Thursday, August 1, 2013

A Major Shift in the Bond Market and Interest Rates

Recent data and evidence suggests, in my opinion, that long-term interest rates have bottomed, after a 31 year bear market, and a new bull market in rates has begun. By the same token, if in fact long-term interest rates have bottomed, a new bear market in bonds has begun. However, while most who agree that rates have bottomed will say this is because of a growing economy or rising inflation expectations, I think it is because of a growing fear of default. This shift in psychology is indicative of the onset of the biggest credit collapse in history. The Bond market, stocks and precious metals have been the last holdouts of this massive credit bubble. Now let's take a quick look at each. Precious Metals topped in April 2011 (Silver) and September 2011 (Gold). Gold has now broken down and confirmed a bear market, while silver has collapsed as well. The last holdout was U.S. Government Bonds, which topped in June 2012 (10-year note). Now, we are starting to see evidence of further stress with the recent bankruptcy of Detroit, Michigan. This is one of the first of the coming massive wave of municipal defaults and bankruptcies. Other notable municipal bankruptcies so far have been Central Falls, Rhode Island and Stockton, California. In reality, most municipalities are bankrupt, even if not officially yet, for the continuation of this debt ponzi scheme requires ever increasing amounts of debt issuance, and if municipalities have trouble issuing new debt, they go bankrupt. Such is the inevitable outcome of the largest ponzi scheme is world history. Back to the U.S. Bond Market. Below please find an Elliott Wave count in interest rates (inverse to bond prices) dating from to the top in rates in 1981 to the low in June 2012. The new Bull Market in rates should continue for decades.

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