Thursday, November 05, 2009

Wondering Out Loud

It's always dangerous to wonder out loud, particularly as whatever one is musing is likely to abrade against the conventional view of things.

A blog participant on another blog mentioned this story (click to be transported).


While one respondent stated "that is a sure sign of a top in the market", my particular reaction (I'm not holding my reaction out as being more insightful) was this: "It seemed like a sure sign of a top in the bond market."

There seems to be lots of speculation about the fate of interest rates. I think that I can say with some conviction that there is no place but up. However, how far up and how soon is anybody's guess. Again, the 'epic' inflationista/deflationista debate which will be waged in the media and blogosphere. I'm not stepping into that fray other than saying one side or the other is in for a big surprise. How's that for neutrality! Equivocation! Teflon!

The second thing to take to address (if not take to task) is 'money on the sideline.' There seems to be much uninformed commentary based on that. I'll not add to the fray there either. I'll state these simple Truths which I believe are not subject to much credible debate:

Truth 1: Short term interest rates cannot fall further.
Truth 2: Long term interest rates can fall further (unlikely)
Truth 3: Long term interest rates can increase (likely)
Truth 4: The bond market is a very large enchilada, and due to low interest rates is not a very filling meal.


Yeah, I know that calling these "Truths" is stretching it a bit. And I know that stating that they are not subject to 'credible debate' is sort of impugning any criticism! That's not my style, so if you have an opinion, voice it.


But the point is this.... These Four Truths, I'm holding out to be self evident that the 'money on the sideline' is really the bond market. So while many who are on the wrong side of the trade are quick to point to the PPT and other unnatural forces that seem to thwart their every move or projection (these are omnipresent market forces always in existent--our job is to outnimble them!), I'm merely pointing out that the 800lb gorilla that represents money not previously in the stock market, is that money "sidelined" in the bond market.

So if you were a bond holder faced with an instrument denominated in a depreciating currency, earning a low return, subject to face value decline due to increasing interest rates what sort of repositioning would you do?

4 comments:

Glenn_in_MA said...

I find your comment closer to the truth. Thanks for the well written food for thought..it's why I come here.

BTW, I'll NEVER be without an opinion but something would look and BE wrong if I agreed with every thing you write. I'm sure you won't hold it against me when I disagree. So betting back to the bond market, the BIG question to me is, "not if, but when?" I'm thinking it's longer than most think...like a few years from now.

Glenn_in_MA said...

bet = get, but it seems to work both ways!

Leisa said...

Glenn, you are always a gentlemen. And remember, the woodshed is for (dis)cussin', smokin' and drinkin' the cornerstones of civilaztion!

Anonymous said...

"While one respondent stated "that is a sure sign of a top in the market", my particular reaction (I'm not holding my reaction out as being more insightful) was this: "It seemed like a sure sign of a top in the bond market."

And the folks at Fairholme start a bond fund!

I agree with Leisa. And with Glenn too! The top is somewhere nearby for bonds. A year? Two? Five? I don't know. These financial crashes are tricky and the bond regime has changed. (Not really correlated with inflation expectations because needed as a blunt policy tool in a deflationary environment.)

MarkM