Tag Archives: bonds

Commitment of Traders Report Sees Dovish FOMC

The Commitment of Traders report published weekly by the Commodity Futures Trading Commission breaks down the weekly market participants into several categories. In the age of big data, we reach a point where it’s easier to collect than it is to make sense of. We keep it simple at COTSignals.com by focusing our analysis on the commercial trader category of the Commitment of Traders Report. Subjectively, it makes sense that the people with a hand in producing or, consuming a given commodity have a fundamental sense of value that speculative traders simply lack. Furthermore, producers and end line users of a given commodity base their actions on the best collective models and strategies focused on their singular market. Quantitatively, we’ve proven the correlation and predictive value of their actions time and again.

Continue reading Commitment of Traders Report Sees Dovish FOMC

Weekly Commodity Strategy Review

We began the week with Bond market analysis for TraderPlanet.  We looked at the tremendous and rapid build in the commercial 160x600trader position noting that the recent sell off may be nearing exhaustion. Based on Thursday’s reversal and ECB/IMF/Greek hope quickly deteriorating, we feel the short-term bang for the buck may be best on the long side of the market.

COT Data: We are Near a Tradable Bond Bottom

Tuesday, we focused on, “A Pause in the Yen’s Destruction.” We noted the rapid application of the Prime Minister and Bank of Japan’s plan to monetize their debt in a last ditch effort to reflate their economy. Like the Bond market, this market has seen tremendous and rapid commercial trader buying as the Yen fell to Y120 = $1.

Finally, we looked at the disconnect between nearby crude oil prices and current fundamentals. It’s hard to get bullish about supply cuts a year out when current inventories are the highest they’ve been in 80 years as we noted in the Energy Information Agency’s, ” Summary of Weekly Petroleum Data.”

Read – “Sell Crude Oil at $65 Per Barrel.

 

Weekly Commodity Strategy Review 11/07/2014

cot_bannerLooks like we’re batting .500 for the week with a loss in the bond market being more than offset by the profits in corn. Meanwhile, our primary piece uncovered a nice pattern in the crude oil futures that we’re still waiting to take action on.

Free 30-day trial of nightly trading signals based on the Commitment of Traders Reports.

The story in, Bonds Creeping Towards Lower Yields, which was published at TraderPlanet still holds. Commercial traders, while roughly neutral in their current position, have rapidly purchased more than 17,000 heading into this week’s trading. This buying should help the support around 140^00 hold as the market makes some type of run at the October highs.

Mechanical COT Signals’ portfolio equity curve tracked by Futures Truth.

Other Sample Portfolios

Tuesday’s corn futures trade for Equities.com combined classic Commitment of Traders’ analysis along with an inside bar trigger to enter the trade. Sometimes, it works like a champ. It’s a high percentage trade and it played out well.

Corn Rally Stalls on Commercial Selling

Finally, our main piece required eyeballing more than 20 years’ worth of commercial trader activity in crude oil futures. In, “Time to Buy Crude Oil’s Decline” we discussed a very specific pattern that we’ve only found eight examples of in the crude oil futures. More importantly, this pattern’s predictive power has been quite strong. Read the full piece for details.

The bulk of my Commitment of Traders research has gone into creating COT Signals.

Bonds Creeping Towards Lower Yields

The multi-year bond rally has continued unabated. Therefore, it’s no surprise that our mechanical, long only trading program following the commercial traders in the bond market has had a good year winning 7/8 trades as you can see on the chart below, for net profits of more than $5,000 per contract.

The current setup suggests that this roll should continue.

Continue reading Bonds Creeping Towards Lower Yields

Gold and Bonds Getting Back to Normal

Gold, interest rates and the stock market have a very interesting relationship. Normally, declining interest rates are good for business and bad for gold. Post 9/11 and housing bubble, zero interest rate policies (ZIRP) created an artificial situation that fractured this relationship rendering it virtually useless over the last decade. This began to change last summer when the Federal Reserve Board stated that they would begin slowing the stimulus they’ve provided to the economy thus allowing interest rates to gradually rise. These relationships have begun to sort themselves out over the last three quarters and may actually be telling us something about the current pricing in the gold market.

