"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, October 12, 2011

Money flows out of Bonds is fueling the current stock rally

Modern markets are all about speculative money flows, and primarily money flows from hedge funds. That can be subdivided further into "RISK" trades versus "RISK AVERSION" trades.

Take a look at the following composite chart of the US Treasury Bond and the S&P 500 index. Note the extremely close inverse relationship between the two lines.

Basically you can see the RISK trade versus the RISK AVERSION trade portrayed here. When traders are running away from risk trades, they are running into Bonds pushing those prices higher in the process.

When they are feeling aggressive towards risk, they are dumping bonds driving those prices lower and shoving equity prices higher.

So where are we in all this? Simple - if traders/investors believe that the actions of the European monetary and political leaders in regards to the bank recapitalization plans will be successful in averting any worsening of that situation, they will continue to move towards RISK trades and sell their recently purchased bond holdings as at least one source of "deflation" will be eliminated from off their radar screen.

If risk trades come back into favor, then the SILVER/GOLD Ratio is going to move  back in the FAVOR of SILVER after having moved in favor of gold since late April of this year.


  1. Dan, thanks for the post. It's helpful. One question. If, as in the following blog post at TFV, John Paulson and the hedge fund community (and its clients) are bracing for the worst, as their clients deplete the funds of the cash required by the funds, then will that mean that the hedge funds won't have the kind of cash to flow as heavily into the risk trades as they would if they had the cash? If money flows primarily from hedge funds, won't the news in this TFV post suggest that the risk trades might NOT actually come back into favor?

  2. I forgot to paste the TFV link:



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