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In the course of the very public battle of the egos playing out between DoubleTree’s truculent Jeff Gundlach, and that Flower Child of the bond market, Bill Gross, the former seems suddenly to have discovered an enthusiasm for commodities which he has been promoting by showing a graph of the ratio between stock and commodity returns of the type we have long used to illustrate our own arguments in favour of one or the other. Given that much of the pair’s war of words has been played out over just which level each of these soi-disant gurus has chosen to constitute the definitive point at which the generational decline in bond yields can be said finally to be over, it is a trifle ironic that friend Gundlach did not have his juniors cook up something more like the chart we append here—one which shows that even greater extremes of relative valuation are to be found between commodity returns and their reliably negatively-correlated antitheses in the fixed income market. A point of note which a closer inspection of this quasiperiodic relationship will reveal is that not only is it mean reverting, but the tendency—once bonds reach 1 to 2 standard deviations above that trend—is for the back reaction to pull them down, far below it. Thus, a relative drop of around 60% was seen after the 1972 peak at the start of this history, with further drops of approximately 50% after each of the 1977, 1986, 1999, and 2002 local maxima.

Any one care to bet that we might just enjoy a similar move this time, too?

S. Corrigan