With crude oil surging over 4 percent and global bond markets continuing to get hit, today one of the greats in the business sent King World News a fantastic piece warning that the global bond market rout in bonds is eerily reminiscent of the period that lead up to the 1987 stock market crash, plus a bonus Q&A that covers central banks losing control.
By Bill Fleckenstein President Of Fleckenstein Capital
June 9 (King World News) – The bond-fire was back in Europe yet again, as yields climbed to a new high for this go-round and the German bund yield rose to about 95 basis points. Equity markets weren't too fazed, although they were a bit lower….
Continue reading the Bill Fleckenstein piece below…
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As for the action here in America, there wasn't much, but the pattern was similar, with our 10-year climbing to a new high of 2.43%, as equity markets drifted around unchanged all day. Away from stocks, as noted, fixed income was heavy once again, green paper was mixed, oil gained 3%, and the metals were flattish.
Looking for a Little Shock and Ah Ha!
There isn't a lot to say about today's activity, but I am kind of excited that the next few months might finally start to change psychology regarding the efficacy and "riskless-ness" of the current central bank policies. Most likely it will take a nasty spill in the stock market to sober people up, but it is starting to feel more and more like that is a distinct possibility.
Included below are two questions and answers from today's Q&A with Bill Fleckenstein. The questions are from his subscribers and they get to read Fleckenstein's answers every day.
Bonus Q&A
Question: So, we can't trust the inflation (CPI) numbers, we can't trust interest rates (LIBOR fixing), we can trust BLS for unemployment numbers, and we can't trust earnings numbers now either:
Experts worry that 'phony numbers' are misleading investors
Sounds to me like the average investor might just as well do the "blindfolded throw at the dartboard" for investing these days. Or, maybe invest in something that doesn't depend on earnings reports etc…maybe…gold?
Answer from Fleck: "Eventually, many people will come to that conclusion, for yours, and other, reasons."
Question: If TLT (20-year treasury ETF) were a stock, it would look like the classic short. Big spike up, stretched well above trend lines, followed by two well defined, sequentially lower, "failed rallies"; most recent one failed BELOW the DECLINING 200-day EMA. The 50 day EMA is about to drop below the declining 200 day EMA. Can't ask for a more "textbook" negative picture.
All this taking place with a background of "easy money", Euro "QE" chatter, very weak economic signals, daily, hourly Greek "noise" etc. This is a scenario "model builders" would consider impossible. However, looking at the absolute LEVELS of bond yields, some long term holders must have decided that enough was enough and decided to cash in their capital gains while they were still there. The picture seems to resemble the top in gold when it blew off above 1900, dropped sharply, then had the classic failed rally. Gold even had two more failed rallies in 2012 before the bottom fell out.
If the bonds start to really tank here, I think we are in a world of hurt. This would clearly validate the notion that the CBs have lost control. All the neophyte fund managers who chased bonds to ridiculous levels, betting on perpetual CB back stops, would suddenly start to panic – especially since so many recent bond buyers (last three or four years) have treated bonds as if they were commodities (namely objects used to speculate on PRICE).
The legitimate bond buyer focuses on yield, quality, and maturity. The "Johnny-come-lately" hedgies who have tried to front run the CBs' QE programs with momentum tactics ramped into a "greater fool" game of chicken, well…their moment of truth is upon them. Given that human nature never really changes, I would expect some sort of spectacular panic to emerge near the end of the sell off.
Answer from Fleck: "Mr. Skin on bonds. Reminds me a little of the spring of 1987. No one cared that bonds were sliding, until October. :)"
Question: While you are very aware of the selloff in bonds going on you seem to miss the opportunity to make money off it. Why not short the bond market??? It seems to be the most obvious of the crazy bubbles and seems to be the one that is showing the greatest signs of stress….I don't disagree with the ultimate blow up of equity markets…. But why not look at the one that is currently cracking. german bunds have gone from 7 bps to 88bps in a matter of weeks….10 yr treasuries have gone from 1.65 yield to 2.38 since the end of january etc etc. the building is on fire but it is starting in bonds not equities.
Answer from Fleck: "Good question. A couple of reasons: the first is that if you were short bonds on the top tick until now, you made a bit under 7% in a month or so (a 10-year Treasury would have made you about 3%-4%). Not bad, but that is no home run (unless you use lots of leverage, which creates all kinds of risks), and you had to assume the risk of being long the euro (which may or may not have worked, depending on your entry point).
My point is there isn't that much profit potential in shorting bonds yet. If you start to really do well short bonds, equities will break hard and then bonds will rally which you could cover into, but I'd rather save my energy for shorting stocks where I can make a lot more for my efforts. Having said that, after the equity markets finally crack and we see what the central banks do, THEN we can see about shorting bonds to capture the taking away of the printing press. That trade interests me, but it is a ways off still. Hope that helps." ***To subscribe to Bill Fleckenstein's fascinating Daily Thoughts CLICK HERE.
***ALSO JUST RELEASED: Are We On The Verge Of A Global Panic? CLICK HERE.
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