The return of the doomsters has netted me a fair about of personal criticism around the net, for reasons which are perfectly understandable. There are so many so-called “experts” out there calling for a hard collapse, one reader put it this way:
Someone somewhere is gonna look very silly come this Oct 1st if the bond market doesn’t crash or the stock marker is going strong
If you read my more serious work on the www.peoplenomics.com site, you will know that
a) I think there is an even-money chance we are in an irregular high flight IV and that
b) the market could still have a major upward move left into the 2017 period.
I might be a damn fool for thinking this, but as I read it, the market history supports this view.
When I read headlines about how the “Central Banks are losing control…” I smile because that shows the lack of understanding people have of CB’s. They specifically do NOT lose control. They always have multiple levers to pull, not the least of which is another QE (4 is it?). And they are also able to raise raises.
The good news about bond market predictions, from the charlatan perspective, is most people don’t demand they write clearly when making bond market predictions.
Allow me to explain: If I were to jump onboard the band wagon and were to say “Bond Crash Coming In October” – what would you think would be the correct interpretation of such an event, even IF it were to be true?
The reason such a prediction is intellectually dishonest is that a bond crash could be: (You get to pick one:)
A. A large drop in bond yields (in other words the amount of interest paid). Let’s take a 10-year treasury and pretend it’s paying 2.15% now. If it goes to 1.9% some of the charlatan s would be able to say “There…you see bonds crashed.”
B. On the other hand, if (as I expect) the Fed meeting in September sees a rate increase, then we might see bonds go to 2.65%. Here’s the trick of the charlatans: When the interest rate goes up, the net present value of the bond declines. (Go read up on Net Present Values or NPV here,)
Thus, the net present value of a 10 year bond will vary – depending on rate expectations.
If you have a 2% yield bond and inflation expectations over the next 10 years jump to some astronomical level (10% per year, say) then your NPV of a 2% yield bond will collapse. But, if you have a 5% yield bond, your NPV (which would be above par value (e.g. over $1,000 now) would go even higher.
The key trick here – and it’s the old fortune teller’s trick, is you can safely predict there will be a “bond crash” at some point, because the Federal Reserve has already said that higher rates are likely this fall. The recent move by the Chinese means serial devaluations worldwide are a possibility.
Does a Market Crash Follow?
Maybe, but I don’t think so.
But when the Fed raises rates, it will not necessarily kill the stock market. In fact, after three raises over the coming 6-12 months, the stock market could easily soar to new heights and maybe double.
The fun thing about understanding the mechanics of how inter-market relations work, and having developed the historical data to back it up, you will notice that bond yields rose in 1928 but the bond market did not collapse.
What happened, instead, is that low yielding money came out of bonds (whose NPV was declining) and it flooded into stocks because equities, unlike stocks, have a unique ability to adjust their prices and yield as business expectations change.
What I believe will happen is the Federal Reserve may actually do – as expected – and at one of their fall meetings will begin to raise rates.
The will be gradualists about it, however….and that’s fine because we are (in my opinion and measured from the 2009 lows) in an aggregate irregular high flat IV which, once the Fed does a couple of raises, will drive “dead money” out of stocks and back into equities which should then do a moonshot like we saw in 1928-1929 when the same fundamentals were in place.
So when the “bond market crashes” (which is won’t overnight), all it will mean to me is that NPVs of bonds are starting down and because money has to go somewhere that is inflation friendly, that means a major run up in Gold should begin, housing should start climbing, and the stock market should soar.
The problem with the bond market, which is larger than the stock market, is that the “turnover” of money has never been this low since prior to the Great Depression.
One of the major reasons that the economy sucks right now is that turnover of money is so low.
In 1989 if you had a million dollars and you could find 10% bonds, you’d have $100K of annual income and be pretty well set. Today, in the reality of the 2% world, a million dollars is only $20K of annual income and you can’t rest on your laurels with that.
What do you do? Work your ass off so you can put $4-more million in the fixed incomes and get back to being “set”.
All of which has been fine for the One Percenters, but their failure to spend has returned the “turnover of money.” As all the money has piled up in bonds, money that would once upon a time have gone into research and development, for example, is sitting is useless bond.
And since Velocity has collapsed, it means the bond market has been screaming upward (on a Net Present Value basis) because rates have fallen because there’s a line around the block of One Percenters who don’t like the word “risk.”
So to the first bottom line of the day. When you read how “the bond market is going to crash” ask whoever is making the prediction whether they are talking about the Yield (which should go up as we get closer to a Fed raise, so that doesn’t even begin to qualify as a prediction).
Or, do the mean that NPVs are going to decline – another non-prediction because of course they will.
But to say that a decline in bond NPVs will do anything other than reflate gold and drive up stocks is really, really stupid, as I see it.
But that’s fine. Because it makes it easier for people like me to make money.
When enough people get scared of the Fed raise (which they did when the Fed began raising its discount rates in the pre-Crash period of the Roaring Twenties, there will come a market low – just before the huge run up when all that former bond money goes looking for adjustable yields and that IMHO is gold, silver, and equities that pay dividends and have a big-name franchise enabling them to move prices up.
About here, if the rhyme off the 1921-1929 market continues to hold, people like me will be selling off major assets in a year, or two, and will make a good bit of change on the call option side as the stock bubble of a lifetime should appear.
Who, ME? OCD?
Inquiring minds want to know:
You clean your bathrooms everyday? Ever hear of OCD. Might want to check with your doctor about that one. The head shrinking kind.
