A Bond Bull Sees More Deflation Ahead

RickAckerman's picture

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cranky-old-geezer's picture



Here's another example of "inflation" and "deflation" being used the wrong way. Don't feel bad, even PhD economists use those words the wrong way.

"Inflation" and "deflation" aren't meant to describe price changes. "Inflation" describes expanding money supply relative to GDP with resulting currency debasement (losing value). "Deflation" describes shrinking money supply relative to GDP with resulting currency revaluation (gaining value).

Prices can change from inflation / deflation. Prices can also change from supply / demand factors.

For example housing prices are falling due to demand collapse, even though the currency is inflating and losing value (which would normally push prices up). Demand collapse pushing prices down is way more than currency inflation pushing prices up, resulting in prices falling overall.

People say housing prices have dropped 30% since the '08 housing collapse started. But the real loss of value is closer to 60%. Depreciating currency keeps prices from dropping 60%.

This is exactly what Bernake wanted. He wanted to hide the true collapse of housing values by printing money and debasing the currency, exactly what has happened since'08. The US dollar has lost nearly 1/3 of its value since 08.

This is clearly demonstrated in prices of things where supply and demand is steady, like food and fuel. Food and fuel prices have risen nearly 50% since '08, because the dollar has lost nearly 1/3 of its value since '08.

Today's bond market isn't about yield anymore. It's about price. Bernanke has single-handedly kept bond prices up by creating artificial demand in the market with massive bond purchases.

So yes, bonds prices have stayed up and bond funds have done well ...in nominal terms.

But how well have they done against 1/3 loss of dollar value since '08?

Doug says more deflation is coming and bonds will continue doing well.

What deflation? There hasn't been any deflation. We've had 50% INFLATION since '08, resulting in the dollar losing 1/3 of its value.

ZerOhead's picture


And nothing moves faster than scared money. Wait until that free $16.1 trillion that Bernanke printed ends up moving out of bonds into equities and commodities all at once when the 'deflation' trade ends... oh and don't forget the $10T in bank deposits plus whatever the Europeans are working on...

The Alarmist's picture

If there really was deflation in the picture, the dollars I earned last year would not be buying me 15% less food this year. Sure, I get more flat panel TV for the money this year, but how many of those can you eat?

AGuy's picture

[Flat Panel TVs] And how long will it last before it breaks? That is never factored into the hedonic adjustments. A TV purchase in the 1990's would last 10+ Years. Recent model TV's last less than 5 years before breaking.



akak's picture

"A bond bull sees more deflation ahead."

Really, Rick?  That's odd, because I see NONE anywhere!  What I DO see is currency depreciation (i.e., inflation), as well as the very real threat, if not the certainty, of vastly more of it ahead.

And just to reiterate, the collapse of an asset bubble is NOT synonymous with deflation --- and all the disingenuous bloviating in the world will not make it so, either.

ebworthen's picture

It's called STAGFLATION, as in stagnation with concurrent deflation and inflation.

No return on savings, crushed housing and property values, debauched currencies, and inflation in food and fuel that isn't counted by Alchemist Economists for CPI or COLA.

...etcetera, etcetera, etcetera...

silverserfer's picture

 Rick is still a baseball card bull as well. "baseball cards are a sound investment for wealth preservation in addition to bonds and beannie babies."  

Lazane's picture

"every investment class has its day in the sun", a new day has dawned for stacking precious metals.

dumpster's picture

oil pushing 100 is a sure sign of deflation lol

rick the whisy whasy //

inflation is printing .. which is going on all over the world .. bonds are under the thumb of fed to make it seek like no inflation ..

but things just keep going up so rick can blovate

sharkbait's picture

Real estate was a can't lose investment for a long time, until it wasn't.  Every investment class has its day(s) in the sun.  In fact since markets are cyclical, they will each have their star performance period many times.

But does the author really undestand what the DV of an 01 means?  Does he truly appreciate how fast and far bond prices can and will back up?  Are long rates going to 1% and are they going to stay there?  I think not.    There is no margin for error at current levels.  Unless you are a true believer on the deflation ( and for a protracted period) scenario.  Maybe this time is different.... as for me, I am not taking that bet

fonzanoon's picture

This is an excellent description of what has taken place being extrapolated to predict what will take place. Thats all it is.

traderjoe's picture

During the period discussed, yields moved from around 18% to 3%. Where's the same catalyst going-forward????

rbg81's picture

What is happening with European soverign debt will eventually happen to American soverign debt.  The big question is: how long will that take?  So far, we have been lucky because we are viewed as the world's last great safe haven.  So we get to borrow like PIIGS at ultra low interest rates.  Make no mistake, this is what the FED really wants--the US economy be damned.  Their #1 priority is making sure the US debt balloon doesn't burst--because when it does, it will take the world economy with it.  So, the author will seem like a genius until we eventually reach that inflection point of no return.

