Wednesday, November 25, 2009

Just Catching On

Today must be MarketWatch day.

Mark Hulbert has a very good article on the divergence seen between Treasury bill yields and equities. In essence, T-bill yields are at the same level they were during the Lehman Brothers meltdown, when the fate of the world was at risk due to the possibility of a financial meltdown in the U.S.

I made a similar observation (with longer dated Treasury bonds) in an article written on August 26, 2009 entitled "Long Term Treasury Yields: Someone Is Going To Be Wrong". Once again, it was the divergence between Treasury yields, which were headed lower, and stocks, which were headed higher, that caught my attention. After all, stocks were forecasting economic strength and lower yields would seem to suggest economic weakness. Both markets cannot be right. Or can they?

Hulbert does ask the right question:

"But why should rates be just as low today? After all, it would certainly appear as though today's economic and financial conditions couldn't be more different."

"Take the stock market, for example, which is coming off the strongest eight-month rally in decades. The S&P 500 index (SPX 1,108, +2.53, +0.23%), in fact, is up some 66% since the March 9 market low. Benchmarks of secondary stocks have performed even better, with the Wilshire US Micro-Cap Index up nearly 100% since the bear market's lows."

Hulbert goes on to answer his own question with a question:

This behavior would seem to indicate that investors have become less and less worried about economic and financial risks. Yet, if that were the case, why would T-Bill yields be back down at levels suggesting that those risks are just as bad today as they were at the heights of financial panic one year ago?

Let's be clear, Hulbert doesn't have the answer and neither does famed newsletter writer, Richard Russell, who calls the situation "the mysterious disconnect". However, I do like Hulbert's choice of words that one of these two markets is "out of touch of with reality" and that given the vastness of both markets, it is very "sobering" to ponder that a lot of people are going to be wrong.


Anonymous said...

This guy seems to have a good explanation?

Guy M. Lerner said...


Thanks for the link; he makes a good point and I would agree (and show sometime this week) that the dollar is at risk of reversing as well some of the commodity currencies and etf's