Bond
Bull Market Ended?
Supposedly “risk free” assets
are looking awfully risky
Looking at the financial landscape today, there are some signs of trouble: the stock market keeps going up, venture capital may also be over-valued, and firms are highly leveraged. But if one asset class stands out for its high prices and potential systemic risk, it’s supposedly low-risk bonds issued by governments in the US and Europe.
These bonds, in the lingo, are considered “risk-free.” By definition, then, they shouldn’t be risky. But prices for these assets have gotten very expensive. If their prices fall, meaning that yields rise, borrowers used to a long period of benign conditions will struggle to refinance their debts. And since many investors don’t hold bonds to maturity, the price of the asset matters more than the regular income payments it provides.
The Bank of International Settlements and Morgan Stanley’s Ruchir Sharma worry that low rates make it easier for companies that should go out of business to get loans and continue to operate. These so-called “zombie” companies may not sound so harmful, but too many of them can cause instability over time. If yields go up, many of these firms will suddenly go out of business at the same time and displace many workers. In the meantime, they also keep people in unproductive jobs and divert capital from more productive investments.
Odds are that eventually the risk-free rate will increase and it may be a gradual unwinding. Asian countries are slowly offering a viable alternative to Western assets and expanding the market for safe debt. Or, investors might rediscover their appetite for risk, reducing demand for safe assets. One way or another, rates will go back up some day. Until then, there is a high price to pay for removing risk from your portfolio.
As of 1/2/20
1.88%
- 1790-1902: erratic yield fluctuations and then a sustained decline in yields to below 3%.
- 1902-1920: the First Bear Bond Market, yields rise from 3% to 5-6%.
- 1920-1946: the Great Bull Bond Market, yields decline from 5-6% to below 2%.
- 1946-1981: the Second Bear Bond Market, yields soar from 2% to above 15% during 1981.
- 1981-2016: the Greatest Bull Bond Market, as yields tumble from 15% to 1.37% in 2016.
Alas, history never ends and, as I mentioned at the beginning of this essay, all empires carry inside themselves the seeds of their own destruction. Just a few decades have passed from the time when Fukuyama had claimed the end of history and the Pax Americana seems to be already over. The Western world dominance had been based first on coal, then on oil, now trying to switch to gas, but all these are finite resources becoming more and more expensive to produce. Just like Rome had followed the decline of its gold mines, the West is following follow the decline of the wells it controls.
The dollar is losing its role of world currency and the Empire is under threat by a new commercial system. Just as the ancient silk road was a factor in the collapse of the Roman Empire, the nascent "road and belt initiative" that will connect Eurasia as a single commercial region may give the final blow to the Globalized dominance of the West.DYI: The Silk Road that China and other countries are building out to enhance trade between them selves thereby over the long haul move away from the American dollar. This grinding affair is taking place worldwide not just countries within the sphere of influence of China and Russia. It would be logical to expect as America’s global currency free ride begins its demise will lift interest rates in a saw tooth manner higher. This is why Presidents since Bush Jr. until today are placing sanctions on countries in an attempt to stop or at least slow down the demise of the American Empire [and the almighty buck].
To be sure, the Western Empire, although in its death throes, is not dead yet. It still has its wondrous propaganda machine working. The great machine has even been able to convince most people that the empire doesn't actually exist, that everything they see being done to them is done for their good and that foreigners are starved and bombed with the best of good intentions.DYI: Today's national main stream press is nothing more than the propaganda arm of the American government. Simply go to 153news.net [videos] or Miles Mathis updates [written format] between those two will highlight America’s massive propaganda machine.
It is a remarkable feat that reminds something that a European poet, Baudelaire, said long ago: "the Devil's best trick consists in letting you believe he doesn't exist." It is typical of all structures to turn nasty during their decline, it happens even to human beings. So, we may be living in an "Empire of Lies" that's destroying itself by trying to build its own reality. Except that the real reality always wins.
On the other hand, it would be difficult to maintain that Westerners are more evil than people belonging to other cultures. If history tells us something, it is that people tend to become evil when they have a chance to do so. The West created many good things, from polyphonic music to modern science and, during this last phase of its history, it is leading the struggle to keep the Earth alive -- a girl such as Greta Thunberg is a typical example of the "good West" as opposed to the "evil West."DYI: Greta Thunberg is one of the worst “crises actors” to come along pumping out their endless claptrap climate scare all for the purpose to raid numerous countries treasuries.
Overall, all empires in history are more or less the same. They are like waves crashing on a beach: some are large, some small, some do damage, some just leave traces on the sand. The Western Empire did more damage than others because it was larger, but it was not different. We have to accept that the universe works in a certain way: never smoothly, always going up and down and, often, going through abrupt collapses, as the ancient Roman philosopher Lucius Seneca had noted long ago. Being the current empire so large, the transition to whatever will come after us needs to be more abrupt and more dramatic than anything seen in history before. But, just like it was the case for ancient Rome, the future may well be a gentler and saner age than the current one. And the universe will go on as it has always done.DYI: The bond market rally of a lifetime is essentially finished. With an upcoming recession that I'm anticipating will be relatively mild with rates moving lower with the 30 year T-bond possibly breaking below two percent. Be as that may be DYI is holding with zero percentage in long term bonds as we are in uncharted historical waters. Rates one day will begin their movement upwards unfortunately no one knows when that will happen.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 1/1/20
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
DYI
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