Everyone’s got advice. Here’s mine: sell bonds
By
Bill Bonner Jul 04, 2008
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It is a miserable world, from an investor's point of view. Almost everything is going down. But for an economist who enjoys laughing at the freaks of finance, today's markets are a delight. Every day's news is like a visit to the circus. Probably the biggest curiosity under today's big top is the US Treasury bond. This week, an investment in a 10-year T-note yields just 3.99%. Even if you give your money to the US federal government for 30 years, you only get 4.54%. As a point of reference, the official consumer price inflation level is also over 4%. Unofficially, some estimates put it as high as 10%.
To come right to the destination of today's ramble: our guess is that America's bond buyers will regret their loans to the US government. This week's headlines focused on central bankers. The poor fellows couldn't hide and didn't know which way to run. Britain faced the "worst housing slump since the 70s", said Tuesday's Telegraph. "First-time buyers vanish as slump deepens."
With the first-time buyers went the recidivists. Unable to get a mortgage loan, neophytes were unable to mount the housing ladder. And with no one to take their places on the bottom rungs, the seasoned homeowners were unable to move up. The Telegraph made it sound as though the Luftwaffe was approaching over Westminster. A disaster was coming "that would match the slumps experienced during the 1990s and the 1970s, the two major corrections since the Second World War." With this vision of bombed-out homes before their eyes, Mervyn King, Ben Bernanke and the whole brethren of central bankers decided to shut their eyes. But they were soon slapped open again.
"Eurozone inflation soars to new high," said the Financial Times. "Crude surges amid gloom of inflation trend," came another headline from the same source. "Eurozone inflation surged to an all-time high of 4% in June, despite worrying signs of a slump in manufacturing, confronting the European Central Bank with the toughest challenge since its creation a decade ago," Ambrose Evans-Pritchard followed up in The Telegraph. "Jean-Claude Trichet, the bank's president, has warned of an 'acute risk' of a wage-price spiral unless inflation is wrung out of the system."
In India, wholesale prices are rising at the fastest rate in 13 years – at over 11%. The reported rate of inflation in Russia is 15%. And on the margins of the world economy, inflation rates are even higher – 30% in Ukraine, 29% in Venezuela, 17% in Pakistan, and 15% in Bulgaria.
What to do about inflation? Not that the clowns lack advice. They get it everywhere they turn. From the Bank for International Settlements, the so-called "central bankers' bank", came this suggestion: "Raise rates." Inflation represents a "clear and present threat". The report, put out by outgoing general manager Malcolm Knight, urged central bankers to put up their key rates in order to hold prices down.
The Wall Street Journal offered similar advice – directed to America's own central banker, Ben Bernanke: "At the current moment, the world isn't likely to demand more dollars until it concludes that the Fed is serious about stopping the greenback's further decline… The easy-money experiment has merely hit consumers and the already-struggling economy with a commodity price wallop, while inspiring a global flight from dollar assets. It's time to start acting to repair the damage."
Even the yahoos in the bleachers had advice. Nearly as remarkable as the T-bond yield itself, and the humbug of the central banker's trade, is that ordinary people have come to care about such things. In an earlier time they argued over the divinity of Christ. Today they tell poll-takers what they think of monetary policy. Invariably, they feel lending rates should be lower. They are as opposed to inflation as they are to street crime and original sin; but they – like central bankers – are terrified of higher lending rates. Warren Buffett, too, had something to say: "Stagflation", he said, was becoming a bigger problem. "I think the 'flation' part will heat up and the 'stag' part will get worse." He is bound to be right – on both scores.
As to inflation, said a spokesman for BHP Billiton, you ain't seen nothing yet. Last week, another mining group, Rio Tinto announced a price increase of 96.5%. Billiton said even that would not be enough; it signalled a price increase of over 100%. And as to the 'stag', Henry Paulson, America's Secretary of the Treasury travelled to Europe this week to try to get the ECB to stay its hand. You may want to fight inflation, said he, or words to that effect, but over on the other shore, our economy is still very fragile. The fragility may be measured by the current key Fed rate – less than half the level of consumer price inflation. And even at that jolly rate, foreclosures still increase, house prices sink, jobs disappear and growth slows.
"The next president deserves a chance to remake the Fed with sound money appointees," said The Wall Street Journal. But that is not what we're likely to get. The easy money experiment will continue. America runs on a deficit of half a trillion dollars and lends money at the lowest nominal rate in the world, outside of Japan. America's "broad money" growth is running three times as fast as its key lending rate – as it is almost everywhere in the world. As the 'stag' part increases, the US deficit will probably grow to a full trillion bucks a year. That is where the 'flation' comes in… and where the bonds go out.
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