“They don't ring a bell at the top,” is an old aphorism of the Stock Market.
Its a way to say that market tops often come out of nowhere, and are unpredictable. But maybe, its just that we don't hear the bell. It may be ringing, but we just don't hear it.
I present for your consideration, a possible bell. A signal that has not occurred in the financial markets for 48 years. And when it came last time it portended one of the worst equity bear markets of all time.
This “bell” or indicator, it the price action of the 30 year US Treasury Bond. This bond is considered among the safest investments in the world, and one of the longest duration. As such it is the perfect sanctuary for those who are seeking long term safety.
Not sure about the financial future? invest in the Long Bond. Although your return is likely to be small, you have the absolute safety of the US Government, backing your investment.
Its not the return ON your principal, that these investors are looking for, its the return OF their principal, to paraphrase Will Rogers.
In Europe, Japan and around the world, this flight to safety has driven yields below zero. A negative yield, in pursuit of safety of principal.
Surprise: this move to safety has now also reached our shores.
Although the long bond has a nominally return above zero. Its real rate of return is now negative. The real rate of return is the return after calculating for inflation. And currently, the 30-year bond's yield is lower than the current level of inflation (as measured by the CPI-the Consumer Price Index).
The real rate of return on the long bond is now negative.
In In other words, in 30 years when the bond matures, you will receive less than you invested, in inflation-adjusted dollars.
Now all of this is quite personal to me. Because the last time this happened I had just graduated from the New York Institute of Finance and was a newly registered representative. A cub Stock Broker.
At the time the future looked bright. The Dow had topped the 1,000 marks and was floating on new highs. And it was precisely at that time, that the long bond flashed the same warning it is making today. The yield on the long bond dropped below the inflation rate.
And, like today, there was a lot of turmoil. We had seen riots in the street, and a huge campaign to end the Viet Nam War.
But markets held together, and little seemed to affect stocks. At least in the beginning.
But then little by little, the scales seemed to change.
Richard Nixon was the President, and he had taken some very big steps in terms of policy. New government agencies were created like OSHA, the Occupational Health and Safety Administration.
But perhaps most significantly, from a financial point of view, Nixon took the dollar off of the Gold Standard. For many, this took the basic safety net away from the currency. Now the dollar would float free.
Uncomfortable investors sought out the long bond. Bond yields fell as US Treasuries were snapped up by wary investors. Eventually, the Long Bond Yield fell below the inflation rate. Just as it is today.
That bell had rung.
Withing 2 years, Nixon would be driven from office, and the Stock Market would begin one of the worst Bear Markets of the 20th century.
A Bear Market, as we noted last week, which would not fully recover for 6 long years.
Again today, for the first time in half a century, that bell is ringing once again. The long bond is yielding less than the rate of inflation.