Send this article to a friend:

November
08
2021

Why You Should Stay Far Away From Bonds
Tom Dyson

The Federal Reserve announced this week that it would begin tapering its bond-buying program later this month. This bond-buying was initiated to fund the feds’ COVID-19 emergency measures.

But Fed chair Jerome Powell was quick to point out that the Fed isn’t in a rush to raise interest rates. And he is still doggedly describing the current high inflation levels as “transitory.”

So what does this mean for investors? Read on below to hear what Bill’s Rogue Economics colleague, Tom Dyson, reads into the recent signals from the Fed and the bond market…

Last week, the bond market’s prediction for inflation over the next five years hit an important new high…

Bond traders foresee inflation just below 3% over the next five years – higher than they’ve ever predicted. And when the bond market talks, I listen…

That’s because bond traders are famously accurate at predicting important macroeconomic trends.

That goes for anything from recessions… to what the Federal Reserve will do next… to wars, government policy, and even inflation.

That’s why one good way to gauge future inflation levels is to look at the bond market… and see what bond traders are betting inflation will be over the next few years.

And right now, bond traders’ inflation fears are higher than they’ve ever been in the last two decades.

So what’s the message for investors from this inflation data? It’s something we’ve predicted many times…

Final Stages of an Epic Credit Binge

The world economy is in the final stages of the most epic credit binge in history. Credit has never been this cheap or this plentiful. And the world has never been so leveraged.

(Junk-rated creditors now owe more than $1.5 trillion by face-value of junk bonds issued. That’s a record.)

Our hypothesis is that if central planners let interest rates rise, they’ll blow up the world economy.

But if they don’t let interest rates rise, prices of everyday goods will keep rising. That will eventually cause investors to stampede out of the bond markets… and lead to what we call a “synchronized global currency devaluation.”

We’re predicting stagflation, in other words. That is, inflation combined with a stagnant economy.

And that brings us back to bond traders’ inflation expectations…

Distressed Market Signals

As I mentioned, bond traders’ inflation predictions for the next five years hit new highs at the end of last month.

We call this the breakeven inflation rate. Put simply, this rate is measured by the spread, or difference, between two bond yields.

And it’s not just five-year inflation predictions hitting new highs. Breakevens for 10-year and 30-year terms hit multi-year highs, too.

And along with this, there was also massive selling in the markets for short-term bonds… especially in Australia, Canada, New Zealand, and across Europe.

The sell-off in Australia’s market was the most severe since 1996. Canada’s was the worst decline since 2009. Bond yields in Greece, Portugal, Italy, and Spain all soared last week, too. (Remember, bond yields move inversely to price.)

From the October 29 Financial Times:

Short-term bond markets have ‘experienced unprecedented volatility’ this week, said George Saravelos, Deutsche Bank’s global head of currency research. […]

Saravelos said the moves have been exacerbated by investors being forced to abandon soured bets as markets move against them. ‘What is happening now runs beyond macro,’ he said… ‘This is the closest we can get to a distressed market.’”

Steer Clear of Bonds

What does this all mean for us?

In short, it looks like the central planners are losing control of short-term interest rates. They’ll either have to increase the money-printing to bring bond yields back down… or things are going to start blowing up.

In the meantime, our best bet is to stay far away from bonds… and wait in the sidelines in hard assets until it’s safe to return to the financial system.

We remain unwaveringly bullish on gold, silver, and deep-value infrastructure plays, like shipping stocks.

Regards,

Tom Dyson, Editor, Postcards From the Fringe

P.S. For more insights from me on the economy and the markets… you can sign up for my free eletter, Postcards From the Fringe here. It’s not your typical financial newsletter. For one, I don’t stick to the economics side of life… My wife and I just spent two years traveling the world with our three children. So along with updates on inflation, interest rates, and investments, you’ll also find updates from our travels and adventures. Sign up for free here.

Like what you’re reading? Send your thoughts to [email protected].

Tom Dyson is a contributing editor, with Dr. Steve Sjuggerud, of DailyWealth. There's not another financial writer with a more proven contrarian view. Tom made his first trade age 12. The stock returned 300% in less than 9 months. Since then, Tom has worked on a bond trading desk at Salomon brothers, qualified to the Chartered Institute of Management Accountants - the UK equivalent of CMA in the US - and ridden freight trains all over North America.

In his spare time, Tom likes to speculate in the capital markets, gamble on the golf course and play poker against his colleagues. He graduated from the University of Nottingham with a degree in Spanish. Tom's articles have appeared in the Daily Reckoning, the largest e-letter in America, and many other well-known contrarian websites.

bonnerandpartners.com