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Faber and Schiff: The American Bond Bubble
By Dian L. Chu, Economic Forecasts & Opinions
As I've been saying for some time that the bond market is screaming for an imminent burst, now Dr. Marc Faber and Mr. Peter Schiff also spoke with CNBC on Aug. 23 warning of a bond bubble trouble.
Faber - Stay Away from a 19-year Rally
Faber advises investors "stay away from Treasurys as they’ve been rallying since 1981--equivalent to a 19-year bull run,"--when the 10-year bottomed out on Sep. 21, 1981. Faber says Dec. 18, 2008 was the peak of the bond bubble with yield of 2.08% and 2.53% on 10-year and 30-year respectively. (See 10-year chart)
“I think that there isn’t much upside potential in Treasurys unless it’s for the short term. Even the short term is uncertain. But if I look 10 years ahead, where do I want to have my money, then certainly not in US Treasuries.”
Faber's biggest concern is that because of a weak economy, the U.S. budget deficit will likely remain high, and continue to go up under the Obama administration, which could make interest payments on government debt unbearable.
He also warned against the misguided confidence arising from still strong foreign demand for U.S. Treasurys:
“In 1999 and 2000, foreigners (bought) the NASDAQ and what happened afterwards was a major collapse. I would not look at foreign buying as a very intelligent leading indicator.”
Faber says a better place for investor's money now is farm land, agricultural commodities and gold should also be a part of investor's portfolio.
Schiff - The Mother of All Bubbles
Schiff basically declares the bond market the mother of all bubbles, and noted that when the bubble bursts, the loss will dwarf the combined losses of the bubbles of stock market and the real estate. Eventually, the government will either inflate or default. Either way will ultimately make bond investors go bust.
For risk-averse investors, Schiff believes gold and foreign bonds such as Switzerland where government debt level is not as high, would be better options than U.S. treasuries.
My Thoughts
Dismal economic data has spooked investors flocking to Treasuries driving down yields. Traditionally, bonds are considered to be safer and less volatile than equities and commodity. However, the financial markets have evolved in such a way that the same players are active in all sectors, employing the same trading technique. This, in part, has made bonds behave almost like stocks with similar volatility. (See comparison chart)
So, investors should start looking at bond the same way as equities, and commodities, and now is the time to move out of bond and into either equities (dividend-paying blue chips as noted in my previous post), or commodity such as gold.
And for the highly risk-averse, parking in cash for the short term would still be better off than staying in "the mother of all bubbles."
(Recommended Reading: Self Fulfilling Prophecy: The Bond Trade, Yield, Dow 30 vs. 10-year U.S. Treasury, and Bonds & Equities: Expect a Major Shift)
Video Source: CNBC
Dian L. Chu, Aug. 25, 2010
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Faber said 19 twice in the TV segment I thought..
so he meant 29 correct? i was hoping asiablues would address this? had me confused. mark faber kicks ass.
All i know is gold just completed it cup and handle and is on the way up
Not to mention a 30 year mother of all cup and handles......
Silver just broke out
Bernanke is going to use that gold revaluation tool soon.
I think its gold 20000 Dow 20000 in 3 years maybe higher
These guys make predictions but they never expected the fed to act this way and this far 10 years ago so they do have to occasionally revise.....Schiff has been way accurate all along............
actually Schiff did expect the Fed to act like they have, hoped they wouldn't, but expected that they would do what they always do.
what he didnt expect was how dumb people are continuing to be with respect to considering the currency (or bonds) of a bankrupt country as safe.
more safe than some others maybe, but hardly safe.
Gold, well they tried it once, in one country, without very much success.
can't see it again.
Trade for the next 24 months; short the 30 yr. on the CME and long Silver; use low margin and be patient; expect wonders to happen.
if i remember correctly Mr Faber said back in 2003 that those bonds yields were a 'generational low'. but this was never about accountability - was it !!
same goes for Bill 'there-will-never-be-a-4%-mortgage' Gross (back in 2002 he said). he has prob made more money being long mortgages than anybody else :-)
With nobody in the Universe saying "buy bonds, sell gold" why do the people who say "sell bonds, buy gold" always call themselves "contrarians".
I hear nothing but the same "contrarian" dittoheads.
I agree, gold is a bubble also, and will fall just as fast; funny thing is, gold is also on a bull run, but even a little longer than bonds. If it was based on fundamentals silver would be $70 an ounce.
