Years ago, I recall attending a presentation given by a luminary in the world of corporate bond investing. His opening slide was a picture of a stick man standing on top of a globe. The message was that every direction he could look was down. I have that view of the bond market today. I believe a secular bear market will develop soon, if it has not already. The last one began in the late 1940s in conditions similar to what we see now. It lasted more than thirty years. Bond investors had negative annual returns in about a third of those years. On a real basis, secular bond bear markets historically experience real returns every bit as bad as secular equity bear markets. Investors get fooled by the lower nominal volatility of bonds, but still lose a lot to inflation. Be wary of the bond market.
Gold is controversial right now. Despite very easy Fed policy, it’s been sagging. Gold likes negative real interest rates, and a weak dollar. I believe the problem for gold has been that real rates have been going up over the last six months, though they are still pretty low. Also, the dollar has been firmer. Neither is usually very supportive of higher gold prices. Plus, there simply have been other things to do (equities). Last, I’ll also note that commodity bull markets and equity bull markets have displayed almost no overlap historically, so it makes some sense that if we are heading into a better set of conditions for equity investing (and I believe we are) the commodity bull market is likely to be over.
Lately I am struck by how deeply mean reversion seems to have set in among investors. As we close in on the market making new highs there seems near disbelief that this can happen. I will concede that punching out of a near thirteen year trading range can take more than one try, but I believe it is likely to happen in 2013. The shape of the treasury yield curve is a very important indicator. It’s very steep, and steep yield curves do not presage recession, flat or inverted curves typically do. Historically, equities have often done very well in the steep curve conditions we have now. It signals better economic conditions are coming, though they may not be here yet. That’s why I am not troubled by recent economic conditions. Historically, equities often go up a lot when the economy is weak. By the time it is strong the best returns often will have passed, and Fed action will present a headwind.