The Coming Crash in the Bond Market
by Bud Conrad, Chief Economist
It is my contention that the 70-year debt supercycle has come to an end.
To put the current financial situation in perspective, here’s a long-term history of the debt-to-GDP ratio, which reached a record high at the beginning of the current crisis. It was a dramatic change in 2009, unlike anything since the aftermath of the Great Depression.
Is your ETF TBT? TBT is mine. Also a good time for me to pick up some more silver rounds. Best to all.
Ah yes, TBT.
Been there, done that, LOST the t-shirt!
Moral of the story: Don’t fight the Fed.–and it really hurts to say that.
Today the Fed is printing over $80B a month–half going to buy those funky mortgage back securities (the bailout continues) and the other half going to subsidiize runaway federal spending. Until Uncle Ben breaks his finger, he will continue pushing the make-believe button on his computer–and presto zappo… more of the same. THey’ll distroy the currency long before he stops printing.
Yes, TBT.
One factor not mentioned in the commentary, unless I missed it in my cursory look through, is my expectation for the dollar. I believe the dollar is approximately at a high, and going down. As this happens foreign investors will withdraw money from the biggest market in the world, namely the US bond market. Only a small percentage leaving will have an effect on US currency, a positive feedback in the falling currency, causing more money withdrawal, causing a further drop, causing more withdrawal, etc.
Meanwhile China and Russia are quietly dumping their dollars to buy gold and soon to be grains, while trying not to drive up prices for commodities. That’s my best guess.
China and Russia have huge gains on the treasuries they bought so they simply are not rolling over the ones that are maturing.
I should be more precise than using a word such as soon above lest you think it implies next week. By “soon” above I mean July or August, that is as close as I can time it right now.
If I lived in The US, I would be worried not about my financial health but more about my personal safety.
What is happening in Detroit is coming to Portland, Washington, Los Angeles, New York, and everywhere up and down their once great country.
The US is 3rd World now, that means no police response when crime is happening.
The cessation of garbage collection and poor people fighting over who gets even that.
Street lights not on at night because the copper wire that joins them is long gone.
The list goes on and on and when there is a municipal bond implosion life will get very nasty and if you think that society doesn’t have such a thin veneer you will be a victim.
It’s Detroit today and the rest of the country tomorrow. USA today! DT
DT,
It sure is NOT like that where I live at the moment in the US.
Now it is not enough to buy Gold and Silver or be out of personal debt the worse part is when the society can’t even afford basic services. DT
I buy what China buys…bonds, bullion and energy companies….the bond collapse is years off. Your leveraged ETF will bankrupt you. Take a look at long term bond cycles. They run 40 yrs, we are barely into our 40 yr cycle of low rates.
Smelly Man
How much lower do you think interest rates will go?:
How can you have a bull market if prices cannot rise?
TBT is not to be used over a long period of time. Meaning months and months. It is a tool in the tool box used for a shorter period, weeks, when the correction occures.
Agreed. No leveraged ETF is along term tool.
As already noted, 2x and 3x funds are not for long-term holdings.
I would disagree about a 40 year bond cycle…there really isn’t enough history to predict any market since the industrial revolution…there’s too much bias for national markets based upon their hegemony of the times. That may surprise a few that I say that. I do use technicals, but sometimes history repeats, sometimes it rhymes, and sometimes it does whatever it wants to. Regarding bonds in particular, there has never been such a bubble of bonds in any recorded history. They certainly aren’t healthy bond markets. I’d be willing to look at the previous 40 (perhaps 35 year) history, but I don’t think I’d make a tit-for-tat predication based on it. However, I do agree that we’re still fighting the Fed at the moment (and the ECB). Bud Conrad’s chart’s of interest rates, including the normalized curve which divides present I rates by 100, are telling. The door on bonds is definitely closing.
Just some thoughts—-I don’t necessarily see a bond market “collapse”. A given is that the Federal Reserve wants more inflation and that the way to create it is currency depreciation. Obviously, at this time the Fed has to be somewhat discouraged but will ultimately be successful. The bond market though is under Fed control. As more foreign countries remove their assets, the Fed just has to purchase more, therefore negating any “collapse”. This ultimately will depreciate the currency and also give us the inflation the Fed wants. The Fed probably figures that over a “long” time, they will be able to slowly unwind their positions but it will be their time table.
