22, 2007--Are the bull markets over? Can you stick a fork in them? Are they done? The bull markets I am referring to are stocks, bonds and commodities, each of which have been bubble-like for for years, rising in value with such conviction that investors and traders became complacent, convinced values would continue rising. But the loud popping sound heard loud and clear in recent days is a telling indication the air is leaking from each bubble.
And when air leaks from a bubble, the law of gravity takes over quickly. In the four weeks leading up to June 12, the 10 year US Treasury bond yields soared from 4.7 percent to 5.25 percent while prices fell 10.5 percent. Understand, that is a market viewed as the ultimate in safety. Certainly, prices have now stabilized but from a fundamental and psychological viewpoint, nothing much has changed. The market is a wreck, the bubble popped and rallies are being sold rather than breaks being bought.
If bond prices fall low enough and rates rise high enough it will ravage stocks and commodities and in particular the metal markets. Popping the bond bubble will cause other bubbles to leak as well.
This year is the 20th anniversary of the, Great Stock Market Crash of 1987. From August 25, to October 19, 1987, the Dow Jones Industrial Averages fell from a then all time high of of 2,722.40 to 1,738.74 for a loss of 36 percent. More than half of that hemorrhaging, 508 points, occurred on Monday, October 19. In the view of many, the massive collapse in the dow twenty years this ago this Fall, was due to bond prices falling and interest rates rising.
In April, 1987 Treasury bond prices peaked out just under 100 but plunged to 76 by October, for a loss of nearly 24 full points. The only reason bond prices bottomed that October, is the Fed began to lower rates because the stock market had collapsed. The Fed of '87 was not about to repeat the mistakes made in 1929.
In ‘29, when the stock market collapsed, rates were actually first raised 465 days before the dow peaked out. The theory was higher rates will cool speculation and bring about stability in the economy. Instead, the higher rates killed economic growth and in turn created the Great Depression that lasted for a decade. The lesson of '29? In a crisis, lower rates never raise them!
This year, bond prices peaked in late February, just under the 114 level and a few weeks ago hit a near term bottom just under 105 for a loss of nine full points. Compared to the 24 full point loss with bond prices seen in 87, this year's loss appears meager. Nonetheless, in a four week span bond prices shed 10.5 percent in value which is enormous considering it is a market viewed as the ultimate in safely.
Thus far, the Dow is holding up well in face the carnage that took place with bond in the weeks leading up to June 12. Twice the dow rallied and poked above the 13800 level while falling no lower than 13380 on a closing basis. As long as that low point is not violated, the dow could rise further.
The CRB index, which is to the commodity markets as the dow is to the equity markets is also holding up well in face of a 10.5 percent drop in bond prices. The widely followed index posted a new all time historic high on Monday, a bit over 416 but plunged steeply into Friday, ending near 408. But as long as the 400 level is not violated to the downside, it too could rise further.
But the, "it too could rise further" forecast rests entirely with the bond market. If rates continue to rise, history is likely to repeat itself with the recent lows in the dow and the CRB violated to the downside. You will know if and when those levels are violated as the popping sound will be deafening.
I do not know and neither does anyone else if the bull markets for stocks and commodities are finished. But the bond market that has been rising for 20 years has changed from a bull to a bear. Interest rates are no longer on the decline. They are now on the rise and that bodes ill for paper and hard asset markets.
If, at some point, the US begins to slip into a recession or another stock market crash similar to '29 or '87, unfolds, the Fed will be quick to lower rates and bond prices will once more turn higher. In the absence of such a scenario it seems logical to assume that, "as bonds go, so go all other markets."
Feel free to contact me at 406-682-5010 for more of my ideas regarding paper and hard assets.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)