Continue reading Gold and Bonds Getting Back to Normal

Trading a Falling Bond Market

Successful trading pits two diametrically opposed ideas against each other and forces the trader to assimilate them into a cogent plan of action. First of all, everything we know, we know from history. We constantly relate the market’s present status to something we’ve seen in the past whether it’s fundamental, technical or pattern based. Secondly, we’re asked to project the implications of the current market’s structure into the unseen future. This week we’re going to discuss the implications of applying historical knowledge of the interest rate complex towards the deployment of mechanical models designed to take advantage of rising rates.

There are two primary steps to this process. Our first step is through analogous research. Analogous research begins when a present situation is recognizable because it looks or, behaves similarly to a pattern or collection of fundamental data that the trader has already experienced. The simplest version is the gut instinct, “You know, this market just feels like…….” A more quantifiable version falls along the lines of, “The last time these factors were in place, the market did…..” Analog trading is the primary basis for pattern recognition. The more often a certain pattern is seen and its results are predicted the more easily they are recognized and traded in the moment.

Empirically applying analogous research to the current interest rate sector yields the conclusion that monetary policy is far more likely to tighten than ease further. Sixty years of Prime interest data yields some ideas of what we can expect if history is any precursor to the future. First of all, rates have been abnormally low for an abnormally long period of time. The last time rates were steady for this long was 1960-1967. The Federal Reserve’s Prime rate has been at 3.25% since January of 2009. More importantly, it has been in a downward trend since August of 2007. A trader’s primary concern is always the trend.

The trader’s next objective is determining a target. These require both time and prices. Over the last 60 years once interest rates begin to move, they move by 73% on average before their peak or trough is reached. Furthermore, it takes an average of 30.6 months for the move to be completed. The extremes over this period include a move as small as 14% in as little as six months to more than 200% over the course of three and a half years. Throwing out the largest and smallest moves in both time and distance leaves us with an average interest rate move of 64.5% in 28 months. I think this blows a hole in the, “bonds are less volatile,” investment theory.

Anecdotally, there have been many headlines and news releases that should be forewarning us that a change in monetary policy is coming. These include comments from Fed Chairman Ben Bernanke as well as large investment managers. Perhaps the most noteworthy of which is Pimco’s decision to start offering access to hedge funds as it moves away from the bond business. Bill Gross has arguably been the most successful bond investor of all time. He has ridden the 30-year bull market in bonds up to $2 Trillion in assets under management. When the King leaves the table it’s a good clue that the free meal is over.

The case has now been made for what to expect out of interest rates as well as the time frame in which we expect it to happen once it begins to unfold. This led me to updating previously deployed interest rate models whose effectiveness became limited due to the artificial manipulation of rates following the economic meltdown of 2008. The simplest model is based on the DCB Bond system, which was published in Futures Truth in 2000. This model basically doubled its initial investment between 1995 and September 11th, 2001. The original version of this program traded both sides of the market and has fluctuated in and out of their Top 10 Bond systems since its publication nearly 14 years ago. Meanwhile the long only version posted a new equity high last June and has been flat for the last year.

Trading program technology has advanced substantially since then. We are currently developing programs using a neural network and selective data slices from rising interest rate environments. The main benefit is that we can train it on the type of market movement we expect it to see. The downside is that due to the small windows of time that rates actually move, we only have an average of a 28-month window to use for both in and out of sample testing per episode. The end result will be something traded on a shorter timeframe and will require closer monitoring during the trading day once it is deployed. Fortunately, the tighter timeframe looks like it’s going to help keep risk in check as well. This is how we intend to use history to prepare us for the future. The only certainty in trading is that nothing lasts or, works forever. Define your criteria and trade within your expectations.

Diversification is not Immunization

Every market crash or bursting bubble is like the ice cream truck calling kids to the street. Portfolio managers and re-balancers know they get the opportunity to truly be heard only when something goes wrong.

Most people live their lives reacting to new stimulus. If something hurts, they don’t do it again. If something works, there’s no reason to change. Portfolio managers attempt to anticipate areas of pain and mitigate that pain wherever possible. However, there are times when efficient portfolio analysis, modern portfolio theory and just plain common-sense investing will still force one to endure periods of pain.

Portfolio composition is usually based on a collection of assets that tend to relate to each other in a predefined and expected way.

There are three basic relationships:

— Positive correlations: Two asset classes rise or fall together, predictably.

