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If there’s one thing many investors crave, it’s safe havens. Places where they can put their money and sleep at night, secure in the knowledge that they’ll at least enjoy the return OF their money, if not much return ON their money.
One thing is abundantly clear from the last several quarters of money flow data, as well as pure price action: Boatloads of investors are finding “safety” in bonds.
Lulled into a sense of security by the Federal Reserve’s interest rate pledges …
Sold on the idea that inflation will never return …
Convinced that bonds have virtually no risk …
They have bought bonds at a pace never before seen in the history of this country — and therein lies the problem! You see, any time an asset class has been overwhelmed with oceans of cash … in a buying frenzy encouraged by reckless central bank policy … it ends in tears. Every time.
Or in plain English, bonds may not be Phoenix single-family homes or Miami Beach condos. They may not be Pets.com shares. But they are every bit as massively overvalued, and massively overinflated by easy Fed cash, as those asset classes were before them. And I am firmly convinced we are headed for yet another Fed-fueled disaster, with only the asset class changing!
Look at the flow of money and tell
me how this ends well! Please!
If you want to know what’s really happening in the markets, just follow the money! For instance, the Fed right now is conjuring cash out of thin air and buying roughly 80% of all the Treasuries being issued. If the Fed were to stick to its announced buying plans through the end of 2013, it would Hoover up roughly 77% of ALL net issuance (new bond sales – redeemed/matured bonds) in the Treasury, agency mortgage bond, and investment grade corporate debt markets combined, according to RBS Americas.
The promise of that kind of buying back stop has lulled investors into the most complacent state in history! Case in point: The MOVE Index of Treasury market volatility (like the VIX, only for bonds instead of stocks) just hit an all-time record low a few weeks ago. The yield on junk bonds just hit the lowest absolute level ever, around 5.9%, while the spreads between yields on risky bonds of all stripes and yields on equivalent Treasuries have collapsed.
And following the money, you can see that investors are buying bonds like never before. Just look at the numbers from the Investment Company Institute, which tracks where mutual fund investors are directing their capital. The figures for December show the same thing the figures have been showing for ages now – money moving OUT of stocks and IN to bonds.
Equity funds lost $3.27 billion in the week ended December 26, while bond funds took in $2.46 billion. The week before? Stock funds lost $5 billion while bond funds gained $427 million in assets. The two weeks before that? $15.6 billion OUT of stocks, and $6.9 billion IN to bonds.
Add it all up, and you see that since January 2010, $297.7 billion has flowed out of stock funds. A stunning $671.4 billion has flooded into bond funds during that same period of time!
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Now I’m not here to argue that people should have poured into stocks during this period of time. We’ve had a lackluster economic “recovery,” major credit problems in Europe, ongoing weakness at global banks, and more. But clearly investors have grown just as enamored with bonds as they used to be with dot-bombs and real estate!
Catalysts already coming together for a wipe out!
So what brings about the end of this massive bond bubble? Several forces that are already in play!
Start with the Fed backing away from its reckless buying plans. As Tom Essaye noted earlier this week, several Fed members are already worried about the detrimental impact of QE.
They’re worried it could spur inflation. They’re worried (as they should be!) that they are distorting the markets and encouraging massive, stupid risk taking among investors. They’re also worried that the Fed itself could lose huge amounts of money on bonds. It has become a giant warehouse of bonds, after all, and if rates go up and bond prices fall, guess who’s going to be left holding the bag?
Then there’s the threat of more ratings agency downgrades of our sovereign credit. Or a disaster in the negotiation over the debt ceiling, one severe enough to spook international bond holders. Or even the perception the economy is rebounding. That would boost inflation fears, and lead to another rash of selling.
Bottom line, if you’re hiding in bonds, you’re not really safe at all. You’re taking huge risks. In my view, the risk rises dramatically the farther out on the risk curve (meaning junk vs. investment grade) you are, and the longer-term your bonds are (say, 30 years vs. 2).
