Have You Met Homer?

No, not the cartoon character that just took a pay cut, this is about Sydney Homer. Homer's "History of Interest Rates" was forced upon me by Jim Grant back in the 90's. This seminal work, and Grant's Money of the Mind, are permanent fixtures on my den shelf. Homer's work is a must (re-)read given the latest bond infatuation.

The decline in yields since Summer fits into the Super Secular and Secular bond rallies dating to 1920 for "modern" America. (The cycles back to the 17th century are fun to track also) The 1920 bull run lasted until 1946. A third of the advance had registered by 1928 when many identified the trend. Two corrections of magnitude were recorded and the peak to trough run took the bond from 5.56% to 2.37%. Then all hell broke loose.

From 1947 to 1981 bonds were in the greatest bear market of all bond time. The rout would take the average yield index from 2.46 to 15.50% (seasoned prime corps). The 70's inflation was 24 years into the yield rise and ushered in the final decade of trouble. A constant maturity 2.5% (if it existed-it did not) would have gone from 101 in 1946 to 17 (!!!) in 1981. , This mother of all bear markets declined by 83%. By comparison the 21 year bear market of 1899-1946 created "only" a 35% decline. Interestingly, the final phase (Volcker) also saw the advent of a host of new products and futures contracts to "hedge" the onslaught.

Since 1981, with the regular interruptions, the super secular bull chugged forward. Amazingly, the most dynamic and consistent characteristic of this phase was the marketing of Equity as the better investment. The proliferation of derivatives designed to enhance stability and shock absorption have led to only more crisis and volatility. And now, in the Summer of 2011, 30 years into the rally, John Q  buys reluctantly in.

Finally, the pattern of rates dating back to the 13th century follows a distinct social cycle.  "Rates decline during early centuries of development and expansion, bottomed out in the centuries of commercial activity, and rose again with the disintegration of social and commercial life. " (Homer, Rutgers Univ Press. pg556. added emphasis) So, tell me what the bond did from 11:00 to 12:30 yesterday, please but you'll have to tell me why I should care.

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