Thursday, December 18, 2008

Bond bubble

Bonds now appear to be the last bubble waiting to pop.

Unlike the dollar this parabolic move is occurring at the end of a 28 year bull run. This looks like an ending move to me. Either way this is the definition of a parabolic move and as such it’s prone to collapse. For the last 8 years the world has jumped from one bubble to the next. First it was tech, then housing, then commodities (specifically oil) and now its bonds. We have become incapable of moderation. I’m not sure if there has ever been a time were investors have been so irrationally controlled by their emotions that they have to produce multiple bubbles one after the other.

I have got to think anyone with a lick of common sense can look at that chart and see the same process going on that pushed oil to $147 this summer. Namely everyone is jumping on what they think is a sure bet. The current thinking is that since the Fed has threatened to buy bonds and target long term rates then bonds are a sure thing.

But lets think about that for a second. Can the Fed really accomplish this goal with no consequences? Is it really as easy as turning on the printing presses? Has the world really seen a paradigm shift and we can now get something for nothing?

Let me just say I seriously doubt it. There is always a consequence. If the Fed goes down this path the dollar will likely crater. Since we need to borrow over a billion dollars a day to keep our country solvent what is going to prevent our creditors from dumping our bonds if the value of the currency comes unglued? What's the point of holding a bond that pays 2% if the value of the currency depreciates 10, 15 or 20%. Not much I would think.

Anyway back to our parabola. If this collapses like all parabolas do I think there's a good chance the money that's been going into bonds will go back into stocks and commodities.