“What’s the bond market telling us?”

“What’s the bond market telling us?”

This seems to be a very common question these days.  As yields continue to fall and stocks continue to rise many people assume that there’s some necessary disconnect in the way bond markets and equity markets are reacting.  So you often see people asking a variation of this question which is “does the bond market know something that the stock market doesn’t?”   I don’t think this implicit correlation is a very good way of viewing things.  And here’s why.

Bond traders primarily care about the return OF their capital and the real return ON their capital.  When we talk about the US government bond market the return OF capital is pretty certain.  If you buy a 10 year US government bond there’s only a small chance that the US government won’t pay you 100 cents on the dollar in 10 years.  After all, this is an entity with hundreds of trillions of dollars in assets and the ability to tax 23% of world output.  In addition, the people who worry about the US government “running out of money” tend to misrepresent the situation (see here for more on this).  So bond investors in the USA mostly care about the real return on their capital.  So, when inflation is low bond traders are happy to take a bit lower yield in return for owning something that’s essentially risk free.

This gets tricky when we assume some economic or stock market correlation because of all the moving parts.  In general, the assumption is that lower yields are a sign that inflation expectations are low which means expectations of future growth are low which means that the stock market will go down, etc.   But this assumes three things which I don’t think are necessarily true:

  1. it assumes that the economy can’t grow during a period of low inflation;

  2. it assumes that the stock market is directly correlated to the economy;

  3. it assumes that bond traders are more prescient than stock market traders.

But none of these assumptions are necessarily true.  We know that inflation expectations can drop for decades during a relatively healthy period of growth.  That’s been the experience in the USA for the last 30 years.  And we also know that the stock market does not perfectly correlate with the economy and in fact, the economic cycle tends to lag the market cycle.  And it would be somewhat presumptuous to assume that bond traders are necessarily smarter than equity market traders even though that’s a commonly held belief in Wall Street circles.

So, what is the bond market telling us?  The bond market is telling us that inflation is currently low.  But don’t assume that those bond traders are necessarily right about future inflation expectations or that they won’t overreact when the facts change.  And don’t assume that low inflation means no growth or negative growth.  And lastly, don’t assume that falling bond yields represent a bad environment for stocks.  So be careful listening to this narrative about bond yields which assumes falling yields portend big problems or some disconnect.  Thinking so narrowly can get you in trouble.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

More Posts - Website

Follow Me:

  • SS

    You consistently see this narrative from the same people who think that bond yields in the USA are about to surge. They seem to all think that we’re on the verge of a huge inflation or that rising stocks are just a sign of a different type of inflation. Meanwhile, they watch the value of gold go down every single day.

  • LVG

    That they can change their minds on the drop of a hat….

  • d_dd

    Interest rates are a function of economic growth, wages, and inflation.

    A good read:

  • Geoff

    Stocks and bonds are discounting the same thing, which is a goldilocks environment of low inflation and moderate growth. There is no inconsistency.

    Also, don’t be fooled by the low 10yr Treasury yield. In isolation, it isn’t a very useful indicator. Better to look at the overall yield curve which remains relatively steep by historical standards. Wake me up when the yield curve inverts.

  • http://www.highgreely.com John Daschbach

    The yield curve is steep by historical standards but the short end of the yield curve has always been highly correlated with the FFR. The 3mo Tsy tracks the FFR almost perfectly, the 1yr nearly as well, so it’s not clear to me that the yield curve tells us much, except what the Fed thinks.

    An inverted yield curve appears to only occur when the Fed undergoes a substantial tightening by raising the FFR in response to inflation expectations, and with varying time lags all major tightenings by the Fed preceed spikes in unemployment and often recessions (none more dramatic than the recent major downturn).

    The 10 yr yield has roughly followed the inflation rate plus an exponentially decreasing term as time has passed since the inflation shock of the late 1970’s. I think the 10 yr is still the best indicator of market behaviors related to interest rates, because the time frame is long enough that Fed actions have only temporary impacts but short enough that many people are thinking of holding to maturity.

