Take a look at this spike in the long bond yield in late 1979 and early 1980 (charts from Yahoo! Finance):
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It must have been a real shocker at the time, and when yields returned to near pre-spike levels, it must have seemed as though the event were an anomaly. Well, it was part of a generational bottoming process for bonds that lasted a few more years:
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Now take a look at recent history:
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I’m just sayin’…
PEJ, I have no explanation for the late reversals. I generally try not to attribute any particular market action to any special mechanisms.
Regarding treasuries, it would be interesting to know the budget deficit – if any – in the late 70s to see if the comparison you are doing is reasonable or not?
You might also want to read this. It is *extremely* worrysome. http://realitylenses.blogspot.com/2009/07/china-currency-reserves-vs-us-budget.html
Um, as a general rule, I’m unconvinced by fundamental explanations for market action. Why did yields bottom under today’s levels in the ’40s when inflation was 10% and we had our biggest debt/gdp ratio ever?
I’m not trying to explain the market action. You are definitely right about fundamentals being decorelated from short term market action.
I am just saying that taking your example, treasuries might have become scarce if the budget was balanced and this might be a good reason for a multi-month rally, while it looks like we will be drowning in multi-trillions offers of treasuries in the next several months? Since supply is increasing exponentially, it will be difficult to find enough demand. Especially since I am about as certain as possible that the federal state will bail out the various states and cities on the verge of bankruptcy?
This explanation seems to find some backing here:
http://www.usgovernmentspending.com/federal_deficit_chart.html
See the dip in 1979. It seems like there was a big surplus in 1979!!!
US Federal Deficit As Percent Of GDP
YEAR GDP Federal Deficit pct GDP
1978 2294.7 2.58
1979 2563.3 1.59
1980 2789.5 2.65
This actually leads to the opposite conclusion. That spike is bonds tanking in late ’79. Deficits were low then compared to recent times, and debt was very low, yet bonds were killed. Bonds actually firmed in the mid-80s at the same time that deficits took off under Reagan.
And how do you reconcile the 2-4% inflation of 83-85 with double digit treasury yields? And vice versa in the ’40s?
If you need further proof, just look at foreign treasury yields and you’ll see the same patterns. You would have to be Ptolemy to explain this stuff with fundamentals.
It seems like the charts are bonds and not yield?
I can’t undertand anybody investing in bonds for their actual tiny/irrelevant yields…
In which case in late 1979 the bonds are actually rallying and yields falling?
Beyond that, i have no clue
Those are yields! Man, you need to bone up on your history if you don’t know what happened with bonds 30 years ago.
Look at this for starters:
http://sovereignspeculator.com/2008/08/08/that-crazy-crazy-bond-market-a-call-for-sub-3-long-bonds/
And get it through your head that markets truly are irrational…
Alright, so I might have misinterpreted your title “Treasuries could have a lot of strength left.” What do you mean? I am short the long bond via TBT (leveraged short ETF, not too much choice unfortunately, I cannot short TLT
)
I know markets are irrational, otherwise, I wouldn’t be trying to beat them
But, they don’t stay irrational forever, they tend to trend to fundamentals on the mid- to long-term.
I can’t day-trade, so I am not trying to neither (for now).
They are irrational at every time scale. I think my long post on yields establishes that.
The point of the post is as follows:
Bonds bottomed over several years 30 years ago at ridiculous prices. Their crash in late 79 / early 80 and subsequent recovery, prior to a sustained decline to new lows may be mirrored by what is unfolding now, at what I think is a generational top that should last several years. The rally late last year may be akin to the 79-80 crash, in that it tips the market’s hand as to the direction for the next 2-3 years. Conclusion: lower yields may await. TBT to fare poorly.
Too many people are expecting to make fortunes from shorting the US long bond. Like I said last August, it will be a great trade, just not yet.
Unrelated: I’m long ES after hours to go neutral. Stop 967.
ok, thanks for clarifying.
As I am not good at market timing yet, I can wait, holding my TBT. I am actually waiting for a good opportunity to grow the position. I am just not sure the collapse is further than 18months, as per my post (2nd comment of this thread).
Inverse ETFs are not buy and hold instruments. And just so you know where I sit, I went long a huge chunk of 10 years yesterday. Forget the China talk and deficits — you can’t make money trading like that… sheesh, I need to start charging for this stuff. Look man, I may be right and I may be wrong on where bonds or anything else goes, but one thing I can guarantee you is that what happens will have nothing to do with the balance of trade or the freaking budget deficit.
