Thursday, October 8, 2009

The bond market is far smarter than the stock market.

Bonds are saying deflation, stocks are saying reflation. Who is right?

There have been 4 famous cases of such bond and stock divergences in the last 20 years. The most famous is the summer of 1987. We all know what occurred then. The other three cases were fall ‘94, summer ‘98 and winter 2000. All three preceded declines in the market. Of all 4 instances, three of them preceded 15% declines in the S&P 500

Posted by mountain goat @ 09:47 PM (1333 views)
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10 thoughts on “The bond market is far smarter than the stock market.

  • Deflation for the US seems quite likely, but not for the UK. The dollar is the international currency of choice; the pound isn’t. The pound has fallen quite a bit already, and it could continue to slide further if the government doesn’t sort out the debt issues. A falling pound means inflation, Argentina-style.

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  • fallingbuzzard says:

    A falling pound creates price inflation but not salary inflation because of the level of slack and overcapacity in the economy and specifically in the labour market. The UK is facing disposable income deflation which has already started and given the relatively comfortable living standard that we currently have, there is no need for salary inflation, just some consumption reduction. The gilt market is categorically pointing to a long struggle with deflationary pressures in the UK.

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  • I’m surprised that the fall in the pound hasn’t been shown visibly in the prices of imported goods (i.e. nearly all goods) in the uk already. Anyone have any ideas why?

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  • More examples of rising costs of imported goods:

    Computer Weekly: Falling pound drives massive increase in hardware prices [Dec 2008]

    Evening Standard: Electrical goods to cost more as yen soars against pound [Jan 2009]

    Telegraph: Weak pound stops inflation falling below zero [Mar 2009]

    We’ve had a NICE decade of falling prices for cars, TVs, electricals, etc. Things look VILE from here on.

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  • Here is a quick example of a price increase – if you are in to camera, Sigma (camera lenses) put all their prices up because of the difference between the pound and yen. That was back in January. I have seen prices for lenses in Jessops almost double in price:
    http://www.photographypress.co.uk/news/news.phtml/7305/8329/Sigma-confirms-price-rise-February.phtml

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  • stillthinking says:

    It is amazing that the pound has fallen so much without matching pressure on prices in the UK. I wonder how much is because prices are hedged in advance by major distributors i.e. probably Dixons are sorting out their foreign currency requirements for Christmas 2010 around now.
    Does seem strange. There must be some level where holding prices steady in the UK doesn’t cover production costs even.

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  • fallingbuzzard says:

    Currency hedging means that the weakness or strength of the pound comes through delayed rather than immediately

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  • There is also the possibility that prices are not being raised because consumers stop buying if they do. A redress of the circumstances which saw increasing profits accruing to capital.

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  • yes thats the right meaning of it fallingbuzzard.

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