"Anyone who says gold is in a bubble, is talking out of their ass. When assets go into a bubble-price, you have an extremely popular ownership of that asset. Take for example the dotcom-stocks in the 1990’s or the S&P in the 1980’s – you had a very large percentage of the population participating in the formation of those bubbles. In the case of gold bullion, less than one per cent of the global investable assets are in gold. Not only isn’t it in a bubble, the real bull market in gold hasn’t even started. It’s still in a bear-market. Let me put it to you that way: gold is still in a bear-market." - Max Keiser
1) There's just not that much gold in the world to buy (or very much money to buy it with), so it's always going to be a select group that buys gold.
2) I was at a barbecue with a bunch of liberals who know nothing about financial matters and they were talking about buying gold and asking me how to do it,
3) How many 10-year bull runs don't end up in bubbles?
one pundit went so far as to suggest the bond vigilantes had thrown in the towel and were buying gold instead.
As long as the Federal Reserve keeps buying the 'bubble' is infinitely inflatable. Money for nothing and all that due to NOTHING backing the dollar of actual value.
FIAT Currency Is Virtually Endless Bitches!
Right up until it becomes like Zimbabwe that is.
From the four roads ahead blog, a great quote.
"Governments are bad allocators of capital. They borrow money and allocate it to where the political return is the highest."
This must be Harvard Economics 101.
This bond bubble will go away just as soon as this economy picks up, which will happen....................
This thing can go on for a long time people.
Treasuries are about as overbought as you can get. There's no point in trying to run out the remainder of the bond market along with the herd. It's best to leave the herd early than a day late.
If Treasuries are a bubble, what are FRNs?
Mark to model accounting units, not a store of value.
Pieces of paper with printing on them. Future wallpaper, fire starter, and butt wipe.
not soft enough for buttwipe, and won't flush. TP will be worth more.
When the dollar has a higher BTU value than currency value, it will be good to burn, but watch the creosote.
Treasury bonds are technically overbought. They are fundamentally overpriced. The mo-mo buyers can play amongst themselves w this asset class. IMO the long bond indeed is for traders only.
Agree w TMosley in response to Leo. Shorting a bond means owing the coupon plus a finance charge to borrow the bonds. That's a tough row to hoe. No need to go there.
I see a disconnect. Our boys Faber and Schiff say that gold is not in a bubble because of the factors which make the PMs more popular. No need to go into the details here. If so, then the same factors can contribute to the popularity of bonds as well. Bubbles indicate fear and greed? If gold and bonds lend security and stability in uncertain economic environments then they are not in bubbles. Can't have it both ways. I really don't want to argue the fine points, just wanted to point out the possible philosophical disconnect.
Not to split hairs, but isn't there a presumption amongst a lot of folks that bubbles are, by definition, irrational? I'm not sure why that is--a bubble in anything could be entirely rational if everything else was seen as a waste of capital.
Thus, the argument about whether gold is in or about to enter a bubble could be interpreted by some as indicating it's going to be temporary, if investors will just stop being irrational and go back into equities. So irrational or no, if I see EVERYTHING ELSE as a rigged game that will remain rigged for a long time to come, I'm interested in being deep inside the gold bubble.
I'm in the "bubbles are created by greed" camp for the most part. Bolstering my point above: I don't think either bonds or gold are being pumped for greed. It's stability and safety that are being sought. Both the U. S. and foreign markets will have to show some sanity and their governments demonstrate some sound policies before the two will be sold off. But I don't have a PhD in economics -- what do I know?
He may have meant 29 years = 2010 - 1981.
I would be less certain about the bonds popping, after all, they didn't after WWII.
That said, we are headed for trouble, the only question is what kind:
http://alephblog.com/2010/08/13/the-four-roads-ahead/
WWII isn't a fair comparison of course. We managed to not only destroy our competition, but also their entire infrastructure. And made scads of money selling new stuff to them. Hopefully that won't be repeated.
A bubble can last a lot longer than you think. Many big hedge funds got their asses handed to them betting against this bond bubble.
That was then this is now. It's not a bubble, it's just a mature bull market; the odds are much better on the downside right now.
It is not the actual underlying value that drives the bubble, but what investors are willing to pay. This is most likely to go for a long time as investors flee stocks.
It'll last till the Politburo pulls the bid or there are no longer any USTs or CDOs in public hands.
Just because you recognize that something is a bubble doesn't mean you have to short it. Just don't be long when it bursts.
actually, the smart thing to do when you see a bubble is to get in and take some profits from time to time.
Yep. I was going to give you a +1 here, but I see inflation has already set in.
+13 trillion
they’ve been rallying since 1981--equivalent to a 19-year bull run,"--when the 10-year bottomed out on Sep. 21, 1981. Faber says Dec. 18, 2008 was the peak
2008 - 1981 = 27 years
This confused me. Where did 19 come from?
I had the same question.
Clearly, neither of you understand the sophisticated proprietary modeling methods he is using to come up with his numbers.