment from too much debt (deflation arising as that debt gets written off or washed out faster than central banks can print), this time it will emerge from increased credit risk in what heretofeore have been the most risk free instruments - US Treasuries. 

The harbinger of this may be Japan, which (as John Mauldin has put it) is a "bug seeking a windshield." The expected new Prime Minister wants to go to extremes of monetization to reinflate their moribund economy. As money has bailed out of Europe, it has found Japan, and the Yen has risen. Now it is being purposely weakened, and has hit a seven month low with the USD.

As the WSJ puts it:

Investors have been selling the yen since Japan's prime minister announced last week that an election will be held Dec. 16. Polls show Shinzo Abe, leader of the opposition Liberal Democratic Party, as the leading candidate to emerge as prime minister. Mr. Abe has been calling on the Bank of Japan to enforce bolder policies, including unlimited printing of money and setting reserve interest rates at zero, or even in negative territory to stimulate lending. 

The MMT view has circulated in financial circles, with the core belief that a currency issuer never need to default. This of course flouts history, where fiat currency after fiat currency has gone down in the sort of credit collapse envisioned by Yves. While it seems almost unimaginable that the USD might suffer such a fate - and it is years away from such a crisis - the Yen may become the first major currency to test the MMT approach of extreme monetization.  

Financial observers spend undue attention on stock markets.  Bond markets are an order of magnitude bigger.  It is now time to watch the bond market.  

Comments

[Tom Green]

prechter free week rally strikes again!

its simply uncanny how it works every time.

heres the trading system:

1. wait for the EWI free week
2. start scanning the markets for bottoming patterns since the market usually goes down a bit more after the free week begins.
3 as the market bottoms look for triangles, cup and handles, h&s etc,
4. go long and profit fron this interesting socionomic phenomena which guages prechters greed

in this case, friday 11/16 put in an inverted head and shoulders bottom

this was a pretty easy rally to forecast, but the free week just gives you that extra confidence

[Tom Green]

it would be interesting to go back and find all the dates of every prechter free week

i cannot remember one never not working

it must be somewhere close to 100% accuracy

[Hockthefarm]

Y:

I just don't get how anyone would call this hyperinflationary:

"He makes an intriguing additonal observation, of a type of hyperinflation, but not the type that is commonly bantered about, a Wiemar-Republic style inflationary collapse. Instead, as we risk more of a deflationary environment from too much debt (deflation arising as that debt gets written off or washed out faster than central banks can print), this time it will emerge from increased credit risk in what heretofeore have been the most risk free instruments - US Treasuries."

Fewer dollars chasing more goods = deflation.
Increased credit risk = higher borrowing costs = less growth, which in turn is also deflationary.

Crude less than 20 $/bbl by 2015! The ripple effect on a market economy will be hugely deflationary. Ditto for commodities in general. +65's (the fastest growing segment in our population) don't want their 6000 square foot house anymore. They want to retire and to do it worry free, they have to be debt free.

What am I missing?
Hock

[yelnick]

Hack, maybe use hyper deflationary. Point is the loss of creditworthiness of the US Treasuries. 

[Hockthefarm]

Thanks yelnick:

As I recall, Prechter is calling for a strong dollar for the next few years. My understanding is that he sees increased credit risk and deflation creating a massive demand for dollars. Longer term though, 5 to 10 years out, I don't think he is so positive on the buck.

H