— Negative correlations: One class rises when the other falls and vice versa, predictably.

— Non-correlational: No predictable relationship.

The right balance of these relationships across multiple asset classes will smooth out returns and help to insure the predictable performance of one’s portfolio.

There’s an old saying from statistics 101: “Correlation does not equal causation.” We can measure how markets move relative to each other, but without understanding their relationships, we can’t say for certain what caused what. Sometimes, understanding “why” has a bigger impact on one’s portfolio than the actual mix of assets.

Last week we saw many markets fall. The stock market is lower, as are precious metals, bonds, grains, coffee, sugar, cocoa, crude oil and the energy markets. Many of the classic market relationships people use to balance their portfolios failed to behave in the anticipated manner and did not balance the risks associated with investing. Markets can and do, behave in unanticipated ways.

Commodity markets have been trending toward generally higher prices. The stock market has also had a nice rally and is up more than 9 percent since Labor Day. During this time, the Federal Reserve Board also announced a second round of quantitative easing to keep interest rates low and weaken the U.S. dollar. Consequently, bonds have rallied in price while the dollar has fallen.

The sudden about-face in many of the markets is twofold. First, the news regarding Ireland’s financial health has become increasingly pessimistic. Ireland was on the financial default radar, along with Greece, more than six months ago. Ireland has been very proactive in implementing domestic austerity measures to rein in spending. Furthermore, Ireland has also steadfastly maintained its financial issues are limited to a few banks that became overleveraged during their own housing bubble.

Unfortunately, the European Union has the same fears about Ireland and Greece we did in the U.S. with our own domestic banks and that is that every bank was more overextended than initially thought, requiring an even bigger lifeline to maintain solvency. Finally, Portugal and Spain are also on the verge of financial insolvency themselves.

The second fear to hit the markets was China’s announcement Wednesday its economy may be overheating again. Rumors are circulating China may follow several banks in Korea in raising its interest rates to slow down inflation and thus, economic growth. The data coming out of China certainly reinforces the idea it may constrict lending in the near future. China has a published cap on the amount of money its nationalized bank will lend in any calendar year and it is quickly approaching that ceiling.  The fears are also evident in China’s stock market, which has slid more than 5 percent in the last few sessions.

These two events combined to cause havoc in our domestic markets as they immediately unraveled the underpinnings of our market rallies. The Chinese news sucked the demand out of the commodity markets. China’s clampdown on inflation is pulling money out of the commodity markets and reducing overseas demand for raw materials. The news from Ireland and the European Union has the equity markets spooked. For many investors, the 50-percent correction in the equity markets from our own financial crisis is all too real and all too recent. Our domestic stock market’s rally and the quickly approaching year’s end makes it easy for many traders and investors to simply pull money out of the markets.

News events shock the markets and broadly sweeping economic forces create seismic shifts in market behavior. During these turbulent times, typical market relationships may fail to behave in the predicted manner.

As the Chinese economy becomes a first class consumer, we must accept our role as a supplier, rather than our historical position of end line consumer. As a supplier, we need to recognize the demand-needs of our trading partners. This is a broadly sweeping change that will affect the commodity markets for years to come.

News from Ireland and the European Union can shock the stock market, reawakening nightmares of 2008, but plans can be made to account for these events.

It does require proactive management of one’s portfolio. The old days of the passive hedge and allocation strategies may be gone.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

An Interesting Case for Bonds

                

This is from John Mauldin’s “Outside the Box.” and provides an interesting perspective on U.S. interest rate futures.This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.


Quarterly Review
and Outlook – First Quarter 2009

by Van Hoisington
and Dr. Lacy Hunt

 


Inflation/Deflation

Over the next decade, the critical element in any investment portfolio
will be the correct call regarding inflation or its antipode, deflation.
Despite near term deflation risks, the overwhelming consensus view is that
“sooner or later” inflation will inevitably return, probably with
great momentum. This inflationist view of the world seems to rely on two
general propositions. First, the unprecedented increases in the Fed’s
balance sheet are, by definition, inflationary. The Fed has to print money
to restore health to the economy, but ultimately this process will result
in a substantially higher general price level. Second, an unparalleled
surge in federal government spending and massive deficits will stimulate
economic activity. This will serve to reinforce the reflationary efforts of
the Fed and lead to inflation.

