Hard Times Ahead for Bonds and Dollar

04/04/2011 9:44 am EST

Focus: MARKETS

John Bollinger

President and Founder, Bollinger Capital Management

While stocks have shown signs of strength, Treasury debt and the US currency are looking sickly, writes John Bollinger in the Capital Growth Letter.

I felt sure that a violent 7% correction for the market caused by a natural-event panic would cause a number of our stops to be hit, but that was not the case. This suggests that what we saw was indeed a correction, not the dawning of a bear market.

Exogenous events—even when they have economic impacts, as the Japanese quake undoubtedly does—tend to be reversed quickly, and so far that is what has happened. The return rally will be of great interest to understanding the way forward.

So far, so good, but the tough part is still ahead of us.

I've often written about how important the market's reaction to news, is and am still of the same opinion. A market pounded with bad news and plagued by uncertainty that fails to decline is a strong market looking to move higher.

That strength may not last forever—the bad news may eventually win out—but until it does, it pays to give the edge to the rally prospects.

From a seasonal perspective, we are cruising through the best period of the year to own stocks. The next important seasonal period is the summer period, when it pays to start raising some defense.

While summer is not yet upon us, it is beginning to be a visible concern for still-nervous investors. Add new funds to the market carefully, using pullbacks where possible, and keep in mind that the rally is long of tooth.

Massive Downside for Bonds
Short-term interest rates remain firmly under the thumb of the Federal Reserve, while intermediate- and long-term rates are in uptrends and working on completing massive bases.

Here are some really scary numbers for bond holders: The traditional technical analysis projections arising from the base formations for long-term rates range from 7.4% to 8.6%, while those for intermediate-term rates range from 6% to 8%.

Those were made using the simplest rule, the depth of the base from the various breakout points reflected above the breakout points. Those projections may not be realistic, but my point isn't that we are going there; my point is that is the risk as of now. So, you really should evaluate what such a move would mean to your bond holdings.

For many people, it'll mean another wave of devastation. Too many people are on their way here—first slaughtered in the stock market, then killed in the real-estate market, and finally buried in the bond market.

If you are long bonds, please spend some time with a bond calculator.

In currencies, the indecision pattern we wrote about has been resolved in favor of a lower dollar. This is the latest in a series of competitive devaluations, and the US seems to be winning that game. This is consistent with the rapid pace of monetization of the debt.

Against these headwinds, the dollar will have a very tough time rallying even out of the best of setups. In any case, the trend is clearly down and important long-term support is coming under fire.

Perhaps this process, a process whose ultimate resolution is the end of the dollar as a reserve currency, is part of a larger political agenda, but I'll leave that for you to speculate on.

The rate at which the Federal Reserve is monetizing the debt (printing money) is way beyond anything ever seen before. The data are simply off the scale. This won't bite us just yet, but it will later, in my opinion.

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