US Bond Bears Should Envy Broken Clocks

Broken clocks get a bad rap…at least they are right twice a day. Many are the objects, individuals and/or institutions who are lucky to be right once a day…or even once a year. Consider, for example, those poor souls who continuously predict rising interest rates. These ‘bond bears‘ have not been right once in the last 30 years.

The lesson is clear: Better to be a broken clock than a bond bear.

But even if bond bears are not right even once-a-three-decades, perhaps they will prove to be right once-a-generation… and perhaps that moment is now, or almost now.

So says James Grant, editor of Grant’s Interest Rate Observer. In a recent issue of his esteemed newsletter, Grant observed, ‘Today’s stunted interest rates, though not exactly unprecedented, are rare and remarkable. The world over, creditors are living on the equivalent of birdseed. Investors who once disdained sky-high yields today settle for crumbs…What are they thinking today?’

Grant answers his own question. Today’s bond buyers believe that ‘in an overleveraged economy, inflation is unachievable. So is growth, they have lately begun to insist. As for us, we hold a candle for both growth and inflation – and, in consequence, for our long anticipated, long overdue bond bear market.’

Grant hangs most of his prediction on fifth-grade arithmetic…or maybe advanced fourth grade: Debts are rising a lot. Revenues, not so much.

‘Like a well fed teenager,’ says Grant, ‘the national debt keeps growing and growing. On December 31, it bumped its head against the statutory ceiling that never seems to contain it. That would be $16.394 trillion, or the cash equivalent of 360.7 million pounds of $100 bills.’

Meanwhile, as the national debt continuously inflates by millions of pounds of hundred dollar bills, the national tax receipts struggle to keep pace.

‘In the past 10 years to fiscal 2012,’ Grant observes, ‘the compound annual growth in federal receipts worked out to 2.8%, that of federal outlays, 5.8%. In as much as the growth in receipts was much below the historical median (which, since 1967, had been 6.75% a year), one might – just for argument’s sake – say that the country had an income problem.’

Rapidly growing debt, coupled with slowly growing revenue, often creates a toxic environment for bonds. Bottom line: Grant is bearish on long-dated US Treasuries.

Regards,

Eric Fry
for Markets and Money

Join Markets and Money on Google+
From the Archives…

As Gold Flows Eastward, It’s No Longer Money
15-02-13 – Greg Canavan

The Setting Sun – Japan’s Forgotten Debt Problems
14-02-13 – Satyajit Das

The Phony Boom in Stocks
13-02-13 – Bill Bonner

First Home Buyers Not Interested in the 30 Year Debt Trap
12-02-13 – Greg Canavan

Money, the Discredited Credit
11-02-13 – Greg Canavan

Claim your FREE Special Investor Report…

Why Australia is on the Verge of a Decade Long Property Boom

Markets & Money Free ReportImagine you could see — with clarity — what was going to happen in the Australian housing market over the next few years?

This man can.

Dubbed ‘Australia’s most controversial economist’, Philip J Anderson says Australia is headed for another ten years of surging property prices.

If you rent somewhere and want to buy… you’re planning to buy or build… you own a home with a mortgage… or are interested in real estate as an investment… you must get this report.

You’ll learn:

  • How to time your investments to the real estate ‘clock’: you’ll see how the economy moves over time — and why — and can use this to time your real estate investments. Not only will you know when property is cheapest, you’ll never be suckered into buying at the peak and becoming trapped in negative equity.
  • The Secret of The ‘Law of Rent’: Just as gravity is one of the laws of science, the law of rent drives the boom and bust of the property cycle. Learn the secret behind mastering the law of rent and how you can use this unique forecasting tool to create a mass of wealth from property.
  • Why the US property market holds the key to property profits in Australia: As an investor outside the US, you have a huge advantage. In this report you’ll discover why the Aussie property market is inextricably linked to the US. And you’ll learn why grasping the predictable movements of the US property market could make you rich.

To download your free report ‘The 18 Year Real Estate Cycle That Says Aussie Real Estate Will Boom’ simply subscribe to Markets and Money for FREE today. Enter your email in the box below and click ‘Send My Free Report’.

We will collect and handle your personal information in accordance with our Privacy Policy.

You can cancel your subscription at any time.

Leave a Reply

Be the First to Comment!

Notify of
avatar
wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au