“Bond investors suffer nightmares, but equity investors have dreams.”

I had never heard of this saying before but an editorial in the Weekend FT referred to it as a Wall Street cliché that sounded perfect in explaining last week.

“Bond investors suffer nightmares, but equity investors have dreams.”

This chart overlaying the Russell 2000 etf over the high yield etf is a great visual of this after last week’s market action. I use these two indices because of the intuitive relationship between smaller companies and the cost of capital for non investment grade credits.

I believe this encapsulates what will most likely be a key market theme in 2017, the push and pull over hopes for a liberated economy and the reality of higher interest rates on an economy and asset market place that have been built on artificially low interest rates.

Bonds are getting smashed globally. The vigilantes are back. The US 10 yr yield at 2.24% was last seen on December 31st, 2015, it’s up nearly 40 bps from last Tuesday’s close. The 30 yr bond yield is at 3% and the 2 yr note yield touched 1%. The Japanese 10 yr is back to zero. The Italian 10 yr is at 2.08%, the highest since July 2015. At one point today it was up 75 bps over the past 3 weeks. The German 10 yr bund yield was at the highest since late January and closed at .32%%. It was at 15 bps last Monday. Yields are jumping also in Asia across the board.

Japanese stocks and the Chinese A shares were the only markets higher in Asia overnight as the stronger US dollar caused selling everywhere else. Japan reported a better than expected Q3 GDP report as it gained 2.2% at an annualized rate vs the estimate of up .8%. Business spending and consumer spending were flattish so it was net exports and government spending that helped to boost GDP. In China, retail sales grew by 10% y/o/y in October but that was below the estimate of up 10.7% and matches the slowest pace of gain since 2006. Maybe consumers were holding off waiting for Singles Day last week from Alibaba. Industrial production rose by 6.1% y/o/y, one tenth less than expected and matches the September pace. Fixed asset investment ytd y/o/y was up by 8.2%, one tenth more than the forecast. I don’t know what’s real and organic growth out of China and what is stimulus influenced.

As a vocal bull, I wanted to update my views on gold in light of the election and the Trump victory. My initial reaction was that the gold bull market was now not going to be as robust as it would have been had Clinton won. Yellen will very likely fill out her term until January 2018 but a more hawkish Chairman will likely fill her spot thereafter. The rise in nominal rates that I foresee may also happen more quickly than I had previously thought. The bull case though takes on a somewhat different complexion in that inflation risks are now more real and we can assume that the Fed will be very slow in responding to it. Thus, while nominal rates are headed higher, real rates will continue to fall and that is the primary driver of gold prices. Also, we have to assume massive new debts and deficits will become more obvious and could become a problem for the US dollar at some point. Looking abroad, we have to fear now what happens to the bond markets in Europe if inflation starts to flare up there, which it will. Draghi will be very slow in adjusting policy in response.

Bottom line, while rates and inflation won’t go to the absolute level of the 1970’s (nowhere close) in coming years, the trajectory might be the same (up) which in turn would be similarly bullish for gold as it was then. There will be a time to be selling gold in coming years but I just think the bull case still has room to play itself out further in 2017 because of the massive monetary hole central banks have put themselves in and how far behind the inflation 8 ball they now find themselves in. Thursday we’ll see October headline CPI which is expected to be up 1.6% y/o/y, the most since October 2014. When the FOMC walked into their December 2015 meeting and exited with a 25 bps rate hike, the November CPI was up .5% y/o/y.