"In the Friday "Big Picture" comments, you discussed the long term view that the U.S. most likely is not in a Japanese style deflationary spiral. That, the Fullermoney view is U.S. rates are going higher. I do not agree or disagree. But, I would like to point to David's comment:

"Price charts are a reality check, in terms of supply and demand, so we need to muster all our objectivity when viewing their factual message. Otherwise, it is easy to rationalize or ignore what we see. Due to preconceived notions, any of us can see three different things when we view price charts: 1) what we want to see; 2) what we think we are going to see; 3) what is actually there. The first two will cost us money.

"With few exceptions, every where you look is another strategist or fund manager saying that U.S. debt is the "short of the century", a "can't miss trade" (Could the Taleb comments be a louder bell?). I don't know about the rest of the world, but you can't turn on the TV or radio in the U.S. without hearing another add on why gold is a "must own" investment. No matter how bullish I am long term on gold, with the constant media bombardment and the price acceleration, I could not take it anymore and sold every gold related investment a few ticks from the top (yes, I'm itching to buy it back). This email is not to brag on one good trade that is equally matched with a few bad ones. It is simply to point out what we all too easily forget, the consensus of strategists and public are usually wrong. And, there is way, way too much agreement on the "great bond bear market" for me to be comfortable. The chart tells us that this is not ready to happen.

"If you have not read it, I urge everyone to pick up "The Holy Grail of Macro Economics, Japan's Balance Sheet Recession", by Richard Koo. The first chapter alone is perhaps worth four years of economic study at the University. I have sent this book to a few of our rates bearish Global Strategists. Their counter point being that the U.S. Treasury and Fed have learned from the Japanese mistakes and will not take away the punch bowl. I think for the last nine months the market believed this (and so do I). Both Bernanke and Geithner have repeatedly referred to "The Japanese Playbook". I believe that the world wide Central Bankers have learned the lessons of Japan and stimulus is here for the foreseeable future. Why are bonds not crashing? (carry trade anyone?) Until the charts tell us otherwise, politicians are the markets danger. The Central Bankers are not making Japan's mistakes, it's the populist politicians that will scare the world into deflation."

Eoin Treacy's view Thank you for this contrarian, well argued email and the book suggestion. There is one large difference between Japan and the USA that is worth mentioning. While both countries have the luxury of issuing debt in their respective currencies the difference lies in who owns it. Japanese debt, as far as I am aware, is mostly held domestically while the USA depends on foreign purchases to fund its deficits.

This chart of foreign net transactions depicts the secular increase in foreign inflows to the USA from the early 1990s to the 2007 peak. However, there has been a net withdrawal of cash from the US economy on four occasions since 2007. Inflows surged back to pre-crisis levels on the November reading but they need to stay there if the US is to have any chance of meeting its obligations without recourse to even more rampant Dollar printing.

Aside the issue of how the USA is going to attract the requisite foreign investment or the fact that the bull market is already one of the lengthiest in history, or that supply is exploding, I wholeheartedly agree that we need to be led by the chart action.

The US 30yr Treasury yield has been trending downwards for most of the last thirty years. The panicky period in September and October of 2008 saw a considerable acceleration in this downtrend which probably marked the bottom for the long downtrend. Yields subsequently rallied back above 4%, which had been an historic area of support, and continue to range above that level. A short-term progression of higher lows has been evident since October and a sustained move below 4.4% would be required to question scope for some further higher to lateral ranging.

While the low near 2.5% was probably a long-term low, we do not know how long base formation will take. If the USA moves into a long deflationary battle with anaemic growth then we a lengthy base formation development phase could follow. If the USA loses the confidence of its creditors yields could move higher a lot sooner. A sustained move above 5.5% would signal a major inconsistency because it would emphatically break the progression of lower rally highs and the long-term downtrend.

It is also interesting to compare the charts of the 2yr and 5yr to the 10yr and 30yr. The shorter end of the curve appears to be pricing in the deflationary scenario and current high unemployment, higher taxes, and lower wage demands bear justify this view which fortifies the longer base building hypothesis. The longer end of the curve appears to offer a more ambivalent view of deflationary projections, while TIPS spreads suggest investors continue to view them as a hedge against future inflation.

Gold is also being viewed as a hedge against future inflation and current interest rates do not offer a headwind for the gold price. The current pullback is somewhat larger than those following previous breakouts in 2005 and 2007, which is a cause for concern in the short-term. However, provided gold sustains the break above $1000 the overall uptrend will remain relatively consistent.