Shed a Tear
Maybe we shouldn’t be rushing to begin etching the bond bull market’s epitaph, but that doesn’t mean that we should refrain from preparing a fitting eulogy:
“What a bull market it was…so gentle, so kind, so faithful, so enduring – a dear, sweet friend to every other financial market and asset class. (Mr. Housing Market wished to say a few words, but is simply too broken up about the loss of his close friend to speak). He was a good man, spreading good cheer in every life he touched…By his mere presence, he enriched the lives of millions – or at least made them FEEL richer. We will miss him.”
Of course, sad to say, our dear friend never had a fighting chance; the forces arrayed against him were simply too formidable. It is a testament to his fortitude that he survived as long as he did. But, in the end, he was no match for surging Federal deficits, resurgent inflation and accelerating economic growth.
Weep not for the bond market, however; it lived a long and wonderful life. For many years, it enjoyed the balmy breeze of budget surpluses. (Remember when investors worried about a SHORTAGE of bonds?) Unfortunately, budget surpluses and politicians cohabitate like hens and foxes; the hen lives until the fox becomes hungry.
Bond Bull Market: The Proximity of Politicians
No budget surplus can survive in the proximity of politicians – especially those conducting a distant and expensive war.
According to the most recent tally by the Congressional Budget Office, the Federal budget this year will exceed $450 billion, and will bump up against half a trillion dollars next year. That’s real money, which means there will be no shortage of T-bonds, T-notes and T-bills on offer from the U.S. Treasury. “The federal budget deficit has flipped from a small surplus to a very large deficit,” Jim Grant observes, “and the estimated monthly cost of the U.S. occupation of Iraq is now put at $3.9 billion…up from $2 billion in April.”
Therefore, we suspect that the Treasury’s plans to issue about $60 billion worth of new debt securities over the next three months is merely an appetizer – a taste of things to come.
“Although it was only a few months ago,” David Tice notes, “that Congress signed into law an increase of nearly $1 trillion in the federal government’s debt ceiling – to $7.384 trillion – there are already signs that the new limit could be reached inside of a year. Washington’s appetite for Americans’ – and the world’s – spare change is growing exponentially.”
The swelling Federal deficit is merely one of the many trends waiting in line to rough up the bond market. Inflation is another. Alan Greenspan has promised to overcome deflation with inflation…and we believe him. The Chairman seems to have never encountered an economic difficulty that could not be papered over with dollar bills.
“The FOMC stand prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance,” Greenspan told the House Banking Committee last week. Is this audacious remark anything more than Greenspan-speak for “If I’ve got a problem, any problem, I’ll print dollars?” The Chairman of the Federal Reserve promises to create inflation. Why should any bond investor doubt him?
Bond Bull Market: Adolescent Inflation Trend
Not surprisingly, the U.S. economy’s embryonic inflation trend has matured into a juvenile, or at least an adolescent. The dollar’s weakness, combined with the stubborn strength of most major commodities, suggests that inflation is returning, perhaps soon. The Leuthold Group’s proprietary commodity diffusion index, designed to anticipate inflation, recently touched a “high inflation danger zone” with 84 percent of Leuthold’s 74 spot commodity prices rising above their year-ago levels.
Then there’s the possibility that the U.S. economy might finally shake off its lethargy. Resurgent economic growth is far from a certainty, but we wouldn’t rule it out. And traditionally, accelerating economic growth coincides with rising bond yields, as corporations compete with the government to borrow the funds required to invest in their businesses.
“The American economy is coiled like a spring and ready to go,” Treasury Secretary Snow recently asserted. Greenspan seconded the notion last week when he told Congress that he expected U.S. GDP to grow between 3.75% and 4.75% next year. If the Chairman’s record as an economic forecaster improves dramatically, and GDP does in fact exceed 3.75% next year, bond yields will almost certainly rise.
Bond Bull Market: A Period of Sustained Growth
“A period of sustained growth may already be under way,” the Times of London observes. “Retail sales in June rose at the second-fastest rate so far this year; news from the Institute of Supply Management of pick-ups in new orders, backlogs and employment in non-manufacturing industries; reports that capital spending on IT equipment and housing construction are increasing; and a government announcement that output in the beleaguered manufacturing sector increased in June for the second straight month.”