    If the Fed uses the history of yield curve inversions since the late 1970’s as a lesson I suspect we will not see an inversion again.

  • http://www.highgreely.com John Daschbach

    The data clearly demonstrate that the bond market is not able to do a very good job of real interest rate prediction. I recently calculated the real returns for all Tsy securities over different holding periods. If the bond market was good at this, then the real return for longer Tsy should not fluctuate hugely, after all in the absence of the Tea Party wackos, there is zero risk of default, and so the longer Tsy’s have to have real returns less than the real growth rate (over very long periods, real returns across all asset classes can only equal the real rate of growth).

    However, looking at the 10 yr Tsy, with a holding period of 10 yrs, the real return since 1965 has ranged from -2%/year (purchase ca. 1973) to 9%/yr (purchase ca. 1983). Real GDP growth has declined pretty linearly (using a ca. 5 yr exponential time constant) from ca. 4% in the mid 1960’s to ca. 2% now. Real 10 yr Tsy returns with 10 yr holding were negative until the mid 1970’s. After the 1983 peak, they dropped to ca. 1.5% by 2004. It appears likely that real 10 yr holding period returns will continue to drop post 2004.

    But over 40+ years of data, the bond market has been “wrong” much more than it’s been “right”.

  • Geoff

    Points well taken, JD. I’d say the yield curve tells us less about what the Fed thinks than it does about what the market thinks about what the Fed thinks. ;)

    As Cullen says, the bond market front runs the Fed which in turn is trying to front run the economy!

  • Explorer

    It is telling you that
    A1.most capital formation for production is taking place elsewhere in the world,
    A2 most employment increase is taking place elsewhere in the world and that until that changes
    A3 the US is in low credit demand, low growth, low inflation, low interest rate territory which means that
    B1 companies continue moving growth to lower wage, growing income countries
    B2 enabling companies to make bigger profits both at home and abroad even while real US wages are stagnant and that
    B3 earnings multiples (PE’s) can be quite high because the alternative investment opportunities like bonds have such low returns.

    It will change one day, but I don’t know when. And it will change for 2 reasons:
    C1 nothing is stable in global economics, politics or science
    C2 herd effect with fear and greed means that things always run too far in one direction and then over react to something and run too far the other way.

    And I still don’t know when, but generally it is not until a lot of the public are “all in”.

  • Anonymousone

    What’s impressive is the recent zeal of both stock and bond buyers who buy financial assets with no price too high. As for which market is more prescient, they are equally brilliant.

  • Eric Webber

    THat doesn’t reflect the last 30 years at all! Theory that doesn’t relate to reality ….

  • john-r

    I think Gunlach has it right. Treasuries are in short supply due to QE. Coming into 2014, everyone and their cat were expecting interest rates to rise. Financial pundits were advising people not to buy bonds or to keep a ladder comprised of short maturities. Obviously, by extension, traders were short the long end.

    As the economy improves, there is a paradoxical effect where counterparties need more collaterals for insuring financial bets. Unfortunately fed sopping up treasuries is causing collateral shortage. On top of that, the treasury is generating large tax revenues and remittances from GSE’s which means less new supply. This further compounds the shortage.

    Now there may be a short squeeze in the works. There were too many people shorting treasuries. But supply is not sufficient to let them cover.

    It’s true, recent bond move has little connection to the stock market or the economy. But a connection may manifest eventually. at some point, short squeeze may get violent. In that case, margin triggers may force traders to liquidate their long equity positions.

  • Andrew P

    I agree that bull markets usually end when the muppets are all-in. The general public are usually the bagholders. But is that always true? Has the public ever been out, and the big boyz run it up and crash it all on their own?

