Marc Faber And Peter Schiff Take On The Bond Bulls; The Rosenberg-Faber Gentlemen's Bet

The debate over whether bonds are in a bubble is very much the topic du jour, and while some deflationists like David Rosenberg believe that not only is there no bubble, but the 10 year will soon slide inside of its all time tights at under 2.1%, others believe the 30 years bull run in Treasuries is the dumbest thing since the dot com bubble, and that if anyone is hoping to make money, it should be on the countertrend. Two such Treasury bears are Marc Faber and Peter Schiff, both of whom were on CNBC tonight, and both were dissecting what in their view is the fallacy of the long-UST trade. As for the Faber-Schiff view, no surprise: Peter encapsulates it best: "the bond market is the mother of all bubbles right now, and when it bursts the losses will dwarf the combined losses of the stock market bubble and the real estate bubble. There is no way for the government to pay this money back." And echoing a topic Zero Hedge has been warning on extensively, namely the maturity of trillions in short-term debt that rolls every month, Schiff notes: "I am afraid is that when people realize we can't pay this money back, we aren't going to be able to roll over all this short-term debt. And so it's not just paying the interest, we are going to have to retire the principal." Peter Schiff is correct that inflating our way out of this debt bubble is a lose-lose proposition. Schiff also notes the stupidity of crowds, by highlighting that 10 years ago everyone was chasing risk, by piling into stock market funds, followed by everyone knows what. The outcome for bond investors is clear: "this decade is going to be the worst decade for bonds in US history. Bond holders are going to get wiped out. Either the government is going to default, or it is going to inflate, but either way the people holding the bonds, are holding the bag."

Faber then joins in: "there isn't much upside in treasuries unless it is for the short term. When I look ten years ahead I don't want to have my money in USTs." His main concern is that due to high budget deficits, there is a good chance that these will go even higher, and as a result the interest payments on government debt will become unbearable. As for the foreign bid, Faber also points out their prior folly: "In 1999/2000 foreigners also wanted to buy the NASDAQ and what happened afterwards is a major collapse. I would not look at foreign buying as a very intelligent leading indicator." In other words Faber just called the Chinese, UK and Japanese permabid in UST moronic. Faber is also not a big fan of a 30 year bond market (since 1981). "I would rather buy an asset class that has been in a bear market." Faber would buy farm land, agricultural commodities, and that gold belongs in a portfolio.

Probably the best argument of the debate is Schiff's observation that the government is not expanding the economy with the newly printed money: no money is being invested in productive capacity, it is not expanding the tax base, and as a result the economy is getting weaker.

Faber, is laconic, in saying that the UST market bottomed out in 1981 when yields went over 15% on the 10 Y, and topped in December 2008, at 2.1%, which was "the peak of the bubble."

Lastly, we learn that Faber and Rosenberg have a bet that bonds will not penetrate the tights seen in December 2008. We believe that even if they do, it is irrelevant. The short-term gyrations of the bond market are now merely all the investors winding and unwinding a plethora of wrong curve trades. The end result, as we have long pointed out, whether it be by way of hyperinflation or hyperdeflation is essentially the same. And the world would be a much more coherent place if the deflationists and inflationists realized that their arguments are two sides of the same coin. What is certain is that the Fed, in its central planning attempt to hold core inflation at 2-3% in perpetuity, will fail. How nobody understands this simple truth is beyond us.

And going back to the Faber-Rosenberg bet: who wins if either of them is correct: in both cases nothing good, and frankly everything bad, awaits the US economy on very short notice.

Comments

[Chemba]

Great.  "buy farmland and agricultural commodities".  Give me a break.  Very practical advice from Dr Faber.

[Leo Kolivakis]

If deflation hits, bonds will outperform in the next 10 years. But if the Fed sponsored liquidity tsunami takes hold, watch out, it will be a bloodbath in bonds. In the meantime, enjoy the wild swings in both bonds and stocks.

[Nihilarian]

Leo, were the past 2 years inflationary or deflationary?

[FreddyInBangkok]

a year or two ago Faber called the Jap bond the trade of the century. his words. didi he sell out yet? Faber don't come cheap like Schmishkin.

[mark mchugh]

I still can't figure out who the UST Bondholders are. 

Anyone?.....Bueller?....Bueller?...Anyone?

[Beard of Zeus]

So, Schiff is bearish on US equities, USTs, and bonds.

Is it relevant that Schiff's firm pushes foreign equities, commodities, and precious metals, which are the only alternatives if you were to follow his advice?

How convenient.

[Herry12]

Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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