I have had more than a few folks ask me how I envision seeing this mess with our financial system eventually playing out. The truth is I am not quite sure because to my knowledge, we have never before seen anything quite like this in modern times.

Generally, we have had economic slowdowns/recessions but during such times, there was more often somewhere around the globe where growth was not that bad. For instance, if the US was slowing, growth in Asia was strong. Perhaps Latin America was growing while the Eurozone was slowing, etc. We do however seem to have entered a period in which it is difficult, if not downright impossible, to find a major nation experiencing any sort of strong or vibrant growth. It seems the entirety of the nations on the planet are all slowing down at the same time.

That, in my view, is what makes this current set of circumstances so unique.

How this ends I cannot say but I do think that one of the keys that it is not going to end well will be seen in the bond markets.

Anyone who has been following the markets for any length of time, and especially at the current time, can see that government bonds are the recipients of massive amounts of safe haven flows. This is in spite of the fact that in many nations, they are paying next to nothing in yields. Scared investors are more interested in RETURN OF CAPITAL at the moment than they are in RETURN ON CAPITAL. “Just as long as I do not lose any more money I could care less what it might pay me right now”, seems to be the current line of thinking among a substantial majority.

This is clearly evident in the long bond chart which has gone on to make another all time high as noted in a previous post. No matter that the US is saddled with $19 TRILLION in debt ( and this does not include unfunded liabilities ) panicking investors are still winning to loan it even more money by buying Treasuries. This is especially true of foreign investors who are flocking in droves to buy US Treasury debt due to the abysmally low rates of return that they can hope to gain in their own native government bonds.

As long as investors are willing to use the bond market as a safe haven this thing can keep going on. Interest rates will move lower and lower the more money flows out of stocks and into the bond market.

What will be the tipping point in my mind will be the occasion when the bond market no longer goes up while stocks are going down. In other words, the safe haven that bonds are currently being viewed as, will come to an end. If that occurs, and I think it will be evident to those of us who are looking for any signs of such a development, it will signal a very clear sign of a complete loss of faith in governments but even more than that, a loss of faith in the ability of Central Banks to do anything to deal with this problem.

If such were to occur, we could actually see interest rates RISE while stocks collapse lower. Both bond prices and stock prices would move sharply lower in sync with each other. How devastating would that be?

Again, I do not know if this will happen nor am I stating that I believe it is inevitable. It might be completely avoidable if the US does not screw up and put another leftist in government later this year since someone who actually understands how economies can be hurt by heavy-handed government regulation and oppressive tax policy could perhaps help to reverse the downward spiral before it gets too far out of control.

That being said, if we see, for any reason, the refusal of the broad investor world to buy Treasuries (or any other government bonds for that matter) during a time of economic crisis, that will be the signal that a loss of confidence has arrived and we are all in for a rough ride before things could be expected to improve. Let’s hope this is not what we get as we move forward into this year and the ones beyond.