“Even if somebody wants to say we’re going to have low inflation for the next year or two, can anybody really say that [with] this most inflationary monetary policy in the history of this country, that people are going to be able to buy a bond for 30 years and clip a 3-per-cent coupon [and come out ahead]?” Mr. Schiff asks. “Does anybody believe that?”
“I think what we should know by now is that we can’t put any faith in what happens in the short run. Internet stocks went way up. Does that validate anything? No. They collapsed to zero,” says Mr. Schiff. When it comes to U.S. Treasuries, “nobody is intending to hold to maturity. Everybody thinks they’re going to get out the door in time.” That’s the greater fool theory at work, and it’s the very definition of a bubble. Beware, all those who would seek shelter in supposedly ultra-safe bonds.
In the beginning, there was a Nasdaq bubble. When the air went rushing out of it, a housing bubble formed, a symptom of a much larger bubble in credit, which in turn helped inflate (arguably) new bubbles in the emerging markets, in oil, and in other commodities.
Pop, pop, pop, pop. Can there possibly be any bubbles left after Meltdown 2008? Only one, maybe: Government debt. In 2009, it could be swept away, too.
“The bond market’s going to collapse,” warns Peter Schiff, president of Euro Pacific Capital, a brokerage firm based in Connecticut. He’s one of a small number of financial pros who called the plunge in U.S. real estate prices before it happened; now he’s forecasting the same for U.S. Treasuries. “It’s the biggest bubble yet to burst. It is a complete fantasy.”
That’s the sort of cheery New Year’s forecast you might expect from a man nicknamed Dr. Doom. But Mr. Schiff has important company in the bearish camp. Pimco, the Newport Beach, Calif., giant that manages some $800-billion (U.S.) in bonds, has also grown negative on U.S. government debt, especially long-term debt. With 30-year Treasuries yielding barely 3 per cent, the rewards hardly seem worth the risk, Pimco’s managers are saying - unless you believe U.S. inflation will be close to nil over the next three decades. Not too likely.
Tags: Bonds, Bubble, Economy, Fed, Federal Reserve, Government, Peter Schiff, PIMCO, Politics, Treasury, U.S.
