Let examine more carefully the relationship between stocks and treasury bonds. The StockCharts start from 1980. The first decade:

bonds 1980

It’s pretty clear that stocks and bonds are generally moving in the same direction all this time. The next decade:

bonds 1990

The relationship is the same. It’s very important to note that the relationship is not affected by recessions. Lets look at the next period more carefully:

bonds 1998

It’s pretty clear that stocks and bonds diverged in late 1997 and kept moving in opposite direction all the time except a short period in 1999 and early 2000. The current decade:

bonds 2000

Stocks and bonds are diverged all the time from 2000 to late 2003, when the divergence ended and they started to move in the same direction again.

The divergence started again in early 2007 and became very pronounced during the market volatility periods in March and August.

So what does it mean? My opinion lately is moving toward conclusion that deflation scare is a typical attribute of the Kondratieff Winter period and the relationship between stocks and bonds and is good indicator of the timing of this scare.

While I’m usually talking about the inflation/deflation cycle, in fact in the economy there are three monetary conditions: inflation, disinflation and deflation. Disinflation is just a slowdown of inflation but not the outright deflation.

In the Spring, Summer and Autumn the deflation is never a problem, which is manifested by synchronized movements of stocks and bonds. The inflation is bad for both stocks and bonds, the disinflation is good.

Not so in the Winter phase. Nobody is scared about inflation anymore. It is totally unprecedented to see new market highs during record oil and gold prices and after 17 Fed rate hikes. Usually runs in commodity prices and increases in interest rates are bearish. But when the Winter comes it’s all changing. When the Winter is coming inflation is good.

Every book on Intermarket Analysis will tell you that stocks and bonds are moving in sync, because that’s the case during the Spring, Summer and Autumn of the Kondratieff wave and everybody already forgot what the Winter is.

The conclusion is that the Intermarket Technical Analysis must adjust for seasons of the Kondratieff Wave, you simply cannot apply all the same rules all the time.

Based on the charts above let specify the timings of all known Kondratieff Winter periods in U.S. history:

  • 1835-1844
  • 1875-1896
  • 1929-1949. No living economists and investors remember that period, so there is no much discussion about this period outside academic circles. That will change soon, I suppose
  • 1998 – first deflationary scare in the current cycle. The Winter phase coming was prevented by the Internet Bubble
  • 2000-2003 – the dress rehearsal of the Winter phase, which was reversed back into Autumn by the Housing Bubble and LBO Bubble
  • Early 2007 – bonds and stocks diverged again, which probably spells the trouble, as the Winter has to come sooner or later and now it feels quite chilly

Conclusion: watching the Intermarket relationship between stocks and bonds is the clue to spot the Kondratieff Winter phase