Can You Hear It?

The bond market is shouting at you this morning.

The benchmark ten-year Treasury Note just traded below a 2% yield. If you were alive the last time that happened, you qualify for Medicare.

Throughout the liquidity crisis of 2008, rates on that benchmark bond didn’t get that low.  Not when Lehman collapsed, not when the US economy was losing 800,000 jobs a month, not when the Treasury was “forced” to guarantee even commercial paper issued by corporations for money market fund holders.

From that Bloomberg article:

“Ten-year note yields dropped 16 basis points, or 0.16 percentage point, to 2.01 percent at 10:09 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 rose 1 14/32, or $14.38 per $1,000 face amount, to 101 2/32. The yields touched the record low of 1.9735 percent, dropping below 2 percent for the first time. “

If you heard it, did you know what it was trying to tell you?

As every major government bond market around the world rallies, and every major stock market declines, the message is clear to bond mavens.  Global deflation is that shadowy shape dead ahead of the world economy, and it is almost certainly going to tear a hole below the waterline.

I know that some readers are going to say “Wait.  The gold market is saying inflation, not deflation.”

That’s not how I see it.  I see the negative real rate on cash parked in T-bills (three month yield 0%, 12 month yield 0.08%) as a clear indication that prices are going down, not up.  As more and more market participants equate gold to another currency, they are simply diversifying their cash into that currency along with Dollars, Pounds, Swiss Francs, Yen and Euros.  If you consider the total bullion supply, the allocation into gold is less than $10 trillion worldwide, a small fraction of the total debt held as investment.

The key to understanding the mixed signals of gold and the bond market(s) is to realize that boiling every bit of information in the market down to a single price eliminates much of the information.  Once that information is reduced to a single data point, you can’t actually re-create it.  We’re left guessing at what forces are at work that put the prices where they are.

The one thing that makes no sense is to look at one market (eg gold) and conclude that there is inflation ahead while ignoring other larger markets that are telling the opposite story.

I believe the rising price of gold is telling us that its relative value as a currency is perceived to be strong enough to overcome the general decline in prices for the stuff we need in the real world.

But that “stuff” is going down in price for the immediate foreseeable future.  If it weren’t going down (inflation ahead) the investors buying bonds would buy the stuff (houses, real estate, oil, etc.) instead of bonds.  So I posit that there is downward pressure on the price of gold due to deflation, presently more than offset by the non-sovereign currency nature of the barbaric relic.



41 Responses to Can You Hear It?

  1. Michael says:

    I really appreciate your thoughts in this blog. Where do you see mortgage rates in the next few months? Today’s 30-year fixed is 4.25%; last week was 4.19%. Are rates going still lower in your opinion? Thank you, Michael

    • hhill51 says:

      I try to avoid making predictions, but this one is already in the bag. Mortgage rates are already down from the levels you cited. In the latest rate survey, Freddie posted a 30-year fixed rate average of 4.15% for the week ending today. I’m sure spot rates are lower than that this afternoon. Some lenders only put out rates each morning, so check with your lender tomorrow. If they don’t quote at least 4.125%, call another lender.
      Here’s the bloomberg article on the latest weekly review of rates.

  2. Conscience of a Conservative says:

    I like many people are thinking much the same things. My conclusions.
    *Bond market has been a better predictor than stock market
    *Gold & Treasuries represent a risk-off trade
    *The bond market is not currently focusing on positive real returns but return of principal/safety
    *Gold is the only hedge against the dollar as CDS on the U.S. is priced in Euros
    *While the risk of double digit inflation is low now the risk is that all the new dollars
    create inflation later in the decade and the U.S. can’t stomach the debt burden of
    servicing our debt at higher rates, so the thinking is more rapid depreciation of our
    currency later in the decade.

    So for now the risk trade is off. And one more thought…Since a medium term bond is the sum of multiple shorter term bond rates the Fed actually does have control over not just short term rates, but medium term ones.

  3. Frank says:

    In a deflation maney becomes more valuable relative to other goods. If gold is money then the rising gold price is a sign of deflation. Gold is getting more valuable relative to other goods. Gold also has the benefit of not being anyone elses liability. It is money free and clear.

