Raj, I think that the decoupling between bonds and stock is an indication that money is indeed going into bonds. I think that the Japanese are not going to liquidate much US stock and they will do that probably at the bottom (they often do), that could provide the spike down in June that I believe we will have.
I think that after a blip up in interest rates in the US (possibly due to Japan getting more liquid) our bond is going to go up while the market for equities goes down, resulting in the long term boond yielding about 5.5% by June or so. This will be due to two main factors, IMO, the deflationary pressures of the asian malaise, and the dearth of long term bonds due to a US budget which is closer to balance than before. If for few month the US just roll over its debt but does not issue new debt, there will not be enough bond for all the pension funds and insurance companies that need to put a percentage of the money coming in into bond. This money continues and flow in (and at rates somewhat larger than last year). This will create a situation of more money wanting to get into bond than there are new bond issued. After all, most of the new issues will be rollovers and thus already commited to bonds and only a small additional demand at the margin could have a powerful effect on supply of such bond. Thus even if Japan repatriate its US bond holding, because this is happening in a period of relatively balanced budgets and little requirement for additional new money, there might develop shortage of bonds.
Note that the increase in US debt last year (188 Billions) is less than the interest disbursed last year( at least $300 Billions) on the total debt and therefore we might already be experiencing a degree of shortage in bonds.
By the way, there is not much money going anywhere when stock declines from about 8000 to 6200, everyone loses. Most funds are required to be in stock, so when they sell a loser and then they turn around to buy a perceived winner, they find three weeks later it has turned into a loser. That is the unfortunate nature of a bear market.
Zeev |