    My gut feeling is the market has another leg up, fueled by low interest rates, and perhaps the muppets finally going all-in. A lot of people on ZH show stats on the current market as compared to 2000 and 2007. A lot of those stats match 2007, but most of the valuation and speculation stats are still way short of 2000 levels. With record low interest rates driving the market higher, I think those stats have to exceed 2000 before the market blows up. We need to see ultimate all-time records in absolutely everything – Case-Shiller P/E, measures of margin debt, speculation, bullishness, lowest junk bond spreads ever, etc…

  • Eric Webber

    Isn’t the Bond Market susceptible to the speculation of Bond traders? And can’t there be a situation whereby an unusual buildup of longs or shorts occurs — thereby causing some to buy who do not want to buy, and others to sell who didn’t want to sell? If so, I would not speculate too much on what the Bond Market is telling us – since it is being driven by the speculation of human beings.

  • The Other Matt

    “And don’t assume that low inflation means no growth or negative growth.”

    Isn’t it about the best educated guess and highest probability about what bonds might be telling us?

    QE drove inflation expectations in 2011 driving core and headline CPI much higher along with precious metal prices. However consumers were crushed by this cost push inflation since wage increases and the ability to tap new credit never arrived to meet the higher costs.

    We’re five plus years into an increasingly hard to identify economic recovery — the average Joe doesn’t intuitively sense it. Wages still stagnant, velocity of money still in the dumps, housing still too costly for the mid to low-end buyers, consumer spending not robust, etc.

    Aren’t all these the traditional signs of low to no growth? At what point do we call a duck a duck?

    But you’re right Cullen — I expect a burst of food and energy inflation to be very evident soon. An inflation cat thrown among the pigeons should lift overall volatility in all asset classes soon.

  • JWG

    If gold starts to rally while yields continue to decline, then it is time to worry, because that will indicate concern about a geopolitical shock beyond central bank ability to ameliorate. The National Front’s win in France and UKIP’s win in the UK in EU elections received little play in the US, but they indicate trouble ahead for the EU and the Euro. Even the Fed lacks the firepower to manage the situation if the Euro starts to wobble because the French credibly threaten to reclaim their monetary sovereignty. The Brits avoided adopting the Euro, and they are better off because of it. This lesson is not lost on the French.

  • Anonymous

    Interest rates are low because growth is non existent. The European Central Bank could move towards negative interest rates at the June 5th meeting. Banks needs to move money. Fed will not be raising rates in the US for a very long time……..

  • http://macronomy.blogspot.com/ Martin T

    I agree Andrew,

    Michael Hartnett from Bank of America Merrill Lynch latest Thundering Word’s title is called “The Final Ascent”:

    ** Hartnett : ML

    “1. Watch credit not govvies: yes the focus is on government bond yields and yes renewed “Japanification” of interest rates, the death of volatility and broad asset price inflation (bonds, stocks & commodities are all up roughly 4% YTD) is a world few were positioned for at the start of 2014. Low rates are caused by low growth. But neither has caused lower stocks in recent years. Liquidity is plentiful and until credit is damaged, low rates will remain positive for stocks. History replete with times where lower yields mean higher stocks too.
    2. Positioning for Melt-Up. Catalysts: Low VAR + High Cash + Low Vol + High Liquidity + Poor Performance = Melt-Up. What will the capitulators buy? Upside optionality, carry trades in Emerging Markets and peripheral Europe, global cyclical best of breed stocks, US tech.
    3. Watch ECB. Investors will continue to see central banks, rather than politicians, as the key policy drivers of markets. If the ECB is aggressive enough next week to depreciate the Euro versus the dollar we would expect “strong dollar losers” such as GLD to underperform large-cap winners of weaker Euro & higher European (export) growth expectations cyclicals like DAX.”

    When investors “infer the persistence of low volatility from empirical evidence” (in other words when knowledge is imperfect and there is a probabilistic scenario under which the moderation can be permanent, then “Bayesian learning can deliver a strong rise in asset prices by up to 80%. Moreover, the end of the low volatility period leads to a strong and sudden crash in prices.

