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A Bond Market Blow-up is Coming — Are You Ready for It?
America is all but officially bankrupt. Our national debt is gargantuan — $14 trillion and growing.And that’s just what’s on the books — items like Social Security and Medicare’s expected obligations make TARP and Quantitative Easing look like a rounding error.
This is putting a terrible strain on the bond market.
It’s the Federal Reserve’s fault. And Uncle Sam’s. The Fed slashed interest rates near zero in response to the financial crisis so the government could borrow big.
Healthcare spending, pension funding – not to mention our military expenditures overseas – the cash has to come from somewhere. And foreign investors cringe every time we ask for it.
So what does this mean?
The bond market is barreling toward disaster. But there is a solution – and it’ll protect you and your money from the fallout.
It’s Not a Question of If – but When…
I give this country 10 years – and that’s being generous.
It won’t take much for a bond-market blow-up to occur. The foreign investors who finance our national debt are losing confidence in our country’s ability to pay it back.
More and more investors are dumping longer-dated bonds and moving into shorter-term ones. Why? Because nobody trusts the purchasing power of U.S. debt 30 years out. And most don’t trust it 10 years out, either.
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The government has borrowed so much money that our creditworthiness has evaporated.
In fact, don’t be surprised if the Chinese and other global sovereign bond investors start demanding extra compensation for the risks they’ll be taking in “buying American.”
They’ll demand a higher return, which means the U.S. government will have to pay more interest to borrow money. Or, they’ll simply go somewhere else for their investment needs.
It’s no different, really, than walking into a bank and asking for a loan. The more times you borrow, the higher the premium you have to pay back to the creditor. It’s only a matter of time before China calls to collect.
If bonds are not attractive to investors, then the bond market collapses.
To be fair, the Fed has exacerbated the problem with its own bond purchases (that it can only afford to make by printing more money). But even then, most of their buying has been on shorter-term debt.
In fact, the Fed loves our debt so much that it just overtook Japan as the second-largest owner of Treasuries!
If nobody trusts the purchasing power of the U.S., that means interest rates have to rise – or else the Fed will have to monetize everything to infinity.
Bond market blow-up or further monetization – either situation will be dire, and devastating to the dollar’s purchasing power.
How to Cover Your Ass…ets
The U.S. government’s debt is barely worth the paper it is printed on. So, investors are clamoring for hard assets.
Measured against gold’s performance, markets are slightly down year-to-date, even after their big advance since the beginning of September.
In other words, investors are expecting higher inflation – and with it the higher interest rates that can only come when the bond market blows up.
Gold and silver get a lot of attention in The Sovereign Investor, and rightly so. Owning physical bullion is the ultimate insurance policy. It’s still worth accumulating if you’re worried enough about how damaging the endgame for the Fed’s monetization will be.
If you’ve been pumping gas or eating food in the past year, you’ve probably already seen rising prices – even though the government is telling you that inflation is mild. And the severity of a bond-market blow-up will likely result in an incredibly high level of inflation.
But the worst part about inflation is that today’s ultra-low interest rates don’t give investors the kind of income they need from interest on bonds, T-bills, money market accounts, or even cash in the bank.
Income matters—more so with each passing day as Baby Boomers begin to retire, or at least start looking for ways to boost their income.
The Secret to Safe, Predictable Income without Falling Victim to a Bond Market Collapse
There’s a subtle investment opportunity from a bond blow-up and interest-rate hike that most analysts fail to recognize. Consider the following:
In 1986, a 1.6 oz. Hershey bar cost $0.40. Today, a 1.5 oz. Hershey bar sells for $1.10. That’s a 175% increase in prices. And that only includes years of “low inflation.”
In 1979, a 12 oz. box of Kellogg’s cornflakes went for $0.79. Today, that same 12 oz. box goes for $2.99 – a 278% increase!
It many sound stodgy, but take a look at consumer goods companies like Hershey (HSY) and Kellogg’s (K). Consumer goods—and the companies that manufacture them—have proven a clear-cut way to handle inflation, expected or not.
It may not provide as good a safety net against the Fed’s stupidity as owning physical gold or silver. But if you’ve got a few years, you can re-invest the dividends from these companies and let the dividend growth compound your wealth.
Also, while many industries that produce high-tech gadgets face stiff competition and better products (requiring them to lower prices), inflation-beating branded consumer goods can raise prices to cover inflation. You don’t have to go for the mega-cap companies in this area; there are plenty of mid-cap companies that fit the bill, like J.M. Smucker (SJM) or Clorox (CLX).
So you get the best of all worlds: stability, a clear-cut way to beat inflation, and a source of income in a low-yield world.
Cornflakes are a far cry from gold—but it’s still a better income bet right now than anything in the bond market. They’re clearly a better place for your fixed-income money than the bond market—and inflation making its way into stocks could turbo-charge your returns.
The only way to win in the bond market right now is to get the hell out.
Andrew Packer
Editor, Credit Crunch Short Report
Editor, Exit Alert Strategist
Blog: www.packer.sovereignsociety.com
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