Bond market crisis will pull stock markets down
Posted on 19 December 2010 with 2 comments from readers
The logical conclusion of the growing global bond market crisis seems to be missing many equity investors. This is not going to be good for stock markets either. It is the long awaited second phase of the 2008 financial crisis.
All over the world bond yields are rising and bond prices therefore falling. Even in Japan bond prices are on the move for the first time in a decade. Something big has happened and it does not get any bigger than bond markets, the true giants of global finance.
Bond market reversal
European leaders are expressing disbelief. But then they are genuinely surprised at the reversal in the bond market which is only acting rationally to mounting levels of global debt and the bond issuances planned for 2011.
What must be happening is that bond investors are selling out as quietly as possible. Those sovereign wealth funds with their hundreds of billions. Ditto the hedge funds.
However, the idea that they will smoothly rotate this money into stock markets is a nonsense. And indeed stock markets have been flat to negative over the past week as if hesitating to know which way to jump next.
The difficulty is obvious. As bond yields rise that means that stocks also need to offer a better return to investors. They can do that by paying higher dividends. But higher dividends like higher bond yields come from falling and not rising prices for the underlying asset, in this case shares.
It is easier to understand with real estate: interest rates go up and real estate prices go down. Clearly in a bond market rout the places to go are cash and precious metals which are just a currency that cannot be printed and are not acting as a commodity in this phase.
Test cases
There are plenty of historical parallels and solid test cases. From the collapse of the South Sea Bubble to the bond market chaos of the 70s. It should not be so surprising that this time is not different.
Surely what follows next is something of a repeat of the late 2008 crisis with stock, bond and real estate markets hit by rising interest rates. And the extent of the damage done to asset prices will depend on where rates stabilize.
For gold and silver this is the perfect storm for while rising interest rates argue against holding the precious metals that pay no interest, for the period of instability the greater security of precious metals with their fixed supply will over power all other investment considerations.
2 Comments posted by readers:
Ed, I’m so glad that you get into the comments page of the DT so quickly because I value you referenced page to provide a counter argument to what the DT correspondent has written. I also value it because I’m into gold and silver, so to read that the current situation is a perfect storm for g and s is pleasant music to my ears.
Bonham Carter predicts 3-4% dividends pa on volatile shares over the next few years, and tell us all that this is GOOD! With his enormous pay-outs from Jupiter, he must, simply must, praise up the investments which provide him with such wealth. He does not make clear, however, what he thinks will happen to share prices.
It seems to me to be the act of a blinkered horse for Bonham Carter to fail to mention bullion but then my suspicion is that he has little experience of this commodity and would not want to pull investors away from the shares, from which he enriches himself so royally.
I did reach 55% gain on gold and silver in 2010 and this is way, way above 3-4% dividend pa. Furthermore, I did not have to pay Bonham Carter’s ilk a proportion of that 55% which is the yield I obtained after paying my eDealer’s up-front fee.
Throughout 2010, I had no counterparty risk whereby Bonham Carter’s ilk could have made serious investment mistakes and lost me my 3-4% and some of my principal investment as well. I do prefer monitoring the progress of my bullion investment myself, relying on your advice and thoughts for example.
Its thanks to people like you that we get to understand whats really going on. Normal news sources are really dumbed down. Keep up the good work, as John Mark says..glad you get your comments in quickly at the DT