QUESTION: From reading your blog, my understanding of your view is that all relationships are in flux with respect to markets and market drivers, except for confidence. For example, the stock/bond relationship can change over time, so stocks do not ultimately go up or down based on what bonds do but based on where confidence stands. If that is correct, then I would submit that both stocks and bonds globally reflect a high degree of confidence in the authorities to “manage” the situation without an accident. European bond market yields reflect complete confidence in the EU and ECB. The US stock market is exactly positively correlated to the belief that the Fed has things under control (see Wednesday’s reaction). Logically, loss in that confidence would obliterate stocks. Yet you suggest we are on the verge of a massive collapse in confidence in government and its agencies and that stocks will double. How do I reconcile?
ANSWER: This is a single domestic perspective. Prior to Great Depression in a PRIVATE WAVE, rising interest rates were seen as BULLISH because it meant people were still borrowing and bidding up rates. Rates crash in recessions because there is no bid.
The central banks have manipulated rates very low and capital has no choice but to shift. As confidence in government declines, rates will rise and people see alternative investments in private sector exactly as we saw going into 1929. There is no relationship that is ever fixed BECAUSE there are other factors people may not be looking at.
Your statement there is a “high degree of confidence in the authorities to “manage” the situation without an accident” reflects this directional change. This is why gold declined. The Goldbugs only see their point of view. The MAJORITY disagree with them and ask the average person on the street do they think government will collapse or the dollar and they will look at you like you are a nut-job. We are not at the point of a collapse in general confidence yet. That comes after 2015.
Your statement “European bond market yields reflect complete confidence in the EU and ECB” does not reflect confidence but manipulation as is the case with rates in the USA. Governments are artificially setting them low to save money, but when the confidence shifts, rates will explode as the Fed was testing the marketplace.
The Pension Crisis is all about this confusion. They have been bond buyers. They earn nothing and the central banks are creating the next default – pensions. They do not have “confidence” but have no choice as do banks with requirements to buy government bonds for reserves.
Your statement: “The US stock market is exactly positively correlated to the belief that the Fed has things under control (see Wednesday’s reaction). Logically, loss in that confidence would obliterate stocks. Yet you suggest we are on the verge of a massive collapse in confidence in government and its agencies and that stocks will double. How do I reconcile?” Your assumption is incorrect. Stocks are not rising because of “confidence” in the Fed, the central banks have themselves been buying stocks lacking confidence in public debt. Money has NO CHOICE but to go to stocks. Pension will go bust and stocks are becoming the ALTERNATIVE to government debt.
Even during the Great Depression, corporate bonds were in higher demand than government. Read the newspaper of 1929 and you will see the complete opposite interpretation of the same fundamentals from today.
There is a cycle to fundamental interpretations as well.