PEJ, if you want to look for fundamental reasons why bonds go up, you might want to check this site:
http://www.hoisingtonmgt.com/hoisington_economic_overview.html
You seem to have bearish bias (perhaps understatement there) on treasuries. It is the general view today that as govt is issuing more treasuries, it will plunge. But there are other variables in play and historical precedents that showed bonds actually enjoy its best time during these circumstances.
It’s not because the govt is supplying huge amounts of treasuries, but a certain condition (that is bullish for bonds) is prompting govt to do that.
It’s a bit like the analogy that when there’s huge fire, there are a lot of firemen. If we’re ignorant about what firemen do, we might think firemen cause huge fires, the more firemen the bigger the fire. In the markets, trying to define causality is a futile effort sometimes. It’s the correlations that help us find the relationship and therefore helps to our speculations.
The causality may be found way after the event… because hindsight is always 20/20.
Hey Mike, I can see you’re frustrated
Nonetheless, I am more looking for compelling reasons and explanations about your view. I’m not going to “buy a huge chunk of 10 years” just to follow you without being 100% convinced myself. I will read again your previous posts and let you know what I think. We don’t necessarily need to agree on everything, especially since you seem to be a lot more short-term focused and a lot more talented on within that window than me
Jason Bourne, thanks for the link, I’ll go through that as well.
I could actually have changed my mind by the end of the day.
Thank you both for sharing ideas, opinions and knowledge.
PEJ, I am glad that you are not following me or anyone else in trading. I would hate to think that someone was making decisions based purely on what they read here.
Please don’t ever follow me. I just hope to share a perspective on the markets and provide a forum for others to share theirs. When there is disagreement, I would expect none of the parties here to be trying to convince the others to follow them in a trade. That would be crazy.
Regarding bond sales, what do you think about this: http://market-ticker.denninger.net/archives/1267-US-5yr-Bond-Auction-Effectively-FAILS.html
Again, it seems worrying (to me at least)
Pej, that is what you call a contrary indicator. The VAST majority of traders are bearish on bonds right now. When there is a consensus in the market, you don’t want to be a part of it. On the contrary, times like that can present opportunities to catch tops and bottoms.
Glad I bought the ES. Looks like we were consolidating and now we’re getting our little blowoff top. In my mind, there’s a good chance that we’ll see the top of the entire bear market rally in the next few days. I see 3 of 3 now.
Don’t expect much out of bonds yet if stocks have a few days of oomph left.
Could be just today, though — I’m watching what could be 2 waves in PM, oil and copper. I don’t expect new highs there, just corrections. If stocks turn while commodities and bonds complete wave 2 corrections, watch out.
You don’t want to be with the crowd, that’s for sure.
From where you stand, my perception was wrong, but I felt that the vast majority of people was actually bullish on treasuries (Fed buying, deflation fears) and even bullish on the the dollar and the economy in general and the markets, since we will have a v-shaped recovery and 10% GDP growth in 2010 ( http://realitylenses.blogspot.com/2009/07/were-entering-new-new-era-where-high.html )?
Pej — Glad you read my old post on bonds. Now do you see how long the market can stay wildly disconnected from fundamentals?
What do you mean by “3 of 3 now”?
and “if stocks turn” ? turn downward or upward?
Um, that sentiment you reference above describes to how things stood last winter (when I was shorting bonds). Now that they have fallen, we have the opposite conditions.
I’m referring to Elliott Waves. Read up on them…
I count 3 waves up from March, in what I figure is a countertrend rally. Countertrend moves are often in 3 waves (main trend moves are 5 waves). So if we’ve got 3 waves, we could be done or nearly done. Since the main trend since the 2007 peak is bearish, I’m looking for a complete 5 major waves (over a 3-5 year period) before we hit bottom. Wave 1 (itself a 5 wave move, being in the direction of the main trend) ended in March, and the the rally since then is wave 2 (which itself is a 3 wave move, being countertrend).
You don’t have to become a full-blown Elliott Waver to be a successful trader, but everyone should have at least a basic understanding of the theory. It is a powerful tool, one of many in a good technical analysis arsenal.
Well, markets can be disconnected from fundamentals for a lot longer than anybody thinks. Look at the real estate market: almost 10 years of disconnection.
