Friday, April 22, 2011

Bill Bonner, "Warning: Investors Still Confident in the US Bond Market"

"Warning: Investors Still Confident in the US Bond Market"
 by Bill Bonner

"First let us catch up with a news report from earlier this week. Bloomberg:

April 18 (Bloomberg) – "Standard & Poor’s put a “negative” outlook on the AAA credit rating of the US, citing a “material risk” the nation’s leaders will fail to deal with rising budget deficits and debt. “We believe there is a material risk that US policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” New York-based S&P said today in a report. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

Well, the press described the news as a “warning shot” or a “wake-up call.” Both of those descriptions are fairly positive. You get a warning shot…and you can turn around. You get a wake-up call and you wake up.

But what do you do when you’re running the world’s biggest Ponzi scheme? Do you stop? Do you “wake up”? No, you deny it! “Don’t worry,” you tell investors. The New York Times: "…Treasury secretary, Timothy F. Geithner…said on Fox Business Network there was “no risk” that the United States would lose its AAA credit rating, disagreeing with Standard & Poor’s negative assessment, and said that investors were still confident in government bonds."

Well, yes. Investors are still confident in US bonds. Then again, investors were still confident in US houses in 2007…and still confident in US tech stocks in 1999. It is only because they are confident that bond yields are so low. But what would bond yields do if investors began to be less confident? Imagine where the price of gold would go!

Well, it turns out that confidence goeth before a fall. Especially in the bond market. Bond market cycles move so slowly that a whole generation of investors is led into great confidence…and then another generation mistrusts them forever. The proof comes to us from a report from Credit Suisse, by way of our Family Office strategist, Rob Marstrand. Rob is looking for real returns over long stretches of time. Bonds work…but like everything else, only sometimes. And this is not one of those times.

If you go to an investment manager and tell him you want to invest some money for your children, safely, securely, most likely he’ll tell you to buy bonds. And he’ll be right – but only when the bond market is in one of its boom phases. When it goes into a bust phase, watch out. You could be looking at losses for 50 years. Or maybe even permanent losses.

Rob reports: "The [Credit Suisse] report highlights two major periods when US bonds were in bear markets in real terms. The first was between August 1915 and June 1920. Bond values declined 51% and then remained underwater until August 1927. The recovery period from start to finish was 12 years. Or about the same as the recovery periods for stocks. But far worse was the second bear market. Between December 1940 and September 1981 bonds fell 67% in real terms. And they took until September 1991 to get back to even. In other words, the bond market recovery period was over 50 years! And some countries have had negative real returns in their bond markets for the entire 111 years covered by the study – including Belgium, Finland, Germany, Italy, and Japan. US bonds have been going generally up in the US ever since Paul Volcker tamed inflation in 1983. That’s a long period in which to form opinions. Not surprisingly, the opinion shaped by this upward stretch is that investors have nothing to fear from US bonds. Confidence is high. But so is the risk of disappointment."

Today, the feds are committed to EZ money. We look around. We don’t see a Fed putting on the brakes after a “warning shot.” Instead, we see America’s central bank going full speed ahead. We don’t see a “Tall Paul” Volcker raising rates. Instead, we see “Short Ben” Bernanke holding them down at zero. We don’t see an administration “waking up” to the need to cut spending; we see the Obama Team dead asleep on the job, dreaming of more income redistribution, more social programs, more tax-the-rich money raisers…with no real idea of what is going on.

What we see is a huge Ponzi Scheme…where old debts are serviced only by raising new ones. The schemers don’t know it, but they’re on the road to Hell.”
A question and comment: Real question emailed by a reader: "Why are there so many posts about economics, and why are they always so doom and gloomy?" Let me counter that question with one of my own... do you like the life style you're living now? The house and car, and sub-$4 per gallon gasoline; readily available food and entertainment; the electronic universe of 500 TV channels, the internet, cell phones, Twitter, Facebook, all of it; convenient shopping at many nearby and well stocked store? What if all that were about to change, for the worse, and you could well be without many of those things? How would you adjust? How would $20 per gallon gasoline impact your life? Could you even survive it, and I mean that in a literal sense? There are very real economic forces affecting us all, though few of us notice it or care. For a long time we've been the beneficiaries of this sytem in many ways, but that time's coming to an end, caused by the ravenously psychopathic greed of the so-called wealthy "Elite," whose actions are causing the entire structure to collapse, not only upon themselves but all of us, with fairly predictable social outcomes. Warnings are out there, folks, though very few care to know. I'm one of those fools who insist on trying to alert you, because you'll never hear these things on the treacherous and lying main stream media, or from the political whores in Washington. Hopefully you can prepare and have a better chance to survive. That's the only reason this blog is here, besides the much more pleasurable sharings about our common human existence. That's why we all, me included, endure these economic posts, my friends... - CP


  1. Knowledge alone is not power, power is the ability to recognize and use the knowledge. CP, you are doing what you can.

  2. I find it difficult to fathom that a person with the intelligence to write an email, doesn't have the intelligence to read the writing on the wall. The mere content of the doom & gloom economic posts answers it's own question. I see this email writer as one who likes comfortable lies rather than face the terrible truth.


  3. Points well made, R. Jacob and Argentum Vulgaris, thanks for commenting.
    We all do what we can, very true, and each must decide for themselves what to believe and act upon. Needing comfortable lies instead of the truth is nearly universal component of human existence, isn't it? I'm not happy having to bring these topics here, dream reading them myself, but that's what has to happen, so onward we go. There's nothing wrong with being afraid, which is the motivator behind that emailed question, only a madman, if informed of what's really happening, wouldn't have some fear these days. I don't suppose there are any madmen visiting this blog, either...