Saturday, May 9, 2009

The Great Bond Crash of the 1930's

Good Afternoon Everyone!


Everything is pretty quiet on the news front so I thought today would be a perfect day for a history lesson.

Watching treasuries sell off over the past couple weeks motivated me to take a look back to The Great Depression to see what happened to bonds in the great 1930's bond collapse. I had always known there was a bond crash during this time, but I really had never focused on the timing of it.

I was able to pick up a great chart highlighting what happened:

My Take:

The similarities to today's crisis are eery here folks. As you can see above, there was a huge bond sell off in the late 1920's as the stock market roared to new highs. When the crash of 1929 then ensued, bonds soared as investors flew into the safety of fixed income.

When stocks began to rally after the first leg down in 1929, bonds then began to slightly sell off again as investors started dipping their toes back into stocks.

When the bear market rally died, bonds spiked back up for the final time before the great bond crash.

Whats interesting here is bonds crashed in 1932 at the same time that equities did. The lows in the stock market occurred in 1932. So why didn't we see another flight back to the safety in bonds in 1932 as stocks were crashing?

The reasons were two fold: Liquidity concerns and fears around inflation as a result of massive government stimulus.

Gee, does this sound familiar?

Folks, one of my favorite sayings is "history always repeats itself". I think we are seeing an exact replay in the treasury market today as we saw in 1932. We have seen treasuries rise and fall depending on what the stock market is doing.

However, as we spend ourselves into oblivion, the world is now concerned about our liquidity. They are also concerned about inflation because we are creating trillions of dollars in an attempt to bailout America!

A replay of the 1930's will almost assuredly happen at some point during our Great Depression part 2. Could we see one more rally into bonds if this bear market rally collapses? Perhaps, but this will most likely be the last one.

Folks, there comes a point in which the math no longer works. The Chinese and the ROW are not dopes. They are losing faith in our treasuries because we are running historic deficits at a time in which tax revenues are crashing!

China's main motivation to buy bonds in the first place was done in support of our obsession around consuming. China's manufacturing roared as we spent like drunken sailors. They also bought bonds because they considered it to be the safest place to park their reserves.

When you look at the new world in which we live in, both of these scenarios have now drastically changed. Our consumer is collapsing, and our safe treasuries all of the sudden don't look so safe anymore.

Bottom Line:

I will be increasingly shorting more treasuries in the very near future. I already have a position here but I am hesitant to buy more because I think stocks are about to take another big dump. This could result in one more big push into bonds.

I will be taking a large position in TLT PUTS on any bounce in treasuries following a market sell off.

The game is about over folks. If you wanted a guess as to where I think we are in this process today versus the 1930's chart above, I would say we are in early 1931.

Find a good hard desk to hide under. You are going to need it by the end of the year.


Anonymous said...

Lot of good Ben "the expert on the Great Depression" Bernake did us. So is he using his expertise to make another Depression happen so he can live through our version of the 'glory days' that he so loves to study so much?

Jeff said...


Ironic isn't it?

I think Ben is a very very smart guy. The problem is he is facing a problem thats impossible to solve.

When bubbles burst there is no way to stop them. Ben's legacy is on the line right now. He has been incredibly creative with the Fed and their unprecedented programs.

However, he needs to wave the white flag right now and let this debt bubble burst.

If he continues to spend like he has we run the risk of heading into a multi generational deflation spiral.

His fight against deflation was grand but its an impossible game to win.

maximus said...


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Best to all


Jeff said...



I saw Mark Faber's on your site.

There has been a lot of discussion around him and yhis recent bullishness because a lot of people really respect him.

I am going to put something up tonight around the market potentially rising here before a huge plunge.

There are some logical reasons to be bullish short term.

Thanks for the support.


Radar said...

How will the weakening US dollar effect the bond demand. I would think it could be a positive for foreign buyers? But I'm just guessing?!


Jeff said...


Good question.

Bonds are a tough call short term because of the Fed.

Bloomberg is out tonight discussing more QE as mortgage rates rise back over 5%. This will support nonds for now if they pull the trigger:

"May 11 (Bloomberg) -- The world’s biggest investors are increasing bets that Federal Reserve Chairman Ben S. Bernanke will boost purchases of Treasuries as the steepest losses on government debt since 1994 send mortgage rates above 5 percent.

The slump in Treasuries the past seven weeks pushed yields on longer-maturity bonds up by more than a half-percentage point and sent average rates on 30-year mortgages to the highest since the start of April, according to North Palm Beach, Florida-based Policy makers said March 18 they were committing “greater support to mortgage lending and housing markets” when they pledged to buy as much as $300 billion of Treasuries and stepped up purchases of bonds backed by home loans."

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