by Justin Spittler, Casey Research:
Doug’s absolutely right. The bond market isn’t safe.
Yesterday, we shared a recent essay by Casey Research founder Doug Casey. In it, Doug discussed how a Donald Trump presidency could impact global financial markets. He also offered actionable advice.
He said investors should lighten up on property. He said they should be careful about what stocks they own. And he encouraged investors to own gold and silver before piling into conventional investments.
Most importantly, Doug urged readers to get out of bonds. According to Doug, the bond market is in the biggest financial bubble in history, and it’s about to pop.
• Doug isn’t the only serious investor who thinks this…
Ray Dalio thinks the bond market has topped out, too.
Dalio runs Bridgewater Associates, the world’s largest hedge fund. Last month, he said, “we think that there’s a significant likelihood that we have made the 30-year top in bond prices.”
Jeffrey Gundlach also thinks the 30-year bull market in bonds is coming to an end.
Gundlach, like Dalio, is a world-class investor. He runs DoubleLine Capital, an investment firm that oversees more than $100 billion. He’s also one of the world’s top bond experts.
According to Barron’s, Gundlach turned bearish on bonds over the summer:
Gundlach says, he turned “maximum negative” on bonds on July 6, two days before the 10-year Treasury yield hit a multidecade closing low of 1.366%. He predicted shortly thereafter that the 10-year yield would top 2% by year end.
• Investors aren’t used to hearing this…
After all, bonds have been in a bull market since 1981. This historic bull market has survived three recessions, the dot-com crash, and the 2008–2009 financial crisis.
But it looks like the good times are coming to an end…
• Bond yields are skyrocketing…
On Monday, the yield on the U.S. 10-year Treasury jumped above 2.50% for the first time since September 2014.
The yield on the U.S. 10-year is now nearly twice as high as it was in July, when it hit an all-time low.
That might sound like a good thing. After all, who doesn’t like earning more interest on their bonds? But you have to remember something: A bond’s yield rises when its price falls.
• U.S. bondholders aren’t the only ones getting scorched, either…
According to Bloomberg Markets, the yield on German 10-years hit the highest level since January on Monday. The yield on Japanese 10-years hit the highest level since mid-February that same day.
Now, soaring yields tell us that bonds are falling. But they don’t tell us why. As you’re about to see, a perfect storm has hit the bond market…
• For one, inflation is picking up…
Inflation measures how fast prices for everyday goods and services rise. The higher the inflation rate, the quicker prices rise.
High inflation hurts everyday people. It means they have to spend more money on groceries, gas, and clothing. It also hurts people who own bonds…
Let’s say you own a bond with a 3% yield. If inflation is 0%, your “real” return (a bond’s yield minus the inflation rate) at the end of the year will be 3%.
If the inflation rate jumps to 2%, your real return would fall to 1%. If inflation hits 4%, your real return would be -1%. You would actually lose money holding the bond.
In short, inflation chips away at bond returns.
• The annual U.S. inflation rate has more than doubled since July…
According to the Consumer Price Index (CPI), it’s now running at 1.60%.
This might not seem like a big deal. After all, inflation topped 10% during “the great inflation of the 1970s.”
But you have to keep in mind that global interest rates hit a 5,000-year low this summer. With most bonds still paying next to nothing, it won’t take much inflation for the bond market to become completely unglued.
• The commodity market is “pricing in” higher inflation…
The Bloomberg Commodity Index (BCOM), which tracks 21 different commodities, is up 12% this year.
Many individual commodities have done even better. Silver is up 23%. Oil is up 43%. And zinc is up 70%.
This could mean that inflation is headed much higher. You see, commodities are raw materials. If they keep rising, it’s only a matter of time before high prices show up in finished goods.
And we have good reason to believe commodities will keep rallying.
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