The Bond Crisis Looms

Financial crises happen all the time and we get over them. People panic and stocks crash, then we move on. However, bond crises are different because this is the source of capital formation. Following a bond collapse, the economy doesn’t recover for many, many years. This is what we should be preparing for.

In the grand scheme of things the stock market is immaterial. The bond market is where all capital resides and the crisis of 2007-2009 was so severe because of the collapse in mortgage backed securities, and by extension real estate; it was not because of the stock market collapse. The bond market is headed for collapse and only then will everyone understand what I am talking about. Treasuries are in many portfolios only because of their AAA rating, so once this rating is lost, institutions by definition must unload their Treasuries. I guarantee the big money will be repositioning themselves in stocks and gold in anticipation of the inevitable collapse in bonds.

Let’s look at this realistically. Even with a balanced budget, which I think is very unlikely, we are still sending hundreds of billions of dollars to foreign nations every year in the form of interest. How do we pay for these interest payments? By borrowing more. There is really no way out of this debt crisis absent a total revolution in thought.

We should be preempting this crisis by thinking of radical solutions. Interest rates are hovering near record lows and this is a lucky break we should be embracing; it is foolish to think rates will stay this low forever. People talking about deflation and how this will keep rates low. Well the debt crisis is exploding in Europe and there is no deflation in sight. The depreciation in the currency will more than ovCan people think objectively instead of incorrectly comparing this crisis to the Great Depression?

Bonds have already retraced most of their gains made during the European debt crisis. I am starting to see complacency in the bond market and the belief that bonds can’t spike down. This is just the type of psychology you need for gap downs in bonds, which I fully expect to see in 2012. For anyone who has their money invested in bonds, I continue to warn you that they are a ticking time bomb. You should be buying the dips in gold instead, period.

The Bond Crisis Looms is a post from: Expected Returns

HTTP://expectedreturnsblog.com

Read more at Expected Returns