Morgan Stanley's Stephen Roach: Market's Faces Rude Awakening

Morgan Stanley's Stephen Roach, in a CNBC interview says that markets could be faced with a "rude awakening"

Some excerpts from the interview:
-Visible manifestation of all the excess liquidity that monetary authorities have poured into the system
-Markets are priced for a recovery that’s gonna end up disappointing earnings
-Financial Crisis isn’t over
-75% of global economy still contracting
-Markets are in for a rude awakening
-Green shoots...simplistic way to look at the world
-we are going to have an anemic recovery

Mainstream Denials And The Greenshoots of Inflation

``We're going to have a currency crisis, probably this fall or the fall of 2010. It's been building up for a long time. We've had a huge rally in the dollar, and artificial rally in the dollar, so it's time for a currency crisis.”-Jim Rogers Bloomberg

Nobel Laureate Dr. Paul Krugman recently wrote in his widely read column at the New York Times to dismiss of the risks of inflation. He suggested that what has been happening in the marketplace isn’t about inflation, but an attempt by the opposition to dislodge present policies,

``But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.” (bold emphasis mine)

Dr. Krugman’s basis for debunking inflation has been 1) most recent data on consumer index and importantly 2) banks haven’t been lending enough since bank reserves remain bloated. Apparently, the popular economist believes that what happens today should be construed as tomorrow’s events.

Yet, Dr. Krugman’s prescription is for the Obama administration to continue with its inflationary path. In other words, the mainstream’s ideology has been epitomized by Dr. Krugman.

And this is the same ideology, which for us has been heightening the risks of intractable inflation, despite the supposed “omniscience” of the Nobel awardee.

As we argued last week in $200 Per Barrel Oil, Here We Come!, inflationary policies will largely cause a spike in oil prices in combination with oil’s structural fundamental imbalances.

Unfortunately Dr. Krugman, who believes in the almighty power of governments as solution to everything, has a skewed understanding of inflation; inflation has been always a political process. Since government actions, such as spending, lending, guaranteeing, protecting, subsidizing etc…, are not determined by the marketplace or by fundamental economic laws of demand and supply, as they are arbitrarily decided upon by policymakers and regulators, then such actions are reckoned as political in nature. Hence, inflation fear mongering isn’t political, Dr. Krugman gets it the other way around, but the use of mandated coercive powers to implement redistributive process is.

Monetary Forces Strengthens Decoupling

Mainstream experts, like Dr. Krugman, have been lost with the sudden rise of stock markets and in the commodity markets as the actions marketplace appears to have been detached from the developments in the real economy. This is because Dr. Krugman has been predicting of a deflationary depression and even wrote a book about it. Lately, Dr. Krugman conceded that “We have averted utter catastrophe.”

As we mentioned in our mid week article, see Monetary Forces Appear To Be Gaining An Upper Hand, these experts have been “rationalizing” on market actions to either affirm or dispute market accounts depending on their inherent biases.

For the bulls, the recent market activities account for as some form of triumph by government policy efforts to resuscitate the global economy or the much ballyhooed “greenshoots”.

For the bears, the widening disconnect with the real economy seems like a surefire indicator of a maturing bear market rally which will ultimately end in tears.

For us, while some signs of economic recovery have indeed been taking place in response to the “shock” (or our Posttraumatic Stress Disorder-PTSD) arising from the near meltdown of the US banking system, due to an institutional bank run which took place late last year, recent developments or market outperformance have been symptomatic of monetary forces asserting dominance over both the marketplace and the economic sphere.

We also beg to differ from the mainstream opinion that the present rising markets is about expanding global risk appetite.

Instead, we see the risk profile as shifting substantially to weigh against US markets more than Emerging Markets or Asia.

Aside from the Bond markets or stock markets (see Figure 4), we note that from the economic growth perspective to policy trajectories (Asia has been adopting policies directed at integration amidst this crisis) to prospective business conditions signs have evinced of “decoupling”.

