Almost a half-century ago, legendary trader Richard Dennis of C&D Commodities put on a famous trade:  long (soy)beans and short bonds.  The trade reflected the established bull market in commodities and bear market in 30-year U.S. Treasury Bonds.  It was an era of high inflation (peaking at 14 percent during the disastrous Carter Administration).  Bonds (and equities) continued sinking until 1982, whereupon the markets reversed, with commodities moving to the doghouse and equities and bonds rallying year after year.

Equities are still in their 41-year rally mode, with the S&P 500 trading at 4505.14 (as of this writing — it will surely be different by the time you are reading this) as against a 52-week high of 4607.07 and an all-time high at 4808 in late 2021.

Bonds are a dramatically different story.  Legendary and now-deceased stock market analyst Richard Russell long contended that the bond market is both much more important and much more dominated by savvy investors than the stock market.  Bonds were trading at a low of 102 in March 2004 (compare to a low of around 55 in 1982) and rose with various advances and setbacks to a high of 190 in March 2020.  (These numbers are based upon nearby Treasury Bond Index futures).

The last three and one-half years have not been kind to bonds.  They fell to 117 in October 2022 and as of this writing are at about 120.  The 70-point drop from the 190 high to 120 is about a 37 percent drop.  It would be as if the S&P 500 dropped from its high of 4800 to about 3000.  In other words, bonds have been in a slow-moving crash — a fairly nasty bear market.  Yet, there are relatively few stories in the financial press or the mainstream media about this development.  It can fairly be termed a “stealth bear market.”

Gold has been very much a despised investment since the 1980 peak of over $800 per troy ounce.  In September 1987, just as the stock market was getting ready to crash, gold had crawled back only to about $465.  From there, things only got worse for the yellow metal.  In June 2001, gold put in a low of approximately $265.  Gold then commenced a long but little-noticed bull market, rising in fits and starts to $1923 in September 2011 (all gold quotes are based on nearby Comex futures).  Disappointment followed again, with gold falling for the next five years back to $1045 in December 2015.

After 2015, gold commenced a slow but relatively steady advance to $2089 in August 2020 (an almost precise doubling of its price since December 2015).  During the last three years, gold has been see-sawing between a low of $1618 in November 2022 and, most recently, at just around $2000.  The fact that gold has pretty much held its own during the last three years is all the more remarkable because the U.S. Dollar was rising sharply during that period, making gold more expensive for the rest of the world.  In May 2021 the Dollar Index was at about 89.5.  It rose sharply to 114 by September 2022, due to the Fed’s actions in raising interest rates.  At last glance, the DX was at about 102.

The total market return on exchange-traded funds invested in shares of gold mining companies during the 2015-2023 period mirrors the stealth gold bull market.  SPDR Gold Shares (symbol GLD) had a total market return of a disappointing minus 10.67 percent in 2015.  Thereafter, the total market return was largely excellent:  8.03 (2016), 12.81 (2017), minus 1.94 (2018), 17.86 (2019), 24.81 (2020), minus 4.15 (2021), minus 0.77 (2022) and 8.94 through the first quarter of 2023.

The relative lack of comment in the financial press about the significance of the U.S. Treasury Bond bear market is matched and indeed perhaps even exceeded by the near-total radio silence about the significance of the post-2015 gold bull market.

The absolute worst investment to have during a long period of rising inflation is a 30-year fixed-interest rate bond.  Inflation consistently eats away at the real (i.e., after inflation) value of the bond, and by the time you get your money back after 30 years, it’s worth far less than the inflation-adjusted value of what you paid to buy it.

Gold, on the other hand, is the classic inflation hedge.  During the catastrophic hyperinflation of Weimar Germany in the early 1920s, the real, after-inflation return on gold was about 100 to 1.

So what’s the takeaway from all this?

The market in U.S. Treasury Bonds is screaming at us that the Fed will, in the end, capitulate to inflation and reluctantly accept regular, periodic inflation above its 2 percent annual target over a policy of raising interest rates to bring inflation back down to 2 percent.  The Fed will do this because it prefers inflation above 2 percent to another Great Depression.  The Fed talks a good game about “doing whatever it takes to bring down inflation” but the bond market’s price action over the last three years tells us the bond market doesn’t believe what the Fed is saying publicly.

Markets, especially wide and deep markets like the bond market, know more about the future than you or I do.  Occasionally markets do get things wrong — for example, the scary 1987 Crash did not generate a new Great Depression — but they rather quickly correct.  The fact that U.S. Treasury Bonds have been declining for over three years is of enormous significance and is not some kind of mistake.  By parallel reasoning, the gold stealth bull market is not some kind of mistake.

Equities are likely to re-price to a much lower level during the upcoming months and years because high-interest rates and inflation represent an unfriendly environment for them.  The Cult of Equities that’s been the road to riches over the past 40 years may be nearing its final end.  When it finally does end, when the final top is finally put in, what follows will confound large portions of the public and the investment community.

Consider this:  when the British stock market collapsed during the South Sea Bubble in the 1720s, stocks went into a bear market that lasted for over 60 years.  Across the pond in Tojo-Land, the Japanese Nikkei put in a top just below 40,000 in 1989.  Today, 34 years later, in 2023, the Nikkei was at 31,975 as of this writing.

As a nation, we are probably more politically divided now than at any time since the Civil War.  However, you can be sure that no political party wants the economy to collapse into a depression while it is holding the reins of power.  This goes hand-in-glove with the analysis that the Fed when push comes to shove, will choose inflation over financial collapse and depression.  That’s what the bond and gold markets are telling us right now, and that’s what common sense is telling us.

There have been numerous reports in the press about “slowing inflation”, a “soft landing” and a “possible recession”.  Suffice it to say that if the bond market and its highly sophisticated investors believed these things, the bond market would be rallying strongly, not continuing to erode week by week and month by month.

Still, markets are unpredictable, and “Black Swan” events can and do occur and catch everyone by surprise (including a very large and sophisticated bond market).  If I had to guess, the greatest risk may be a “straw that broke the camel’s back” – a type of scenario caused by the higher interest rates now being engineered by the Fed.  The amount of credit and debt in our society is of gigantic proportion, and if major chain-reaction defaults started occurring all of a sudden as the result of rising interest rates, there might be just too many fires for the Fed to put out.  If the initial result were a severe recession or another Great Depression, the printing presses will be used to extricate the Federal government and the country from the catastrophe (because history tells us the alternative is politically impossible and unacceptable), likely bringing gold to the fore again as the premier safe haven — unless it is confiscated once again as it was in the 1930s.

All food for thought.