Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Warning: Investors Still Confident in the US Bond Market

Interest-Rates / US Bonds Apr 25, 2011 - 11:47 AM GMT

By: Bill_Bonner

Interest-Rates

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.

Bill Bonner
The Daily Reckoning

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007).

    © 2011 Copyright The Daily Reckoning, Bill Bonner - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in