  4. Pepsi says:

    Nice to read your opinion. Inflation and deflation are always happening at the same time but of course in different asset classes. But from an overall view we are experiencing inflation and at a rate far greater than government statistics state. But like all nations we have a printing press to erode the purchasing power of the dollar and the government has been using it quite effectively. So, my view is that we will have a hyperinflationary depression.

  5. Joe says:

    Uh, then why is silver going up?

  6. richard says:

    The feds don’t have control of anything! They are flying keynesian blind! Doc

  7. richard says:

    Mind on your money is on target. We are well into the low interest rate fed induced “last?” fed tango DEPRESSION!!! Doc

  8. disposable says:

    So, why are food prices going up at an annualized rate of around 10%? The problem with people quoting inflation/deflation statistics is that they’re usually quoting them for things that people don’t use every day, like gasoline and food. Those, for some paradoxical reason, are left out of the inflation statistics due to their “volatility.” Yeah, that and they blow up whatever line is being sold about “mild inflation” or even “deflation.”

  9. RoberB says:

    But it’s not just one thing, gold.
    Since Dec ’08 the CRB-CCI index has doubled, gold has almost tripled, silver has more than quadupled, palladium has quintupled, and for government ‘budget’ discussions, trillion has become the new billion. If you can posit that there will be a massive decrease in the money supply to pay for all this, then we would have deflation and the prices of everything would collapse accordingly. Incidentally, that is just like the effect of having a ‘new’ dollar which is, say, 1/1000 of the old dollar. But the supply of ‘dollars’ is unlimited, and the government will not hesitate to create them.
    If you also propose “[that] If [stuff] weren’t going down [in the future] [ … ] the investors buying bonds would buy the stuff (houses, real estate, oil, etc.) instead of bonds”, but I would think that the players buying bonds (including the buyers of last resort, the FED, the government, have no need for ‘stuff’ (i.e. they have it all and they are relatively few in number anyway), they are either speculators or market fixers (i.e. government) or they just want to park their money somewhere until they figure out which wave to catch next, the mark of every economy where the merits of working and saving have been abandoned. If interest rates are zero, then the proceeds of speculation become the new ‘interest’. The ordinary people who actually buy stuff don’t buy too many bonds – they buy stuff they need to live until hyperinflation hits the streets and they can’t buy anything with their worthless money. One only has to think of past inflationary economies such as Brazil, where the daily preoccupation of the masses was whether to speculate on cooking oil or telephones or gasoline to survive.

    So it seems to me, rather than deflation, a hyperinflationary depression a la Zimbabwe is a more likely scenario. They managed to stop the hyperinflation almost instantly, as have others, by adopting the US dollar. Should the dollar become worthless, what could we adopt of which there would be an adequate supply that people could accept with confidence? A ‘new’ dollar, convertible into gold (and possibly silver), just like the old days? The common objection is that there’s not enough gold, but that’s not right. A new car cost as little as 10 oz of gold in the early 1900s and until the 1930s. Allowing for population increase and the concomitant increase in volumes of production for everything else, maybe one ounce would buy you a car.
    After all, in Zim, people adjusted very quickly to paying 10 dollars for a flash drive instead of the 200 trillion dollars it cost the week before.

  10. Joe says:

    Listen, if interest rates in the bond market were fully driven by investors, then there MIGHT be a tiny bit of validity to what has been said here. But interest rates are being kept artificially low by central banks; and they do this by printing money to buy up whatever they need to in order to accomplish the task. Helping them out lately has been a huge herd of weak minded fools who only have their misguided emotions to lead them in making “investment” decisions, and their “decision” was to pile into “the safety of” bonds and help drive rates lower. I don’t know how, so deep into this financial crisis, so many are still so totally clueless. The world wide bond market is the worst place to be right now. Period!!! It is at or approaching $100 trillion in size and the world cannot sustain it with a GDP of only $60 trillion. This is simple elementary school math here. Either 50% to 75% of the bond market is going to vaporize, or its going to get inflated away by having the world’s GDP triple or quadruple in size (relative to the bond market). Right now, the central banks are working on inflating it away. But, it takes a bit of time before any new money added to the system can show its effect in higher prices. The smart money is going into hard assets right now such as bullion. When the world wide bond market collapses, and it WILL collapse, all these fools who own bonds are going to be completely stunned…. it will be too late to convert holdings into tangible assets, which by the way will have risen in price….

