The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

25 March 2010

The Great Conundrum of 2010

I would not isolate yesterday as the bond market’s “turning point” because the trend to lower bond prices and higher yields has been in force for ~18 months now; yesterday’s action is just another step along the way (to higher yields). And increased peril to valuation measures for equities.

Money flows from one asset class to another (to bonds from equities, in your example) is... well, let’s name it the Great Conundrum of 2010. All asset classes have been bid to sky high valuations, well beyond normal, traditional, and typical measures. This situation could be due to any number of causes, but I prefer the simple: a global hunt by portfolio managers for yield in a low (or no) yield environment. The result is high prices/lessened value; bottom line = increased risk.

Thus, the question: where does the money (liquidation funds) flow, if it does not follow the traditional path? My answer, such as it is: First a reversal of the carry trade positions, second a rush into those reversal flows, and third... well, I do not know.

I will explain the preceding paragraph:
1) Reverse the carry trade; for example, long resources/short US$ becomes sell resources/buy US$ (cover short). This action should bring some disarray (sloppy price action or decline), which means
2) A new carry trade: short resources/LONG US$.

Thus begets a change and a new trend, now (or finally) obvious to all market participants.

But that ‘answer’ itself is too facile: in a fiat currency world, the US$ rises against other declining currencies... until the game of musical chairs ends. What happens then? Your guess is as good as mine.

Full Disclosure: This post is my reply as part of a conversation on Investment Poetry. Join the discussions here.
-- David M Gordon / The Deipnosophist


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