Thursday, June 17, 2010

Bond Bubble? Maybe. Maybe not.

Pop goes the bond fund balloon?

Yet unlike the technology- and credit-fueled bubbles, which resulted from eager buyers chasing returns, this latest bubble is forming in part because frightened investors want to minimize risk and avoid further losses.

Unlike the credit-fueled bubble? Seriously? This *IS* the credit-fueled bubble. We are still in it. It did not just magically disappear.

Let's look at the mother of all credit fueled bubbles and its aftermath for a small glimpse of what could happen.

I refer you to the Historical Bank Prime Loan Rate.

1929 range of 5.5 to 6 <------ The Roaring 20s!
1930 range of 3.5 to 6
1931 range of 2.75 to 5
1932 range of 3.25 to 4
1933 range of 1.5 to 4
<------ The Great Depression!
1934 (date uncertain) value of 1.5
1935 (date uncertain) value of 1.5
1947-12 (specific date uncertain) value of 1.75
1948-08 (specific date uncertain) value of 2
1950-09-22: 2.25
1951-01-08: 2.5
1951-10-17: 2.75
1951-12-19: 3
1953-04-27: 3.25
1954-03-17: 3
<------ 20-25 years later!

I'm not saying it will happen, but I'm not about to suggest it won't. Those placing leveraged bets on higher interest rates and higher inflation might continue to be very disappointed.

seasonally adjusted CPI was 217.224 in December 2009. It was 217.224 in May 2010. That's a big fat nothing, right down to the last digit of precision.

This is not investment advice. In order to know if there is a bond bubble, one must first figure out where interest rates are headed. Good luck on that one long-term. Interest rates will be somewhere between Japan's and Zimbabwe's no doubt.

Kan’s Megaproblem

Japan’s gross debt-to-GDP ratio is second only to Zimbabwe, at almost 200 percent.

Japan can't seem to escape deflation and even Zimbabwe's inflation is down to 6.1% , as hard as that is to believe. It's certainly better than the 89.7 sextillion percent rate they had earlier.


EconomicDisconnect said...

Bond yields will be next to zero except on the longest end for quite some time. If I am wrong anytime in the next 3 years then the internet certainly will not be working so you cannot gloat.

The reason all money all over the world is "free" to borrow is because there is an unlimited supply. Bankers must be confused why banks borrow free money and then buy government bonds at some minimal % interest of return. Whats confusing? All the cash is free why not get a little extra fre cash instead of loaning to another Starbucks.

EconomicDisconnect said...

Yes, I gave full credit for my theft of your material!

Stagflationary Mark said...


In any event, I am flattered. It sure beats people linking to Dennis Kneale's comments and using that material to heckle him. Not that I know anyone who would do that! ;)

*whistling nervously*
*looking down at shoes*
*avoiding eye contact*

Stagflationary Mark said...

I would also add that I have no great desire to take out a home mortgage and invest it elsewhere, even at these low rates.

Borrowing at 4.75% doesn't do me any good unless I can safely invest it elsewhere, pay the taxes on the gains, and actually end up with a net profit. Go figure!

G.H. said...

About 6 months ago I posted the following to another board I frequent as I was trying to make a point about fraudulent accounting being used in our system, here's a snippet:

"I'm not sympathetic to the cartel the way you are given ZIRP. Here's where the whole bubblevision argument for banks profits paying back TARP falls flat on it's ass (fed frauds rate):

08/2008, 2.00
09/2008, 1.81
10/2008, 0.97
11/2008, 0.39
12/2008, 0.16
01/2009, 0.15
02/2009, 0.22
03/2009, 0.18
04/2009, 0.15
05/2009, 0.18
06/2009, 0.21
07/2009, 0.16
08/2009, 0.16
09/2009, 0.15
10/2009, 0.12
11/2009, 0.12
12/2009, 0.12"

Someone at the WSJ sees it my way.

"Yes, much of Wall Street wants to see Mr. Bernanke confirmed. The Street is currently making a bundle off Fed policy, as it borrows at near-zero rates and lends long, and the banks don't want that to end. The banks also loved negative real interest rates in the middle of the last decade, and we know how that turned out. Wall Street always loves easy money—until inflation returns, or the bubbles pop.

