DEFLATION

The only chart we need, to realize that the economy is falling off of a cliff and monetary policy has lost its power over the economy.  Despite record deficits and record debt, long-term U.S. Treasury yields are declining inexorably lower.  That's deflation in a nutshell.  At no point along that timeline has the gap between yields and the stock market been this wide (except on the left when yields were high and stocks low).  Meanwhile each leap higher in stocks is having less (upward) correlation with yields and by extension the economy.  That disconnect comes courtesy of Central Banks who are setting up Wall Street for the mother of all reality checks.

I already addressed the 'bonds in a bubble' thesis here.  However, anyone who thinks that an asset yielding 1% is in a bubble, is in for a rude awakening.  The total bond market is several times larger than the stock market - the treasury market alone is twice as large and unlike the stock market, it's not a speculative casino.  Interest rates/yields are based primarily on default risk and inflationary expectations.  The much discussed $121 billion pulled out of mom and pop equity mutual funds in the past year equates to just slightly more than one month of Federal Government deficit borrowing i.e. it's one Obama signature on a slow day...

The accelerating decline in yields indicates accelerating deflation

Notice when Quantitative Easing (QE1) started (i.e. March 2009), the stock market AND yields leapt higher i.e. they were highly correlated to the nascent reflationary economic expansion.  At that time, the stock market was much lower than it is now, whereas yields were much higher.   Fast forward two rounds of QE, one Twist and two LTROs later - over $3 trillion in debt monetization already pumped into the system and yet yields are back down to where they were at the worst part of the Lehman crisis.  

Now that IS scary...