    So one can expect significant rise in the last leg of the rally, eg. “melt-up”.



  • Alberto
  • jswede

    the bond market takes data as it comes in — it does not “see” 10, 20 30yrs into the future. its outlook is ever evolving.

  • J Thomas

    Suppose I believed that the stock market will have another temporary drop like 2008, and then it will start rising again like it did last time.

    Then I would not want all my money in stocks. I would want a significant sum of money that I could move into stocks during or after the drop.

    Where would I put it while I wait? Into the bond market, of course. Then when the mild, 2008-style correction comes I will buy stocks.

    How much of that is going on? I don’t see how to tell. But it would be one force that would tend to synchronize them some. The higher the stock market goes, the more that this sort of opportunist will cash in more of his winnings and put them into the bond market. And when the stock market as another gentle downturn like 2008, he will cash out his bonds to buy stocks, driving down demand for bonds too.

  • jswede

    the bond market is saying the same thing as when it rallied (much more than this) at the end of QE1 and QE2: inflation from ‘too much money chasing too few goods’ is non-existent, and that this economy does not have legs on its own.

  • http://macronomy.blogspot.com/ Martin T

    Good points John R. I agree the Fed had no choice but to taper as they were soaking up too many bonds, much needed as collateral in the financial system.



  • The Other Matt

    I realize this may not fit exactly into the theme of this post, but too good to not pass along.

    For all the Fed’s attempts to conduct economic forecasting and manage the economy via monetary policy, it is potentially shocking to think they are working with bad data — or worse politically motivated data releases. Check out this analysis with regard to Q1 GDP from consumerindexes.com

    “Summary and Commentary

    This is a bad report, and the numbers speak for themselves. And looking at the trend lines, things are unlikely to get better anytime soon.

    But we also feel compelled to digress from the bad news itself. While other people may be utterly shocked to find that the economy is in contraction, we are much more inclined outrage at the possibility that the BEA published clearly fictitious numbers last month in an effort to “ease” the readings towards the bad news that they knew (or should have known) would follow shortly :

    — If they (the BEA) did not realize last month that the US economy was in contraction during the first quarter of 2014, they are sufficiently incompetent (in practice and procedure) to merit a complete overhaul and/or gutting of the agency.

    — That said, gross incompetence is probably the lesser evil — simply because if they knew full well last month how bad the news really had become, they simply descended into a Goebbelesque world of publishing what they wanted the world to think.

    — We wonder who the BEA is supposed to serve? The history texts tell us that the BEA’s genesis was in the second Roosevelt administration’s frustration at the poor performance of “live” economic data during the Great Depression. Maybe we need someone of FDR’s ilk to get really pissed at the quality of the “live” data currently emanating from the BEA. For example, recall how the BEA reported the first quarter of 2008 over time :

    BEA’s Changing View of First Quarter 2008 GDP

    Reported Growth Rate Report Date Months Lag
    +0.6% April 30, 2008 1
    +1.0% June 26, 2008 3
    -0.7% July 31, 2009 16
    -1.8% July 29, 2011 40
    -2.7% July 31, 2013 64

    — The BEA is not serving anyone particularly well (except perhaps their political masters) with a track record like the above. In “real-time” they overstated the 1Q-2008 growth rate (during an election year) by a staggering +3.3% (and note that in the run-up to the election they initially revised that overstatement even further up). We are hard pressed to find another developed country (except China) reporting economic data on a less timely, accurate or transparent basis.

    — And, is it remotely possible that the pace of economic growth has changed so dramatically in just two quarters — contracting by over 5% since the 3rd quarter of 2013? Has anyone sensed so catastrophic a change? Or for that matter, did anyone actually sense 4% economic growth in 3Q-2013? We suspect that we will find out (some time from now) that the third and fourth quarters of 2013 were nowhere near as wonderful as they were originally cast.

    When reflecting on the BEA we have certainly offered a hard choice: incompetence or Goebbelesque. Sadly, we may be seeing a fair share of both.”