Figure 4: Bespoke Invest: BRIC outperforms S&P 500

And we are entirely agree with the observation that the ongoing dynamics has been a “shift from the Core to the Periphery”, as analyst Doug Noland in his Credit Bubble Bulletin predicts, ``A robust Core to Periphery Dynamic and the re-emergence of dollar vulnerability are a potent combination. U.S. markets to this point remain sanguine with the prospect of an expanding Federal Reserve balance sheet rectifying any spike in interest rates. But currency markets are no doubt increasingly fixated on our propensity to monetize our massive debt. At some point, increasingly unwieldy flows out of our currency may force the Fed’s hand. The scenario where the Fed is forced to choose between loose monetary policy and currency crisis could be a potential big negative surprise for U.S. markets.” (bold highlight mine)

In short, since the survival of the present paper money system is mainly a measure of confidence or trust in the system, policies that work to undermine these framework risks the extreme ends of either a hyperinflation or deflation.

Another, mainstream deflationists continue to struggle with the fallacies of lack of aggregate demand, US centric global growth model, global surplus capacity, imbalances of current accounts and ‘velocity of money’ all of which are based on the assumption of the neutrality of money.

Debunking Mainstream Fallacies

Inflation doesn’t need demand. This mistakenly assumes that normalization of the credit process depends on the private sector as the sole pathway for inflation.

In the recent Zimbabwe or the 1920s Weimar Germany experience, their governments simply increased liabilities on an exponential scale and simultaneously spent them on the economy and the result was a hyperinflationary depression! No consumer spending required, it had all been government spending!

Today, governments not only in the US but all around the world have been frontloading fiscal expenditures or inflating altogether. Hence the inflationary transmission scheme can’t be compared to Japan in the 90s since this has been a global effort more than a stand alone stint!!!

In addition, as noted above, financing today has apparently taken place outside of the banking system, particularly on the capital markets. Example, financing for junk bonds in Europe has reportedly been brought back to life (Wall Street Journal)!

Thus, global government ‘stimulus’ spending, growth of financing obtained from global capital markets and a semblance of normalization of the banking system risks unleashing outsized or “substantial” inflation, if not the extreme-hyperinflation!

Remember Asia and the emerging markets have the capacity to undertake massive credit expansion since they are both systemically underleveraged relative to OECD economies and have a functional banking system largely unscathed by the recent crisis [see Will Deglobalization Lead To Decoupling?]. Moreover present government policies have likewise been geared towards attaining such goals.

The next problem would be if governments would be able to withdraw or reverse present policies at the right time if benign inflation turns savage!

Moreover, the collapse in global trade late last year was mainly read by the mainstream as a structural loss of the US driven global growth engine. Thereby, without the US consumers it is held, the world was bereft of a buyer for their products. This has been proven to be incorrect.

Apparently, the emergence of barter trades (post October collapse) suggested to us that demand wasn’t impaired but that the problem was in the gridlock in the US banking system which hampered trade financing [see What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis].

And as the world has recovered from this shock, global trades have begun to show indications of significant improvements, and this partly includes the US.

So while it is true that we won’t see volume of trades in the magnitude of the peak of the bubble days and that it would take sometime for the world to adjust to new patterns, recent activities have only confirmed our suspicion that the world hasn’t been dependent solely on the US, as markets everywhere have depicted signs of “decoupling” or divergences.

And if the world isn’t US centric then the rest of the other fallacies which relies on the US as the center of power crumbles along with it, namely surplus capacity, velocity of money or current account imbalances.

Furthermore, since some public personalities such as Pimco’s Bill Gross or former US comptroller General David Walker have raised the likely prospects that the US could lose its AAA credit ratings based on present directions of government policies, some analysts have rushed into the defense stating that the US position is privileged since debt has been underwritten from its own currency and that the US has a larger taxing capacity.

We again beg to differ; if the US continues to debase its currency then it has effectively been implicitly repudiating its debt.

As Henry Hazlitt wrote in From Bretton Woods to Inflation, ``Devaluation is the modern euphemism for debasement of the coinage. It always means repudiation. It means that the promise to pay a certain definite weight of gold has been broken, and that the devaluing government, for its bonds or currency notes, will pay a smaller weight of gold.” Hence, the US risks jeopardizing on its hegemon as the world’s currency reserve standard as it breaks its promises to its creditors.

Money Is Not Neutral

We also agree when experts tell us that the US will endure from significantly higher taxes in order to finance government redistribution programs when nearly two-thirds of the population is close to being bankrupt and that the remaining one third would suffer from a stifling burden of new taxes.