    • Ken says:


      You hit the nail on the head! These interest rates mean nothing in light of prepetual Fed buying with funny money. Also the author never mentioned why in 2008 gold went down and this time gold is going up along with lowered Tbill interest rates. Therein lies your answer.

      • Joe says:

        Not only the Federal Reserve is buying bonds, but the ECB and China and Japan and Canada and…

        This commentary here, like so many that originate from the US, almost always assume that the US continues to be the big financial powerhouse and center of financial world of glory days long gone. Its not. For example, gold is going up because of China, India, Europe and others – not because of the US. So far US investors have only played a minor role. As for what is happening to stocks and bonds lately, here is an explanation from someone who is extremely successful in the world of investing: … search for Eric Sprott

  11. Agent P says:

    I can’t eat a house, real estate, oil or bonds. The deflation/inflation debate is a fools errand for those whom ‘definitions’ represent the Alpha and the Omega… If you are living in the real world, you get reality-smack every day when you go to purchase items needed for sustenance.

    • hhill51 says:

      Thanks for the follow-up column idea.
      I can’t tell you how many times I’ve said “I can’t eat gold.”… but I do wonder how eating will keep you alive without a house when the temperature drops to zero, or how you “go to purchase items needed for sustenance” without oil (gasoline).

    • You can’t eat paper dollars either. A medium of exchange will rapidly be adapted in any scenario. Gold and silver are more likely than anyhting else to be that medium.

  12. phybrr says:

    Those who say “I can’t eat gold” must rather eat fiat dollars. I hope the red ink
    is not toxic.

  13. K.C.Valanis says:

    Creators of paper ‘money’ have an interest in keeping bonds up, by buying them, and the price of gold down, by shorting or selling it. At the tipping point, bonds will collapse and/or the price of gold will explode, leaving the blind holding the (empty) bag at the corner of Wall Street and Poverty Street.

  14. Steve C says:

    “the allocation into gold is less than $10 trillion worldwide, a small fraction of the total debt held as investment” – What he is missing is that gold is not a currency that is created by issuing debt. It’s the real deal whereas currency based on debt is disintegrating because it has no real value.

    Yes, we have deflation in capital assets but that is not the case with food, fuel, medicine and other items that are necessary for survival. It’s just the markets way of pointing out what is important.

  15. Hope-enomics says:

    A side of the coin. I perhaps am naivve and have a bit too simplistic perspective, but. Uncertainty and the lack of clear direction is what is effecting North American Markets. Oops, I never thought of that, is what is effecting Euro markets. Both are having similar effects. No faith. Fear and capital preservation. IMO the Bond Market is maintaining and increasing demand because of the increased degree of certainty, the risk off reduced downside is driving dollars to bonds.

    If this continues for a length of time with no clarity, then deflation becomes more of a risk and the bond market today may be interpreted to have forcasted it. IMO, stupidity. and politics are the risk here. If more clarity surfaces soon enough, however, we will see yields rise, prices fall, and a flow back into equities.

    The economies in the US and Canada are growing slowly. Companies even retail corps are increasing revenues and profits…. Investors have no faith and they have no faith because mainly, the US lacks direction. Hope and Change better start happening quick, and the Tea cups better either fall off the table or be drained so a direction, any direction can be set. The pickets must be starting to hurt.

    I certainly am not 100% positive, but this simplistic view makes the most sense to me.

  16. New normal says:

    No it’s not deflation. The reason treasury notes yields are going so low is due to to massive amounts of dollars trying to find a market liquid enough to park. That is all. Not due to this myth of deflation. Maybe you haven’t gone shopping recently or haven’t been in a meeting with your boss where he tells you that there will be no wage increase this year to go with the last 3-4 years. We are in a stagflationary enviroment. The dollar weakens, food and energy prices rise, but the jobs market remains awful. That’s what is happening now.

    • hhill51 says:

      Sorry, but that just doesn’t wash. If it was “parking” they needed, investors would be buying T-bills. Certainly not Notes with long duration…. Every basis point of rate increase is a large hit to capital. Maybe floating-rate bonds if T-bills at negative yield are too much to stomach. But not fixed-rate 10-year bonds. Just doesn’t happen as a liquidity play.
      The conversation with the boss is just another indication of the deflation I was talking about. I would guess that, along with the zero percent raise in spite of more experience in the job, you (and everyone else) gets the bad news that the deductible, copays, and employee contribution for health insurance is increasing each of those past four years. In other words, annual pay cuts. The bond market says more of the same to come.

