The Bond Bubble

The bubbling stories going around this week in the financial blogosphere have mostly centered on the heady climb of US treasuries. In fact the topic has been quite hot the past month but the din is getting louder now. Comparisions with the dot com bubble and the housing bubble have started doing the rounds. The yield on the 10 year US paper is currently around 1% now. Which means that if you freeze the frame today, it will take a hundred years for the interest component to add up and match the price you pay for such bonds today. The P/Es (inverse of yield) of the no-brick and no-mortar tech companies were also in the heady hundreds during 1999-00. I don’t have too much of a view since it’s all happening outside of our shores. The Small Investor writes about it here as also the links I’ve listed below: it’s important enough for us to pay attention since we have NOT decoupled ourselves from the west. It’s actually the FII money that’s driving up our local markets here. Hot money.

• FT Alphaville on the conundrum that equity prices and bond price are now moving in step. i.e. UP!

Logically, I’d guess that the bond market is bigger, more liquid and less amenable to manipulation. So, if the bonds and the stocks are sending out conflicting messages, should one not trust the former?

However, are bond markets better predictors of the economy? I think not: since nominal GDP growth and interest rates are both driven by inflation. Correlation is NOT causality. It’s a mistake many make – if two lines A & B move in tandem, that does not necessarily mean that A and B have a causal relationship. There could be a third factor C which is driving both A & B. So, bond prices are ↑; equity markets are ↑; economic data (US) is ↔. Thats the confusion. 

• A website called bond-bubble (what else!) has come up and the graph on it’s homepage is quite telling.

It shows the super steep rise of US public debt – almost a parabolic rise. To me this looks similar to the rise of the Chinese stock market. That looked parabolic as well ( y = 4 * A * x↑2) and it could not defy gravity. But can US debt come crashing down? Maybe – if the currency crashes.

• That seems to be awesome news for the gold bugs! It makes the case that the bursting of the bond bubble will pave the way for a massive upsurge in gold prices. The article notes that the yellow metal shines brightest in three situations – “heightened economical/financial risk; outright inflation and/or deflation”. And therein makes the case for a coming Gold bubble! Marc Faber,  (who keeps telling people to buy gold) has been bearish on treasuries right through the start of April but no one seems to be listening.

 TULIP → SOUTH SEA → RAILROAD → ROARING TWENTIES → POSEIDON → JAPAN → DOT COM → HOUSING → BOND → IS IT GOLD NOW? 

This is making people like me (the “half informed”) even more nervous now. Ignorance is bliss – part knowledge is most painful. Anyways, the local markets are frothing on all the money that’s coming in from the US. The Fed there is busy buying up treasuries and sloshing money in their system (to buy the bonds, the Fed has to release money by paying whoever is holding bonds). They’re doing it by working their printing presses overtime spooking inflation. But I guess the game with inflation is that if you whack it too much too fast, the thing just snaps and the party careens towards deflation. I wish I had paid more attention during my economics classes. But to me it sounds logical that what comes in, goes out. So, this money will go back from where it came (at least in the interim). And all will fall down.

Though there is some more ground for the NIFTY to cover. That’s what the “experts” here are saying. The market isn’t fully stoned yet. It’s just started rolling the weed, maybe a few drags….let’s stop hallucinating. In 2008 so many of our local “experts” were shouting out that India is decoupled and that the housing bubble will not effect us. Even politicians had joined the chorous. De-coupled my moon. We are as joined to the US hip as our big bro in the vicinity.

Maybe I’ll be able to call the top.