The next Fed chairman is going to need the market credibility, and the political support, to raise interest rates when much of Congress and Wall Street will be telling him to stay at zero. That is the real reason to oppose a second term for Chairman Bernanke."

Rates going up anytime soon? I wouldn't bet on that. And it seems Mr. Market is not betting on it either.

Stagflationary Mark said...


For what it is worth...

01/1999, 4.63
02/1999, 4.76
03/1999, 4.81
04/1999, 4.74
05/1999, 4.74
06/1999, 4.76
07/1999, 4.99
08/1999, 5.07
09/1999, 5.22
10/1999, 5.20
11/1999, 5.42
12/1999, 5.30
01/2000, 5.45
02/2000, 5.73
03/2000, 5.85
04/2000, 6.02
05/2000, 6.27
06/2000, 6.53
07/2000, 6.54


05/2004, 1.00
06/2004, 1.03
07/2004, 1.26
08/2004, 1.43
09/2004, 1.61
10/2004, 1.76
11/2004, 1.93
12/2004, 2.16
01/2005, 2.28
02/2005, 2.50
03/2005, 2.63
04/2005, 2.79
05/2005, 3.00
06/2005, 3.04
07/2005, 3.26
08/2005, 3.50
09/2005, 3.62
10/2005, 3.78
11/2005, 4.00
12/2005, 4.16
01/2006, 4.29
02/2006, 4.49
03/2006, 4.59
04/2006, 4.79
05/2006, 4.94
06/2006, 4.99
07/2006, 5.24
08/2006, 5.25
09/2006, 5.25
10/2006, 5.25
11/2006, 5.25
12/2006, 5.24
01/2007, 5.25
02/2007, 5.26
03/2007, 5.26
04/2007, 5.25
05/2007, 5.25
06/2007, 5.25
07/2007, 5.26


Based on the last 5 months of CPI and this year's stock market performance it would seem that Bernanke already is a hawk!

01/2010, 0.11
02/2010, 0.13
03/2010, 0.16
04/2010, 0.20
05/2010, 0.20


He's the Herbert Hoover of our Great Depression pushing rates to nose bleed levels such as that.

In theory, it would seem that -2.0% might be more appropriate. If he could just convince people to pay interest to deposit money in banks and not just stuff it under their mattresses then he might even be able to pull it off! ;)

Stagflationary Mark said...


A blast from the past...

September 6, 2007
Let Them Eat Cake!

In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent.

Welcome to Japan!

Stagflationary Mark said...

Oops. Didn't copy the entire quote.

In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover.

Anonymous said...

Why not try high yield dividend paying stocks? Worried about losing capital if the price falls?

word verification: dernit
Dern it! I lost my money!

GawainsGhost said...

Hey, Mark, this interview with Harry Dent is very interesting.

Stagflationary Mark said...


Worried about losing capital if the price falls?

Time is money to me. I'm mostly worried about losing "free" time.

I should have enough resources to continue to live a very modest and frugal lifestyle as long as I don't take many risks. That's good enough for me.

Let's just say that the enjoyment found by reading a used book or playing with my dog would not increase if my nest egg doubled.

Money Won't Buy You Happiness

People generally overestimate the amount of long-term pleasure they'll get from a given object.

Free time is better than free objects, at least to me. That's especially true if one factors in the place where I last worked.

Sierra Entertainment

...massive accounting fraud...

Major Layoffs

I was fortunate to be able to quit in 1999 before that ship completely sank. Morale was horrible at the time and I doubt very much it got any better. I popped many an antacid. No desire to go back to something similar someday.

Stagflationary Mark said...


Guest: Harry Dent, HS Dent and Andrew discuss demographic economics and the countries that are in danger of entering into a prolonged depression. On the top of that list is the U.S....

Fantastic. Sigh.

I didn't listen to much of it (an hour is a long time and I generally prefer to read), but it did inspire me to find this.

Storm ahead

Dent believes we've seen the greatest real estate and credit bubble in history. When a credit bubble deleverages, the private credit contracts faster than the government credit to try and stimulate growth and there is a deflation in prices. Businesses that see and prepare for this economic “storm” will also see their unstable competitors get blown away. He predicts we will see a big change in the next three to six months, and the slowdown is part of a four-stage cycle that's going to determine the long-term business leaders in each industry or market segment.