All these imply that the US won’t see any vigorous recovery soon and probably could experience intermittent bouts of economic recessions or weaknesses.

Yet this is also exactly why we should continue to expect accelerated inflation. The mainstream represented by Dr. Krugman, whom has been influential to the present administration, encourages its government to adopt a Dr. Gono “Zimbabwe solution” of money printing away from its miseries. This is because mainstream ideology thinks of money as neutral.

According to Ludwig von Mises in The Non-Neutrality of Money, ``The reasoning of modern marginal utility economics begins from the assumption of a state of pure barter. The mechanism of exchanging commodities and of market transactions is considered on the supposition that direct exchange alone prevails. The economists depict a purely hypothetical entity, a market without indirect exchange, without a medium of exchange, without money. There is no doubt that this method is the only possible one, that the elimination of money is necessary and that we cannot do without this concept of a market with direct exchange only. But we have to realize that it is a hypothetical concept which has no counterpart in reality. The actual market is necessarily a market of indirect exchange and money transactions.”

``From this assumption of a market without money, the fallacious idea of neutral money is derived. The economists were so fond of the tool which this hypothetical concept provided that they overestimated the extent of its applicability. They began to believe that all problems of catallactics could be analyzed by means of this fictitious concept. In accordance with this view, they considered that the main work of economic analysis was the study of direct exchange. After that all that was left was to introduce the monetary terms into the formulas obtained. But this was, in their eyes, a work of only secondary importance, because, as they were convinced, the introduction of monetary terms did not affect the substantial operation of the mechanism they had described. The functioning of the market mechanism as demonstrated by the concept of pure barter was not affected by monetary factors.”

In other words, mainstream economics have analyzed mainly from the context of pure barter trades, or if money is taken into account, they consider its function as medium of exchange only.

This view disregards or dismisses the other function of money as a store of value. Hence, the proclivity by the mainstream, like Dr. Krugman, to suggest of money printing as certified way to juice up an economy.

However for us, money isn’t neutral. It impacts prices relatively, and importantly functions as a store of value (backed by real savings) that has psychological underpinning based on expectations which is being transmitted on real time to the marketplace by virtue of price signal dynamics.

As Henry Hazlitt wrote in What You Should Know About Inflation, ``the value of money varies for basically the same reasons as the value of any commodity. Just as the value of a bushel of wheat depends not only on the total present supply of wheat but on the expected future supply and on the quality of the wheat, so the value of a dollar depends on a similar variety of considerations. The value of money, like the value of goods, is not determined by merely mechanical or physical relationships, but primarily by psychological factors which may often be complicated.”

Surging Food Prices As The Proverbial “Nail In The Coffin”

Well as the mainstream remains firmly in denial, the unfolding price surges continue across stock markets and the commodities sphere.

We will just wait until these significantly percolate into food prices from which should serve as the final “nail in the coffin” see figure 5.

Figure 5: Economist: Food Prices Creeping Up!

In addition to the creeping food prices above, last week saw White Sugar rose to a 3 year high in London and soybeans notched its third weekly gain.

In other words, the broadening of gains seen in commodity prices has now filtered into food. This reinforces our view that monetary forces are becoming “sticky” and that the price inflation has been accelerating.

Since food prices are even more politically sensitive than oil or energy, rising prices will consequently mean a global public outcry that risks political destabilization in some parts of the world. Again this initially will be blamed on “speculators” than on governments, until inflation gets really out of whack.

We expect the 2007 episode to dwarf and function as a prologue to the forthcoming food crisis that could be expected to erupt in several parts of the world as discussed in Four Reasons Why ‘Fear’ In Gold Prices Is A Fallacy.

Finally, the growing incidence of public discontent on high food prices will eventually lead the mainstream ideologues and deflationists to capitulate.

But that would be a great time to talk about deflation.

Effects Of Inflationary Policies Surface In Currency Markets

``America’s policy is pushing China towards developing an alternative financial system. For the past two decades China’s entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China’s dual approach to be effective; its inefficiency was masked by bubble-generated global demand. China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.”- Andy Xie If China loses faith the dollar will collapse

This episode of the stock markets in a fierce rebound has brought about exhortations of “greenshoots” and “prospective” economic recovery, which we have described as the reflexivity theory at work.

