February 17, 2008

Peter Schiff on the US Bond Bubble - "The mother of all bubbles"

Schiff was right on everything - houses, gold, commodities, foreign stocks, the dollar - EVERYTHING. He'll be right on the bond bubble too. Invest wisely.

The Mother of All Bubbles

I have often said that the only thing worse than holding U.S. dollars is holding promises to be paid U.S. dollars at some distant point in the future. However, this is precisely what U.S. Treasuries represent.

Given all of the inflation that already exists, and all of the additional inflation likely to be created over that time period, why would anyone pay par value for the right to receive $1,000 in thirty years in exchange for a mere 4.5% coupon?

Although it looks like the sucker bet of the century, the fools have been lining up to buy. Alan Greeenspan called this a "conundrum."

I simply call it mass delusion of the same variety that brought us pets.com, and $800,000 tract homes in the middle of the California desert.

...While low rates are great for borrowers, they are lousy for lenders. Why would anyone want to offer a thirty-year mortgage at an artificially depressed interest rate? As soon as the Fed raises rates again, as it clearly intends to do once the crisis ends, all that low yielding mortgage paper will collapse in value. Lenders can surely figure this out and will therefore refuse to volunteer to be the patsy in this plan.

Eventually, the world’s lenders will reach similar conclusions with respect to U.S. Treasuries. No matter how low the Fed funds or discount rates get, private savers around the world will simply refuse to lend given the inherent risks and paltry returns. At some point the sheer absurdity of holding long-term, low-yielding receipts for future payments of depreciating U.S. dollars will be apparent to all.

28 comments:

Peter T said...

It is surprising that both gold and long-term treasuries have been rising in price so far. Some predicted it (like Mish Shedlock), but I am still not convinced that one of the two will not fall of a cliff within a year. A fall in gold would indicate deflation; a fall in treasuries inflation.

keith said...

EXACTLY - Gold is saying inflation and bonds are saying deflation and just like the argument here at HP, one side is gonna eventually give way

I think we're going to see inflation followed by deflation, so it's just a matter of timing. Or asset deflation combined with consumables inflation.

It's enough to make your head blow up.

But I'm thinking of shorting US Treasurys next week - anyone know an easy way to do that?

Anonymous said...

http://www.atimes.com/atimes/Global_Economy/GA05Dj01.html

We believe a nasty popping of the bond-market bubble lies in wait for investors. Why? In short, yields are too low, bond prices too high, and quality spreads too tight. The gargantuan rally, which actually peaked in June 2003, as evidenced in the monthly chart of 30-year bond futures below, should soon be history.

Anonymous said...

how about inflation of necessities (hurting retirees, poor and middle class the most), and deflation of everything else (creating firesale prices for the cash rich)?

Yoski said...

That of course brings us back to the question of what to do with your savings during times when the number one concern is the return of principal instead of on principal.
Gold, a pretty corrosion resistant yellow metal without any industrial uses. Very speculative.
Silver, Platinum & Palladium at least have industrial uses.
Commodities? Difficult to get into for the private person. Maybe some stock of companies involved in production & discovery.
Stocks, risky play in difficult times. Usually a decent protection against inflation but dangerous in serious economic downturns.
Bonds, treasuries at least have a good chance of return of principal. Other bonds usually not even guarantee that.
Good farm land. Probably an OK investment given the growing world population and the bio-fuel craze by our politicians.
Just spend the money on loose women, booze & crack. That way you don't have to worry about retirement.

Anonymous said...

I like Schiff, but he still believes in the decoupling theory...this will not be the case. Read up what Mish Shedlock has to say - he does not hold any punches. :)

Rob Smith said...

Want to short long term treasury bonds?

Try put options on the iShares Lehman treasury bond funds: TLT (20 year treasuries), IEF (7-10 year treasuries), or TLH (10-20 year treasuries).

Anonymous said...

Keith look into RYJUX. Looks like it has finally posted a bullish flag.

Anonymous said...

