Thursday, February 11, 2010

Is the Bond Market Screaming Inflation?

Uh oh...

Did anyone catch the 30 year bond auction today? If not take a look (Warning, this is not for the faint of heart):

My Take:

Folks this is ugly. A bid to cover of 2.36 is god awful. Anything below a 2.0 BTC is considered to be a failed auction. We came real damn close to seeing one today. The 28% participation by the indirect bidders(FCB's) was also not a good sign. The world's appetite for our debt continues to deteriorate.

CNBC's Rick Santelli gave this auction a big fat "F".

So what does this tell us?

The bond market is more worried about inflation versus deflation. Gold was up strong today which confirmed today's inflationary sentiment following the tepid demand for this afternoons 30 year auction.

That 4.7% yield on a 30 year bond looks pretty good in today's world of zero yields in CD's and short bonds. However, the bond traders are more worried about tomorrow versus today.

The huge risk of owning a 30 year bond is inflation. For example: If inflation down the line begins to rise annually at 10% and your 30 bond returns 4.7%, your investment will annualy lose 5+% a year. Not good!

The fears around deflation and inflation are widely known since this crisis started. This has left investment advisors looking like a deer in the headlights.

The bond market over the last several weeks appears to now be much more concerned of inflation.

If the bond market was fearing deflation, they would be gobbling up these 30 year bonds because a 5% yield would be looking real good down the line if we saw a deflationary death spiral in the US.

Take a look at Japan's 10 year bond yields during their deflationary collapse:

As you can see above, Japan's 10 year yield has been hanging around 1% for years as a result of deflation. That 4.7% return on today's long bond would look pretty darn good if deflation hit the USA hard over the next decade or so.

The fact that the bond market has no appetite for long bonds tells you that deflation is not their concern.

The Bottom Line:

The bond market pretty much screamed inflation as they become increasingly more concerned about our trillion dollar deficits. IMO, the increasing concerns around the sovereign debt issues in Portugal, Spain, and Greece has made the bond market even more jittery.

They are beginning to ask themselves if these nations need to get bailed out as well. If they do, it will lead to more money printing which then increases the risk of inflation down the line.

Folks, one thing is clear, we can't print ourselves out of this mess without risking severe inflation. In a worst case scenario, this could very well lead to hyperinflation if the world's spending and printing spirals out of control.

It appears the governments of the world have no intentions of stopping the Ponzi style printing presses. I am beginning to wonder if maybe they are coming to the realization that there is no other answer other than to let the economy collapse which would trigger an economic reset.

Sadly, pulling the plug on our spending and bailouts and triggering an economic reset is the only way out of this mess if the government wants to save itself. It would be extremely messy, but we have survived it before(the 1930,s and the 1870's are good examples) and we would survive it again.

Hyperinflation however is a whole different animal. This would trigger social chaos, starvation, and a destabilization of our government. Hitlers rise to power is a good example of what can happen during hyperinflation.

Don't ever forget: History always repeats itself!

Let's all hope that we don't go down this inflationary path. An economic reset to a more affordable standard of living is the only way to get out of this disaster. We can no longer afford $50,000 a year college educations, $600,000 houses, and $60,000 cars in the driveway.

This way of life has left this country bankrupt and it needs to stop right now before its too late.

Will the reset be painful? Of course! All depressions are. However, they are necessary because they wring out the excesses of the mania's that precede it.

Hold onto your hats folks, this is going to be a bumpy ride. My advice is to own some hard assets to protect yourself from inflation because I am afraid our government is going to attempt to print their way out of this.

As most of you know, I always follow the bond market and its fears versus the bulltards over in the stock market.

From what I have observed throughout history, the stock market always seems to get hit by things that they should have seen coming. I think it happens because they are all so blinded by greed.

The way the I see it: If you like to gamble in casinos, hop on over and buy some equities.

As for me, I will continue to invest in the bond market and hard assets.

Disclosure: Long gold and silver via GLD and SLV. Short treasuries via TBT.


getyourselfconnected said...

glad I caught this before posting I will link it.

I would quibble a little bit as I do not see the 30 year poor sale as inflation fears as much as devaluation/default fear but then again those are almost the same thing in the end. Great to see you post!

Flipdippy said...

Even if you are right jeff we are still very clearly the lessest evil right now. The China may be a bubble right now too, nobody seems to lknow yet.

One domino falling and either we all go down or there is a flight to dollars.