I recently made my thoughts clear on the junk bond market here. Now I would encourage you to consider exiting any long-term Treasury or corporate bonds, as well as mutual funds or ETFs that invest in them. Instead, for your fixed income money, stick to short-term, higher-grade bills and notes or equivalent ETFs and mutual funds. Specific names can be found in my Safe Money Report.
Until next time,
Mike
Excellent article.So many Americans have given up on “In God We Trust” and have become,like their leader,Obama,worshippers of govt.People putting their trust in govt and thinking govt should have the power to do anything,including stealing from some and giving to others,is wrong.A lot of people are going to suffer.Same as when their greed got them into overpriced tech stocks and houses.
Mike,
In your recent message about bond investment you did not comment about GNMA accounts.
How can we short this market. Can we short long term treasuries?
I agree with your assessment. I purchased the VXX.
what your opion on 801k or reits in pipe line conpanies that are in natural gas and oil storage.they pay good dividends and seem to be safer than bonds .
Mr. Mattive,
If your organization accepts people like myself for investment management could you please send some information? I am 92 and have subscribed to Weiss since years before Martin came on board. I now have only about $285,000 in retirement funds for mangement, all with Fidelity. When Weiss promoted Weiss Capital Inv. I used them through the transition to Banyan even though I soon learned neither had considered following Weiss. With the bubble threat I ended that but need another management service.
Yours,
Larry Turnbull,MD
Fed can pause/suspend QE. I seem to remember reading reports that the Fed withdrew liquidity at key junctures just before market crashes. The first couple times this happened I told someone they were “shaking the money tree” to scare investors back into bonds. It’s becomes training to a whole generation that if every time they put on too much into equities they get whacked over they head…they’ll just quit playing altogether. But the 401k and other defined contribution money has to be allocated somewhere. The fed will defend low rates “to the death” due to what’s at stake (I thought a recent stat was that they already soak up 70% of all new bond issuance…which they reportedly overpay for by purchasing from primary dealers and funds like PIMCO instead of straight from the treasury or, in the MBS, from the GSE’s)
Did you see the predictions for food prices in 2013? And how about health care costs? Yeah right there’s no inflation because we can buy crap from China at cheaper prices. And for douche bags who think we can just grow our way out of this (it would take double digit growth to get the federal budget back into balance)–the cost of all the free stuff the government gives away (like healthcare) is rising much faster than the increased revenues created by GDP growth. It’s been an ongoing scam anyways to borrow 7-9% of GDP to eke out measly sub-3% “growth”…yeah that’s sustainable. The US Labor Secretary touted in a CNBC interview how many millions of jobs the administration saved through its generous entitlement programs which generated (false) demand for goods and services in the economy.
Well at least I get to enjoy some of that newly printed money as a government sector worker: I got a bonus; a 4% raise; I worked so much overtime in 2012 I made 12% above my base salary; and I’m going on a two week trip to Hawaii for the second time in the past six months (avg 1-2 times a year). Since I get over a $100 a day per diem plus travel pay while I’m sitting on the air plane while on these government funded vacations I almost always partake in the finest restaurants and strip clubs on the island…ha, and you hear these stories about food stamp cards being used for strip clubs…welfare is most definitely not just for the poor.
MIKE, HELP! AS THIS BUBBLE BEGINS TO BURST, WE ARE WONDERING WHAT DO ABOUT OUR 401K MY HUSBAND SHOULDN’T RETIRE FOR 2 YEARS (59 1/2) I HAVEN’T SEEN THIS ADRESSED ANY WHERE IN MONEY AND MARKETS SHOULD IT BE IN FIXED ,SMALL CAPS, CONSERVATIVE MIXED ETC.
WE ARE GOING TO CHECK WITH THE PLAN ADMIN. TO SEE HOW HEAVILY IT’S INVESTED IN BONDS (HALLIBURTON)
USING MONEY AND MARKETS ADVICE IN 2007, HIS 401K DIDN’T LOSE AS MUCH AS OTHERS DID
THANKS IN ADVANCE FOR ANY HELP, CAROL AND DALE