LOL. Well, like it, or don’t, there are some of us in the world who walk up to the edge of OCD but aren’t really. It’s a matter of appearances.
No, the toilets only get done once a week. Showers and bath tubs, though get a squeegee after each use. Only takes a second.
The towel you dry with (remember, walls and doors are now dry) is then used to wipe down the frame (which takes all of 10-seconds per side) and then the shower head and handle. Once done with that, the towel is slapped around the base of the shower and floor and that picks off most all the water there.
Then, if guests are coming over (or whatever) there’s no “quick, let me clean the bathroom” – it is in a perpetual state of readiness. Sinks are rinsed out well after brushing and such, too.
Same in the kitchen: Dishes go from table to dishwasher which is run once a day and yes, the carpet never has anything on it. But the vacuuming isn’t daily…that’s more a 1.5 times per week deal and it’s really focused on the high traffic areas because clear carpets last longer.
I don’t think that meets the test of OCD. Neither does my invention for marital bliss called “Matching Food – Matching Breath” or MFMB which we will snicker about when dining out if one of us says something like “Say, that triple garlic salmon sounds….”
If you check your Diagnostic and Statistical Manual of Mental Disorders, 5th Edition: DSM-5 (which I know you keep right next to your computer because it does explain so much of the Internet, haha) I think you’ll find Elaine may lean a bit more toward OCD than me (I lean the other way). But that’s fine because we sort of average out.
Which means having garlic breath at the same time.
Speaking of cleaning, reader James has a cat who, like Zeus, makes a mess of himself in the summertime:
I used to shop vac the cat during the summer, he used to hate it cause the thing was so loud. I put the vac on the patio and run the hose thru the sliding door. He loved it and used to rub on the thing when he wanted a hose down. that and it was pretty cool to see how big of a hairball I could get since it makes a perfectly round ball rolling around in there. YMMV.
Keep up the good work, I’ll write back when I break even. LOL
P.S. I designed PCB’s for 30 years and did a search for PCB design jobs in china, 100’s of American companies are hiring in china these days, looks like I need to consider relocating.
I’d be in the ER for arm stiches if I got near Zeus with a shop vac…but it’s a good idea.
On relocating to China, I’ve heard they do good Chinese food…but what happens when you get a Yen for teriyaki? (rim shot)
I’d better skedaddle before Pun Land Security knocks…but first one more email
George, your myopic view of global warming really should expand beyond the limited borders of theUSA. If you look at the rest of the world (including th arctic) you might discover that the world is warming. But like most American jingoists, its evident that your data set conforms to your mental biases.
A reality check moment. Go read some history of sea level and then repeat after me:
Harley: It’s a cycle. Climate: It’s a cycle. Markets: It’s a cycle. Life: It’s a cycle. Food: it’s a cycle. Seasons: It’s a cycle. Rain: It’s a cycle…
Seeing the pattern, yet?
One last Reader Write
This is marvelous:
My Grandfather moved to California after being discharged from the army after WW1, and married one of those Hispanic women who could trace her families move to the new world to the mid 1500’s. From them, he learned a saying, “Big Fire, Big Rain, Big earthquake”. So, whenever there is a big wet in California, I get excited about a big earthquake. Unfortunately, I think that saying has more local meaning, than global. By that I mean, California had a smaller and more dispersed population back then, so the connect to big fire, big rain, big earthquake was probably true because the fires would have been more local.
My mother remembered the big flood of the 32-33 El Nino followed by the big Long Beach earthquake of ’33 that was so devastating that they rewrote the building codes for schools that year. The other caution I was raised with, was watch for a full moon. So, I grew up with a mother who had regular EQ drills since she had lived through the Long Beach one. So, when the 1971 occurred, and we lived 2 miles from the epic center, I knew what to do.
Now, I particularly remember the big wet’s of 1953-54, 1963-64, 1972-3, 1977-78, 1982-83, 1986-87, 1994-5 largely because as a child and student it meant no school because the roads were flooded, and as an adult, adjusting for people who couldn’t get to work because of flooded roads and landslides. Whenever a big EQ would happen I would go back into mind and see if a big wet proceeded it. I would go back a year, since it would take a year to really loosen the faults.
I personally experienced the 1971 San Fernando EQ as well as the 1978 S. Barbara, the 1986 North Palm Springs, the 1987 Whittier, and 1989 SF EQ, and finally the 1994 Northridge.
According to http://www.el-nino.com/ there were el nino’s in 1969-70, 1972-73, 1976-77, 1977-78, 1982-83, 1986-87, 1991-92, 1992-93, 1993-94. So, the San Fernando, S. Barbara, Whittier and Northridge EQ’s followed that, but not so much the North Palm Springs or SF ones.. So, for my research, 4 EQ’s had an El Nino before, 2 didn’t.
Since my first big EQ was the 1971 San Fernando, and the full moon fell Feb 10th, EQ on 9th, I thought my mother’s warnings were valid. However, since then, no others have been so close, such as Aug 18th 1978 full moon, EQ on 13th, July 21, 1986. EQ July 8th, much to my disappointment. So, though I would like it to be true that the moon has an effect, I leave that to Jim Berkland.
So, though I still get excited about the idea of a big EQ after an El Nino, and though my experiences show an EQ was twice as likely after a big wet, I’ve learned to live with just the hope of a connection, though there isn’t necessarily one. However, those who know me know I sprout much excitement in El Nino years as I await the big one.
Just one man’s take.
And thank you for sharing. Well sourced data “from the people” is often better than data from the number crunchers who seasonally and ARIMA the rest of us.
Write when you break-even,