Multibillionaire hedge fund operator John Paulson, the investment genius who made a killing going short subprime mortgages a few years ago, told a standing room only crowd at New York’s University Club that double-digit inflation is about to rear its ugly head by 2012, killing the bond market, and restoring strength to equities and gold.
Paulson’s warning to sell U.S. government bonds is one of the latest signs that the most successful investors of this generation believe the run up in bonds is over. Paulson especially underscored the attraction of equities with earnings yields of 7%-8% compared to the 2.6% pittance available on 10-year Treasuries.
The US long bond is showing characteristics of a "double top". If this analysis is accurate, we have already reached the lows for long term bond yields - and are now slowly climbing right up to around 2.5% for the 10 year and 3.9% currently for the 30 year.
My concern with this analysis, is that a mid size increase in yields to 5% in 10 year bonds would drop their value by 50%! Naturally we do not know the size or timing of the coming correction, but if history is any guide, a correction in bonds will also lead to a significant correction in equities.
If my analysis is accurate on bond market timing, March 2011 is a possible correction date.
Coincidentally, Martin Armstrong's site projects an equities correction in June 2011, three months after my date which certainly fits within historical parameters.
Will deflation continue indefinitely, driving bond yields even lower and equities sideways?
Or will we see deflation confined to certain illiquid sectors such as real estate?
One thing that is certain if bonds collapse as yields rise substantially - a re-freeze of credit markets is coming.