Bond yields are beckoning the stock market back towards its March 2009 lows

After falling to 2.67 on Friday, the 10 year US Treasury bond yield yesterday continued its dramatic decline breaking below 2.60 to close at 2.58.

The 5-year TIPS yield officially went negative last week. The bond market is pricing in a recession. Whether one prefers to see this as a new recession or a continuation of the 2007 recession, it really doesn't matter. The economic landscape is looking pretty tough over the next few months. Falling bond yields typically lead the stock market lower. The consensus view today is that there will be no renewed period of negative growth ahead because “double-dips are extremely rare”. But what the consensus view overlooks is that we have been through very extreme financial conditions in the world the past few years. Statistically “rare” events have become our common occurrences.
Meanwhile economist Paul Krugman was speaking to the Canadian Bar Association this week and (apparently in preparation research for the appearance) became one of the latest American financial commentators to finally notice that Canadians are up to our ucksters in debt today:

“In preparation, I did some homework; and to be honest, I came away a little less sanguine about Canada than I started. Everything I and others have said about the Canadian banking system and its virtues is true. But in other respects, there do seem to be some worrying signs. First of all, Canadians borrow and spend like, well, Americans”:

Read his article about it in the NY Times yesterday, Uh-Oh Canada? As one who has been trying to bang this gong for a couple of years now in my home land, I am happy that an influential American commentator is finally noticing we are not a miraculous “decoupled” island unto ourselves up here. (We hear this oblivious drivel mostly everywhere else).
In a slowing global economy where the world is awash in excess supply of most things, Canada is unfortunately over-levered and over-exposed to the consumption down cycle now in process around the globe. Our leaders have been as short-sighted here as everywhere else. We have not squirreled away our nuts for winter days. We have spent pretty much every cent and more. This means we are not now prepared for slower demand, slower growth. Reduce, reuse, and recycle means less sales for Canada's resource dependent economy. And I believe that post-credit bubble this is not just a cyclical shift but a secular move down in world demand that will last for several years to come. Compounding all of this is the aging demographics in most parts of the developed world (including China and Japan) where boomers are learning to live on less. See WSJ: Boomers cutting back.
Ultimately less consumption is better for the planet, but only those that can see and adjust to this new normal will be able to prosper in it. It is time to invest in people, technology and infastructure, not more non-productive things.

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One Response to Bond yields are beckoning the stock market back towards its March 2009 lows

  1. Anonymous says:

    I have to confess that as of Aug. 16, albeit slowly, but I started to short a US long bond. What goes up must come down.
    Your chart is very helpful to see how far I'm from the bottom supposedly. I think I can manage it.
    By the way, Danielle, you are looking pretty hot on your new picture. Cheers!

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