I'm not making any bets right now other than we still have a lot of room to print before we catch up to where Germany/UK/France/Italy are before they start bailing out their neighbors.

What is truly fascinating is how many of these potential black swan events push closer to the edge of the cliff and then...nothing.

I will get worried after we start to have more and more auctions like this one or worse.

getyourselfconnected said...

Check this chart flip:

Still think the US has a way to go??? The math says no.

flipdippy said...


UK, Germany, France, Italy are all above 100% debt to gdp. I forget the order, I believe UK is close to 400%.

And yet they are talking about bailing out Greece/Spain/Portugal?

There's room to keep the printing presses running, IMO.

jeff said...




I think default and inflation can all be rolled into one at this point.

The bottom line is that the bond market is spooked.

jeff said...


Great points.

Those "Black Swanns" are being propped via the printing press/rule changes for now.

Marc Faber was out yesterday saying that he would rate our debt as "junk bonds".

One of his key points:

What doesn't often get included in the US calculations is the trillions in debt obligations the Fed has made.

I agree with him.

I agree that many of those PIGS countries are way more screwed then we are.

I think the risk of a run on all currencies is possible. None of them are worth a crap in my view.

Could investors then flock to gold or land and other hard assets? Who knows.

Scary times!

getyourselfconnected said...

Check the scales!!!

If the euro is screwed the US is totally F%$#@(d. That was my point.

getyourselfconnected said...

Wheres C-T? We need her sage words?

Jeff said...

Here is the Faber interview.

Check it out!

CT-Hilltopper said...

Thanks get... LOL

This is one of the reasons that I own real estate.

I own three houses, one that I live in, and two that I rent.

All of these properties are owned free and clear, no mortgages.

I KNEW the second that I saw the results of that pathetic bond auction that Jeff would have a post up on it. LOL

Pre- Apocalyptic Bond Market Time Bomb? LOL

I think we have gotten to the point where everything is too big to fail, and as a nation, even as a world, we've been there for a long time. Even the kids. My kids play midget basketball, and at the end of the year, at the trophy ceremony EVERYBODY gets a trophy, not just the winners anymore. It's supposed to build the kid's self-esteem. They've been doing this for a loooooong time.

What's wrong with losing? As long as you gave it your best. why do you need a trophy for coming in second best? Now that mind set has trickled over into economics, and it's playing as well in economics as it did in life. That's why you see so many people heading for the psychiatric drugs as they get older.

In real life, you don't get trophies for being second best. You get fired.

Being coddled and protected isn't necessarily good for the human soul. As everyone in the world is about to find out, in spades.

My disclosures: Real estate, gold, and a firmly stuffed mattress.

jeff said...


Great to see you back!

No mortgages eh? Good for you!

I think the mattress idea is looking like a good place to have your money right now.

China jacked up rates last night. Thats gonna be painful for the markets.

I don't trust anything right now. I think I way start having back troubles by the end of the year because my mattress might start getting a little lumpy..LOL

Nice to hear from you.

jg said...

I think your read -- that the bond market fears inflation (or default) -- is spot-on. Nice analysis, sir.

jeff said...



GLad you are enjoying the blog.

Anonymous said...

I looked up "bid to cover" online and the sites I saw seemed to think any auction over 2 was evidence of bonds being aggressively bid up. Are you guys just terminal pessimists?

Jeff said...


Keep researching.

You have no idea how bad this was.

Rick Santelli who is the king of the bond market on CNBC rated this auction an F.

Look at how the 30 year sold off after the auction.

I am a realist vs. being pessimistic. Believe what you want but there are a lot of kool aid drinkers who are misrepresenting the truth.

Remember, practically on Wall St have a vested interest in seeing stocks go up.

Be careful about what you read.



Anonymous said...

Thanks for responding. As for your comment, "As for me, I will continue to invest in the bond market and hard assets;" by investing in bonds do you mean shorting? What do you think of TIPS? And as for hard assets, what about real estate? (I ask because your blog title seems to imply you may be interested in real estate.)

Jeff said...

Hey anon

I think TIPS are a great idea for protection from inflation.

I am shorting treasuries via the ETF TBT.

I also have money in bonds through PIMCO.

Real estate IMO hasn't come down to the right price in most areas.

Areas of Michigan, Cali, and Vegas are close.

This site started as a housing crash site before morphing into an contrarion investment based site.

Best of luck with your investments.

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