  • Andrea Malagoli

    Agreed. Interest rates have been falling gradually since 1982, over many business cycles. Some short term moves may be determined by the business cycles, but the longer term behavior is more a factor of monetary and fiscal policy.

    The idea that interest rates may rise because the economy is improving is one of those common talking points with no real basis — but places like CNBC are the repository of all banal common wisdom.

  • DRR

    Disinflation for real production(low interest rates)–hyperinflation for fiat financial assets.

    Leveraging paper assets is more profitable and less risky than committing physical capital in a world of over-capacity.

  • Geoff

    The most important point of this post is that there is no disconnect between stocks and bonds.

  • http://orcamgroup.com Cullen Roche


  • Nico

    there we go – we just tripled 666 and “melt-up” is all over the blogosphere

    this is fascinating, each time

  • fin

    And France has a history of depreciating their currency…

  • Andrea Malagoli

    Yep. Only academic theoreticians come up with models that interpret the yield curve as the “market expected” future rates.

  • http://www.highgreely.com John Daschbach

    Yet more strong statements without an intelligent basis. There is a huge literature trying to understand inflation, and anyone who can think critically and has read broadly knows there is no simple explanation for inflation.

    The classic arguments from the non-thinking class regarding monetary and fiscal policy are that it should have resulted in higher inflation, not lower. Wether monetary policy has any impact except at the extremes is highly debatable. But, we do know that both the growth rates of the MZM and of total private sector credit, have far exceeded the sum of inflation and real growth for well over three decades. So the quantity theory of money and inflation is easily shown to be wrong. But, even if wasn’t so definitively proved wrong, how does monetary policy impact this over longer periods? The answer is the data don’t show any long term correlation between either credit or MZM growth, and credit growth and MZM growth show both correlated and anti-correlated periods, in other words no meaningful correlation. Correlation is not causation, but it is a requirement for an intelligent argument.

    Fiscal policy and inflation similarly show both correlated and anti-correlated periods.

    So it’s not possible for an intelligent person to make such a statement.

  • Geoff

    But the Quantity Theory is not wrong. It’s just that V declined, you see. ;)

    V will increase. Just you wait.

  • http://orcamgroup.com Cullen Roche

    Also, M has gone up, but we don’t really know what M is because we haven’t precisely defined what “money” is. :-)

  • Geoff

    We should also define the source of the money. If it came from an asset swap, it will likely have less impact than if it came from, say, a helicopter.

  • http://thebuttonwoodtree.wordpress.com Romeo Fayette

    I’m going as far as to call the bond market wrong here. A 50bp+ drop in 10y seems myopically focused on -1% Q1 GDP. Q2 is tracking higher (3-4%), confirming the weather-related, pent-up demand argument. (Look at rail traffic +4.2% ytd, durable goods/CapEx all +3%y/y after q1’s GDP inventory drawdown, and strong ISM/PMIs.)

    Doing the math using TIPS implied figures:
    2.48% 10y = 0.26% real GDP growth + 2.22% inflation average annual for the next 10 years

    Now, that 2.22% avg annual inflation might be too high for the next decade’s average, but the 0.26% avg real growth is way too low for my taste — even factoring-in 1 or 2 recessions. A 3% 10y seems fair to me, considering a 2% real GDP trend, 1.6% PCE run-rate, 1.6% 5y5y implied breakeven, and a recession in there somewhere.

    If Tsy buyers are afraid of US corporations’ health, then IG & HY spreads wouldn’t be at record tights. (I don’t think these absolute and relative HY spreads are sustainable, but you’d be seeing a widening if bond-buyers were flying to safety.)

