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Minyan Mailbag - Stocks & Bonds

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

John,

I agree with you 100% that the bond market is smarter than the stock market, but tell me what you think of this theory. If equities started a severe and rapid decline soon, I think the initial reaction in the bond market would be to rally. This would be the reaction of market participants thinking the Fed would lower rates and inject liquidity to rescue the stock market.

The participants would believe this to be the case, because that is what the Fed has done at every sign of trouble for the last 7 years. It would also be a function of a "flight to quality". The bond market would only collapse later when the world realized the only way the U.S. could repay is to print money, but for now, people still believe the Fed is in control.

If this theory is plausible, then it could very well be the "smarter" bond market is rallying in anticipation of a stock market decline. Of course, this theory speaks my position and therefore my thought process is manipulated, so please, debunk this theory.

Minyan JK

Minyan JK,

I can't debunk it...it is highly plausible. As you saw yesterday, Scott and I, two intelligent bears, cannot even agree on whether the Fed will tighten or ease next. We are in un-chartered territory economically. The Fed has confused the markets as well as our trading partners (and possibly itself).

All I can say with some confidence is that we are approaching extreme levels of compression. Risk assessment has been replaced with a dire need for performance at all costs.

Regards,
Prof. Succo

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