Wild markets! Bonds crashing!

Martin here with an urgent update on these wild, wild markets.

The key factor many investors seem to be forgetting: While stock markets have enjoyed a historic rally, bond markets are suffering a dramatic decline.

Just in the past six days, long-term Treasury bond prices have plunged a whopping seven points, including another big drop yesterday.

So if you think yesterday’s stock market euphoria means the government’s newer and bigger bailout plan is going to be a success, think again.

The epicenter of this crisis was never in the stock market. From the very outset, it has always been in the bond and credit markets. It’s in the bond and credit markets that …

• subprime mortgages first collapsed,

• mortgage-backed bonds turned to dust,

• commercial paper (short-term IOUs) was crushed,

• interbank lending froze up, and

• the entire global financial system came to the brink of what the IMF chief called “a systemic meltdown.”

Most important, it’s in the bond and credit markets where the world’s governments will face their day of reckoning.

Millions of investors will ask: “Why should I put my money in government guaranteed bonds when I can put it in government guaranteed banks and get a much higher yield?”

Or worse, some will say: “I bought your bonds because I didn’t trust the banks. Now, you’re giving my money to the banks anyhow. So I can’t trust you anymore either.”

You and I know that they’re wrong, that the government’s direct guarantee is far stronger than any indirect guarantee. But all it takes is a small percentage of investors acting on these beliefs to tip the scale in the bond market, drive interest rates higher and make the entire debt crisis a lot worse.

Will the new government master plan be a total dud? Of course not. It could temporarily stimulate some more rallies on Wall Street. And it may even ease some panic in some debt sectors. But that’s a far cry from ending the crisis. For you, though, it’s …

A Wonderful Selling Opportunity

We’ve been hoping for a rally like this. Now we’ve got it.

This rally gives you a great chance to get rid of all the stocks you were unable to sell while the market was crashing.

It lets you move decisively from risk to safety.

And it gives you an ideal window to jump into investments that will protect you — and could even enrich you — in the next phase of the crash.

Each time the government has come out with a new great idea for saving the financial markets, it has given it a new name with a new twist.

But They All Backfired, and the
New U.S. and European Plans
Announced Yesterday Are No Different.

In August 2007, when central banks injected hundreds of billions in new liquid funds into the banking system, and again, in March 2008, when the Federal Reserve rescued Bear Stearns, their goal was essentially the same as today’s: To boost investor confidence.

Initially, they did. Among other things, investors bought more shares in insolvent banks, invested more in junk bonds of overrated corporations, and placed more bets on shaky derivatives. But that did not end the debt crisis. It only made it worse.

The main reason: Even while authorities were dumping liquidity onto the markets from above, the fires on the ground continued to rage. More homeowners fell behind on mortgage payments. More credit cards, auto loans and student loans went bad. More bank balance sheets crumbled.

Before long, investors realized they’d been duped. They fled in panic. And the debt crisis returned with a vengeance. Instead of restoring realism, the authorities created a fantasy. Rather than bringing stability, they fostered instability. Inadvertently, they helped create the very panic they sought to prevent.

The same thing is going to happen again this time.

Don’t let the enormity of their response fool you. The bigger it is, the more desperation it denotes. And the more desperate they become, the more likely their bailouts will fail.

The government, despite all its power, cannot repeal the law of gravity to stop investors from selling. Nor can it turn back the clock to magically reverse the nation’s financial sins.

Looking further into the future, there will be many reasons to expect a recovery. But first the economy will suffer a great fall.

For now, tell your broker, your financial planner or your money manager to stick with safety and investments especially designed for times like these. Then, later, you can go back to traditional investment approaches.

Good luck and God bless!

Martin

P.S. If you missed our emergency Q&A session on Friday, you can still watch it online now. Just click here.

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.

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