We'll see how good he is. He's basically calling for a fall disaster. I certainly would not rule it out.

EconomicDisconnect said...

Wasnt Harry Dent "two face" in the Dark Knight??

Stagflationary Mark said...

Here's some trivia that I posted on the TIP message board yesterday.

In 2008, the 10-Year inflation expectations peaked at 2.56% on March 10th. It was all downhill from there. On November 20th, 10-Year inflation expectations were just 0.04%. It took 8 months to make the trip down though.

In 2010, the 10-Year inflation expectations peaked at 2.45% on April 29th. As of yesterday, they sat at 1.99%. That's a BIG move down in the last 6 weeks. If we were to repeat 2008, we'd be pretty much right on schedule.

Could this be like the dam scene in "Force 10 from Navarone"? Who knows?

Notices the dam hasn't collapsed yet

The dam collapsed. It just required patience.

Stagflationary Mark said...


I had to look! That was Harvey Dent. :)

EconomicDisconnect said...

I know, I was playing!

Funny you mention that film, it is one of my favorites! I loved the explosives the guy had; cobras and some that looked like poop. The knife fight scene between Apollo Creed (Carl Weathers) and the huge guy was pretty awesome. I cannot believe that was Quint from Jaws as the leader.

GawainsGhost said...

Yes, well, Dent's point, which he does not articulate, is that most recessions occur as a natural part of the business cycyle, that is over capacity and over production.

It's an old saying. No one realizes there's an inventory problem until someone looks around and asks, where did all of this stuff come from?

But a financial crisis brought about by a credit bubble is an entirely different animal. I believe we're in for years, if not decades, of deleveraging as debt deflation rules.

There is no easy way out of this mess, because the fundamental and structural problems have not been addressed.

Howbeit, I am way long guns, ammo and water. As they say, whiskey is for drinking, but water is for fighting over.

Stagflationary Mark said...


As for Harvey Dent, you knew but I didn't. I had to go look to see what his name was.

My ongoing joke with my girlfriend is that every time I'd see Force 10 from Navarone or even if I just saw it in the channel listings I then I would tell her.

For a while, it was on about once a week. I think the joke got old to her. Unfortunately, it never got old to me though!

I was like the David Lereah of that movie.

"Last chance to see Force 10 from Navarone. You may never get another chance. See it now or forever miss out!

Stagflationary Mark said...


It's an old saying. No one realizes there's an inventory problem until someone looks around and asks, where did all of this stuff come from?

It's a great saying.

What You Should Know About The Self Storage Business

Estimates of the overall number of self storage facilities operating in the United States varies greatly but most industry veterans estimate that there are somewhere between 45,000 and 50,000 facilities as of the date this went to press.

Houston, we have a problem

EconomicDisconnect said...

My wife pulls the same trick when "Sweet Home Alabama" is on. Somebody shoot me please.

Stagflationary Mark said...


So it all balances out I guess. Hahaha!

G.H. said...


"...the Herbert Hoover of our Great Depression pushing rates to nose bleed levels such as that."

Excellent point.

It would seem that the last two fed chiefs have as their core belief that the best way to handle a downturn in the US eCONomy is to have very little 'interest' in it.

Stagflationary Mark said...


Some would argue that the second to the last fed chief was second 'rate'. ;)

G.H. said...

Stag, how 'bout I fix it for 'ya...

"Some would argue that the second to the last fed chief was cut 'rate'."

There 'ya betcha...

I'd argue that "the second to the last fed chief" was, above all, simply well connected. Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars!

I read the book about five years ago, you know, as I was trying to get a grip on why the H__L everybody around me seemed to have so much while I was merely enjoying a somewhat minimalist existence happy to make the most resourceful use of my gains from a Windows/Visual C++/MFC/Y2K/Internet Bubble career from days gone by.

Now, of course, we all know how it all transpired. Or, shall I say, creditGREENSPANired!

Stagflationary Mark said...


The Adventures of Cutpurse Greenspan!

Nobody be sharin' the pirate booty! Hidden away it is. Argh!