    At very most, we’ve fallen to a 2.40% 10y because of technical reasons:
    1. Correlation trade w international CBs verbally committed to further QE/easing
    2. US pensions reallocating to a glide path

  • LVG

    You guys might like this one from Scott Sumner:

    “The quantity theory still holds–a permanent doubling of the base will, other things equal, cause the price level to be twice as high as it would otherwise be. MV=PY will still be perfectly true each and every second, because it’s a DEFINITION. ”


    And remember, the only reason there isn’t hyperinflation is because the Fed is paying interest on reserves so all those reserves aren’t “getting out”.


  • Geoff


  • Fed Up

    What about Japan?

    They didn’t pay interest on reserves, right?

  • JWG

    Each time a QE installment has ended interest rates have declined; why should this time be any different? Note that the Fed will remain in the market in a significant way after the taper is completed because it will reinvest maturing bonds rather than allow its balance sheet to shrink. The last time the Fed let its balance sheet start to shrink we had the flash crash; the Fed’s balance sheet won’t be shrinking anytime soon.

  • Alberto

    Behavioural finance at top speed here !

    You want to see thare is no disconnect between stocks and bonds (may be because you full of stocks OR bonds) so it’s the most important point. Funny world.

  • Geoff

    Speaking of behavioural finance, I think it is extremely biased and unrealistic to believe that bond people are somehow smarter than stock people, or that the bond mkt is privy to secret information that the stock mkt doesn’t have.

  • Alberto

    I agree with you, this is not the point. This and 99,9% of the economy/finance forums are trying to predict the future looking at past data. Past data are meaningful ONLY if we live in a stationary and ergodic world. Do you really believe that past data collected in a world where population was less than 1/2 of today, China, India etc… just places for an exotic trip, all big oil fields (our blood) far from topping etc.. is similar to the world of today ? All and I mean ALL economical theories were developed during the fastest wealth accumulation in history due to a unique combination of factors. Why people are so mentally lazy when not completely dull ? The laws of thermodynamics are the same in any time, any place, the so called principles of economy are temporarily, when they start to fail because the world has changed we’re unable to recognize it.

  • J Thomas

    “The laws of thermodynamics are the same in any time, any place, the so called principles of economy are temporarily, when they start to fail because the world has changed we’re unable to recognize it.”

    When tyhe world changes our measurement of those changes always lags.

    It takes awhile to confirm that the changes are real. Then we argue about what they mean.

    And until we get something approaching a consensus about the meaning, organizations whose members disagree will go with the old consensus because they don’t agree how to change it.

    And so here we are, as usual.

  • http://www.theyenguy.wordpress.com theyenguy

    The 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, started to steepen at the end of the week of May 30, 2014, suggesting that a stock market reversal is at hand.

    Ever since Milton Friedman came out with the Free To Choose doctrine of floating currencies, the world has been operating on a debt based money system, and to the dismay of Austrian Economist, not a hard asset money system.

    At the end of the age of liberalism, meaning freedom from the state, debt becomes money, as the fiat, that is the rule of the Banker Regime is coming to a climax. And as is seen in May 28, 2014 financial marketplace trading, with 30 Year US Government Debt, EDV, and US Ten Year Notes, TLT, rising strongly in value, debt has become wealth.

    The Distressed Investments, traded by the Fidelity Mutual Fund, FAGIX, have increased in value ever since the US Fed traded out “money good” US Treasuries for the worst of debt in QE1 in 2008, with the aim of restarting financial marketplace investing and regenerating the global economic system.

    The US Fed’s monetary policies and the Banker Regime’s policies of credit choice were stunningly successful, in that they have produced terrific Equity Investment, VT, and Credit Investment, AGG. On May 28, 2014, the world is attaining peak wealth, it is an awesome moral hazard based wealth.

    As the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, has flattened, seen in the Flattner, ETF, FLAT, trading higher in value, Distressed Investments, FAGIX, and Junk Bonds, JNK, have come to be established as the most valued of all investments.

    Soon physical possession of gold bullion will emerge as the only “safe asset”, as the fiat of the Banker Regime fails, as investors derisk out of currency carry trade investments and debt trade investments.

