About six weeks ago in one my blog posts on income investing I wrote:
http://twocents.blogs.com/weblog/2008/06/recognition-wave.html
"Unless we have a deflationary collapse starting soon, bonds have nowhere to go but down. There is still a small group who believe that the deflation of 1996-98/99 will recommence after this inflationary interlude of 8-10 years. I myself have felt that a timeout or rest period in inflation was due, especially if a deeper recession occurred. In that case one would expect a decent bond rally. However, barring amazing collapses of multiple financial institutions and a permanent contraction of credit in its wake this year, there will be no long term bond rally until rates are much, much higher in a decade or more."
Much sooner than I would have thought possible we have had "amazing collapses of multiple financial institutions" and evidence of credit contraction not just in the markets but also at the bank loan officer's desk, according to the FED's loan officer survey. And the new (and long due) rules for rational credit rating of mortgage applicants, proposed this week, will constrict it more. Bonds are still bouncing around, but we are seeing a fracture in the bond market. Treasuries and GNMA's ("full faith and credit....") and municipals are holding up and rising slowly, but corporate bonds, especially high yield or junk bonds, are not.(Incidentally, there is now a good way for those of us without a Bloomberg terminal to get a feel for what junk bonds and munis are doing. HYG is the symbol for a junk bond index ETF and MUB is the symbol for a muni bond index ETF.) This parting of ways or "widening of the spread" between junk and treasuries has been taking place while crude oil and gold have been re-exploding upwards and a commodity mania has become acceptable on Main Street. It bespeaks an approaching recession.
As a former commodity futures trader before I got old and gray, my gut feeling, based on the history I know, has been that we would have a significant pull back or at least leveling out in commodity prices, including gold. We've had several periods like that since the lows of 1999-2003, and it is common in commodity bull markets. Whether it really started today or not is foolish to speculate about, but I have been cutting back on commodity exposure in recent weeks just as I cut back on "generic" stocks last year and early this year. As mentioned I sold one-half of my high yield oils and gas trusts. I did buy TYG the infrastructure closed end fund, but did not buy KYN and MGU. Not did I add on to ETO or buy DRP. I still like them at some point, but I'm going to wait. I cut back to minimal positions in VGENX and VGPMX the Vanguard managed petro and the managed mining funds. PCRIX has also been pruned and the rest hedged by the long/short commodity/currency fund from Rydex--RYMFX.
