Almost every day, I read another analysis about interest rates and how they shouldn’t go up, can’t go up or won’t go up. The gist of their arguments?
The economy isn’t strong enough to handle higher rates. Inflation isn’t high enough to drive up rates. Investors won’t abandon our debt market because we’re the “cleanest dirty shirt” vis-à-vis other global alternatives. The Federal Reserve isn’t going to taper quantitative easing aggressively, and as long as the central bank has its hand on the tiller, bonds are a “buy.”
And yet, almost every day, interest rates keep going up. They’ve been doing so for more than three months now. They’re at their highest level since the summer of 2011. They’ve taken out several levels of technical resistance, blowing through downtrends that date back years, not just months, weeks or days.
So the question you might be asking is: “Why?” Why are so many highly paid Wall Street analysts, big-name bond fund managers, and other so-called experts telling you this can’t happen — yet almost every single day, it does happen?
My answer is relatively straightforward: They’re misunderstanding the primary force at work here.
I believe that, yes, economic growth is somewhat better than it was, and, yes, inflation is clearly an issue. But I also believe the real reason the bond market is getting massacred is simple, clear and straightforward: It was a massive bubble, and now it’s bursting.
That’s it! Forget all of the academic, Ivory Tower, mumbo jumbo arguments out there. The simple fact is, tremendous amounts of money flowed into bonds over the past four-plus years due to the reckless monetary policy of the U.S. Federal Reserve and foreign central banks. Now, it’s flowing out.
|Investors pulled $114.1 billion out of domestic bond funds since June. And that’s only the beginning.|
I recently explained how foreign investors just yanked the most money from the U.S. bond market in a single month in history. But it’s not just foreigners who are running for the hills. The latest TrimTabs figures show that U.S. bond mutual funds and ETFs lost another $30.3 billion in just the first three weeks of August. That means outflows are already more than double the $14.8 billion in July, and the month isn’t over yet.
All told, TrimTabs says a whopping $114.1 billion has rushed out of domestic bond funds since June. That’s a huge number. But you have to remember that the inflows preceding that were incredibly massive, and spread out over a period of more than four years. So I believe we have a long way to go to deflate this bubble, the third — and biggest — one in the past decade and a half.
We’ve been there before.
How many times did we hear when “dot-bomb” stocks were crashing in 2000-2002 that they shouldn’t, couldn’t, wouldn’t lose 70 percent or more of their value? As the Nasdaq Composite plunged from 5,000 to 4,000 to 3,000 and, ultimately, all the way down close to 1,100, how many times did you read, hear or see some expert claim that tech stocks were finally cheap, that selling them no longer made sense?
Or during the housing bust from 2005 to 2009 — how many times did you read, hear or see some real estate expert claim houses and condos were now cheap? That they shouldn’t, couldn’t, wouldn’t drop another 10 percent, 20 percent, 30 percent or more?
Even top Fed officials argued all the way down that there was no bubble, that the mortgage problems were “contained,” and that home prices never suffered from nationwide busts. Yet, there was a bubble, the problems were not contained, and home prices did suffer a country-wide collapse regardless.
Now the whole sorry process is repeating itself all over again. Denial is so thick on Wall Street and in Washington, you could cut it with a knife. We keep being told rates shan’t, can’t, won’t rise. Yet they are.
If you followed my advice, thankfully, you got your money out of this massive bubble market a year ago — or at least several months ago. Or, better yet, you took advantage of my recommendations designed to help you profit from rising rates.
But if I’m right, and rates do have much further to rise, we could be just getting started — Wall Street denial be damned.
Until next time,