Saturday, October 27, 2012

Jim Rogers Warns on Treasury Bonds

It is very difficult to pick a top in a market that has been very strong for decades, but the downward spiral for the bond market is very near. The debt keeps piling up in the US and the Fed keeps buying it. At some point, the price inflation kicks in (on top of the huge supply of new debt) and all hell will break loose in bond markets. In the clip below Rogers discusses the bond market with RT's Lauren Lyster.

One note. Lyster suggests that it is about what people think which ultimately will drive the markets. This is the John Maynard Keynes view that the stock market is like a beauty contest. If you want ti know the winner, you shouldn't pick the faces that are your personal favorites. It is to select those that you think others will think prettiest.

This is actually another Keynesian fallacy about markets.

The stock market actually acts the exact opposite at key inflection points. Just before the housing bubble burst, everyone was bullish on housing. You can have the entire world bullish about something but if the money isn't there to buy it, the market will crash anyway. When the Fed stopped printing money, even though everyone was bullish about housing, the market collapsed.

In the bond market, the top will come, not necessarily because people turn bearish on bonds (that will come down the road). It will come because of two factors:

1. The amount of debt issued by the Treasury keeps climbing---so there will be a huge supply for the markets to deal with and

2. Accelerating price inflation will make it profitable for entrepreneurs to borrow money, thus putting upward pressure on rates. Here you will have a dichotomy, where many may still hold that bonds are a good investment, but others by borrowing aggressively will be pushing interest rates higher, which will push bonds down even though at the investment level many may hold that rates aren't going higher and that therefore bonds are a good investment.

No comments:

Post a Comment