  17. the rooster says:

    Insane …. it’s not inflation or deflation. It’s stagflation. The bond market is nothing but an illusion of deflation. Central banks are buying bonds to maintain some aspect of liquidity in the market. It’s artificial.

    • hhill51 says:

      Have you looked at the monthly Fed balance sheet reports? Their purchases are very limited at the long end of the curve. Your assertion that the central banks are pushing the long end rates to these levels just doesn’t hold up when you look at the evidence. There were no central banks buying those Disney 10-year and 30-year bonds issued last week, agreed?

  18. TnAndy says:

    The 10 year has NEVER traded below 2% ?

    1.67 is the historic low in 1945.

  19. Mike says:

    The conclusions you have drawn in this piece are “Old Paradigm.” In a free market, bond prices reflect the bond vigilante’s view as to whether inflation is baked into the cake. In a managed market, such as we currently have, where the Fed (by it’s own admission) is buying it’s own bonds to keep rates low, the only indicator that works is gold (and to a lesser degree silver.) That’s why the central banks of the world hate gold so much, and why there is such a concerted effort to minimize it. Ben Bernanke cannot admit that gold is money, because he must do all he can to de-legitimize it. And yet gold remains the only monetary asset that is not someone else’s liability. Real gold that is, not paper gold. Paper gold is no better than paper money. Today, the price of bonds only reflect the ability of central banks to print more money. The smart money has caught on, hence the move into real assets.

  20. the rooster says:

    How difficult would it be for bond rates to go lower on the basis of central banks intervention with money-from-nothing ? Not very ! We are being pushed to gold on the basis of pain (the stick). There is a monetary paradigm shift to real assets now that they a) float in price to reflect real market fundamentals & b) the weight can be digitized and ownership title (as a fully backed currency) can be transferred between parties via the internet. People rarely respond to “carrots” and anything that influences from a top-down point of view must not dictate the change. It has to be bottom-up and market driven because any shift requires that neither system crashes, the legacy system (USD) or the newer system (real-time gold as money).

    The floating USD is a currency within the fiat paradigm but it also has a very strategic role within the real-time gold-as-money paradigm. The dollar is the real-time measure that allows us to measure how much gold to make payment with (in weight) when trading for something that is almost always priced in a fiat currency.

    The strategy of Bretton Woods was primarily structural in nature to get us all on the same chessboard and introduce us into a real-time paradigm when , sometime thereafter, gold could be reintroduced as a real-time currency. Debt free store of value has now been married with instant global liquidity. Can it possibly be any better ?

    Real-time commodity based payment processors are the way of the future. You cannot pour new wine into old wineskins …… so true.

    • hhill51 says:

      You’re stealing my thunder a bit. I agree that commodities (specifically energy) is the likely best replacement for single-nation currency when the strain on the reserve currency status gets too extreme.

      • the rooster says:

        The choice of monetary commodities is important. Should a society choose to use a commodity that has high utility value in a monetary application (in reserve) ??? Keep in mind that the final “lynchpin” of credibility is the market’s ability to call the commodity for delivery. This is where people can often lose the idea of precious metals as a form of currency because value is often translated to utility value. The less utility (non-financial) value that a commodity has, the better suited it is to being a good form of money. Can you imagine warehousing huge amounts of copper and removing it from its utility demands ? In actual fact, if gold had no utility value at all, it would be even better suited than it is at present. It is only gold’s intrinsic value that is important and that intrinsic value comes back to the fact that its production as a finished monetary product subscribes to the law of weights and measures (supply and demand) and cannot be created from “pen & ink”. It is in this way that it maintains some aspect of good supply discipline and is not overproduced.

        When gold trades in real-time as it does now, there can never be too little gold in the world, there can only be too much ….. which , from a practical point of view, is highly unlikely. Even then, the trade value can be adjusted by market forces to suit the market.

  21. Conscience of a Conservative says:

    Not sure I’d want Oil, coal or gas as a store of value. It’s value is dependent on economic activity and gov’t carbon regulations. Lastly unlike gold these items get consumed when used.

