Thursday, December 20, 2012

Bonds are in a bubble

There. I said it. It can't be said any more plainly.

Interest rates are set to rise. The economy is set to rise. Inflation is set to rise. There may be some headline risk over the next few months, but the underlying economy is going to pull out of this funk that it is in, and get going again. And interest rates are going to RISE. That means that bonds and bond funds are going to go DOWN. This means they will lose a large percentage of their value. If you are in a bond fund, get out. There may be fluctuations. You may have second thoughts next week, or next month if you take your money out of bonds, BUT, the bond market bubble WILL end. And bonds and bond funds will start down. For the long term.

The specter of interest rates rising is what started this whole debacle  5 years ago. Do you remember when there were riots over the price of rice? Do you remember when gasoline was on the way to $5 a gallon in the U.S.? That was 2006-7. Interest rates were set to go up dramatically, and that is what burst the housing bubble and almost broke the banks and led to this recession. Now, we have worked through those tactical difficulties. And the money that has been printed to paper over those things is going to work it's way into the economy of the world. Now inflation is going to get going in ernest. It won't be overnight. It will be at least a couple years. The first year or two is going to seem like we are in the late nineties again. But then the interest rates will rise with a vengeance as the trend of rising interest rates and inflation gets going. By then it will be too late. Stocks will do very well for most of an inflationary environment. At the end there will be hell to pay. But the job of every investor is to try to keep up with inflation as long as he/she can.

Gold and silver are getting hit hard right now. This is because of the strength of the stock market and the weakness in the bond market. Interest rates are starting to rise and this is threatening to gold. But it won't last. It is a "trade" that is being unwound. The bond market will not be able to keep up with inflation. The bond market will not put inflation in it's place because the government will try to keep interest rates low to preserve the growth of the economy. And by the time we get a strong hand like Mr. Volcker, who tamed inflation in the 1980's, it will be late in the game. The political system will remain behind the curve. Inflation will get out of hand before it is brought under control. This may be five to ten years from now. In the meantime it is important to keep up with inflation by investing in those things that go up with inflation. Buy gold and silver and be patient. Land should hold it's value. Buy stocks now and sell when the tide starts to turn in a couple years or so.

This is my long term outlook. In the short term we will need to manage our risk on an individual basis. This means each investor is responsible for his/her own decisions. If one is not able to go "all out" and put all of ones eggs in one basket, then at least start the shift out of bonds and into inflation hedges.

Don't wait until everyone is panicking. Look ahead and be pro-active.
This is my warning to those I care about.

Here is that chart of bond prices:

Damn that was intense....

But I mean it!

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