    The new fiat of diktat coming from the Beast Regime’s regional fascist leaders, will emerge to establish regional security, stability and sustainability, and enforce debt servitude in each of the world’s ten regions, and throughout all of mankind’s seven institutions, this being foretold in Bible Prophecy of Revelation 13:1-4.

    This monster is completely different than the Creature from Jekyll Island; as is has feet of a bear, mouth of lion, and the stealth of a leopard, and is foretold to arise out Mediterrean, that is Club Med, waves of sovereign insolvency, banking insolvency and corporate insolvency.

    Reuters reports ECB Goes On 300 Million Euro Spending Spree For Bank Watchdog. ECB will spend 300 million euros this year and next in building an elite group to monitor top banks, with the lion’s share spent on generous pay for many of its staff.

    In summary of financial market place trading, on Wednesday May 28, 2014, the US 30 Year Government Bonds, EDV, and US Ten Year Notes, TLT, traded higher, as the Benchmark Interest Rate, ^TNX, closed at 2.44% in a process of coming to establish peak credit wealth, AGG.

    If one is invested in a bond fund, then one is jubilant, as these have soared terrifically higher since the first of 2014. For example, the PIMCO Long-Term US Government C, PFGCX, has returned 8.9% this year, and at the same time yields 1.8%.

    The world is a historic inflection point. The death of currencies, such as the Euro, FXE, is underway, on the failure of trust in the monetary policies of the world central banks to stimulate equity investment growth and global economic growth, with the result that the US Dollar, $USD, UUP, is trading somewhat higher.

    The trade higher in US Dollar, $USD, UUP, coming largely from a purchase of the 30 Year US Government Bonds, EDV, and 10 Year US Notes,TLT, caused Gold, GLD, which is both a currency and a commodity, to trade strongly lower, falling out of a consolidation chart pattern. Its lower price presents a buying opportunity, as it is in a bull market, and will be in demand as fiat money and fiat wealth is now in a dying process. One should begin dollar cost averaging a purchase of gold bullion.

  • The Other Matt

    BAML in my opinion has one of the best big picture research departments anywhere. Good stuff.

  • pliu412


    Monetary Uncertainty Principle:

    We cannot know which M or V to use. But we can measure MV used in GDP production correctly from NIPA account, an amazing discovery.

    So after getting MV, then we can derive different velocities depending on which M (M1, M2, or MZM) to use.

    The important part is how to relate MV to GDP, not M or V to GDP, right?

  • pliu412


    Which M or V is not important, but total MV used in GDP is more important. It has gone up.

  • Alberto

    Wrong, our measurement of those changes are fine, modern technology gives us all the necessary data, may be even too many. What lags is our will to adapt to changes that a muted reality is going to impose. We resist, resist, than we have to change, all in a sudden when there is no way to minimize the impact. I’m not a doomster, we have the knowledge to change direction while not compromising the essential of what we call “our modern quality of life”, but an orderly transition needs about 2 generations, we’re really late. This is an old document about a hot topic (not the only one, it’s just hot), one of the hundreds well written docs you can find but it’s somewhat unique because comes directly from your government. They know, we know, so why ?


    … and fracking doesn’t solve it’s just the retirement party of a dying industry.

  • http://thebuttonwoodtree.wordpress.com Romeo Fayette

    Hilarious. How can I subscribe to your newsletter?

  • http://www.highgreely.com John Daschbach

    What an illogical statement! If bond market was maturity independent then yields would be maturity independent. So of course the bond market estimates the future and completely understands how to do TVM calculations.

  • Bond Vigilante

    Yes, bond yields are going to rise.
    No, rates don’t rise because of (increased) inflation.
    No, rising rates are actually very DEFLATIONARY.
    No, gold doesn’t rise when inflation rises. It rises when real interest rates become negative.
    Yes, rising stocks are very inflationary. It’s asset inflation. just like rising bond prices are a form of asset inflation as well.

