Bill Bonner on Deflation, U.S. Treasury Bonds and the Trade of the Decade

Welcome to the DR Video Series. A few times a month, we will post interviews, video shorts and insights from today’s top minds. As a Daily Reckoning reader, you’ll have first crack at these exclusive videos — we’ll let you know each time one is posted.

In the first part of this two-part interview, the Daily Reckoning’s own Eric Fry sits down with Bill Bonner at the Agora Financial Investment Symposium in Vancouver to discuss a multitude of topics: what the speakers had to say at this year’s event, Bill’s thoughts on the credit deleveraging cycle, why he remains anti-Treasury…and why his “Trade of the Decade” still looks like a great bet. Enjoy!

Bill Bonner on Deflation, US Treasury Bonds and the Trade of The Decade

Eric Fry: Hello.  I’m Eric Fry.  I’m here with Bill Bonner.  And Bill, I just wanted to check in with you after the recently concluded investment symposium in Vancouver – you were there –

Bill Bonner: I was there.

Eric Fry: You saw the speakers.

Bill Bonner: I was there, yes.

Eric Fry: So who was right, who was wrong, who was just plain nuts?

Bill Bonner: Oh, boy.  That’s a loaded gun you’ve given me there.

Eric Fry: I know.  I want to elicit an answer here.

Bill Bonner: Well, I think the thing was – I found myself agreeing with just about everybody, but not necessarily coming to the same conclusion.  And, I think what I saw is that there is very good evidence and lots of documentation for the credit deleveraging cycle that I think everybody sees, and beyond that there’s a lot of speculation about what that means. I mean, in terms of the government response to it, in terms of investor response, and as you know, the bond market and the dollar rests on confidence.  So there’s a lot of worry that confidence will give way when they see the federal government continuing to run huge deficits year after year.

I personally came to the conclusion that that was probably not a worry for the near term.  In fact, you know, I feel myself being much more optimistic than most analysts and I see ourselves working our way through this in the classic Japanese way, which just happens to be the worst possible way.

Eric Fry: Right.  Okay.  Well, that suggests the kind of lengthy deflation or disinflationary period.  Is that what you’re looking for?

Bill Bonner: That’s what I see.  Now, I told the audience myself that that’s all you can see, and it’s important to remember just because you don’t see something doesn’t mean it’s not coming and from what we’ve  seen and what we’ve experienced over the last few years is a realization that the unintended consequences of government actions are sometimes very sudden and very powerful, so we could see a crisis at any moment.  And I told the people in the audience that even though I personally do not see a blow-off in the gold market, for example, I would sure want to hold some gold just in case.

Eric Fry: Right.  Right.  Well, a lot of the speakers also seem to want to have it both ways on the question of deflation and inflation and many of them were saying, yes, I think there’s going to be a deflation so I want to buy Treasuries, but only for two-and-a-half years and then there’s going to be inflation.  Now, you are on record as being relatively anti-Treasuries as a Trade of the Decade.

Bill Bonner: I’m totally anti-Treasury.

Eric Fry: How does that coincide with your expectation for a deflationary environment?

Bill Bonner: Well, this expectation has evolved over the last six months, and six months ago if you had asked me, I would have been more anti-Treasury than I am today because now what I see — which I didn’t see before, which didn’t exist before — was the ability of the world to finance Treasuries over a long period of time. Before we weren’t in the Japan situation because we didn’t have the savings to finance all those deficits.  We’re talking about deficits of 1.5 trillion dollars a year over the next 15, next 10 years. And anybody would have said a year ago, maybe six months ago, ‘Well, that’s impossible, you can’t finance that much.’  I think I did say that.

But now, what we’re seeing is that there’s a huge increase in savings that the savings, even of the Japanese, are still going to the U.S. Treasury market and then, if we’re right, generally about the bear market in stocks, bear markets in equities, generally it’s going to mean that investors are scared and they’re going to look for safety in the safest credit in the world.

You know that – and I made this point too – that printing press, that Bernanke’s famous printing press, the technology that it’s got, is that they can always guarantee inflation.  Well, the thing is, they can’t always guarantee inflation, not in a credit deleveraging cycle, and that’s what we’re seeing.  They cannot get it.

They’re getting lower and lower rates and now they’re getting uncomfortably low rates of consumer price inflation, even to the point of absolute deflation, which seems to be coming, seems to me will be here next quarter or quarter afterwards.

Eric Fry: Right.

Bill Bonner: But that printing press thing, it works both ways because on the one hand, people say, well, I don’t want Treasury bonds because I know they’ve got that printing press and they can just print up dollars at will.  But in a fear situation, people say I want Treasury bonds because I know they can print up dollars at will.

Eric Fry: Right.  Well, and does that mean that your Trade of the Decade, then, is not a trade of the next five years, or should we restart the Trade of the Decade here in August and –

Bill. Bonner: Now, look, a Trade of the Decade is a Trade of the Decade.  You stick with it and you –

Eric Fry: And dance with the one you brought in.

Bill Bonner: Yeah, that’s right.  You just stick with – you go home with the one you came with.

Eric Fry: Right.

Bill. Bonner: And besides, it’s too early to know, but I’d say that as the trade, it still looks pretty good.  You know I modified that trade, by the way.  I said, buy Japanese small cap stocks and sell Japanese bonds.  I changed it from U.S. bonds to Japanese bonds just to get the currency thing out of the way.

Eric Fry: Neutralized?

Bill Bonner: Neutralize the currency problem and so now I still feel pretty good about that.