It seems like it is too late for monetary policies to change anything. Unless the gov't steps into price controls.... the laws of supply and demand will set prices going forward.

Combine an increasing supply of people(12% increase in just soybean demand each year from just China), with a decreasing food production over the past 20 years, and add new supply factors such as changing drought patterns, soil erosion, tumbling reserves,ethanol(though this is not the actual issue) and cost of fossil based fertilizers and pesticides = price inflation for food and most base resources.

What the Gov't does or doesn't do is probably irrelevant now.

Anything without real value deflates; whether a gov't, commodity, corporation, or profession. Does gold have real value?

Anonymous said...

Great post Keith,

I think we already saw inflation, and are headed to deflation.

I like Schiff, but I dont agree wih alot of his ideas.

He thinks the dollar will tank, but doesnt take into consideration that the Euro is overpriced.

I am investing with deflation in mind. I also do not like metals short term.

Danny

Buzz Saw said...

Yep, and there is no conundrum. At least with treasuries they can reasonably expect the return **of** their worth less dollars.

Gabor said...

You are going to see deflation relative to real money (gold). You are going to see inflation relative to paper money (US Dollars). It's that simple.

Mark in San Diego said...

Did anyone else notice that the 10 year Treasury started to drop this past week and the yield went up? Maybe the Chinese and Japanese are waking up.

Mark in San Diego said...

Actually, if you read Shiff, he has one of the answers - hold cash - he says, "the only thing worse thank holding cash. . ." At least cash is not a promise to pay. . .although it may deflate in value, it is better than not getting paid at all. . .actually, my "house money" that I banked in a money market two years ago (when I sold my house) is now worth 10% more (5% a year), and housing prices have come down an "official" 18% here in San Diego, so my "house money" is now worth 28% more in purchasing power.

Anonymous said...

Yoski said...
Gold, a pretty corrosion resistant yellow metal without any industrial uses. Very speculative.


gold is money. period. you can say were having deflation, because the value of money, real money, is going higher. the fact nobody here on hp seems to know this baffles me.

Anonymous said...

Keith,
Once again you have been led astray by Schiff. He was correct in housing but he is about to look stupid on the dollar and US Bonds. The dollar has bottomed and Treasury's will provide huge returns going forward. We are in a deflationary train wreck. Once real panic begins the dollar will again become the currency of choice. The safety of government bonds will drive yields to 0%.

Anonymous said...

You know what Keith, I am really getting irritated because you keep rooting against the U.S.A. Why do you think people will no longer buy our bonds? Where else are they going to invest their money? We are the world's largest economy and thus they cannot afford to see us fail. If we catch a sneeze, then the rest of the world will catch the flu.

I am glad you live outside of America because this country doesn't need people like you. America is the greatest country in the world and the greatest country known to human civilization. She is wonderful, charitable, enterprising, industrious and DON'T YOU DARE SAY OUR TIME IS OVER. Because the best days for America are not behind, but it is ahead.

Yours Sincerely,

An American Patriot

Gabor said...

There is no way something that the government prints will EVER become more valuable. It can only become more and more worthless. It because more valuable during the great depression because it was backed by gold. The dollar has to collapse, there is no way around this. The Amero is coming.

Anonymous said...

Anon 7:09 pm I think, sums it all up. With a tone that is that of a petulant child, s/he is outraged that we DARE say that the game is over. Well, all empires fall - and some don't take 400 years as Rome did. Consider the French Empire (1804-1815 part I, 1852-1870 part II) - Not even fifty years long. I think we're now starting to see the sheeple panic. It's only a glimmering now, but it is the shape of things to come.

Anonymous said...

" I am really getting irritated because you keep rooting against the U.S.A. Why do you think people will no longer buy our bonds? Where else are they going to invest their money? We are the world's largest economy and thus they cannot afford to see us fail. If we catch a sneeze, then the rest of the world will catch the flu. "

So WHAT??? You can thank the dumbing down of the US on the US politicans. So if you want to bitch at someone and moan, bitch at the policy makers THEMSELVES.

