It took me a lifetime, but I think I figured out the bond market.
I’m going to use the term bond as a generic term to describe all bonds whether they are long term or short term. Obviously short term bonds would be two year treasures. Long-term bonds would be ten year and thirty year treasuries.
I want you to think of the bond market as a bank, a safe place to put your money when you’re scared or when things aren’t working out correctly.
Or you can think of the bond market as the person you should’ve married but didn’t. You didn’t marry the bond market because you didn’t find her attractive. Instead, you went for the super-attractive gold-digging bitch.
And you got burned.
Maybe this has happened to you several times.
It happens because nobody gets an erection over the bond market.
The bond market is where you put your money when you’re on the ropes, or when you’re afraid.
That’s what the bond market is: a giant bank of money that lies in wait for when the bull market in stocks comes around again.
For the most part, the bond market is a pretty boring place. There’s not much action there.
What really moves the bond market is when the stock market is plunging and people are running in fear.
When that happens, investors pour their money into long-term treasuries as opposed to short-term treasuries. That is principally because, before the bear market begins, long-term treasuries pay better than short term treasuries.
When the bear market begins to arrive, when the specter of recession looms, when the Fed is raising interest rates, irrational fear sets in and investors flood out of the stock market.
As that happens, and as money flows into the bond market, there is greater demand for bonds. This raises the price for bonds and correspondingly lowers the yield of those bonds.
That’s okay because investors will happily accept a 1 to 2% return in the bond market rather than a major loss in the stock market.
While money is flowing in from the stock market, investors are also flooding out of short-term bonds into long-term bonds. They are doing so because long-term bonds in a pre-bear market still have a higher yield.
This has the effect, through greater demand, of raising the price of long term bonds and lowering the price of short term bonds.
This has a corresponding effect of lowering the yield of long-term bonds and raising the yield of short term bonds.
At some point the short-term bonds will give a greater yield then the long-term bonds.
This is called bond yield inversion.
Supposedly it signals a looming recession.
I will go you one further. The bond yield inversion is not a predictor, but a consequence of fear, inflation, recession, and all bad things that can happen.
In other words, the bond yield inversion is occurring because of fear.
The bond yield inversion is a barometer of fear.
This does not necessarily mean that things are going to get worse, but that things are likely to get worse.
Historically a bond yield inversion has portended a recession.
The point I want to make is that it’s not bond yield inversion that is causing the problem, but fear.
If the Fed recognizes fear as the root cause and acts accordingly, then a recession can be forestalled.
You forestall a recession by raising interest rates.
When the Fed raises interest rates, it tightens money, stems inflation, fleshes out the Ponzi schemers, and forces borrowers to think twice and cut once.
When the Fed raises interest rates, investors turn away from the cowboy atmosphere that is the stock market and move their money into safe investments.
These moves by the Fed, promote growth in the bond market and restore faith in the economy.
As I said before, think of the bond market as a big bank of safety, not glamorous, but secure.
Now, what happens if the Fed doesn’t raise interest rates?
If the Fed becomes scared and views rising interest rates as an enemy instead of the healing salve that it is, then the economy will only grow worse.
Fear will entrench itself, inflation will grow, consumer confidence will drop, purchasing will decrease, and even more money will flow out of the stock market. Stock market prices will drop precipitously thus causing panic.
Complete faith will be lost in the stock market. Fortunes and portfolios will be rubbed out overnight. It will become almost impossible for companies to raise funds through stock securities.
Very quickly the economy will grind to a snail’s pace.
A full-blown depression will ensue.
Of course, this is usually the consequence of years of profligate spending.
These are the wages of sin.
Sincerely,
Archer Crosley
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