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Can You Hear It?
The bond market is shouting at you this morning. The benchmark ten-year Treasury Note just traded below a 2% yield. It's never done that before. Not when Lehman collapsed, not when the US economy was losing 800,000 jobs a month, not when the Treasury was "forced" to guarantee even commercial paper issued by corporations for money market fund holders. From that Bloomberg article: "Ten-year note yields dropped 16 basis points, or 0.16 percentage point, to 2.01 percent at 10:09 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 rose 1 14/32, or $14.38 per $1,000 face amount, to 101 2/32. The yields touched the record low of 1.9735 percent, dropping below 2 percent for the first time." If you heard it, did you know what it was trying to tell you? As every major government bond market around the world rallies, and every major stock market declines, the message is clear to bond mavens. Global deflation is that shadowy shape dead ahead of the world economy, and it is almost certainly going to tear a hole below the waterline. I know that some readers are going to say "Wait. The gold market is saying inflation, not deflation." That's not how I see it. I see the negative real rate on cash parked in T-bills (three month yield 0%, 12 month yield 0.08%) as a clear indication that prices are going down, not up. As more and more market participants equate gold to another currency, they are simply diversifying their cash into that currency along with Dollars, Pounds, Swiss Franks, Yen and Euros. If you consider the total bullion supply, the allocation into gold is less than $10 trillion worldwide, a small fraction of the total debt held as investment. The key to understanding the mixed signals of gold and the bond market(s) is to realize that boiling every bit of information in the market down to a single price eliminates much of the information. Once that information is reduced to a single data point, you can't actually re-create it. We're left guessing at what forces are at work that put the prices where they are. The one thing that makes no sense is to look at one market (eg gold) and conclude that there is inflation ahead while ignoring other larger markets that are telling the opposite story. I believe the rising price of gold is telling us that its relative value as a currency is perceived to be strong enough to overcome the general decline in prices for the stuff we need in the real world. But that "stuff" is going down in price for the immediate foreseeable future. If it weren't going down (inflation ahead) the investors buying bonds would buy the stuff (houses, real estate, oil, etc.) instead of bonds. So I posit that there is downward pressure on the price of gold due to deflation, presently more than offset by the non-sovereign currency nature of the barbaric relic. Howard Hill is a former Wall Street mortgage finance "rocket scientist" who invented a number of successful bond structuring techniques and analytic tools in the 1980's and 1990's. He headed research, finance, sales and trading groups at major Wall Street houses in the first half of his career, and became a customer for Wall Street in the new Millennium, analyzing and buying the same kinds of bonds he used to create. In addition to scores of mortgage deals, he structured the first securitized deals with apartment building loans, nursing home loans, mobile home park mortgages, computer leases, life insurance policyholder loans and Argentine mortgages. |
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