Bonds: The Most Important Asset Class

Bonds are without a doubt the most important asset class to grasp in this particular crisis. The fundamental problem with bonds is that our leaders had this genius idea that they could spend and spend year after year without repurcussions. As I’ve said before, this is a failure in our political system because the only way to get elected is to spend, spend, spend. And when the crisis does arrive? Well, that’s someone else’s problem!

Investment Habits

I learned recently that there is a specific part of the brain that “saves” habits, which means that habits never really die. Investing habits are no different- people by way of habit believe that bonds are a “safe” investment. Financial advisers with asinine formulas telling you how to allocate your retirement money between bonds and stocks are sending people right over the cliff. Things are going to get nasty because the largest demographic in America (Boomers) are about to be wiped out due to conventional wisdom. This is why I would bet any amount of money that social unrest is coming.

It is just unfathomable that anyone would be investing in sovereign debt with deficits rising at an accelerating pace. Demographics are working against all Western nations, and so is something called compound interest. Even with balanced budgets, our debt is mathematically guaranteed to rise exponentially. There is no way out of this sovereign debt crisis absent a complete restructuring of the monetary system. Currently there are 2 choices: inflate or create a new world currency. Inflation is probably the option our leaders will take, which means bonds are going to crater.

This is going to be THE big crisis because the bond market dwarfs all other markets (besides the currency market, which works a little differently anyway). When the stock market crashed in 1987, the world didn’t end; in fact, it was the beginning of an age of prosperity. But when bonds collapse, huge amounts of capital are wiped out in a blink of an eye. And when a large portion of your capital disappears, you are not going to spend money- unless it is to buy tangible assets that rise with inflation. This is why a collapse in bonds will lead to a massive rally in inflation hedges. You are already seeing this dynamic take place in stocks and distressed real estate in the U.S.

Debt-to-GDP Ratio

An important thing to understand is that whenever we had high annual deficits, we had a relatively low debt-to-GDP ratio. And when we had a high debt-to-GDP ratio, we had relatively low deficits. Well now we have high annual deficits and a high debt-to-GDP ratio. So economic pundits who claim that our debt-to-GDP ratio has been this high before so there is nothing to worry about are only telling you half the story. Either they are flat-out lying or they don’t know what the hell they’re talking about. I personally tend to favor the latter.

It’s funny because 99.99% of countries in recorded human history have defaulted on their debt. The only thing to consider is when we will default. Gold right now is a clear buy, I don’t care if it falls to $1300 from here- there is just too much risk of Europe falling apart for you to sit on your hands. I’m warning you to get your money out of banks and into tangible assets. If and when the banking system freezes, it will happen suddenly.

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    That a bank holiday is coming I have little doubt.  The question is when.  As has been said by others it’s better to be a year early than a day late.  You’re on it, Moses.

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    I couldn’t agree more. The only question is timing as you
    say. When will investors realise that governments have borrowed too much money
    and will struggle to pay it back?

    I think this realisation will come when the Fed is forced to
    raise interest rates and flatten out the yield curve. When will the Fed be
    forced to do this? When the political pressure caused by high gas/food prices
    is worse than the political pressure caused by slow growth/unemployment.

    They never act until they are pushed.

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