“Add those positions up,” the Times of London concludes, “and you get a bondholder’s nightmare – loose fiscal policy in a period of accelerating economic growth, and a Fed chairman willing to risk some inflation in order to stimulate growth at a rapid-enough rate to sop up excess capacity. Investors are now hoping that the pin Greenspan has stuck in the bond bubble will result in a slow leak rather than a big bang.”
But just in case, we would advise standing a safe distance away and covering your ears. If, in fact, the bond bull market has perished, what is an investor to do?
For starters, don’t buy bonds.
The Daily Reckoning
July 23, 2003
We can’t wait to read the history books. Maybe a year from now. Maybe 2…5…10 years. We want to know the precise date on which the U.S. consumer credit economy stops muddling through. For it must shake, rattle and roll over dead some day. Everything does.
The day may come and go without notice. The world created in the Dollar Standard era may end with scarcely a whimper…and no bang whatsoever. But it will end. How and when…and the irony and agony of it all…are grist for the Daily Reckoning mill. Our wheel turns slowly, grinding one day’s market news and then the next. Consumer sentiment gets crushed into chain store sales…which gets mashed into the pulp of M1, M2, M3 and so on. Unless you have a lively imagination or a perverse sense of humor, you might find the whole thing as dull and pointless as a joint session of Congress. What a pity, because you’d miss the eternal drama of it all…the spectacle of monumental arrogance humbled before nature.
Isn’t that the theme? Powerful moneymen who think they can buck the laws of nature…and thumb their noses at the dead?
Men learned centuries ago that paper money unbacked by gold can’t last. No counter examples exist. Long before the birth of Christ, they discovered that you ‘can’t get something for nothin”…that savings, not consumption, are the way to wealth…and that you cannot create real money ‘out of thin air.’ But modern economists, central bankers and politicians pay no attention.
The dead write no letters to the editor…they cast no votes….they buy no stocks or bonds. They are forgotten and ignored. Instead, Greenspan, Bernanke, McTeer, Bush, the whole bunch of them, go about their business as if they were the smartest men who ever lived…so smart they can ignore the lessons of two thousand years.
Won’t it be a hoot to see them brought low? Maybe we are the only ones who think so…
The precise day is important, because that is the day you should sell your bonds and buy gold. It is the day when bonds begin shuffling off to the graveyard…and never come back. It is the day the U.S. economy changes course…instead of sliding towards Japan, it heads south…towards Argentina…or southeast, in Zimbabwe’s direction. It is the day they knock the ‘dis’ off of inflation. It is the day the U.S. stops muddling through and the dollar gets marked to a suspicious market, and all we lonely, cranky, crotchety…optimistic gold buyers get to turn our fellow grumps and say, “see, I told you so….”
Maybe the day has already come and gone. Eric tells us, below, that bond investors have lost 10% in the last month or so. And the differential between TIPS, the inflation- indexed treasury bonds, and bonds from the same issuer and same duration without the inflation protection is approaching 2% – higher than it has been in a long, long time. Bond investors themselves are beginning to fear inflation.
We’re not very good at guessing birthdates or telephone numbers…so we have to stick to the essentials. By any reasonable measure we can think of, U.S. bonds are overpriced. We will stay away. The U.S. economy could continue to ape the Japanese for months to come…even years. But whatever profit remains in dollar bonds (as the U.S. economy slouches toward deflation, bonds should rise in value) is dwarfed by risk.
Our advice: if you want to own bonds, buy euro bonds.
Over to you, Eric…
Eric Fry in New York…
– The Dow Jones Industrial Average struggled early on yesterday, before heading higher in the afternoon to end the session 61 points higher at 9,158. The Nasdaq jumped 1.5% to 1,706. Bonds bounced a bit and gold dipped a bit. The stock market had been drifting lower all morning yesterday until the news crossed the wires that Saddam Hussein’s sons – Odai and Qusai – perished during a six- hour shootout. (Obe Wan remains at large).
– “Share prices surged immediately on the news Odai and Qusai had been killed,” remarked your New York editor’s friend, Michael Martin, an institutional stockbroker with R. F. Lafferty. “But this mini-rally is nothing more than a ‘dead-son’ bounce.”
– Meanwhile, the beleaguered bond market could muster nothing better than a feeble dead-cat bounce yesterday, despite the harrowing drop it suffered on Monday. The 10- year Treasury yield dipped slightly to 4.15%.
