Saturday, August 31, 2013

Bond Investors Should Not Chill Out At All

CNBC allows PIMCO to give us three reasons why bond investors should "chill out" and stop worrying.  I'll give the folks at home three reasons why I'm not a bond investor.

1.  Economic fundamentals don't support much of anything anymore.  Go back to my article in June 2013 about the BIS study showing every asset market in the developed world pushed up by central bank monetary stimulus.  Consumer spending is 70% of GDP, higher than ever in history, and it has to come down eventually.  Government spending is higher than ever and has to come down eventually.  If federal spending comes down after a hyperinflationary period, bond investors are toast.

2.  Inflation is definitely coming back.  People who haven't read Shadow Government Statistics don't realize that inflation is already here.  Compare your grocery bill to what you paid last year, especially for energy-intensive staples like meat and bread.

3.  Investors always misread the Fed.  This is because many US investors haven't lived through hyperinflationary periods.  The necessary precursors for such an episode are in place:  a liquidity trap, government borrowing crowding out private borrowing, and political unwillingness to curtail government spending.

Bond gurus who assume that tapering QE won't require a higher Fed funds rate miss the boat.  Any tapering will raise real rates by lowering the market value of existing bonds.  Bond investors have no reason at all to chill out now that the bond market bubble awaits its pinprick.