Bonds vs. Tech Stocks for Bubble Supremacy

Nothing much happened on Wall Street yesterday.

And there’s not much in the press today. The Financial Times talks of mergers and acquisitions, Australia’s upcoming elections, and South Africa’s drift towards Zimbabwe.

The International Herald Tribune (the overseas version of The New York Times) is concerned with elections in Haiti, Iraq bombings, and China’s banking system.

Generally, you are better off not reading the paper. It causes you to think like everyone else, which is to say, not to think at all. Instead, you spend your time getting worked up about things too remote and too complex to understand…things that you can’t do anything about anyway.

The issues are complex…but the motives are simple. The NYT and the FT want to sell papers. So they come up with stories that confirm readers’ prejudices, flatter their vanities, and distract them from their own concerns and challenges. Readers are encouraged to ignore their own problems and meddle in the affairs of other people.

All we find of interest in the news this morning is that bankruptcies have risen to a 5-year high – just what you’d expect in a major correction.

The Wall Street Journal, meanwhile, carries an article entitled “The Great American Bond Bubble.” The authors worry that bonds have gotten themselves into a bubble similar to tech stocks in 1999. You’ll recall that back then investors were so sure new technology would pay off that they were prepared to pay astronomical prices for dizzy tech companies. Many of these companies had no realistic business plans, no revenue, no employees, and no hope of making money. Others were embryonic, with a tiny stream of income that they were sure would grow into a flood. It was not unusual for investors to pay 50 times earnings, or even 100 times earnings, for these stocks.

Well, just look at what is happening in the bond market, say the authors. Prices have gone so high – for government bonds – that investors once again are paying sky-high prices for tiny streams of income. In the case of America’s inflation-adjusted 10-year notes, the TIPS, for example, investors are now paying more than 100 times the expected annual return.


Ah…you know the answer. Because there’s a Great Correction going on. There’s more evidence of it every week. The recent jobs report…new unemployment claims…the latest consumer spending figures…Japanese GDP…European industrial output…

…and sinking yields on Japanese and US government debt…

…all point to a Great Correction.

What can you do with your money during a Great Correction?

If you’re smart, you know that most asset values are vulnerable. If you’re investing for retirement in 5 years, for example, you’re taking a big chance in stocks. If they follow the Japanese example they could go down for the next 5…10…15 years. If they follow the example from the US from the ’30s…they’ve still got another 50% decline coming. Maybe more.

If you’re 20 or 30 years old, heck, you can take the risk. Sometime between now and retirement, stocks are likely to trade at prices at least as high as they are now. But if you’re 55 or 60 you’ve got to think about it carefully. The risk is that half your money will be gone when you need it. The reward is what…maybe a 10% gain? Maybe 20%? Not worth it.

The stock market has been shilly-shallying around – up, down, up – for the last 10 years. Investors have made nothing. The boomers are getting ready to retire. They figure they’d rather hold onto what they’ve got than take a chance on losing it – especially when the performance of stocks has been so poor.

The nice thing about US bonds is that you’re sure to get your money.

The bad thing is that you’re not sure how much the money you get will be worth.

But that’s a problem for another day…

Bill Bonner
for The Daily Reckoning

The Daily Reckoning