U.S. at WAR! - stocks and bonds battle

As the table nearby suggests, the Dow Jones stock average (black line with blue under) and the 10-year Treasury yield (green line) were behaving quite nicely, in a traditional sympathy, for much of 2011... but delinked a few weeks ago. Since which, Treasuries rallied, sending yields down nearly 15 percent in relative terms, but stocks have declined only 5 percent relative to their highs.

(A comparison of Treasuries to the S & P, and even the utilities index, yields much the same result -- though the utilities continue a little stronger than the broader indexes, affirming the suggestion that a. many investors expect lower interest rates, and b. there is an appetite for low-risk high-yield investments -- or at least, investments that are perceived that way.)

It's suggestive evidence, either that we're in a new trend, or that there's been a temporary disconnect, a "gap" or contest that's likely to be resolved sooner or later. Which situation are we in, and which will prevail -- i.e., what's more ephemeral and temporary, the bond rally, or the lesser weakness in stocks.

1. We've commented in recent days about the reasons the slump in stocks may be the kind of mild adjustment within a longer uptrend that one just has to learn to expect from the markets. Ec Seykota, Jesse Livermore, and others -- not to mention Damon Vickers -- have all explained why at much greater depth. But, especially in light of the bond rally we've seen -- much stronger than the selloff in stocks -- this is just another piece of "bad news" that many traders would expect to send stock markets down much further if we were at a panic point.

2. As to the bond rally, well, if you believe inflation rates over the next 10 years are likely to be in the 0-1 percent range, I guess a 10-year yield of about 3 percent may make some sense. Especially if you believe in the promises of U.S. politicians -- take a look at an actual bond, sometime; it turns out it's a "promise" to pay by our politicians; hmmmm -- to make good on the debts the U.S. has been accumulating like some kind of drunken sailer at a Korn concert. Yah, maybe U.S. Treasuries are a great buy, and the yield is on its way to 2 percent, 1 percent. We're on our way back to the gold standard. And, yes, Virginia, there is a Santa Clause.

Is there a way to invest this? We don't recommend it. This is the kind of move you invest if you are a billionaire fund manager and you have Dave Smick, a future chairman of the Brazilian Central Bank, former Fed governors, and others able to alert you to the hints and information they can glean about the likely moves of the U.S. Fed and foreign central banks.

But it may help you to keep your calm, and your bearings, as the war resolves itself in the coming weeks.  

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