Sunday, January 11, 2009

Government Bonds: The Latest Bubble, but Probably Not the Last

These days US Treasuries can do no wrong. No matter how much interest dips, they're just the hottest thing in town. The bird in the hand theory of finance, I suppose. But is this bird really in hand, and for how long?

One would think that the bond market has already factored in the upcoming big-spending stimuli planned by a number of G20 players; but, even though the printing presses have already begun their magic in earnest, the amounts that have already been distributed have yet to have an impact on the economic outlook. Recession and deflation seem to be what are on everyone's mind.

But for how long? We know that markets are fickle. And supple. They can turn on a dime.

Thanks to for this picture of Huffy turning on dime.]

Once the presses get churning at billions a minute, and whether or not deflationary pricing stops, what will the markets do? Could they turn this bond boom into another burst bubble?

The world has been awash in credit and in the chimera of purchasing power the sheer mass of it seemed to engender. It flowed into the real estate bubble until 2006, then to the stock market bubble in 2007, then to commodities in 2008. Each one came rushing down like something at Magic Mountain, only to see the remaining cash hop on again for another loop with bonds.

Government bonds are the last safe haven before ... there's only one thing left after government bonds: Gold. But that would mean a flight from paper currencies altogether. Are we that far gone?

We'll soon find out. Foreign bonds will have a tremendous amount of competition soon, once the US and other debtor nations begin to borrow to the max. Cash may still flow into these government bonds for a while, but as stated in this editorial in Friday's Financial Times, "finance ministers must make plain how they intend to keep paying creditors without resorting to debasing their currencies. Those who have not already credibly done so are living on borrowed time."

And just which have done so in a credible fashion? I'm hard-pressed to name one.

So I'm betting that gold will be our next, and perhaps last, bubble, at least for this time around. (Disclosure: Yes, I do own some gold-related assets. I'd be a hypocrite if I didn't.)

In case you haven't seen my mantra, I'll repeat it for you:

"You can take the gold out of the standard, but you can't take the standard out of gold."

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