Friday, September 9, 2016

Bonds Sell Off

Supply side economic theories and policies came of age in the 1960-70's. How could supply side ideas not gain traction in a period of inflationary forces. The cost of goods was rising steadily after WWII. What else is there but to encourage more production. And as inflation spiked in the early '80s and then was crushed by Volcker supply side theories came into their own. Decades of intentional low interest rates to encourage supply also had the effect of encouraging consumption through consumer financing innovation enabled by a steady decline in bond yields and interest rates in general.

It does appear that the world has reached the limits of supply side benefits. Perhaps a few years ago. Now producers yearn for a time of increased demand sufficient to raise prices for basic commodities. Over production of goods and services, combined with technologic advances in production has combined to produce a stagnation in western economies even as the consumers find themselves over burdened with debt and lacking wage leverage.

The long decline in interest rates produced a financial based economy that increasingly put it's earnings and savings in financial instruments, bonds and stocks and other derivitives, anywhere for any yield, due to the lack of opportunity in manufacturing or services.

At long last we may begin to see some wage pressures in an upward direction. Consumers may begin to see an increase in purchasing power and basic materials prices look to have bottomed. And the Central banks of the world are beginning to lean toward "normalization" of interest rates after years of a zero interest rate policy.

We see pressure on the long term bonds with, perhaps, the start of a trend change in the direction of interest rates.

With the massive sums that are parked in bonds I wonder what an exit from the 'safety' of bonds will look like. The bond market has certainly gotten lopsided over the last few years. The normalization of interest rates could be rapid.

But the question remains. If not bonds, then what?

And if normalization due to mild inflation, then what?

Mild inflation is good. And the money has to go somewhere.


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