Hi Richard, Do you really think that The Fed has that much control or power over the markets to just be able to manipulate them ad infinitum, in a situation like now they are only as good as their last decision and at some point I believe the markets will throw them under the bus. When you play with fire you will get burnt. DT
I go back and forth on the bond market—-in fact it’s starting to look a little tenuous now. The Fed can move in and out of the bond market depending on a current time/situation. It can increase/decrease their holdings depending on a particular moment in time.
I might add that this will be another case of the middle class paying the freight on this whole mess.
I believe that you are right about the middle class getting shafted in a scenario like this it will mean a VAT tax coupled with user fees on most things. Real Estate will be dead in the water, Rick Rule was pointing out the other day that if their is a drought in California the Colorado River no longer can supply water to them and Nevada, Arizona, and Colorado, their are now just to many people. He say’s you will see mass migrations from there and Lake Meade will not have enough water to supply Hoover Dam. No Power, No Water, talk about bad planning that’s what happens when The Government is involved. The new cry will be Eastward HO! DT
dt,
I’ve studied the Colorado River Multi-State Pact regarding the allocation of the Colorado river resources which supply the states you mention. Until last year, the 15+ year drought in the Southwest was starting to get a little alarming. 2012 was a banner year for fresh water run-off, raising the level of Lake Mead 40 feet in a single year, erasing about 5 years of dropping levelsr. Good thing…had the lake instead dropped 10 feet, automatic rationing was going to start, affecting mostly agricultural users first, but having some impact upon joe blow citizens. (the Hoover Dam’s reservoir was down to its lowest level since 1938) The ring around Mead was quite a site. Some have dismissed it due to upstream Lake Powell which is still near full, but Powell’s retention is a last-resort to fill Mead, holding about 5 year’s use of water (ignoring silt layer…functional water level is less).
Anyone thinking of buying property long-term in Colorado River Pact states should give some consideration to water. Some of those beautiful man-made lakes and golf courses won’t look so great if there water gets shut off!
So we lucked-out for another 4 or 5 years…we’ll see what happens in a another few years.
Hi John, I forgot to mention that Rick Rule also said that if they have a drought like they had in California in 1977 that Canada will not send water from BC, for two reasons one is that you can’t put water in a wire like electricity and the other is that when The Enron scandal happened in California that state asked Canada to ship power to them but they never paid the Canadian Government for this power saying that they charged too much, so what does this mean according to Rick Rule they won’t be shipping power or water until they get paid upfront and for the past. DT
The primary purposes of central banks to QE is to support their banks and government. All other reasons are either incidental or integral to those two primaries. Following discussion is very good to point this out why. I have listened to it several times and still learn more.
http://www.goldmoney.com/podcast/ben-davies-part-1-2-on-nominal-gdp-targeting.html
Nominal GDP targeting is the prayerbook these central bankers are using, they only add or change rhyme when it is deemed necessary to accomplish their goal. Changes like targeting maximum unemployment, interest rates, sequestering bad paper like mortgages are incidentals they announce, but things they don’t say are the real indicators. The second part of the above talks about gold, but only hints at connection to NGDP targeting. It is my opinion that Central banks and their outlet banks and funds have been suppressing gold and silver for purposes to attain goals. Paul Volker once said that not suppressing gold and silver during his reign was the one mistake they made, and the reason it is now being done alongside capital controls is to channel money into vehicles which will help their NGDP target.
Additionally, the stock market in the US is going up because the Fed is funding it. But the really big question is, will it all work???? Don’t know, but I tend to think not because even if they do attain their target briefly it is not likely to remain as their money theory is fundamentally wrong in the first place. This means a really rough ride for several years, with both nominal and real values in all things, bonds, stocks and gold going up and down making prior Vx look tame.
In the end real things win out because they are real. Paper things are a trade, long and short, something to play but risky while real things are insurance.
It would be interesting to ask mainstream market bulls if they’ve calculated an approximation of how much money going into the stock markets is nascent, earned, income of long-term investors, versus short-term, HFT pump’n’dump volume.
I understand exactly what you are saying, richard, but I look at the numbers and don’t see how. My estimate needs about $4 trillion in QE next year to cover deficit, plus maturing bonds plus extra to keep interest rates down from flight out of dollars.
