Today, with bond yields
near zero, yields can’t go much lower which
means bond profits can’t
rise as they once did. Yet, despite
today’s outlook for
lower bond profits, investors
are increasingly buying
bonds, not for profit but for safety.
INVESTORS
ARE SPOOKED, RISK IS BACK IN TOWN
In January 2008, target="_blank" in The Economy and the Fat Kid, I wrote:
… one day, a fat kid shows up at the playground. While everyone knows it’s a private playground and admittance is strictly controlled, no one knows where the fat kid came from or how he got in. Nonetheless, the fat kid’s there.
Then
the fat kid walks over to the teeter-totter
and sits down. The fat kid’s
end of the teeter-totter slams
to the ground as the other
end skyrockets up; tossing
all those on the high end off. The name of the fat kid is risk.
DON’T BLAME THE FAT
KID: THE ROLE OF RISK IN FREE MARKETS
…Between
2002 and 2007, risk went into hiding as central banks flooded the markets with cheap money; allowing capital flows to mask losses while
boosting asset values to
record levels. Billions of dollars of central bank credit translated
into trillions of dollars of leveraged
bets creating bubbles in all asset
classes—real estate, stocks, commodities, and bonds.
… But global market risks, temporarily hidden by cheap credit, have now reasserted themselves with a vengeance… Risk is back and no matter how often the playground supervisor tries to reassure us, we know the playground is no longer safe. Even
the big kids are getting hurt. The fat kid’s back
and so is the whiff of deflation.
RISK
IS IN THE HOUSE
LIBOR’s
getting high
As central bankers try
To calm
the markets down
But risk
is back in town
Risk
is in the house Yo!
Risk
is in the house
Credit
lines are drawn
Where’s
the money gone
Spreads
are growing fast
Markets
sucking gas
Risk
is in the house Yo!
Risk
is in the house
Triple A means squat
Commercial paper rots
Monolines
are down
‘Cause risk is back in town
Risk
is in the house Yo!
Risk
is in the house
Risk
is going ‘round
Can you
hear the sound
As tranches hit the ground
‘Cause risk is back in town
Despite
today’s high stock markets’
valuations, investors are
withdrawing money from
stock markets in increasing
numbers and are instead buying bonds. These are today’s bond lemmings, bond buyers
bound together in the deluded belief that bonds are safe. They are not.
On October 11, 2012, a Wall
Street Journal blogger wrote:
…investors
pulled $10.6 billion out of stock funds in the week ended Oct. … That was the
biggest weekly outflow of the year and the largest since August 2011…
.
The
total outflow from US
stock market funds
for
2012 now exceeds $100
billion
ASIANS PREFER
BONDS
Bond
flows hit five-year highs among Asian
investors was posted
October 4, 2012 by Emily Blewett
at Citywire Global:
Gross sales into
bond funds made up 68% of the industry
in the first seven months
to July this year whilst 21% were made up of equities. This shows a turnaround
in investor sentiment from
2008 when 64% of gross
sales went to equities
and only 16% to bond funds
in the twelve month period.
As global risks increase, investor appetite for bonds in both Asia and the West are growing as the search for safety is now
paramount; but investors
are mistaken that bonds
are safe. They’re
not
DEFLATION: THE
DAISY CHAIN OF DEBT AND DEFAULTS
Collective slowing global demand is a sign that
deflation has now metastasized. Japan is contracting, Europe is contracting, China is slowing and the US is desperately hoping it can
print enough money to
escape deflation’s growing
grasp. It can’t.
A collective
collapse in global demand is
what happened during the Great Depression. It’s happening again today. The trillions of dollars governments
printed and spent since 2008 only delayed the inevitable but did not prevent it; and, now in 2012, the inevitable has
once again resumed its deflationary descent.
Most stocks
and bonds will not survive the coming
rendering. Stocks thrive
on growth and the only
possible growth now is debt; and bonds are IOUs, debts and obligations contracted in better times when the odds of repayment were more favorable. Today, the odds are less favorable. Tomorrow, they will be
worse.
Once underway, deflation’s momentum is impossible to
reverse. Nothing central bankers
did during the Great Depression revived private demand; and the
trillions of dollars being printed
today to hopefully do so will be
no more successful than were efforts in the 1930s.
What will result from today’s
simultaneous central bank
monetary easing is massive currency debasement and the buildup of inflationary pressures more than
capable of crossing hyperinflation’s
invisible line.
GOLD: THE
PALLIATIVE FOR DEFLATION AND INFLATION
In the endgame of the bankers’ credit and debt ponzi scheme, gold is the ultimate two-edge hedge. Gold protects against both inflation and deflation.
The following excerpt is from my
book, Time of the Vulture:
How to Survive the Crisis and Prosper in the Process
Gold today
is valued primarily as an inflation hedge.
That is so because when inflation took hold in the 1970s, gold exploded upwards, rising from $35 per ounce in 1972 to $850 per ounce in 1980, an increase of 2,428% in just eight years.
…What is equally
as important, however, is
what happened to gold during the Great Depression,
the period when deflation stopped the US and
world economy dead in its tracks… If, in 1928, $100,000 had been invested in the Dow, in 1938
the investment would have
been worth only $10,000.
If, however, that
$100,000 had been invested
in gold mining stocks, the investment
would have increased to
$1,000,000 by 1938.
p. 29, Time of the Vulture:
How to Survive the Crisis and Prosper in the Process, 3rd ed., 2012
Note: Shares in Homestake Mining, the largest gold mining company in the world, were $4.19 in 1929. In 1935, shares were $495 and paid a $56 dividend.
For those attached to today’s markets, to both their opportunities
and inequities, the coming
collapse is not a welcome
event. For those expecting the better world that will come, the coming collapse is merely a necessary transition
to better times.
My video, America, Version
1.0, 1.2 and 1.3, discusses the America of the past, present and future. America 1.3
is going to be a lot more like America 1.0.
Buy gold, buy silver, have faith.
Darryl Robert Schoon
www.survivethecrisis.com
www.drschoon.com
