BOND WAVE MAPPING： CASE STUDY 2
Price & Inflation Cycles
Along the Bond Wave
Originally published July 23, 2016
Last edited July 11, 2017
By Michio Suginoo
Sidney Homer, in his chart of the centennial best credit frontier or “Homer’s Saucer,” left us a notion that the state of money has something to do with the evolution of the Western civilization. Homer’s notion extends to a life cycle of civilization. In studying the bond wave, I intend to contemplate Homer’s notion in a shorter horizon, say secular time frame. Using the bond wave, by observing a long-term transformation in the relationship between bond yields and other metrics for an extended period of time, my attempt is to capture a notion that the state of money mirrors a broader socio, political, and economic reality.
Bond wave mapping provides a heuristic approach to apply historical analogy to make inferences about our present and future based on our past.
This section reviews the transformation in the relationship between price behaviour and the bond wave.
In general, the following components at minimum constitute bond yields: real risk-free rate, inflation premium, default premium, illiquidity premium, maturity premium, and tax premium. And in this reading, our interest is the relationship between the bond wave and inflation rate, treating the variability in other components being non-material in a secular scale: this assumption needs to be tested in other readings.
Chart 3.2.1 illustrates the relationship between the bond wave and price cycle (the cycle of price level). The chart illustrates a drastic change in the behaviour of the price level in relation to the bond wave somewhere between the 1970s and 1980s.
Chart 3.2.2.b illustrates the relationship between the bond wave and inflation cycle (the cycle of the rate of change in price level).
From these two charts, the following two observations can be made.