And as we have repeatedly been saying, the unparalleled scale of concerted and collaborative global central bank actions will ultimately be transmitted to the currency markets which subsequently will pose as the underlying current to financial market actions.

Figure 3: stockcharts.com: Falling US Dollar And Rising Stocks, Commodities and Treasury Yields

As governments continue to distort the market pricing process by providing subsidies, guarantees, fiscal spending and other interventionist measures, the pressures accrued from the imbalances will ultimately be vented on the world’s currency market which risks a cataclysmic collapse in the present monetary system.

Let me reiterate, this grandest experiment of the unbacked paper-digital money system has been 38 years old. If one would treasure the lessons of history, ALL paper money had been extinguished out of the propensity of the rulers to inflate or destroy the currency-mostly for political survival or wars, see our previous discussion Government Guarantees And the US Dollar Standard.

So those fervently praying for governments to “print money” as a way out of the present predicament or to “avoid a Japan” have been putting undue faith on a system which had temporarily weaved “short term” magic before, but at the cost of building a riskier economic and financial structure based on the exponential growth in systemic leverage and moral hazard, which only leads to worsening cyclical bubbles or worst a collapse in the world’s monetary architecture.

Yet policies that serve to uphold the economically unsustainable borrow, speculate and spend policies will ultimately meet its comeuppance. You can dream of printing away the economic crisis similar to Zimbabwe. But that dream we know only turned into a real life nightmare.

Yet, today’s global policy directions reflect on the very essence of why paper money has failed.

The present “boom” appears to be manifesting inflation as getting some “traction”.

As figure 3 shows, the Euro-weighted US dollar index (USD) has broken below its 200-day moving averages, which signals a regression to its long term bear market.

Some will interpret today’s phenomenon as the revival of risk appetite or the reawakening of the “animal spirits” especially when seen with rising yields of the long term US treasuries (TNX).

Some others will adduce market activities especially by the performances of the global stock markets (DJW) alongside rising commodity prices (oil broke above $55 and is now $58!) to prospective global economic recovery.

We hope both of these arguments are right because this will be the ideal “goldilocks” scenario.

From our end, we understand this “goldilocks” scenario as toothfairy economics simply because of the “the marginal utility of real goods and services divided by the marginal utility (mostly for portfolio and transactions purposes) of government liabilities” or inflation as defined by Professor John Hussman in our previous discussion Expect A Different Inflationary Environment.

In short, when more paper money is produced than real goods we essentially get inflation.

But think of it, if present trends will persist and inflation is indeed gaining traction, then rising commodities will essentially squeeze purchasing power of consumers and raise the cost of production for producers.

Meanwhile, rising interest rates will jeopardize or even defeat programs instituted by governments to ease debtor angst, especially in the crisis affected nations.

Aside, rising interest will translate to higher cost of maintaining or servicing debt for the government and the private sector.

So governments seem trapped in a fix; on one hand by allowing markets to function this will translate to the much dreaded (but needed) deflation, which policymakers won’t accept.

On the other hand, policies to pump money in the system will mean more inflation which essentially will undermine most of the programs that have been put in place to mend the dislocations brought upon by the present crisis.

More proof of inflation driving the currency markets in Asia which seems being transmitted to the stock markets? See figure 4.

Figure 4: Bloomberg: Bloomberg-JP Morgan Asia Dollar Index (yellow), MSCI AC ASIA PACIFIC (green)

When Asian Markets are on a rebound as shown by the Bloomberg’s MSCI ASIA PACIFIC [MXAP:IND-green], the Asian currency benchmark Bloomberg-JP Morgan Asia Dollar Index [ADXY:IND-yellow] goes positive-meaning regional currencies appreciate against the US dollar.

There appears to be a strong correlation between the activities in the stock markets and the region’s currency values possibly influenced by portfolio flows, relative economic growth, relative inflation and or yield differential expectations.

But I would like to remind you that currency markets aren’t free markets (no markets are actually free) and are subjected to repeated government manipulations directly (direct market operations) or indirectly (domestic inflationary policies).

Yes, today’s fiat paper money currency standard is a monopoly supplied by governments.

This makes currencies values vulnerable to political interferences which may induce short term aberrations where arguably market prices do not manifest efficiency.