– “I was adored once …” Sir Toby Belch sighs in Shakespeare’s Twelfth Night. Mr. Bond Market must be entertaining similar thoughts as he faces the disdain of the very same investors who once adored every little basis point on his nerdy frame.
– Treasury prices have rallied sharply over the past three years, pushing the yield on the 10-year note from nearly 6.8% in early 2000 to a 45-year low of around 3.1% recently. Ever since early 2000, investors have been flocking to the bond market, seeking sanctuary from the violent stock market. As of June 30th, long-term government bond funds had gained an average of 13% per year for the past three years. By contrast, many of the once-popular equity funds (Did someone say, “Janus?”) had lost more than 20% per year over the last three years.
– Is it any wonder that the bond market’s siren song lured investors away from the abusive stock market? Of course, the bond market did not provide as much comfort as many investors imagined…especially lately. Buyers of long-term bond funds have suffered a 10% loss in less than two months. So Mr. Bond Market is adored no more. Most investors want nothing to do with this guy.
– Last week, Chairman Alan Greenspan crowed to the Senate Committee on Banking, Housing, and Urban Affairs that his policies were succeeding in “warding off unwelcome disinflation.” In fact, so successfully did Greenspan ward off unwelcome disinflation, that he triggered an unwelcome crash in the bond market. Bravo Alan!
– But let’s be fair; there could have been no crash in the bond market if the very same Alan Greenspan had not first nurtured an epic bond bubble that elevated bond prices to absurd levels. So let’s give him credit, both for the boom and the bust. Twice bravo, Alan!
– And your New York editor would like to extend a special, heartfelt thanks to the Chairman. Were it not for Greenspan’s easy monetary policies, your editor could not have refinanced his house in early June at generational-low mortgage rates. Thanks, Alan!
Bill Bonner, back in Paris…
*** “First off let me say, I’m impressed,” says a Daily Reckoning reader, starting off on the right foot. “Never in my life have I taken such an interest in economics before. Quite honestly no one had ever made it remotely interesting to me before I began reading and subscribing to the Daily Reckoning. Now I look forward to each new edition, often quoting to my friends and family from you! 😉
“But what I am curious about is your insight and recommendations to the thousands of us ‘poor folk’ in the USA. In other words how would you suggest to those of us (even with college degrees) making less than 20K/yr, living literally paycheck to paycheck to cover basic life essentials who are lucky to have $500 if even in savings/assets, to get on the upwardly mobile track???
“I’ve heard the old adage of ‘It takes money to make money’ or ‘Only the rich get richer’ all my life. Can you think of any ways to break the economic chains on the anchor that suffocates us?”
*** “Have you re-financed your house yet,” is our snappy retort.
But the question is near and dear to us. We lived through nearly 40 Maryland summers before we could afford air- conditioning. We do not recall being any less happy in those days, but at least we sweat less now.
Fortunately, we were protected from big mortgages and big debts by the combined wisdom of the local banking community…which judged a start-up publishing business a poor risk. And we were protected from investment losses by the fact that we had no money.
Now we know; it is very unlikely that you can make much financial progress by buying stocks or bonds, anyway. The idea of getting rich by investing on Wall Street is largely a fraud. It can be done, but so might you win the lottery.
Wall Street sells products, just like a used car dealer. If it can induce you to buy something, it will make money. But will you? Not likely. If there were money to be made, the product would have been held by the Wall Streeters themselves…or offered to rich insiders. Ask yourself, if a product really could produce an above-market rate of return, why would the sharp people on Wall Street make it available to perfect strangers?
Nor are there any other financial tricks we know of that will turn a $500 nest egg into big money quickly. In fact, the only formula we know for making money – one we have some experience with – is this: you start a business, you work 18 hours a day for 20 years, and then you get to live in a house with air-conditioning. Then, of course, you get bored…and buy a decrepit château in France and spend all your time and money fixing it up. You see, the literal translation of the word ‘château’ into English is ‘money pit.’
If you are interested in following our example, we will refer you to a similar free service offered by a friend…
…and send you a loaded revolver by UPS, in case you want to blow your brains out now and save yourself a lot of time and trouble.
*** Oh là là…and update on the poor working stiffs from our friend, Dan Ferris:
“Page 14, July 28 issue of BusinessWeek…
“23% of Americans say they won’t take a vacation because it’s not in the family budget.
“17% won’t take a vacation due to ‘the general economic climate.’
“14% are concerned about job security.
“That’s from a phone survey of 1,014 adults.”