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Where have the Bond Market Mavens gone?

Greg Silberman CFA, CA(SA)
Profession: Portfolio Manager and Research Analyst
Company: Ritterband Investment Management LLC


We've been puzzled by the Bond markets performance in the face of a highly inflationist Fed. Where have the bond Mavens gone?

When it comes to markets we deal in probabilities. At any given time, there are multiple factors affecting the market, some bullish, some bearish. It’s up to the subjective judgement of the analyst to determine which factor(s) will dominate and hence the direction he/she thinks the market will move in. As such we are always dealing with probabilities.

One market which has seemingly defied those probabilities is the Bond market. Next to Gold, Bonds are supposed to be the inflation hounds of the finance world. Their ability to sniff out inflation became famous in the 70s when the term Bond Maven was coined. The Bond Market Mavens were a counter balancing force against an inflationary Fed. That is, the Bond market would punish the Fed with higher interest rates at the smallest hint of an increase in monetary inflation.

Contrast that with the current situation where the Fed is churning out 10% more currency each year (at least that’s what we think it is as the Fed no longer publishes M3 statistics) and the Bond markets response has been incredibly benign:

Figure 1 - Bond Yields heading lower in a hurry

What to make of it?

Interest Rates have been falling through the floor whilst the Fed and Central Banks around the World print like mad. The currency market gets it – the Dollar is in a free fall - the commodity market gets it - most commodities are at or near all time highs.

So what’s wrong with the Bond market? Where are the Bond Mavens?

Honestly, we have no idea. Maybe they see deflation ahead. Maybe, due to the credit crunch, the panic for quality has overwhelmed the flood of new money. Or maybe the Fed is just monetizing the debt. Whatever it is, the Bond market Mavens are Dead or at the very least completely Silent!

We just heard an observation by analyst Gary Dorsch from SirChartsAlot that attempts to explain this phenomenon.


Per Gary, the Bond Market Mavens have been replaced by the Oil Mavens. OPEC and non-aligned Oil producers have taken up the position as counter balance to the Fed... and we may add Gold has also assumed that mantle. Every time the US Dollar falls (as the money supply expands); it is met by higher Oil (and Gold) prices.

Figure 2 - Perfect inverse correlation between the Dollar (blue) and Oil (red) and Gold (green)

We think it is a mistake to dismiss the Bond markets signal as manipulation or the like. Instead we continue to see the epic struggle of deflation (Bonds) meeting Fed induced inflation (showing up in Oil and Gold).

Far from being a counterbalance to the Fed, the OPEC countries seem complicit in this arrangement and will not prevent the Fed from going about its business as long as they can maintain the real price of Oil. And so far $100 Oil has not caused an economic meltdown but merely pushed strategic holdings e.g. Citigroup the way of the Middle East.

In our opinion, this game of Fed engineered growth (the 100 Dollar Bill drop) will continue only until the Bond market says it’s enough through much higher interest rates.

More commentary and stock picks follow for subscribers…


Greg Silberman CA(SA), CFA I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks. Please visit my website for a free trial to my newsletter. Click here:

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.




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