  • Andrea Malagoli

    John, what is not possible is to maintain these tones in an open blog. Please refrain from making derogatory and offensive comments.

    Also, your response is off topic because I was not discussing inflation. By the way, persistently rising inflation has been a signature of the post WW2 fiat money/high leverage economies, so one way or another there is a relationship there.

  • Andrea Malagoli

    More display of ignorance on your part. There are several theories about equilibrium interest rates. The expectation hypothesis is only one of them.

  • http://thebuttonwoodtree.wordpress.com Romeo Fayette

    And by the way, Cullen, with the latest 10y TIPS auction headlining a 0.26% yield and 5y5y forward inflation breakeven at 2.48%, I don’t see how you can say this:

    “The bond market is telling us that inflation is currently low. But don’t assume that those bond traders are necessarily right about future inflation expectations…”

    The “facts” are that the market-derived expectation is for low growth, not low inflation.

  • J Thomas

    Alberto, it looks like you’re talking about a very long-term trend.

    But for investing, the trends happen much faster.

    While new money flows into the stock market faster than the supply of stocks increases, stock prices will tend to go up. It’s like a rising tide floats all the boats that don’t leak too fast. It’s just like inflation, except that when the price of food goes up people hate it, but when the price of stocks goes up they love it.

    Since you can depend on stock prices on average to go up because more money is there to buy them, you can be reasonably sure that the odds are in your favor when you invest more money in the market. More prices will go up than down. You will tend to make money.

    But if anything happens to stop the flow of new money into the market, then prices will on average stop rising. And some of the stock market gamblers will take their money out of the market because they don’t expect to win, and prices will fall, and most of the gamblers will try to get out at the same time leading to a sharp sudden correction.

    This does not have to have anything to do with the actual economy. But if gamblers think that the economy will not result in as much new money going into the markets, that’s one reason to cash out.

    And there are “fundamentals” gamblers who do care about the assumed value of the companies more than they care about what some other fool will pay for them, and when the prices get too high they’ll bail, which can cause a crash.

    If you could reliably predict when the crash would come, then you could optimize your profits. Sell the week before the crash (because you might be a few days off), and buy back after the crash. Then wait for the next crash.

    But you aren’t that reliable. Sometimes when you think the correction is over, there’s another correction that comes so quick people think it’s all part of the same correction. You can still lose when you think you’re buying at the bottom.

    And you don’t really know when the top is either. If it’s been 2 years since you bought in, and you think it’s time to sell, but really it’s 2 more years down the road, you’ve lost out on the majority of your paper profits. With exponential growth the biggest increase comes late….

    One alternative is to estimate roughly when you think the correction will come, and gradually sell with the intention of being mostly out of the market then. After the correction you’ll be ready to buy. The worse you time it, the less that works but you’ve given yourself a buffer.

    Another alternative is to figure that you are hopeless at timing the market but you have a steady reliable income, so every month take your savings out of your paycheck and invest it regardless of price. You’ll lose big in the corrections but you’ll win small after the corrections, so it will somewhat average out. If you always buy and never sell, you’ll have something to retire on.

    Sometimes people publish statistics that purport to show how well different strategies would have done in past markets. They usually have huge statistical flaws. Don’t believe them.

    Like, there is the old chestnut about what you’d have if you started “buy and hold” right after the crash at the beginning of the Depression. But of course people who do “buy and hold” don’t start right after a crash, they start whenever they start and they take their losses. Also, the old chestnut does not look at individual stocks but at some index like the Dow. If you don’t sell the stocks that will go bankrupt you’ll do considerably worse than the index, which dumps them and replaces them with good new companies.

    If you want to guess at that sort of thing, you do better to build your own simulation models. Choose a random portfolio of stocks, and see what would have happened if you had followed a given strategy. Choosing random stocks implies that you aren’t good at picking them, while in reality you know which stocks will do really badly, or at least you know some of them. But it gives a better estimate than assuming you do know ahead of time which are good, because on average you don’t.