BTW the rest of the world DOESNT need the US at all!!! And you will soon find that one out.

Anonymous said...

I opened an account with Peter Schiff 6 years ago, and
put in my life savings. Im finally able to retire now, BIG THANKS TO PETER SCHIFF and Europacific Capital!!!

Thanks a million!

Anonymous said...

If we laymen can figure this out, why haven't the world's investors, with trillions at their disposal figured it out? The answer is, where else are they going to put all that money? Do you trust China or India? Will the EU be around in 30 years? Should you trust some Latin American banana republic that makes the US government look honest? Stable currencies like the Swiss Franc pay even lower yields. How do you invest $5 trillion in gold? While I personally would never buy US bonds, those with so much money have no choice.

Cal said...

I have a question. Now I love Peter Schiff, if he had a concert I would be pulling off my boxer shorts and throwing the to the stage. But I do not see why lenders would consider paper low yield just because the Fed Rate is low. When the Fed Rate goes to 10% will the lenders not "sell" the loans at the same margin, say 2.5% above Fed Rate ??

Anonymous said...

Anonymous Anonymous said...

Anon 7:09 pm I think, sums it all up. With a tone that is that of a petulant child, s/he is outraged that we DARE say that the game is over. Well, all empires fall - and some don't take 400 years as Rome did. Consider the French Empire (1804-1815 part I, 1852-1870 part II) - Not even fifty years long. I think we're now starting to see the sheeple panic. It's only a glimmering now, but it is the shape of things to come.

February 17, 2008 8:39 PM

America is NOT an empire. America is a free nation and the greatest export that America wants to send around the world is FREEDOM. Americans will actually die so other people can be free!!! What other nation in history has done that? Instead of calling America an "empire", call it "the greatest freedom giver in mankind".

Anonymous said...

Anonymous said...
....We are the world's largest economy and thus they cannot afford to see us fail. If we catch a sneeze, then the rest of the world will catch the flu.

I am glad you live outside of America because this country doesn't need people like you. America is the greatest country in the world and the greatest country known to human civilization. She is wonderful, charitable, enterprising, industrious and DON'T YOU DARE SAY OUR TIME IS OVER. Because the best days for America are not behind, but it is ahead.
Yours Sincerely,
An American Patriot

There is no place like home. click click. There is no place like home click click. There is no place like home. click click

What are you doing here? Perhaps you know deep down inside that your view of the world is teetering? You know something is wrong but you can't put your finger on it? You read the posts here and get furious because others don't share your patriotic zeal? Do you believe that we are not supporting the troops?

OUR TIME IS OVER. At least until, America wakes up and shuts off the T.V. and begins to pay attention to everything thing that has occurred while we were hypnotized in front of the screen.

We have allowed the Biggest Theft of All Time to happen on our watch. Most still don't even know there is anything wrong. YOU know there is something wrong or you wouldn't be reading this blog.

Or maybe you just want someone to tell you when it will be a good time to buy a house?

OUR TIME IS OVER.

Anonymous said...

We are headed into a GLOBAL currency crisis. All currencies will devalue in relationship to gold. Gold will always be worth something as opposed to nothing.

Think Wiemar

Anonymous said...

"America is NOT an empire."

Are you kidding me?

I don't come here to read what the ignorant have to say.

Read a freaking book every now and then. It will do you good.

Let's review our holdings all over the world, shall we?

Or not. Why should I do your work for you.

the mortgage guy said...

Schiff's been right on many things. I'm not sure about his bond bubble stance however. I think things will get so bad globally, that the dollar and US treasury will strengthen through foreign economies weaknesses.

I've been very bearish on the economy. In fact, until last night when I came across this post on The Common Sense forecaster, I thought there was no one more bearish.

The post is about Dr. Nouriel Roubini's recent post about "The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster".

I made the mistake of reading the post at 11:30 pm last night. I didn't get to sleep until 3 am.

It's a long, somewhat technical, good read. In fact I'll go further and say it is a must read. Here is the url. Enjoy...

http://tinyurl.com/33srlj