Nevertheless, while imbalances can be deferred for sometime, in due course they get to be exposed by the natural forces of the market.

And applied to the Philippine Peso, in contrast to mainstream and popular predictions, we argued in 2009: Phisix and Peso Will Advance!, that the Peso like the Phisix will defy bearish projections, which had mostly been anchored on remittances and exports, made by mainstream experts who remain afflicted with rear view looking, ivory tower ensconced-laboratory based economic theories and an obsession with self-importance.

The Philippine Peso has been marginally up on a year to date basis with Friday’s close at Php 47.25 and quite distant yet to the Php 50-52 level predicted by the consensus of “experts”.

And based on the above premises, we expect the Peso to similarly reflect gains in the Phisix. In my view, the Peso will possibly appreciate towards the Php 45-46 level or better by the yearend.

And as a final word today’s boom in contrast to the 2003-2007 cycle which basically lasted more than 4 years maybe swifter, steeper and shorter.

Seeds of Hyperinflation Have Been Sown

``Many false arguments are used to defend inflationism. Least harmful is the claim that a moderate inflation does not do much harm. This has to be admitted. A small dose of poison is less pernicious than a large one. But this is no justification for administering the poison in the first place. It is claimed that in times of a grave emergency the use of means may be justified which in normal times would not be considered. But who is to decide whether the emergency is grave enough to warrant the application of dangerous measures? Every government and every political party in power is inclined to regard the difficulties it has to cope with as quite extraordinary and to conclude that any means for combatting them is justified. The drug addict, who says he will abstain from tomorrow on, will never conquer the drug habit. We have to adopt a sound policy today, not tomorrow.”-Ludwig von Mises, Interventionism: An Economic Analysis, Inflation and Credit Expansion

While “greenshoots” have been more evident in Asia and emerging markets than their OECD counterparts, as evidenced by rising reports of indices based on Purchasing Managers Index and bank lending, some have questioned the sustainability of these improvements.

For instance, acquisitions of oil and petroleum products allegedly haven’t been reflective of the economy’s demand and supply, here we quote CBI China (FT Alphaville)

``Most players expected bearish gasoil market in may amid weaker speculative demand and increased supplies. Speculative demand will probably plunge if the market gains no more support in may, but end-user demand is not likely to grow much amid gloomy economy. Meanwhile, oversupply will probably remain as supplies grow. When supplies from PetroChina and Sinopec are not seen to change, CNOOC Huizhou refinery is estimated to supply 200,000-300,000mt of gasoil to East and South China per month. Without much support from international crude, PetroChina and Sinopec may cut prices to promote sales in some regions, where they failed to fulfill their sales targets in April.

``There is little possibility for China to import any gasoil in May in view of negative import margin and weak demand from the domestic market. Meanwhile, Sinopec’s and PetroChina’s gasoil exports may be little changed from the previous three months, about 200,000-300,000mt altogether.” (emphasis added)

Moreover, China’s electricity consumption which serves as a key barometer of economic activities has equally registered a decline on a year to year basis in April (Xinhua).

Furthermore, energy bears point to the growing disconnect between rising oil prices and high inventory, see figure 5.

Figure 5: FT Alphavile: US Oil Inventories Nearly At The Brim

The Financial Times Alphaville quotes Goldman Sachs; ``Commodity prices cannot diverge for long from physical fundamentals as they are largely “spot” assets….As storage bridges the gap between today and the future, commodities that are easier to store, such as metals and agriculture, are more anticipatory.

``Thus, electricity followed by natural gas are the most spot or least anticipatory commodities given the difficulties in storing these commodities while base metals are generally the least spot or most anticipatory given their ease of storage, followed by agriculture and then oil.”

In other words, given the storage issues energy prices are supposed to reflect actual demand and supply.

But as we have earlier asserted experts tend to look at ONLY demand and supply of real goods frequently disregarding the demand and supply of money relative to real goods.

Left to markets, storage issues will find a remedy. And most likely rising oil prices could a manifestation of the diffusing liquidity in the system.

Proof?