These propositions are intuitively attractive. However, they are
beguiling and do not stand the test of history or economic theory. As a
consequence, betting on inflation as a portfolio strategy will be as bad a
bet in the next decade as it has been over the disinflationary period of
the past twenty years when Treasury bonds produced a higher total return
than common stocks. This is a reminder that both stock and Treasury bond
returns are sensitive to inflation, albeit with inverse results.

Economic Theory

If inflation and interest rates were to rise in this recession, or in
the early stages of a recovery, the expansion would be cut short and the
economy would either remain in, or relapse into recession. In late stages
of economic downturns, substantial amounts of unutilized labor and other
resources exist. Thus, both factory utilization and unemployment rates lag
other economic indicators. For instance, reflecting this severe recession,
unused labor and other productive resources have increased sharply. The
yearly percentage decline in household employment is the largest since
current data series began in 1949. In March the unemployment rate stood at
8.5%, up from a cyclical low of 4.4%. This is the highest level since the
early 1980s. The labor department’s broader U6 unemployment rate includes
those less active in the labor markets and working part time because full
time work is not available. The U6 rate of 15.6% in March was the highest
in the 15 year history of the series and up from its cyclical low of 7.9%.
The operating rate for all industries and manufacturing both fell to their
lowest levels on record in March. Manufacturing capacity was around 15%
below the sixty year average (Chart 1). Given these conditions, let’s
assume for the moment that inflation rises immediately. With unemployment
widespread, wages would seriously lag inflation. Thus, real household
income would decline and truncate any potential gain in consumer spending.

Manufacturing Capacity Utilization - Monthly

A technically superior and more complete method of capturing the concept
of excess labor and capacity is the Aggregate Supply and Demand Curve
(Chart 2). Inflation will not commence until the Aggregate Demand (AD)
Curve shifts outward sufficiently to reach the part of the Aggregate Supply
(AS) curve that is upward sloping. The AS curve is perfectly elastic or
horizontal when substantial excess capacity exists. Excess capacity causes
firms to cut staff, wages and other costs. Since wage and benefit costs comprise
about 70% of the cost of production, the AS curve will shift outward,
meaning that prices will be lower at every level of AD. Therefore, multiple
outward shifts in the Aggregate Demand curve will be required before the
economy encounters an upward sloping Aggregate Supply Curve thus creating
higher price levels. In our opinion such a process will take well over a
decade.

An Illustration of the Aggregate Supply Curve during a Period of Substantial Unutilized Resources

Record
Expansion of the Fed’s Balance Sheet and M2

In the past year, the Fed’s balance sheet, as measured by the monetary
base, has nearly doubled from $826 billion last March to $1.64 trillion,
and potentially larger increases are indicated for the future. The
increases already posted are far above the range of historical experience.
Many observers believe that this is the equivalent to printing money, and
that it is only a matter of time until significant inflation erupts. They
recall Milton Friedman’s famous quote that “inflation is always and
everywhere a monetary phenomenon.”

These gigantic increases in the monetary base (or the Fed’s balance
sheet) and M2, however, have not led to the creation of fresh credit or
economic growth. The reason is that M2 is not determined by the monetary
base alone, and GDP is not solely determined by M2. M2 is also determined
by factors the Fed does not control. These include the public’s preference
for checking accounts versus their preference for holding currency or time
and saving deposits and the bank’s needs for excess reserves. These
factors, beyond the Fed’s control, determine what is known as the money
multiplier. M2 is equal to the base times the money multiplier. Over the
past year total reserves, now 50% of the monetary base, increased by about
$736 billion, but excess reserves went up by nearly as much, or about $722
billion, causing the money multiplier to fall (Chart 3). Thus, only $14
billion, or a paltry 1.9% of the massive increase of total reserves, was
available to make loans and investments. Not surprisingly, from December to
March, bank loans fell 5.4% annualized. Moreover, in the three months ended
March, bank credit plus commercial paper posted a record decline.

M2 Money Multiplier and Excess Reserves - monthly

If this all sounds complicated you are right, it is. The bottom line,
however, is that it is totally incorrect to assume that the massive
expansion in reserves created by the Fed is inflationary. Economic activity
cannot move forward unless credit expansion follows reserves expansion.
That is not happening. Too much and poorly financed debt has rendered
monetary policy ineffective.

