The bond market will crash

Sep 10, 2010

Baltimore, Maryland

Nothing much to report from the markets. The Dow gained 28 points yesterday. Gold lost $6. The dollar was was the bond market.

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The Fed came out with a report from its regional banks. Almost all the indicators showed a slowing economy. Not that we're headed into a double - dip. We haven't even gotten out of the first dip yet. Here's Bloomberg with the news:

"Banks: `Widespread Signs of a Deceleration' in Economy The Federal Reserve said the U.S. economy maintained its expansion while showing "widespread signs of a deceleration" in mid-July through the end of August, according to a survey by 12 regional Fed banks.

'Major Disappointment'

The report is "a continuation of the view that was discussed at Jackson Hole that the chairman put forth," John Taylor, an economist at Stanford University and creator of an interest-rate formula used by central banks, said in an interview on Bloomberg Radio. "It's not a double dip, it's not another recession within a recession. But it is a major disappointment in terms of a recovery."

The regional survey, known as the Beige Book for the color of its cover, offers anecdotal evidence that will help central bankers determine whether more stimulus is needed to reduce a jobless rate stuck near a 26-year high and protect a recovery from the deepest recession since the 1930s. The policy-making Federal Open Market Committee next meets Sept. 21.

President Barack Obama, speaking in Parma, Ohio today, said he recognizes that the recovery has been "painfully slow" and called on Congress to enact measures to cut taxes for businesses and middle-income Americans while letting rates rise for the wealthiest.

Home sales declined in recent months, the Fed said. "

Probably the most often asked question in the financial world now is: when is the bond market going crack? If the economy really were gathering speed, however slowly - as the Fed insists - you'd expect a rise in inflation...and a fall in the bond market.

Practically everything is connected to the bond market. If bonds crack the dollar won't be far behind (or ahead). If bonds crack there will be one heckuva lot of money looking for a new home. Where will it go? Gold? Commodities? Stocks?

Yep. Probably all of those things.

Bonds are a "risk off" investment. You buy them when you're afraid that the economy may not recover quickly. You buy them when you suspect that the 'risk on' investments won't turn out so well. Bonds are a retreat...a safe house...a bolt hole...where you can wait out a bad spell in the market.

But wait? Could this be a scary movie? Could investors be like a young couple taking refuge in an abandoned house in the woods...and then discovering that the place was not completely abandoned?

Is there a maniac loose in the bond market?

Well, a manner of speaking...

We've been meaning to warn you.

You're probably sick of hearing it, dear reader. We've been saying it off and on for the last ten years. The US is following in Japan's footsteps. It will stay in Japan's tracks - in a long, slow, soft depression - as long as it can.

Not only that, but America's financial authorities are doing the same thing the Japanese did. And they're getting the same results - a nation of zombies.

Japan has been in a slump for 20 years. But the worst is still ahead. So far, they've been able to cover their stimulus budgets with the savings of their long suffering people. But now, the deficits are bigger than ever...the debt is the highest in the world...and the people are becoming zombies too. That is, they're retiring...and expecting to live at the expense of the government.

Only trouble is, the government spent all their pension money.

And now the Japanese will have to borrow from...from whom? That's the funny part...there isn't anyone.

The public sector bailed out the private sector. Now, who's going to bail out the public sector? No one. It's going broke.

Not a big deal, as far as we're concerned. But we wouldn't want to be holding a huge pile of Japanese Government Bonds (JGBs) when the issuers go belly up.

That's why our modified trade of the decade has us selling JGBs and buying cheap, Japanese small-cap stocks. We're not so sure the stocks will work out as planned, but we're confident about the JGBs. If they don't crack before the end of the decade, we'll eat our hat.

And guess what? The US bond market will crack too.

We're on record. The Daily Reckoning says the bond market will crash. But not any time soon. The Japanese managed to keep digging themselves a grave for a long time. We'll do the same - most likely.

Investors will get even more comfortable with bonds. They'll settle the young couple in the 'abandoned' house. They may even start foolin' around. Having fun. Making money as bonds rise and yields fall.

But beware. There are maniacs on the loose. And zombies too.

Don't go down into the basement!

*** Fidel Castro is back on the job. After a long illness, the man is back at work...running his island nation into the ground.

Fifty years ago, Cuba was the most prosperous, most fun-loving, most-likely-to-succeed nation in Latin America. But...uh had a dictator.

So, Fidel Castro and his band of sociopaths and incompetents took over. One of Fidel's first acts as the new dictator was to appoint Che Guevara to run the central bank. What a mistake that was. Che was no better banker than he was anything else...which is to say, he was terrible. Soon, the economy was a wreck. Fidel figured he should get rid of Che was packed off to begin a series of very stupid attempts to export revolution...first, with a criminal gang in Africa, which ended in disaster for everyone...and second, where at least Che could speak the language, in South America. That one ended in disaster for Che...which is to say, it was a plus for the rest of the world.

But El Presidente is no fool. And now he's come to see that his economic model doesn't work. Bloomberg reports:

"Fidel Castro's comment to a visiting U.S. journalist that Cuba's economic system doesn't work is the strongest signal yet that the communist island is looking to private enterprise and foreign investment to bolster growth.

"The Cuban model doesn't even work for us anymore," Castro told journalist Jeffrey Goldberg after being asked if he believed it was something still worth exporting, according to a post yesterday on The Atlantic magazine's website. Castro didn't elaborate on his comment, Goldberg said.

Since re-entering the public sphere in July following an illness that almost killed him, statements by the 84-year-old former president have focused on international affairs. His silence on domestic issues signals he is willing to allow his brother Raul to reduce state control of the economy, said Tomas Bilbao, executive director of the Washington-based Cuba Study Group, which promotes free-market overhaul of the Cuban economy.

"These are pragmatic admissions from an idealist," Bilbao said. "Ever since he came back he has stayed away from talking about domestic issues which in itself is the best thing he can do to support his brother's running of the country."

"Raul Castro, 79, has initiated measures to open the economy since being handed power by his brother in 2006. The moves come as the economy suffers its worst slide since the former Soviet Union ended its support in the 1990s, Bilbao said.

In a speech to the National Assembly on Aug. 1, Raul said that the government will allow more citizens to work for themselves rather than for the state. He warned that some government workers will lose their jobs to reduce inefficiency.

Property Laws

That month, the government loosened controls that prohibited Cubans from selling their own fruit and vegetables. It also eased property laws, extending lease periods to 99 years from 50 years for foreign investors in an effort to build up a tourism infrastructure and draw more visitors to the Caribbean island of 11.4 million people.

Cubans can now run private taxi companies, own mobile phones and operate their own barbershops. The state still controls 90 percent of the economy, paying workers salaries of about $20 a month in addition to free rationed food staples and health care, and nearly free housing and transportation.

The island's economy is suffering after prices for exports such as sugar and seafood fell. Cuba, the world's seventh- biggest nickel exporter, has seen the price of that metal tumble 59 percent this year.

Raul said in July that one in five state workers may not be needed to keep the government running. The Cuban government employs 95 percent of the country's workforce.

Cuba now receives about 100,000 barrels of oil a day from Venezuela, which Cuba pays for by sending medical staff to work in the South American country's community clinics. Venezuela has suffered five consecutive quarters of economic contraction and Cuba is looking to diversify its trade partners, Bilbao said."

What surprises us is that anyone thought the Cuban model would ever work.


Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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