pension bubbles, stock bubbles, bond bubbles, etc

To J.R.:

 There seems to be a bubble in the Bond market. I read this and somehow I think you may not agree with it…or do you? This lady believes the rates will go up and thus it’s time to short the Bond market. Her company offers opportunities to short the bond market via options. I’m not sure how this is done and I don’t consider doing this for myself, but I am very intrigued b/c under normal circumstances I would agree with her, but you do have some knowledge of Austrian economics, and I’ve been exposed to plenty of your thoughts which made a lot of sense. So, my questions would be something like: 

1. do you think the bond market will collapse? 
2. It appears more investors have been shifting money from the bond market to the equities market. Will the stock market continue to go up int he next few years? If so, it means more money go away from the bond market. 
3. Will there be a stock market drop soon? 
4. Can the bond market go up simultaneously with the stock market? 

I have been thinking about this all morning and the only conclusion i draw is that there is a battle b/w the market forces (where the rates want to go up) and the man/govt/fed forces (where they cannot allow that to happen). 

Your input would be highly valuable to me. Thank you. 


J.R. replies:

There is a lot in your questions. First, I also “short” the bond market on occasion (when I expect yields/interest rates to rise). I use put options and other methods.

Also, there are many occasions when US bonds and US stocks go up or down together, if only briefly. In late May and mid-June of 2013, they both went down at the same time (see chart below). Some people do not understand that very simple fact and thus would probably never forecast it.

tlt vs spx

Prices drop relative to two primary factors: supply and demand. Demand for both stocks and bonds fluctuate based on “consumer confidence,” as in overall economic outlook, like whether there is a public perception of a long-term gasoline price crisis or just a small issue that a minor political change “should” resolve or continuing unrivaled global dominance or what.

It is also important to be aware that both US bonds and US stocks are international markets. It is not just domestic investors involved. So, can lots of retiring baby boomers dump their stocks and their bonds and real estate all at once to convert to cash for covering their living expenses? Of course!

We also have lots of overlap involving government pension funds like the city of Detroit, which recently filed bankruptcy. Many of the lenders that may be “screwed” in the bankruptcy of Detroit are banks in Europe. That means that some of those banks will face more serious solvency issues as well, which may force them to dump stock holdings to stay in business.

The big issue is cash. I’ve repeated this in many ways for many years. Gold and bonds and stocks are primarily valued in terms of their future purchasing power in cash. Cash is almost always the end-point that people have in mind when dealing with budgets and solvency, so when that detail of the primacy of cash is ignored, lots of confusion can result. The discounting of the importance of cash can quickly shift in a panic of surging demand for cash.

Everyone loses interest in bonds or stocks or real estate when their kid is in the emergency room or their car is impounded. They want cash.

The same is true with the “pension bubble.” When Detroit and IBM and Illinois all have short-falls in their pensions funds due to mainstream incompetence (ignorance?), then they all need to dump their speculative investments in order to cover their cash obligations. They dump speculative bubble investments like gold or bonds or real estate or stocks. They may even seek higher-risk methods to “make up” for prior “incompetence and mismanagement,” which typically leads to spiraling panics of selling as those higher-risk methods fail as well.  Just like insurance companies who need cash to cover their enormous promises like in unrealistic annuity contracts, the more unrealistic the contract, the worse in the long-run, even if it attracts a new wave of cash from naive imbeciles who actually believe the insurance companies can keep those promises even though they have even less competence than the people at the insurance company who “need” the high-risk gambles to pay off.

So, will the US treasury bond market “collapse?” Not likely. The assets of the taxpayers (involuntary underwriters) will be confiscated to cover those debts because the political will of the creditors far exceeds the sophistication of “the sheeple.” Or, maybe I am wrong. 😉

In deflation, the original driver of demand for cash may be recognized by the masses: tax obligations. A military system dictates what tax rates will be extracted/extorted from the colonies/underwriters and then dictates what form of payment is accepted, creating demand for that financial instrument (out of thin air/bullets and bombs) through tax claims that are also created “out of thin air” (bullets and bombs).

Why does deflation tend to increase the recognition of the tax-based demand for cash? Because in deflation, governments face insolvency and may be raising tax rates while they decrease spending. They may raise collection activity of other sorts, too, like the fees for car registrations and compulsory participation in Obamacare and photo-enforced speeding tickets that cost $600 instead of what was only $100 last year.

How is it that governments can dictate these fees and tax rates? Bullets and bombs are a big part of the answer. Gold, in my opinion, is almost entirely irrelevant.

As for my forecasts of Us stock markets markets, I continue to repeat my forecast first made in 2003 for an eventual collapse of the US stock market. I have been detailing the various mid-term indicators for a final top in the most popular US stock groupings (S&P 500, DJIA, etc) and a resumed crash of NASDAQ and other sectors that are not currently near all-time highs.

Naturally, if you have understood much of my writings of recent years, I am watching for a rise in gasoline prices, then a fall which is already happening. When gas prices get high enough that demand declines again sharply (like in 2008), then that will mark a new conservatism (less spending, less economic activity by consumers & industries) that also should coincide will a final topping of US stock prices (then a sharper crash than the “small” one of 2007-2009).

Bonds are not as simple to forecast. There will be sell-offs like in the last few months. However, US treasury bonds should do much better than stocks or real estate or gold in a deflationary cash crisis. There will be a huge dumping of those more speculative investments as people pour for safer things like cash and US bonds. However, the bond market will also have some unprecedented volatility in both directions, like increasing concerns that the US government may have trouble keeping it’s re-payment promises, then a sudden relief based on some new totalitarian revenue-generating program.

Ultimately, and this could be decades away, I think that the UN-Vatican program to convert the US in to a North American Union is going very well. The US will be encouraged to take over Canada and Mexico (two very oil-rich nations) to help to cover the enormous debt obligations of the US Treasury. As the current US tax base weakens, new revenue sources will be the natural targets of any “parasitic empire.”

For now, there are issues like how much US real estate will eventually come in to the ownership of the US Treasury & Federal Reserve if the US mortgage market collapses. Further, whether that number is 8% or 80%, there is also the issue of how much will all of it be worth in terms of cash.

What is not seriously in question is whether governments are systems of redistributing wealth. Anyone who does not know the answer to that is simply dishonest, perhaps out of terror.

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