AGuy's picture

Well, there is a difference. Currently the ECB can't print money and monerize debt. The US already has begun debt monertization. Its seems unlike that the Fed will stand on the sidelines during a bond collapse, and its extremely probable that the Fed will continue buying debt to keep interest rates low until the dollars value reaches zero.

Its very likely that the ECB will reverse its tune and monertize debt to prevent a full European financial crisis. Merkel will change her mind as soon as Germany is backed up against a financial wall of collapse.


I can't say I agree with the author. Holding Bonds is a Lose Lose proposition:

Deflation: US Tax revenues plunge, force US gov'ts (State, Local & Federal) to default on debt obligations. If Fed Defaults, the Dollar collapses

Stagflation: (What we have now). Bond Yield become worthless, and Bond holders get burned as inflation eats there buying power. Everything slowly gets more expesive, and unemployment remains high or continues to grow for a very long time.

Inflation: Bond prices collapse, and Bond holders eat there shirts.


"So, the author will seem like a genius until we eventually reach that inflection point of no return."

Yes, Just like Lehman was King of the Financial Industry with record profits during the height of the Bubble.

rbg81's picture

The more the Fed is forced to buy UST, the more it becomes apparent that the Emperor has no clothes.  At that point, inflation takes off the the Fed basically kills the Economy trying to keep Government borrowing costs low.  But the paradox is that as more people become dependent on the Governement, political pressures will leave the Fed no choice.  Its an ugly, distorted scenario that would mean hyperinflation so (paradoxically) the Government could mask the true cost of the deficit.

In a way, we are lucky that Europe is in such bad shape.  It gives us a few years grace period and makes the Bond bulls look smart.  Anyone who has shorted UST, has lost their shirts. But it won't last forever.

Kayman's picture

" since QEs have not produced the desired effect."

Bernanke has provided the top end liquidity to save the TBTF's, even though they remain insolvent.

Objective achieved. 

And while we do the math. as long term interest rates approach zero, bond prices approach infinity... No ???

AGuy's picture

"And while we do the math. as long term interest rates approach zero, bond prices approach infinity... No ???"

No. Bonds can't really go negative, at least in any significant amount. The most a bond price can go is the value of the loan.  If I sell a $100 Bond at zero percent, the highest it can go is $100. In some instances, if there is a mad rush out of one investiment and into short term gov't debt its possible for interest rates to go slightly negative. This is when someone holding a bond that they bought sells it to someone at a negative return. But only a fool would continue to buy short term debt at negative rates.

Since Bernanke is the Fed Chief, he will not let any meaniful amount of deflation to take hold, by simply buying up illiquid assets (aka MBS, Gov't Bonds, Corp bonds, etc) to create liquidity,  stalling deflation. This causes stagflation, as the liquidity is used to speculate into tangable assets such as Precious metals, Farm land, AgraCulture commodites, Oil, etc. Liquidity created by the Fed never end up in Joe Six pack hands, which prevents any wage increases, but forces J6P to pay for more to fuel up his car, put food on the table, and  higher taxes (state, local, etc), as state/local gov'ts pass on their higher costs to taxpayers. Monertizing simply sucks the life out of J6P will enriching speculators.


Straw Dog's picture

A well reasoned argument.

Are we at the mercy of Bernanke's printer, each new iteration of QE is weaker, plus it's hard to believe the Bernank will risk a big enough QE to make difference since QEs have not produced the desired effect. Add to that the increased FED scrutiny by congress.

apberusdisvet's picture

Methinks that the municpal bond sector is about to go poof; most especially in those areas with multi-million dollar pensions for public sector union retirees and a high school graduation rate of less than 50%.

AGuy's picture

MeThinks Municpals will raise taxes and cut staff, stalling any MuniBond implosion for the near term. Yes there will be a few that default, but its like to be just a few over the next year or two. Better to bleed taxpayers dry before defaulting.

Elected officials? Damned if the default or raise taxes. Raising taxes will keep corrupt politicians out of jail, because when a local gov't goes BK, there are investigations, which can lead to prosecution. Raising taxes on the other hand, might get them booted out of office, but it will keep them out of jail, and push the problem on to the next guy that takes office.


oddjob's picture

I guess somebody has to be bullish on paper promises.

Adbuster's picture

Recommendations on Closed End Build America Bond Funds? BAB? EBABX? Others?

What bond funds could Joe Average assemble to achive a 11% ROI? My VFIIX ain't doing it...


SwingForce's picture

You are totally dependant on The Benbernakes printer-finger, you know that right? 

SMG's picture

That's what makes how this is going to play out so hard to call.  And what gives insiders an advantage.

My call is they will make the peasants suffer a while and make THEM BEG for printing.  So a period (months?) of deflation followed by hyperinflation.

Just my opinion and I am really not that smart.