Warning: Investors Still Confident in the US Bond Market

04-24-2011 • LewRockwell.com

Well, the press described the news as a “warning shot” or a “wake-up call.” Both of those descriptions are fairly positive. You get a warning shot…and you can turn around. You get a wake-up call and you wake up. But what do you do when you’re running the world’s biggest Ponzi scheme? Do you stop? Do you “wake up”? No, you deny it! “Don’t worry,” you tell investors. The New York Times: …Treasury secretary, Timothy F. Geithner…said on Fox Business Network there was “no risk” that the United States would lose its AAA credit rating, disagreeing with Standard & Poor’s negative assessment, and said that investors were still confident in government bonds. Well, yes. Investors are still confident in US bonds. Then again, investors were still confident in US houses in 2007…and still confident in US tech stocks in 1999. It is only because they are confident that bond yields are so low. But what would bond yields do if investors began to be less confident? Imagine where the price of gold would go! Well, it turns out that confidence goeth before a fall. Especially in the bond market. Bond market cycles move so slowly that a whole generation of investors is led into great confidence…and then another generation mistrusts them forever. The proof comes to us from a report from Credit Suisse, by way of our Family Office strategist, Rob Marstrand. Rob is looking for real returns over long stretches of time. Bonds work…but like everything else, only sometimes. And this is not one of those times. If you go to an investment manager and tell him you want to invest some money for your children, safely, securely, most likely he’ll tell you to buy bonds. And he’ll be right – but only when the bond market is in one of its boom phases. When it goes into a bust phase, watch out. You could be looking at losses for 50 years. Or maybe even permanent losses.