Friday, August 27, 2010

Are we Turning Japanese?

So I had a thought yesterday about yields on the 10 year dipping to under 2.5% and all this talk about Japan. So I thought...why not try to figure out if bonds are really in a bubble or if we are turning Japanese...
My buddy GX has access to a bloomberg so I asked him to send me a chart of Japanese 10 year yield during the lost decade and I asked him to overlay Japan's GDP:
Yields are in Orange, GDP in White...the little spikes at the top of the GDP curve are at around the 2.5% area.

So then I was like...well where the hell are we on this chart? If we are turning Japanese we need to figure out where we are on this chart to really decide if Bonds are in a bubble of if we will go below 2% and reside there for a decade or so...

The instructive part of this exercise is to look at the ranges..Japan's deflationary spiral started in the early 90's then really took flight after a little double dip followed by a bigger double dip...but they never got over 3%ish on GDP growth during much of the 90's....that's when yields really took off to the downside and stayed well below 2% for the decade to come.

As the old addage goes..."OK the world is going to what's the trade"...well that's of course why I go forth on these stupid academic exercises...and bug my friend's with bloombergs to make stupid charts for me...

GX...overlay the Nikkei:
Green is the Nikkei.

Given our GDP growth rate (sub 2%) and the current yield on our 10 year Treasuries (2.5%) I would say we are either in 1994 or 1997 in Japanese years. Which definitely means we are looking at a deflationary spiral and our rates are going lower and they probably will stay there for a long long time.

All of this being said...Bonds have more room to run if we are indeed turning Japanese, also, Stocks will be fairly choppy for the next few years trading in a range that continues to decline overall...however at the bottoms and tops of these ranges vast quantities of money can be just gotta go long and short.

For now...I guess you can still chase treasuries...

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