I guess they could allow interest rates to rise, but then the deficit increases, but that would actually require less QE than keeping rates down! Maybe the Fed is hoping for an EU collapse to happen before a US collapse as that would certainly relieve pressure, but then we are looking at massive bank failure. I assume you are of the John Mauldin “muddle through” belief.
If there is anything correct in Mauldin’s interpretation, it would be to change the “muddle through” to “Muddle Down”. In the end we all die which is perfect epitaph to this Keynesian outcome.
I understand capital controls at the individual level, but I don’t see how the government imposes capital controls at the international company level without actually causing a cessation of money returned to the US. Which company is going to return spare profit or cash flow to the US if it feels it might be trapped there. It is bad enough that it is already more highly taxed.
cfs: Capital control on individuals is really small potatoes to corporate level, that and wars in both currencies and taxation not to mention regulations and government changes in law make this NGDP targeting all the more difficult.
I suppose inflation or more properly defined as currency devaluation is to be the consequence, control of which is easier said than done.
I read the Hinde Capital theory a couple of weeks ago and it is flawed in my belief.
If you look back you will see I posted These podcasts a while ago.
Taxing overseas profits or requiring profits to be returned is probably on the minds of politicians every day, but then how would they stay in power if they exposed such thoughts?
The US tries to bully companies to return profits to the US for taxation, but the US is powerless to enforce it. If they try, then subsidiaries are made independent, but with board members serving on both companies and all kinds of games played to disguise earnings.
Unless of course there is a OWG (one world government), god forbid such muddle towards.
The interview discusses the written Hinde theory in part to inherent flaws, but only theory. The flaws as you point out make good sense as Davies mentions how difficult it was for him to explain the theory when he fundamentally does not agree with it. In other words Davies was trying to get into the minds of these central bankers to explain their theories even though he does not thing it valid.
Not any easy task to work with tools one knows will not work.
For millennia taxation was set at around 10%. Nowadays 20% is generally accepted, but above that level there is an increasing tendency to find ways of avoiding taxation. With multinational companies, the opportunities among multiple jurisdictions with different rules and levels of scrutiny, the US cannot win.
US cannot win, probably not. So many big questions, so difficult to predict. Makes planning really hard.
One big question is what the next World Currency will be and when. Whatever it is will have significant impact on treasuries, but how and when this is done makes investments that much harder.
Wish I had a crystal ball that told me the truth! Perhaps we do but just don’t fully realize it. Gold as integral part of the next world currency, many trends in that direction while just as many telling us our own government will not let us appreciate even so.
World currency. Not in my lifetime. It would need a world government.
There will be NO crash in the bond market…At least not anytime soon. The powers to be are much stronger than we assume or are led to believe. Sound money will prevail but no one and I mean NO ONE will come out of this thing without scars. Even those who hold Gold.
I know what you’re saying TImothy, but I don’t agree.
The powers you mention have been able to do what they do because they keep pushing the envelope each day. They have the luxury of momentum of trust. Confidence can now be lost in a week. It took about a year for Arthur Aandersen to sink in, about 3 months for Bear Stearns, and about 1 month for Fannie and Freddie. The realization of a possible financial freeze also took about 1 month, from mid-Oct to mid-Nov 2008.
Greece went from 4% interest rates to 8% in one week. Spain went from “Of course we won’t need EU help” to receiving EFSF funds about a week later. Today, the Fed buys back 70% of our Treasuries put up for sale. I agree we should be leery of who we’re betting against, but that doesn’t change my opinion on what needs to be done: trade paper fiat for real money.
If gold holds at these levels over the next few weeks, we’ll be in a good place for the future. Actually, the only thing I personally am confident in is the hard asset itself. The stocks may get hammered yet but the metal should survive in the grand scheme of things.
Many countries are attempting to depreciate their currencies right now. It’s like musical chairs or a round robin. Our turn will come again.
They are trying to weaken their currency against the USD. So the USD will go up.
As a well know silver analyst would say: “I called that top 6 times in the last 3 years”
The interest rate can keep going down as far as the fed wants it to go. I believe it might even be able to go to negative rates.
I just don’t see how the US economy can get to sustained growth without cutting back on policies that impede it. Policies like increased taxes and regulations, tiered judicial and wealth capturing system where QE flows mostly into the rich with to big to jail credentials and yet the economy has over decades been channeled into a service and consumer base. The wealthy don’t contribute much to consumption whereas services are concentrated more and more into government.
