Secular and Cyclical

September 25, 2011:" The secular bull market in bonds may be ending. The only factor correlated to long term interest rates is core inflation.  Bonds have delivered inflation + 2% or more for 30+ years. FTQ has to be present , as investors feel they "must" be in there. " Thus spoke David Rosenberg a tad over a year ago making the case for equities. What you got was an unwanted volatility trip under the auspice of Central Bank "stability" objectives.

Secular market moves must carry certain long term characteristics that separate them from the cyclical. The key component of the secular bull market in bonds was the universal disdain with which they were held into the mid -1980's. In other words, the mistakes of the 60's and 70's had to culminate in the complete rejection of long term fixed interest obligations as an investment before they could reverse. Even Volcker admitted in his memoir that he never imagined that rates would need to be pushed so high (or social costs so devastating) to break the inflation expectation credit cycle.

 A secular bull market in stocks shows an increase in acceptable P/E multiple. For bonds, yields would be substituted for capital appreciation and the belief that one would know when to punt. Gold, the so called inflation hedge, has been in a decade plus advance as the world teetered on the edge of debt deflation abyss. Beyond negative yields, both real and nominal depending on the country, yellow metal shows the persistence of memory and the behavioral economics of expectations.

 The Treasury market, in the form of the Classic futures contract, hit its high on July 25, 2012. 13 weeks and nearly 9 handles later, peeps are starting to wonder about bonds.  The Fed is on a PR campaign Lindsey Lohan would kill for to mitigate the cyclical nature of rates. As we've opined many times before, nothing changes minds like the price. Money always chases the asset with the rising price. For over 3 decades, that asset has been bonds. Exchange traded vehicles have proliferated to absorb the public's infatuation with allegedly risk- less fixed income. The secular bull market in bonds is over because the cornerstone of its advance (generational dis-inflation ) has been replaced by Central Bank commitment to the opposite.

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