In China, the surge in bank lending has mainly been about government induced lending rather than growth in the private sector activity, according to the Wall Street Journal (bold highlight mine),

``China’s state-controlled banks are clearly leading the lending charge, accounting for 50.5% of the new credit extended during the quarter. Foreign banks are, however, behaving more like they are elsewhere, and are not following their Chinese colleagues into the lending surge. Loans by foreign financial institutions declined by 26.4 billion yuan in the first quarter.

``The central bank’s breakdown of new medium- and long-term borrowing, the kind most likely to be used to pay for investment, shows that 50.1% went to infrastructure in the first quarter. That clearly reflects how banks are being pressed to give priority to government stimulus projects. But such lending has its own risks. “Recent bank lending has been concentrated in government projects which, while helping drive rapid investment, also requires evaluation of local governments’ ability to repay the debts,” the central bank said.

``Outside of stimulus projects, demand for credit is not as strong. Only 7.9% of new medium- and long-term lending went to manufacturing, and 11.2% to real estate development.”

Moreover, China continues to massively import iron ore which jumped 24% in April.

As we discussed in The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency and Has China Begun Preparing For The Crack-Up Boom? China appears to be heavily acquiring commodities mostly likely designed to diversify from its US dollar reserves holdings which could function as insurance against the risks of hyperinflation or have been consolidating its potential role as primary contender to the currency reserve hegemony, presently held by the US dollar or both.

But as far as the loose connections leaving experts in the quandary, for us they all seem like puzzles falling into place.

As Ludwig von Mises wrote in Interventionism: An Economic Analysis, Inflation and Credit Expansion, ``But on the other hand inflation cannot continue indefinitely. As soon as the public realizes that the government does not intend to stop inflation, that the quantity of money will continue to increase with no end in sight, and that consequently the money prices of all goods and services will continue to soar with no possibility of stopping them, everybody will tend to buy as much as possible and to keep his ready cash at a minimum. The keeping of cash under such conditions involves not only the costs usually called interest, but also considerable losses due to the decrease in the money’s purchasing power. The advantages of holding cash must be bought at sacrifices which appear so high that everybody restricts more and more his ready cash. During the great inflations of World War I, this development was termed “a flight to commodities” and the “crack-up boom.” The monetary system is then bound to collapse; a panic ensues; it ends in a complete devaluation of money Barter is substituted or a new kind of money is resorted to. Examples are the Continental Currency in 1781, the French Assignats in 1796, and the German Mark in 1923.”

For us, this means that the seeds for hyperinflation have been sown, and that those arguing for “timing” and the “inevitability” have been tunneling their market outlook based on Holy Grail economics as guide to investing.

Mr. Russell Napier, author of the Anatomy of the Bear Market seems to share our outlook, in an interview at the Financial Times quoted by FT Alphaville, we quote Mr. Napier (bold emphasis mine),

``The key three indicators that we’ve passed the risk of deflation are rising price of Treasury inflation protected securities, the rising price of commodities and the rising price of corporate bonds. This is not to say that this bounce is the end of the bear market…

And a decoupling with China?

Adds Mr. Napier, ``So I see inflation problems in a couple of years and I see problems with the Chinese not being as big a buyer of US treasuries simply because they will be having a great domestic consumption boom which means they’ll not run surpluses and buy these surpluses. And the crucial one people sometimes forget is the retirement of the babyboomers, the medicare costs in particular and the social security costs of this is going to be issuing a lot of treasuries into the future…

And the US will probably experience a fierce bear market in US treasuries aside from the excruciating effects to its economy due to rising interest rates…see figure 6.

Figure 6: Economagic: The End of the US Treasury Bull Market?

Again Mr. Napier, ``For the next couple of years people will see it as normalisation, if yields on Treasuries go to 4 or 4.5 per cent. People will say this is a normalisation of the treasury yield as we pass the deflation risk . There’ll be a great breath and sigh of relief that we’re going back into another business cycle, and when it looks like we may never get there equity prices will go up. But the final sting I believe is in the tail. The last treasury bear market lasted from 1946 -1981 and there’s no reason to suggest that this one will be any shorter.”

US Treasuries have been in a bullmarket since 1980s, the long cycle does indicate that an inflection point is imminent.

The last word from Mr. Warren Buffett during his latest Berkshire Hathaway’s Woodstock for Capitalists, ``Anybody who holds (US) dollar obligations from outside this country is going to get back less in purchasing power in the future”.