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.