We know that inflation is running a lot higher this year – true inflation, that is, and not the phony Government CPI. Thus, low inflation would not explain the 80 basis point drop in long bond yields since January 1st. “Flight to safety” would flow either into the very short end of the yield curve or into gold or under the mattress. Therefore, it is apparent to me that the Treasury bond market is starting to price in economic armegeddon. This will mean deflation of asset prices (stocks, homes, crappy Wall Street concoctions) but not necessarily deflation of necessities.
With retail sales, auto sales, and home sales all collapsing, the only explanation left is that the Treasury bond market is pricing in a severe economic downturn. This would explain also why high yield bond spreads have widened considerably over the past month. The big drop in oil prices this week would further affirm this.
For anyone who is reading this and has invested in my Easy Trade Idea from the end of July, I used to today’s low volume pullback in the stock to add to our position in the fund by shorting slightly in the money puts that expire tomorrow. If the price closes below the strike tomorrow, we will take delivery of more shares with a cost-basis reduced by the amount of put premium we collected today.