This whole economic scheme with stock market rising smells really fishy to me, rotten fish mostly. Muddling along has already failed so it is no solution. Currency wars heating up are a testament to that fact. All these failed trials and attempts of central economic planning give stronger and stronger support behind the theories of Austrian economics.
I suspect that Bernanke and other central bankers are now trying a version of mini-hyperinflation but using government policies as basis of control. The common agreement of many, Faber, Rogers, Rosenberg, Stephen Roach, Don Coxe, Richard Russell, Bill Gross and El Erian and many others is THIS IS GOING TO END BADLY.
If you are not malinvested when others are it becomes a waiting game.
We were taught this in 1934:
http://www.youtube.com/watch?v=MeZe2qPLPh0
Then The General Theory of Employment, Interest and Money was published in 1936 and we entered the land of perpetual credit expansion. Everything works in the land of leverage until the reality that leverage works in two directions becomes the news of the day. Instant gratification equal ignorant ecstasy. Nuff said!!!!!!
Boy Clay,
I think you just NAILED it.
It is not so much that Austrian economics is rather that Keynsian socialism is wrong.
I believe we are not getting growth, despite pumping money into the system, is that pumping money tends to create bubbles…..housing, stock market, typically. However by high taxation too much money is taken away to encourage growth. I don’t know the optimum rate of taxation, and, indeed, it may vary as a function of the business cycle. What is historically quite clear is that regardless of country and saving characteristics of the population, taxation below 20% seems to allow growth and taxation above about 20% seems to stifle growth. Most of the late sixties/early seventies had taxation set at around 17%-
China just came out with their February data and it wasn’t very encouraging. Industrial production and retail sales were less then expected and inflation was higher then expected. If this continues, they’ll be between a “rock and hard place” as it relates to their policy decisions. Can anyone say stagflation. With our trade deficit this past month being higher then thought it conjures up an image of importing inflation.
Yes, we are importing inflation, or trying to, and exporting inflation to the rest to the world.
Japan’s data this morning was even worse.
Damn! For some reason this particular computer senses proximity of my hand as a click!
I had not finished typing and not even starting proof reading of the above.
I see 10th word omitted, (RIGHT), BUT
India is still growing quite well.
I don’t believe US statistics anymore. period. If they can’t get inflation right all other calculations, relating to growth, will be wrong.
You realized their currency fell over 50% and inflation has doubled?
Kaiser was interesting on Friday:
http://rt.com/shows/keiser-report/episode-416-max-keiser-005/
I sure miss Lauren Lyster on RT.
U.S. 10 year will trade below 1%. Economic data moving forward will start slowing down and the flight to safety mantra will start again. Right now the retail investor is jumping into stocks.
Charles Bobrinskoy “Go home gather up all your long term(anything over 2 year) bonds and sell them!”
Would’nt you love to bug Obama economic advisor Mark Zandi and make a NYT reporter say “You scared the hell out of us!” Very much on point to this thread:
http://video.cnbc.com/gallery/?play=1&video=3000153530
I actually agreed with the advice on CNBC, except when asked what the interest rate of the long bond should be, he said 3.5%, and the correct answer is inflation plus 1% or inflation plus 2% dependent on whether we are talking 10=year or 30-year bond.
I heard him say the 10yr at 3.5% to 5%.
What I found interesting is Steve Liesman’s comment to the effect:
“I do not think it is primarily the goal of what they are doing….but the Fed’s active presence in the market is providing the retail investor an out.”
To which Bobrinskoy said “Yes…absolutely and they should take the bid!!!!”
But Liesman’s comment begs the question what does he know the primary concern of the Fed is if it is not the retail investor?
Well we all know the answer to that….don’t we!!!!!!!!!
http://news.yahoo.com/ashley-judd-could-beat-mitch-mcconnell-2014-074500831.html
Well, she would be prettier to look at.
Paulson is shorting housing?!?
That says to me he is expecting interest rate rise.
Kazakstan increased gold reserve last week. Now standing at 117 Tons.
The graphs are beginning to shout:
This is an example of how mining used to be done.
I agree. That is why I am short long bonds. (An ultra ETF to be precise)