A phrase you’ll sometimes read on these pages is “idiot-maker”, as in the “idiot-maker rally”, which is our term to describe this massive bull run we’ve been on since March, 2009, during which tons of smart people have called for its premature death.
We don’t actually mean anyone is an idiot for mis-calling the market. We mean that the market has that amazing ability to make even the smartest people look like total idiots. And actually that’s one of the things we love about all markets, not just the current multi-year bull run.
Of course, the real idiot maker rally in America is the rally in US Treasuries, which is something that’s been ongoing since the early 80s, as seen easily by this chart of 10-year yields, which have relentlessly been grinding lower and lower.
For as long as we’ve been following the market, people have been incredulous at how insanely low Treasury yields are. And pretty much all the big market gurus (Gross, Buffett, Taleb, etc.) have declared at some point or another how stupid you’d have to be be buying Treasuries, and at each point yields have pretty much only gone lower.
Of course, this is reminiscent of Japan, except the multi-decade rally in Japanese Government Bonds has been called the “widow-maker” due to the fact that so many big investors have been impaled trying to short that rally.
Well, we’ve recently seen a fresh bout of folks declaring that the UST rally is over and done with.
Back on March 24, UBS declared that September 22, 2011 would go down as the all-time low for US Treasuries, and that the bond bear market was officially on.
Here’s why they said the bond bull market was over:
- The US is transitioning into sustainable recovery mode.
- Credit flow is improving, and turning positive again.
- The consensus that QE3 is coming is now starting to crack.
- China is going to strengthen again in the second half.
- The European recession will not be as bad as feared.
Here was the chart we ran to go with the post. You can see the low in late September of last year, and you can see that UBS made its big call just as yields were finally taking off.
Fast forward to now, and look what happened. Bonds have rallied significantly since this call.
After Friday’s bad jobs report, the yield on the 10-year is once again barely above 2%, off significantly from the time when UBS made its call, and the yield was close to 2.4%.
In fact, all of the reasons that UBS cited above look a little suspect. The European recession does not appear to be turning around. The US data has just been mediocre, and even credit growth has tapered a bit.
It’s certainly possible that the latest spike up towards ~2.4% was just another freak move towards the great grind lower.
The greatest idiot-maker rally of all could easily continue.