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by Al Martin

Why Bond Bears Are Wrong -- And Will Be Wrong Again

(9-25-14) Definitions first. A bond bear is someone who believes that interest rates are going higher hence the value of bonds is going to decline.

      Bloomberg reports that “Julian Robertson the billionaire founder of Tiger Management LLC, said there’s a bubble in bonds that will end ‘in a very bad way.’

      “Bonds are at ridiculous levels,” Robertson said today at the Bloomberg Markets Most Influential Summit in New York. “It’s a worldwide phenomenon that governments are buying bonds to keep their countries moving along economically.”

      “Robertson was joined by other billionaire money managers at the summit in expressing concern that debt markets are overheated. Omega Advisors Inc. founder Leon Cooperman called bonds ‘very overvalued.’

      “…Investors who have bet against Treasuries since the financial crisis have lost out as the runaway inflation predicted by some academics and politicians including U.S. House Speaker John Boehner has failed to materialize. Longer-dated US debt has rallied 14 percent this year through Sept. 19.”

      The truth is, however, that bond bears have all lost money – and yet they continue to bang the drum because so many of the hedge funds are all short bonds. Thus it’s just a case of these old fools just “talking up their book” which means “arguing for a scenario that if true, would end up making you money.”

      Bloomberg continues – “Bill Conway, the billionaire co-founder of private-equity manager Carlyle Group LP, said that while he doesn’t see a catalyst that would cause the bond market to collapse, his firm has taken advantage of the low interest-rate environment by refinancing the debt supporting many of its portfolio companies.”

      “Refinancing debt” means that he’s taking advantage of the low-interest rate environment. It also means he’s talking out of both sides of his mouth.

      They’re just a gang of old shills talking up their book. What these guys are talking about is the same stuff you hear every single day in financial media. This is the same old crowd of bond bears including CNBC’s Jim Cramer who keep banging the drum telling people every day to get short the bonds – and it’s been a money-losing strategy all year.

      Why? Because they don’t know enough about economics to get their minds around the concept that bonds are still moving higher. If you’re a professional shill or tout or if you’re long stocks, and you want to talk up your book, you have to be a bond bear.

      Their whole premise is that when the Fed stops “easing” and when the quantitative easing ends, supposedly in October 2014, that suddenly long rates are going to rise. That’s premised on two things, this incessant harping about inflation rising even as inflation is declining globally but as CNBC Shill Jim Cramer says – don’t worry inflation will rise as governments and central banks are all maintaining an effort now to have a global 2% inflation target in the industrialized world. But what he’s not saying is that inflation keeps declining but they can’t admit that – and don’t want to admit that. Why? Because you can’t admit the truth and say that inflation is declining and global GDP is declining. You’re not going to get any government or media shill to say that.

      This is the same old story that central banks have been talking about since the late 1980s. They’ve been talking forever about creating sustained inflation which in turn will help equity prices which in turn helps retail sales which in turn lifts GDP. This is the same old story since the Bank of Japan started talking about it in 1987 which in 30 years of have quadrupled the planet’s money supply. Still the central banks haven’t managed to create any inflation.

      So is this conspiracy or incompetence? You can’t say all conspiracies are bad. Some conspiracies are necessary. It doesn’t really matter who’s managing these institutions like central banks World Bank, IMF et al, since what they have assumed to be their job is that they’ve all been scared shitless! of a pernicious round of global deflation that they can’t control. Consequently you see these central banks and their endless efforts to re-inflate their own economies through quantitative easing and bringing rates lower by making risk capital cheap – and certainly that’s what has helped the equities recover since the last bust

      But the reason why the global reflation effort isn’t working -- and the reason nobody wants to admit – as former Fed Head Ben Bernanke used to say is that the speculative bubbles that have occurred since 1987 haven’t been able to unwind naturally because governments have become so politically hamstrung that they are useless. We are now seeing the Achilles heel of elected governments and multi-party democracies come into play. They have been unable to proffer any useful fiscal legislation.

      But to get back to Julian Robertson who said that there’s a bubble in bonds that will end “in a very bad way.” That argument that you hear from the bond bears presumes that global banks will be able to create inflation – which is something they have not been able to do in 30 years of trying. But there’s nothing remarkable about that because so is 90% of the Street. That’s why you hear that line on CNBC and Bloomberg all the time.

      So why do they do it? The funds are talking up their books because they have to since they’re all long equities and they run long-only equity funds. Of course therefore they have to be bond bears. Professional touts like Jim Cramer and Larry Kudlow also have to be bond bears because it’s their job to be bond bears.

      The presumption is that when central banks finally do start to raise interest rates, this will lead to an exponential rise of long-term interest rates in the 10-30 year spectrum. They have already tried it numerous times – and it didn’t work in the last 3 rounds of quantitative easing that the United States, ECB, Japan, etc. have done.

      Meanwhile the bond bears keep saying that as soon as that ends and the central banks stop buying back their own bonds, then long rates are going to rise. However what happened is that long rates continued to fall. Why? Because demand for money continues to fall.

      What sets interest rates? They are like any other market. When you trade the US Government long bonds, you’re not trading the bonds themselves which is a non-deliverable electronic contract. What you’re trading is interest rates, which move based on the demand or lack thereof for money.

      When demand for money falls, long term interest rates fall, even as the bond bears have been wrong for years. Bill Gross of PIMCO for example talks about the end of the 30-year super-cycle and he says it’s time for a secular long-term bear market in bonds. The problem is that it is all premised two things the central banks have not been able to make happen, 1) Higher rates of inflation and 2) Higher real demand for money which in turn would create higher GDP.

      The reason why GDP is falling is because the air in the 2004-2007 bubble was never let out. The old fiscal conservative Republicans are right about this idea – and one of the reasons why former Fed Head Greenspan got pushed out – is that he knew you have to let the air out of the bubble. You can’t do what the banks did which is let only half of the air out of the speculative bubble and then try to pump it back up again through endless quantitative easing.

      What the mainstream media is not going to tell you is that falling demand and falling GDP and falling rates of inflation that a new speculative bubble in equity prices and real estate prices has taken place because the all the air n the previous­­­­­­ speculative bubble was not let out.

      The S&P 500 is not trading at 13 times earning anymore but it keeps tr­­ying to act like it is. It’s trading at 17 times earnings so the Jim Cramers of the world have to say – we wouldn’t be trading at 17 times earnings if people didn’t know that economic growth was coming. The shills crow about record corporate earnings and 17 P/E and 20 P/E can be sustained. But what nobody is saying – and when they try to say it, they are immediately cut off by a commercial -- is that those rising corporate earnings aren’t coming because of increased revenue but are coming because of a record amount of stock that publicly traded corporations have repurchased in the last 5 years, thus diminishing the total amount of share they have outstanding. This makes the earnings look better on a per share basis.

      So why is this taking place? If a publicly traded corporation is not spending $30 billion on capital expenditure (cap ex) but is spending $30 billion on repurchasing its own shares, the price per share increases without having to sell any more product.

      It’s not magic – and that’s why the bond bears will continue to be wrong… PS We have been trading the US Long Bond contract from the long side since the beginning of the year, as can be seen on our weekly recommendations on Insider Intelligence.com, wherein our 100,000 daily trading in bonds has now increased to 240,000. For more information, send an email to virtualagency (at) yahoo.com

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.



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