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Eric,


I appreciate your insights on your daily commentaries. Your email from last night highlighted the US long term bond indices. I have never understood bonds so I do not understand the implications of the breaking of the long term trends, especially as these are "total return" and "capital appreciation" indices. If these were simply bond price charts, the implications would be clear enough. Would a trend reversal be due more to lower bond prices, a change in interest rates, or what?


Joe

This is an important discussion

I have come to view long-term trend lines, especially total return indices, as the graphical representations of investment decision-making. Positive sloping trend lines represent, in general, inflows. Negative sloping ones illustrate outflows. When trend lines fail, it implies that the money flows, marginal decision-making, have changed. For example, the waffling trend line in the bond market suggests that drivers of the great bull market, the way people view bonds, are beginning to change.

What was once purchased without question will be questioned as the signs of a recognized emerge. The more definable the top, the more investors begin to alter their decision making. This, in turn, alters money flows. It starts with a trickle, but can turn into a torrent as the trend direction becomes more obvious.

I think of trend reversal, trend line failure, as not only a change in price but also opportunity cost. If the bonds continue to deteriorate or under peform other assets, the opportunity cost of holding bonds increases. As price declines and opportunity cost also increases, the price decline will accelerate. This happens frequently in capital markets.

Right now, the transition is still subtle and largely unrecognized. Long-term tops do not end with a bang but rather a whimper.

Regards,

Eric