On the financial playground, long-term bonds are generally the last picked for the winning team -- well behind equities, commodities, high-yield (junk) bonds, even the barely established emerging markets. The reason being: the amount of time it takes to actually reap the fruits of your return.
Hence, the notion that treasuries are investment "redwood seeds," while other, riskier assets are "kudzu weeds."
BUT, as a January 5, 2012 CNBC article reveals, the asset that supposedly nobody loves has outperformed them all. Here, the article writes:
"Despite a reputation for being a slow-growing alternative to stocks, bonds just passed stocks' long-term performance over the past 30 years... No one thought the tortoise could catch up, and it just did."
"No one" in the mainstream, that is. There, the usual experts fell into one of two categories: Bulls AND Hyperinflationists. Both of which saw the odds of an outperforming bond market equal to spotting Big Foot. See for yourself:
- The Bulls: Believed in "Reflation" of the global economy. Therefore, long-term bonds were a waste of portfolio space while the rising tide of recovery would lift the returns on higher-yielding assets.
That hasn't happened.
- The "Hyperinflationists": Saw the Fed's largest inflation-creating campaign in recent history -- care of two rounds of quantitative easing that pumped $13 trillion (90%-10% of annual GDP) into the fledgling finanical system -- as the ultimate adrenalin shot for yields.
That never happened, either. In fact, rates on the 10-year Treasury note are BELOW where they were since the 2007 financial implosion (5% versus 1.9%).
Bottom line: Both groups were caught like a deer in headlights by the continual drop in bond yields. But there was a third group that saw the trend coming from a mile away: The "Deflationists" at Elliott Wave International. We saw that despite the Federal Reserve's rate-slashing crusade to a record low of 0-.25%, the demand for and issuance of debt would DECREASE.
And, as the following charts from the federalreserve.gov show, the total amount of outstanding consumer debt AND mortgage debt is indeed lower today than it was at the start of the financial crisis:
-- AND --
An increase in easy money = a decrease in debt? It's counterintuitive to mainstream economics. But, as early as 2002, in the first edition of his best-selling book "Conquer the Crash," EWI President Bob Prechter laid out the exact script in this detail:
"The primary precondition of deflation is a major societal buildup in the extension of credit (and its flip side, the assumption of debt). When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. These behaviors reduce the 'velocity' of money, i.e. the speed with which it circulates to make purchases, thus putting downside pressure on prices."
Prechter also revealed a historic analog of this boom-bust liquidity cycle: the Kondratieff Cycle. He identified the Kondratieff Cycle in this 200-year chart of T-bond yields and wrote: "Since total borrowing contracts during deflation, prime interest rates fall."
Flash ahead: This newly updated chart shows how T-Bond yields have continued lower since the original publication:
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