Skip to comments.BOND GOD: The World Is Changing, And Bonds Are The Most Overbought I've Seen In My 55 Year Career
Posted on 02/03/2013 11:48:10 AM PST by blam
BOND GOD: The World Is Changing, And Bonds Are The Most Overbought I've Seen In My 55 Year Career
Feb. 3, 2013, 12:05 PM
For years, investors have watched in disbelief as the 30-year bull market in fixed-income assets has raged on, leaving bears in the dust.
The bond skeptics are having another moment, as talk grows of a "great rotation" from bonds into equities, as rates finally start to rise, and the economy turns back into the old normal.
Dan Fuss of Loomis Sayles is the third bond fund manager to be called a "bond god" (the other two are Bill Gross and Jeff Gundlach).
He is strongly of the view that the current fixed income market is out of control, and that a reckoning is coming.
This is the most overbought market I have ever seen in my life in the business, Fuss, 79, who oversees $66 billion in fixed-income assets as vice chairman of Boston-based Loomis Sayles & Co., said in an interview in London. What I tell my clients is, Its not the end of the world, but for heavens sakes dont go out and borrow money to buy bonds right now.
The world is changing, said Fuss, who started in the investment business when Dwight Eisenhower was U.S. President. We are coming off a period of very low interest rates because the central banks have been buying the bonds. Interest rates are going to go up.
The idea of the bond bull run coming to an end is a bit more popular, it seems, within the equity side of the world, where analysts are (to some extent) cheerleading the shift from fixed income into bonds. That being said, Bill Gross
(Excerpt) Read more at businessinsider.com ...
I learned my lesson on bonds in the early 80s. As a young married couple with two good incomes, and getting killed by pre-Reagan tax rates, we mistakenly went heavily into muni bonds.
Then the Carter inflation killed bond prices, I lost my job and needed to cash them in.
Ha. I don’t believe this for a nanosecond. The Central banks will not allow bond yields to to go up, period. Governments simply can’t afford the interest payments. If UST yields went up, the effect would be quickly self correcting as US+Europe+Japanese Governments would go bankrupt and we’d in a world-wide depression (forget recession) within months.
If you want to know where we are headed, look at Japan. Zero interest rates as far as the eye can see.
In a rational world, interest rates would be sky high now. But these days they are being held down by the federal reserve. I don’t believe the federal reserve can raise interest rates, because doing so will raise the amount of money we will have to use to pay off the bonds. It will be a fiscal cliff larger than the fiscal cliff. The federal reserve knows this, and does not want to be the one to torpedo the economy. If private investors rotate out of bonds, then the federal reserve will be forced to pick up the slack and buy more bonds themselves.
I would never borrow money to buy bonds. As I understand the bond system, you’d essentially be borrowing money to,loan money to a company. That’s not financially sound.
If I were to buy bonds, it would be straight cash, I think.
And when it does rise, it will be a surprise to all but the insiders and it will go up faster than gasoline.
If that ever happened, Congress would be forced to repeal the federal reserve act the next day, and print money directly to pay off the bonds.
“The Central banks will not allow bond yields to to go up, period”
Eventually, this won’t be possible. That will be the end of this charade.
Well, then, how about reversing it and shorting bonds to raise money to buy stocks?
I agree with you...it will eventually fall apart. The practical question is when.
I contend that the farce will keep going for quite some time because, as the author states, ALL the Central Banks are playing the same game. The Powers-That-Be all have the same fundamental goal: stave off social upheaval.
— For the West (including Japan): Too much debt, too many promises, and too high a standard of living. Aside from Germany and Japan, there is not enough industry to provide a living for everyone. So the Government has a bigger and bigger role in employment and entitlements keep the rest of the population fed & docile. They play along because if there will be massive social upheaval if Government spending is actually cut to sustainable levels.
— For the East (particularly China): They need to grow, so they need to export. They play along because the alternative is massive unemployment and, likewise, social upheaval. Also, even while its Monopoly $$, it helps them catch up with the West from a military/technological standpoint.
— For the Oil Producers: They are in the same boat. The minute the petrol dollars stop, they will have to contend with their own restive populations.
The fundamental problem is that the Human race now produce enough to survive without everyone taking part in the workforce. While this is good in many ways, it also renders a lot of people .redundant. At the same time, we are also busy offshoring jobs so the necessities of life can be produced even more cheaply. All countries are trying to export excess goods to each other now in a race to the bottom. Improvements in technology and foreign education/work ethic have made this possible. As value-added jobs disappear, Government has picked up the slack by employing more people and handing out ever increasing transfer payments to poor people. After all, we Westerners demand high living standards and we dont let people starve. While our credit was good, this created an illusion of normalcy (prosperity) for a long time, but illusions have limits. People are slowly waking up to the fact that Government can’t deliver all it promised. And, at this point, all but the stupidest politicians will admit to themselves that its not working. Deficit spending is giving us increasingly diminishing returns, buying less & less stability today at the expense of anarchy tomorrow. But they feel they have no choice. So, they all play along and accept increasing worthless currency to keep the Status Quo going—because no one can fathom what will happen when the music stops. Certainly riots—cities will burn and people will die. Perhaps even the start of a new Dark Age. So, we have condemned ourselves to a Zombie economy as long as our leaders will go to extraordinary lengths to maintain the facade.
I’m not a financial expert, by any means, but if you think the bond market will go bust soon, that would be the better position. Of course, you are taking a risk of the bond market not going bust and have to purchase them at a higher rate than intended.
Once again-— The Federal Reserve is a private bank. What is in for them to buy so much USG debt taking the place of China? China has been a net seller of USG debt
It is the one thing keeping the economy afloat. Yes, they are a private bank, but a private bank with few customers, and all of them in the US, deeply wired into the US financial sector, and too big to fail. Where are they going to go, if they allow the US to collapse? They are in this as deeply as the government.
If they don't keep interest rates down, the US government won't be able to pay interest on the debt. If the government can't do that, they will either have to hard default on the debt, with all the social chaos that may cause, or they will repeal the federal reserve act and print money directly. I believe they will do the latter eventually.
The fed must buy all of the US's debt, and keep interest rates at near zero, and hope congress can pull through and cut spending enough to resolve the deficit. If that doesn't happen, it will be the end of the Fed, and eventually, the current US government.
To really have increases in the rates over that time we will need job growth and wage competition..something that's not in the cards.
Seems to me for the average person the interest rate play is to get the lowest rates possible on any debts they have and buy equities not bonds with any new money
Yields will go up, when the bond collapse begins.
If spending is cut enough to have any effect, riots will begin and the civil war will be on.
I'm 69 and I expect they'll still be 'kicking the can' when I die.
If they can, they will. They have been doing it for 20 years in Japan.
If they can, they will. They have been doing it for 20 years in Japan.
I can remember when the Nikkei-225 was at 39,000...today it's at about 10,000.
So between the FR and the USG is is a mutually assured survival or a mutually assured destruction
"We therefore have a choice of two no-wins: massive state debt, increasing austerity, rising real inflation and social injustice - or economic collapse and chaos. Imagining this can be called "sustainable" or able to be prolonged on a semi-permanent basis is surely one of the most incredible false beliefs that exist."
I’ll check out your link
Even Sean Hannity who is a boring mainstream conservative said very matter of factually. Like he had said it a thousand times before. He said the markets and real estate were up only because the Federal Reserve was juicing the economy by buying USG debt, thus keeping interest rates low. That the current improving economy was not due to natural factors but due to the FR created artificial low interest rate environment
Everything these days is pretend.