Bonds and Deflation in the Greater Depression
By Delwyn Lounsbury - THE DEFLATION GURU
In the short term bonds and deflation are on a tear going up in price as people flee to safety. So, interest rates go down temporarily. Then watch out! Higher interest rates mean bonds lose value. DON'T FORGET - THE HIGHER THE INTEREST RATE THE BIGGER THE BOND CAPITAL LOSES - especially in junk bonds.
Recently, bond buyer Bill Gross of the five billion dollar Pimco Fund could have had gross capital gains on his bonds and higher interest income too (later on when interest rates rise) if he would have stayed with the trade. Bonds have recently been gaining value as interest rates dropped. Gross got faked out by the inflation scare. Forget about inflation!
Gross and 99% of the world got some socialist smoke blown in their eyes about the resurgence of financial repression and inflation in the medium (5 + years) term. Robert Prechter says it is not going to happen. Robert Prechter of <a href="<a href="http://www.deflationeconomy.com/elliott-wave-principle.html">Elliott">http://www.deflationeconomy.com/elliott-wave-principle.html">Elliott Wave</a> International says interest rates will ramp up even in the deflation as people scurry around borrowing to stay afloat at any rate of interest. DEFLATION DEAD AHEAD!
Besides, Bill Gross could have then protected his investor’s portfolio by hedging on the financial futures markets exchanges or buying long term puts on bond ETFs (exchange traded funds). There are even short the bond market ETFs where you would not run out of time like in an options trade. Deflation and the Greater Depression will rule. Cash Is King!
Bonds and deflation are nothing but trouble at low interest rate levels. You could have big capital losses due to the fact that bonds prices sink as interest rates rise. Bonds and deflation mean they are no longer for widows and orphans. They never have been that safe due to big cycle swings in interest rates in the economy due to government financial repression (fraudulently planning on paying down the debt with inflated dollars) and the Federal Reserve Bank (a fraudulent monopoly cartel) intervention in the free market. For years the Keynesian monetary scientists have been first stimulating then cooling the economy. The resulting ups and downs in interest rates mean you could have nasty capital losses on bonds when interest rates rise.
The safest government bonds pay hardly any interest right now and could drop tremendously in value if interest rates rise. 90 day Treasury bills, the safest government sponsored debt instruments, pay next to nothing. However, Tbills and money market funds are the safest place to park your money. Robert Prechter says the rates on these short term financial instruments may go back to 15 percent like in the 1980's even though the economy is in a deflationary mode. Plus, the rate you would earn is compounded daily. Look for most other assets to lose 90 percent of value and unemployment rates to reach 30% into 2016 in the Greater Depression. Gold may drop in half. The U.S. dollar may have a 5 year bull market according to Prechter. Get more information on Robert Prechter and the Elliott wave theory at my website.
In October of 2010 the Department of the Treasury had an auction for 5 year TIPS (Treasury Inflation Protected Securities). The yield was a paltry negative .55 percent. Who needs inflation protection? Deflation is here to stay. Yet, most people still think inflation will come roaring back. The $1,550 per ounce price of gold is a big head-fake. Gold and silver prices have reached blow off mania climax highs and should head back down quickly. Low interest rates means money is on sale. Fewer are borrowing so the price is down. That is a sign of a weak deflation economy – a slow business climate.
Investors have flocked to higher interest yielding instruments like a moth to a flame. They will be very sorry. Junk bonds or high interest yielding bonds could drop even more. Why do you think they are called junk bonds? They are risky!
Get bonds in 2016 or when interest rates are 15 to 20 percent. Things are going to get crazy at some point in the Greater Depression. This is when you should load up on safe government bonds. Meanwhile, stay in short term maturities.
I would not be too afraid of a fall in value of the U.S. dollar hurting bonds. There will be safety and strength in the dollar as other nations have more trouble and problems than we will have here in America. Everyone thinks the dollar will be toast.
Not so! Safety means there will be demand for dollars.
Besides, most of the financial power elite have their money here in America. It is in their best interest to have a strong dollar. They are the 1,500 or so families around the world that are the creditors. Do you think they want any more inflation to eat up the value of their holdings? They want a deflation economy just like in the 1930's. They can then short stocks and bonds until 2016 or so. Then they will buy back those assets, commodities and real estate at a 90 per cent discount. You should be doing the same thing.
They want deflation to keep the value of the dollar strong and therefore the values of their loans up. Count on it. The U.S. dollar is the reserve currency of the world. This is the winter of the long (70 plus or minus) year cycle. What is deflation? It is the end of credit inflation. Deflation is the only cure to runaway credit and currency inflation. Only gold backed private money will keep this from happening again. Do not let government control the money ever again!
Bonds and deflation will be an interesting investment play to watch due to a volatile interest rate environment in the next ten years. Get them when no one else wants them at times of sky high interest rates. And only get the safest strongest bonds. If the company whose bonds you buy goes out of business you are out of luck completely. The Federal government should still be in business. Some states, counties and cities may be bankrupt many their bonds won't be worth the paper they are printed on.
There are mutual funds and ETF's that own a bond portfolio. You can switch your retirement T-bill account into them when interest rates are sky high and bonds are being pounded to new lows.
For now, the safest place to park money is the money market funds that hold only 90 day U.S. government treasury bills (T-bills). You can also buy them direct from the U.S. Treasury. You would then have the hassle of re buying every 90 days. CD's and other short term investment are not as safe. Often, they are buying short term corporate debt. It depends on the bank!
There are also ETFs which trade like stocks and own pools of bonds. You can buy or short them and there are put and call options traded on them. They have low stock-like commissions and you don't have to wait until the end of the day to get out of a position like you do with mutual funds. Contact your broker for a list of these ETF's.
The deflation economics cycle started with the 2000 dot com stock mania bubble climax peak. It may not end until 2016 to 2018. At that time, most assets may have lost 90% in price and unemployment could be 30%. Even the price of gold may drop in half. CASH IS KING in deflation. Japan has seen deflation for 20 years and now the rest of the world is catching the epidemic. You cannot stop the pendulum from swinging. Deflation economics will continue until credit inflation is wrung out of the system by credit deflation in the Greater Depression. More at my website...
PS If you don't want runaway inflation and government messing with the economy again, lobby for and subscribe to private gold backed money. Do not let government control the money. Period! They always inflate the daylights out of it.
Copyright 2011 by Delwyn Lounsbury - THE DEFLATION GURU
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