What about the
M2 Surge?

M2 has increased by over a 14% annual rate over the past six months,
which is in the vicinity of past record growth rates. Liquidity creation or
destruction, in the broadest sense, has two components. The first is
influenced by the Fed and its allies in the banking system, and the second
is outside the banking system in what is often referred to as the shadow
banking system. The equation of exchange (GDP equals M2 multiplied by the
velocity of money or V) captures this relationship. The statement that all
the Fed has to do is print money in order to restore prosperity is not
substantiated by history or theory. An increase in the stock of money will
only lead to a higher GDP if V, or velocity, is stable. V should be thought
of conceptually rather than mechanically. If the stock of money is $1
trillion and total spending is $2 trillion, then V is 2. If spending rises
to $3 trillion and M2 is unchanged, velocity then jumps to 3. While V
cannot be observed without utilizing GDP and M, this does not mean that the
properties of V cannot be understood and analyzed.

The historical record indicates that V may be likened to a symbiotic
relationship of two variables. One is financial innovation and the other is
the degree of leverage in the economy. Financial innovation and greater
leverage go hand in hand, and during those times velocity is generally
above its long-term average of 1.67 (Chart 4). Velocity was generally below
this average when there was a reversal of failed financial innovation and
deleveraging occurred. When innovation and increased leveraging transpired
early in the 20th century, velocity was generally above the long-term
average. After 1928 velocity collapsed, and remained below the average
until the early 1950s as the economy deleveraged. From the early 1950s
through 1980 velocity was relatively stable and never far from 1.67 since
leverage was generally stable in an environment of tight financial
regulation. Since 1980, velocity was well above 1.67, reflecting rapid
financial innovation and substantially greater leverage. With those
innovations having failed miserably, and with the burdensome side of
leverage (i.e. falling asset prices and income streams, but debt remaining)
so apparent, velocity is likely to fall well below 1.67 in the years to
come, compared with a still high 1.77 in the fourth quarter of 2008. Thus,
as the shadow banking system continues to collapse, velocity should move
well below its mean, greatly impairing the efficacy of monetary policy.
This means that M2 growth will not necessarily be transferred into higher
GDP. For example, in Q4 of 2008 annualized GDP fell 5.8% while M2 expanded
by 15.7%. The same pattern appears likely in Q1 of this year.

Velocity of Money 1900-2008

The highly ingenious monetary policy devices developed by the Bernanke
Fed may prevent the calamitous events associated with the debt deflation of
the Great Depression, but they do not restore the economy to health quickly
or easily. The problem for the Fed is that it does not control velocity or
the money created outside the banking system.

Washington policy makers are now moving to increase regulation of the
banks and nonbank entities as well. This is seen as necessary as a result
of the excessive and unwise innovations of the past ten or more years.
Thus, the lesson of history offers a perverse twist to the conventional
wisdom. Regulation should be the tightest when leverage is increasing
rapidly, but lax in the face of deleveraging.

Are Massive
Budget Deficits Inflationary?

Based on the calculations of the Congressional Budget Office, U.S.
Government Debt will jump to almost 72% of GDP in just four fiscal years.
As such, this debt ratio would advance to the highest level since 1950 (Chart
5). The conventional wisdom is that this will restore prosperity and higher
inflation will return. Contrarily, the historical record indicates that
massive increases in government debt will weaken the private economy,
thereby hindering rather than speeding an economic recovery. This does not
mean that a recovery will not occur, but time rather than government action
will be the curative factor.

Gross Federal Debt Held by Public as a % of GDP

By weakening the private economy, government borrowing is not an
inflationary threat. Much light on this matter can be shed by examining
Japan from 1988 to the 2008 and the U.S. from 1929 to 1941. In the case of
Japan government debt to GDP ratio surged from 50% to almost 170%. So, if
large increases in government debt were the key to economic prosperity,
Japan would be in the greatest boom of all time. Instead, their economy is
in shambles. After two decades of repeated disappointments, Japan is in the
midst of its worst recession since the end of World War II. In the fourth
quarter, their GDP declined almost twice as fast as that of the U.S. or the
EU. The huge increase in Japanese government debt was created when it
provided funds to salvage failing banks, insurance and other companies,
plus transitory tax relief and make-work projects.