    • hhill51 says:

      Check out the energy statistics at You’ll see that every major sector of energy users and energy production is convertible into BTU’s. It’s the physics of conversion that makes it interesting to me. For example, they now have solar/wind BTU output statistics, even though they basically didn’t exist when the series started. In other words, it’s actual wealth, real value, and it can be delivered any number of ways. It also happens to grow in use and availability as the economy grows. Check back later for a new post that develops the concept a bit more.

  22. the rooster says:

    That real wealth principle is already in action and has been since the mid-90’s with the advent of gold backed digital; currency where the digitised currency is actually the ownership title to gold bullion in reserve. The reserve is a distinct service from the payment processing service (user/account interface). One of the historical problems of the classic gold standard was that banks had too much consolidated power in terms of holding the gold and doing the books (accounting). Business models are easily decentralized now.

    Had it not been for the advent of the free floating fiat dollar (1971), then real-time gold would have not come about. The dollar’s role was not ultimately destined to be a currency as we think of it, but as a measure and a servant to weighted bullion …. and other commodities if you like.

    Think of what could be done with all those commodity based ETF’s with the simple addition of e-commerce so you can transfer the real wealth (assuming it’s really backed, another story) from your ETF to someone else, as a weighted currency.

  23. Kevin Churchill says:

    The last time we had a peak like this in gold was in the the early 80’s before Paul Volker busted inflation with high interest rates. This time there is an apparent reverse correlation between interest rates and the price of gold. So what’s different? Mostly the apparent desire on the part of the Fed to ignore the half of it’s mandate relating to inflation. There is no doubt in my mind that stagflation is with us. Inflation is exportable, so I fully expect to see the next IPOD touch or IPAD cost $10-20 more than the current one. Rents are already increasing, and so is labor. I now have to pay my yard help $9/hr versus $8 two years ago. Statistics in other countries (UK, CHina) point to persistent and accelerating inflation.
    Sometimes it helps to look a the flip side of a issue. Consider the 80’s, when bonds were scorned as an investment (hence the high rates). Were bonds a ‘buy’ then? In hindsight we know the UST30yr at 15% was the buy of the decade. The current fever for UST debt at insanely low yields is the flip side of that period and will in due course be seen to be just as wrong.

    • the rooster says:

      kevin … the actions of “the stick” in creating inflation are part’n parcel of “the script”. Something has to move us over to gold now that we are in the information age and can use gold properly on the basis of being able to “piece up” enhanced values” and distribute gold ownership title as a currency. See my other posts. You’ll eventually come to realize that the dollar’s ultimate role is not as a currency at all, but as a real-time measure for real-time weighted gold money of the 21st century.

      Some evils are necessary and are included in “the script”. They’re part of the process.

      You cannot pour new wine into old wineskins.

  24. madmarc says:

    No offense to those who define deflation according to specific occurences in the economy, but do any of you buy groceries, or gasoline, or pay utilities? Naturally these are removed from most inflationary indices, but all are higher, in some cases double or triple digits, at least where I live (Ontario). Of course, Canada is completely immune from the economic woes of the rest of the world, we are told, in spite of record personal debt and dizzying government deficit spending.

    Inflation is in single digits, you say? I pay 6 bucks for a gallon of milk, 4 for a dozen eggs, and forget meat, it has exploded. Oil has dropped around $20 a barrel, true, but gas prices stay stupidly high, Please don’t waste your breath comparing fuel prices here to Europe or anywhere else, I am illustrating a point, that inflation is already here, even if only in the things that people use every day. Cars, homes, washing machines, big screens are all cheap, but how often do you replace them? Something to consider.

  25. the rooster says:

    MadMarc … Good points. My observation of the stagflation that’s taking place is that large ticket items that have a tendency of being leveraged in debt are falling in price, while consumables are experiencing the bubble in the credit markets and higher prices.

    Gold is the perfect “sponge” …. or near perfect.

  26. The rising gold and silver dollar values of the last decade have been telling us that something is fishy in the economy overall.

  27. the rooster says:

    I understand the use of “fishy” …….it’s actually “Christian” is it not ? There appears to be a script that’s being followed and adhered to and that script has good and bad roles, alike. Some evils are necessary. Follow the script. The irony is that those with the bad roles are the ones doing the outstanding job of doing so, wouldn’t you say ?

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