12 Apr

Although the “Bond Vigilantes” may be in the market today, I disagree with your possible implications – I do not believe that the U.S. economy is in better shape than the consensus.

First, I would set forth that the last financial crisis (2007 – 2011) and the U.S. government’s responses (Dodd Frank, the Fed’s rates, the Fed’s QE, etc.) have broken the funding spigot for micro-cap finance, a mjor engine for innovation and growth in the U.S. Sure, Fortune 500 companies are sitting on huge piles of cash, but Main Street can’t get a loan to expand and isn’t hiring the small time people (like high school kids or those who have dropped out of the work force). My firm, Rhodes Holdings LLC, does micro-cap public company work out and M&A, and we can vouch for the lack of funding due to government regulation.

Secondly, since the crisis started, my bond holdings have far outperformed any equity focused index. Even with the Dow doubling, I still trounced it. Therefore I would agree with your assessment that bonds are set for a good run now, and I mean Treasuries.

Lastly (in my opinion), the U.S. economy has been based upon a high growth model since WWII whereas Europe’s model has been low growth for the last 30 years. I believe that the U.S. needs to adopt a low economic growth model now, and our government’s policies have precluded the economy from adopting such a model, even though the crisis should have precipitated that model change. This adoption will mean that the U.S. needs to changes its social policies and largesse to match its new model, and that is precisely why our government has not allowed it – cater to the special interest instead of facing reality.



Vigilantes were members of 19th century American “vigilance committees,” composed of citizens who banded together to render immediate, and often rough, justice in circumstances where they felt formal law enforcement actions were insufficient.  Whether this was a good thing or not, I don’t know.  But the idea of vigilantes has become part of American folklore.

…and bond vigilantes

I first saw the term “bond vigilantes” in the 1980s in the work of brokerage house economist Ed Yardeni.  My impression is that he invented it   …but, hey, I’m a stock guy not a bond expert.  The idea was that should the Fed falter, due to political pressure, in its mandate to contain inflation under Paul Volcker (as it had throughout the 1970s, under his predecessors), private bond investors would step into the Treasury market and tighten money policy (by pushing up bond yields) whether the Fed liked it or not.

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Posted by on April 12, 2012 in BLOG, Business, Entrepenuers


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