S&P 500 in red, iShares Lehman 20+ year Treasury bond (TLT) in blue:

Source: Yahoo! Finance

Let’s look at the longer term view. It is remarkable how strong the old inverse relationship remains. Lower yields are NOT, repeat, NOT bullish for stocks! They are extremely bearish right now:

Source: Yahoo! Finance

The only explanation for this behavior that makes sense is deflation. There is no safe place for cash right now other than stacks of $100 bills or Treasury debt. I have been saying for some time now that even though the long bond will surely be defaulted on (probably through inflation), it is a great speculation. I think this will be a rally for the history books, as the sell-off in risk assets reaches the panic stage. We haven’t seen anything yet.

A long, cold winter ahead

Decades from now, I bet we’ll refer to the way things were before this decade and after, because the Great Crash of the late 2000s will change the face of the planet. Life will feel much different, more like winter, Kondratieff winter. I don’t buy into all aspects of K-wave theory (Elliott Waves are more my speed), but I am beginning to feel why he called deflationary depressions winter. Everything slows down (monetary velocity not least), and there is a retrenchment. We huddle together with those we trust and cling tightly to essentials. The profligacy of warmer, faster times is gone, and we keep it simple and safe.

We’ll look back at all of the obvious mistakes we made, and wonder how we could have been so reckless. And by the time we who are young are old, our grandkids will joke about what tightwads we are, since we lived through the Depression, as if one of those could ever happen again.