Wednesday, August 29, 2012

The great bond bubble joins the S&P

The two most important questions Will you lend to someone who is insolvent and has no plan to get out of insolvency at 1.47% for 10 years when inflation is running at about 3% and prospects of hyper-inflation loom?

Will you sell good assets that are likely to protect your future because S&P 500 crossed an arbitrary line on a chart?

Any astute investor would answer the above two questions with a firm �no.�

A question everybody should askYet fear is such a powerful emotion that it has overcome logic and sanity in the markets.The good news is that when the majority acts out of fear, it provides opportunity for the rest of us.

A CBOE Interest Rate 10-Year T-Note (^TNX) chart illustrates the point.

The driving force behind price movements in popular bond ETFs such as TLT , TBT and TBF , and many others.

As the chart shows, panic has now exceeded the panic at the deepest point of the 2008 financial crisis when measured by the 10-year yield. Ask yourself a simple question, "Is the situation today worse than the situation during the worst of the 2008 financial crisis?"Anyone who is willing to set opinions aside and rigorously analyze the data would answer with a definite �no.�

Is the U.S. government worthy of 1.47%? Here are the statistics to ponder:

  • U.S. national debt $15.76 trillion or $138,577 per taxpayer.

  • Unfunded liabilities not included in the national debt:

  • Social security $15.71 trillion.

  • Prescription drug $20.78 trillion.

  • Medicare $82.64 trillion.

  • Total unfunded liabilities $119.13 trillion or $1,047,713 per taxpayer.

  • U.S. federal budget deficit $1.41 trillion.

The Great Bond Bubble

The bubbles form because those making the bubbles bigger are fully convinced of the arguments in favor of the bubbles never busting.

This is true of every bubble we have studied ranging from Dutch tulips to the housing bubble. History is repeating itself.

The real questions

Here are the real questions:

  • How big will the bubble become?

  • When will it burst?

  • How to make money from the bubble?

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