Regarding the bonds, I am rethinking it and might close the position before going on holiday tomorrow evening.
But then, just to clarify, how do you see rates staying to almost historical lows, with such a huge supply? Who has the money the buy? The only support outside china/japan I have currently thought of would be banks borrowing at 0% from the Fed to buy 2-3% yields on the treasuries, but that must have limits as well?
You need to shake up your current theoretical framework a bit. Pick up a copy of Conquer the Crash and watch this video (you have to sign up but it’s free):
http://www.socionomics.net/history/
Thanks for the tips. I have bought Conquer the Crash a few weeks ago, but haven’t read it yet. Though I might have to change my priorities on the books i am reading.
Also, this video is interesting, even though paul desmond had a pretty bad call (timing wise) a few weeks ago:
http://www.tradersnarrative.com/lowry-research-update-market-going-lower-2755.html
Mike, I have no idea to count waves. But the Popperian in me is more concerned about the “wrong” way to do wave counts instead of the “right” way. Why can’t the November 2007 top count as the start of wave one, and the March-May 2008 rally as wave two, and so on… ? When do waves start? I do think the Elliott Wave is a very useful TA tool for me as there seems to be many premutations to count waves.
Sure, it is subjective. I do count the waves as you label them, but those to me were wave 1 and 2 of the larger 1 that ended last March. What we have since then is clearly a large order wave, big enough to correct the large wave 1 down. Waves of course are fractals.
Glad I went long ES last night. Also glad I picked up calls on the 10-year this AM. Now let’s see if the bond spike this afternoon signals the beginning of the end for the risk trade. Oil and copper have corrected their drops, and we’ve got a solid new top in stocks. We’ll see…
Mike, about Elliott Waves:
I saw Robert Prechter’s documentary yesterday. Thank you for letting me know about it. I had registered on the elliotwave international web site, but wasn’t aware of the socionomics one.
I have been following for the past several months his commentaries on the youtube channel someone set up for his interviews and have read about EW a long time ago.
My problem is that I do not know how to count the waves, and so it seems like you can get mold the way you count to confirm your beliefs?
I just saw this on Mish’s blog: http://4.bp.blogspot.com/_nSTO-vZpSgc/SnKH347I2ZI/AAAAAAAAGis/PYrccD89He8/s1600-h/%24usd-weekly.png
On this chart, without the benefit of hindsight, how would you have counted the waves in the period [july 08 - march 09]? Even worse, how would you have done for the period [oct 06 - mar 08] ? it seems there are 11 waves on the latter period, which is a lot less confusing the the former.
Thanks
Hey Pej,
Elliott Wave is very much an art, and IMO you have to look at the waves in the context of other TA tools like MACD, TICK, Put/Call, II surveys, the VIX, etc, as well as hints about sentiment from news headlines and the tone of comments and posts on blogs (and I guess cable TV if you can stand it — Bloomberg is the least offensive there).
You have to take all of these things together to form your hypothesis of where we are. When it comes to counting waves, it is important to remember that they are fractals, so you have different magnitudes nested within one another. You have to gauge the breadth and intensity of each wave of mood. Clearly, the rally since March is of a different order than the rally from November 08 to January 09 — there is a much greater shift in attitude, though the percentage move in the S&P is not that much greater. So this is a primary wave (2) and that was an intermediate wave (4 of primary 1).
All I can say is, it takes a lot of study and real-time practice before you can begin to make this work for you. But you don’t have to be 100% on board with the theory to pick up a few tricks. If you really want to learn it, get Prechter and Frost’s 1978 book, The Elliott Wave Principle. You can also hang out on evilspeculator.com — mole and some frequent commenters there are big into EW. Or sign up for EWI’s short-term updates, which show you how it works in action. That is a good service anyway, and they use a lot of other TA tools as well.
Thanks for all the info Mike.
The fact that the waves are fractal kind of allows for any interpretation, when there’s no benefit of hindsight though. That’s the troubling bit.
I’m off this week, so might not get the time to read/post but I’ll make sure I’ll get a copy of the book once I’m back.
No prob, Pej. Like I said, it’s an art, not a science, and it’s best combined with other hints about crowd psychology from technical analysis and your take on the zeitgeist. You can take it or leave it, but I think all aspiring traders owe it to themselves to at least learn the theory.