In 2008, after two decades of massive debt increases, the Nikkei 225
average was 77% lower than in 1989, and the yield on long Japanese
Government Bonds was less than 1.5% (Chart 6). As the Government Debt to
GDP ratio surged, interest rates and stock prices fell, reflecting the
negative consequences of the transfer of financial resources from the
private to the public sector (Chart 7). Thus, the fiscal largesse did not
restore Japan to prosperity. The deprivation of private sector funds
suggested that these policy actions served to impede, rather than
facilitate, economic activity.

Japan: Gevernment Debt as a % of GDP and Nikkei Stock Average

Japan: Government Debt as a % of GDP and Long Term Government Rates

This recent Japanese experience mirrors U.S. history from 1929 to 1941
when the ratio of U.S. government debt to GDP almost tripled from 16% to
near 50%. As the U.S. debt ratio rose, long Treasury yields moved lower,
indicating that the private sector was hurt, not helped, by the government’s
efforts. The yearly low in long Treasury yields occurred at 1.95% in 1941,
the last year before full WWII mobilization. In 1941, the S&P 500,
despite some massive rallies in the 1930s, was 62% lower than in 1929, and
had been falling since 1936. Thus, two distinct periods separated by
country and considerable time indicate that stock prices respond
unfavorably to massive government deficit spending and bond yields decline.

The U.S. economy finally recovered during WWII. Some attribute this recovery
to a further increase in Federal debt which peaked at almost 109% of GDP.
However, the dynamics during the War were much different than from those of
1929 through 1941 and today. The U.S. ran huge trade surpluses as we
supplied military and other goods to allies, which served to lift the U.S.
economy through a massive multiplier effect. Additionally, 10% of our
population, or 12 million persons, were moved into military services. This
is equivalent to 30 million people today. Also, mandatory rationing of
goods was instituted and people were essentially forced to use an
unprecedented portion of their income to buy U.S. bonds or other saving
instruments. This unparalleled saving permitted the U.S. economy to recover
from the massive debt acquired prior to 1929.

Bonds Still an
Exceptional Value

Since the 1870s, three extended deflations have occurred–two in the
U.S. from 1874-94 and from 1928 to 1941, and one in Japan from 1988 to
2008. All these deflations occurred in the aftermath of an extended period
of “extreme over indebtedness,” a term originally used by Irving
Fisher in his famous 1933 article, “The Debt-Deflation Theory of Great
Depressions.” Fisher argued that debt deflation controlled all, or
nearly all, other economic variables. Although not mentioned by Fisher, the
historical record indicates that the risk premium (the difference between
the total return on stocks and Treasury bonds) is also apparently
controlled by such circumstances. Since 1802, U.S. stocks returned 2.5% per
annum more than Treasury bonds, but in deflations the risk premium was
negative. In the U.S. from 1874-94 and 1928-41, Treasury bonds returned
0.9% and 7% per annum, respectively, more than common stocks. In Japan’s
recession from 1988-2008, Treasury bond returns exceeded those on common
stocks by an even greater 8.4%. Thus, historically, risk taking has not
been rewarded in deflation. The premier investment asset has been the long
government bond (Table 1).

Risk Premium During Debt Deflations

This table also speaks to the impact of massive government deficit
spending on stock and bond returns. In the U.S. from 1874-94, no
significant fiscal policy response occurred. The negative consequences of
the extreme over indebtedness were allowed to simply burn out over time.
Discretionary monetary policy did not exist then since the U.S. was on the
Gold Standard. The risk premium was not nearly as negative in the late 19th
century as it was in the U.S. from 1928-41 and in Japan from 1988-2008 when
the government debt to GDP ratio more than tripled in both cases. In the
U.S. 1874-94, at least stocks had a positive return of 4.4%. In the U.S.
1928-41 and in Japan in the past twenty years, stocks posted compound
annual returns of negative 2.4% and 2.3%, respectively. Therefore on a
historical basis, U.S. Treasury bonds should maintain its position as the
premier asset class as the U.S. economy struggles with declining asset
prices, overindebtedness, declining income flows and slow growth.

Van R. Hoisington
Lacy H. Hunt, Ph.D.