Which Market Is Telling the Truth?

Posted by Bill Bonner - Diary of a Rogue Economist

Share on Facebook

Tweet on Twitter

Stocks vs Bonds

Bill makes his prediction in the last paragraph of this excerpt from his most recent letter – Money Talks Editor 
 
Mixed Signals

Remember our prediction for the US economy? First Tokyo, then Buenos Aires. That was our guess when the crisis of 2008-09 began.

The idea was simple: The crisis would lead to economic stagnation a la Japan… which would eventually be resolved by government money-printing and inflation. 

Held up against the facts, that prediction is an obvious forgery. It is correct in the broad outlines of the last six years. But the details are missing… including some very important ones. 

Unlike Japan, the US stock market rallied. The bounce that we thought would be temporary and small turned out to be huge… and continues until today. Investors who took our advice successfully avoided one of the great bull markets of history. 

Will it last? Is it real? Who will have the last laugh? We don’t know. But for the moment, you will hear no satisfied giggling from this side of the trade. 

On the other hand, the economy did track Japan and continues to do so. 

Click to Enlarge

Stocks vs BondsIt is strange the way the two things diverged. There is the stock market – which seems to be telling us that we have an American-style revival going on. And there is the bond market – whose puny yields whisper to us in Japanese. 

The stock market is supposed to look ahead. Investors are supposed to anticipate changes in corporate earnings… which tend to come with higher revenue. Stock prices – at or near all-time highs – should be signaling better times ahead. 

A real recovery, though, would come to the stock market like an exterminating angel. It would mean higher interest rates and higher consumer prices – as more and more borrowers bid for limited resources. The stock market would soon retreat as fixed-rate investments gained in popularity. 

The bond market, where yields are falling, not rising, tells us to beware. It suggests that the economy is not really improving; demand for loans remains weak; inflation, too, will likely be subdued. 

What to make of it? 

Which market is telling the truth? 

Our guess is that we are still in Tokyo… with slow growth, low rates, an aging population, increasing debt and low consumer price inflation. The equity market, on the other hand, is a fake-out… an artifact of the biggest stock manipulation of all time. 

Since we are spending so much time there, dear readers may be interested in knowing more of what is going on in Japan. More tomorrow… 

Regards, 

Bill

Further Reading: The Fed’s stock market manipulation can’t last forever. That’s why Bonner & Partners senior analyst Braden Copeland created a simple 3-step roadmap to help protect your wealth before, during and after the coming equity market implosion. Be prepared when the bubble bursts. Find the full details here.