"One thing to consider is that if a full blown deflation were to hit the US, with the value of equities, commodities, and real estate decreasing, the actions of the bond market may not be to go up as many have surmised. After all with the value of every thing else going down what will keep the value of a bond up?"
Ohhh so right you are.... And deflation is the key word.
This I concur on. I'm a believer in that ALL one sees can be traced back to M2 {I'm the broken record that you just can't turn off}. Here is how I see it:
All the actions of the market place is based on TWO main premises:
1) Capital inflows create an increasing market
2) Liquidity
For M2 data source:
stls.frb.org
Perform a MACD on this data, and you'll see that it reached a maximum at/near 04/20/98.{depends on your MACD used} this is when the M2 rate has started to decrease. Note we are talk the RATE of M2, not M2. {first derivative} This is weekly data.
Next load in the DOW 30 index: you can find it here:
mobydata.com {Symbol is DJ.ASC}
And look as to when the DOW 30 broke it's up trend, and signal it first MACD sell signal. Near the same day.
What does it mean? It means that the US FED dried up liquidity, and cash flows directly. They undermined the stability of the markets, and have made a crash viable. Without liquidity, a market is driven by it's own momentum. This is why you can see selling spikes in the Bond market, which than drives a ramp in the DOW. As the cash moves from t-bonds {mutual funds cash positions} into the market. Since the Bond market is larger, the drive in the Dow continues for the whole day.
So as the bond market deteriorates, what is there to support it. Foreign cash inflows. The higher yields have generated foreign investment, far be it small now, but will become much larger as the yields increase. The main US resident sees the US bonds falling, so is less likely to invest in the Bond market, in hopes of higher yields. But the foreigner, seeing his Yen deteriorating, is happy to jump in. So this is causing a cash inflow, into the USD. USD goes up.
Gold is a hedge against currency fluctuations, but is based in USD. And as the US dollar increases Gold will suffer. This is why I state that the trend for GOLD is much lower. My 3 month target, $250.
So when will the market crash? As has been stated the Russell index, and similar small caps, have already corrected. The DOWS lack of liquidity will drive it down rapidly.
Summary:
DOW: down due to lack of liquidity. {but will jump down}
Bonds: Down due to capital outflows higher than inflows {M2}
USD: UP as yields rise on Bonds, and smaller inflows
Gold: Down as the USD increases rapidly
Trade: And an every increasing Trade deficit
Employment: Should dramatically change to unemployment
This is deflation, but with a deteriorating bond market. What will get cheaper: products, services, commodities, bonds, stocks. Be prepared when the YEN get near 155, that is still the breaking point. From there it's 200. It's only the US intervention(s) that have slowed the YEN down.
This is what happens when you export inflation, it comes back as a reccession. No matter how much the FED reduce rates later, they can't stimulate an economy when the investors move the Bonds yields higher. This is the worse case for the economy, breach of faith. Which ends in a World wide Gold standard. NOV! But dramtically lower first.
XAU 52 |
