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The mainstream financial media likes to focus on stocks because:
1) The stories are a lot sexier than bonds or currencies
2) They make for better hype jobs than bonds or currencies
If your job is to sit in front of a camera selling the notion of getting
rich from investing, you’re not going to talk about bonds or currencies (maybe
the latter is of interest but only with insane amounts of leverage which
usually bankrupts a trader in his or her first trade).
However, today stocks are in fact a very minor story. They are, in a
sense, the investing equivalent of picking up pennies in front of a
steamroller.
That steamroller is the $100 trillion bond bubble.
For 30+ years, Western countries have been papering over the decline in
living standards by issuing debt. In its simplest rendering, sovereign
nations spent more than they could collect in taxes, so they issued debt
(borrowed money) to fund their various welfare schemes.
This was usually sold as a “temporary” issue. But as politicians have
shown us time and again, overspending is never a temporary issue.
This is compounded by the fact that the political process largely consists of
promising various social spending programs/ entitlements to incentivize
voters.
This type of social spending is not temporary… this is endemic.
The US is not alone… Most major Western nations are completely
bankrupt due to excessive social spending. And ALL of this spending has been
fueled by bonds.
This is why Central Banks have done everything they can to stop any and
all defaults from occurring in the sovereign bonds space. Indeed, when you
consider the bond bubble everything Central Banks have done begins
to make sense.
1) Central banks cut interest rates to make these gargantuan
debts more serviceable.
2) Central banks want/target inflation because it makes the
debts more serviceable and puts off the inevitable debt restructuring.
3) Central banks are terrified of debt deflation (Fed
Chair Janet Yellen herself admitted that oil’s recent deflation was an
economic positive) because it would burst the bond bubble and bankrupt
sovereign nations.
The bond bubble, like all bubbles, will burst. When it does, everything
about investing will change.
Bonds have been in bull market since the early ‘80s. Thus, an entire
generation of investors and money managers (anyone under the age of 55) has
been investing in an era in which risk has generally gotten cheaper and
cheaper.
This, in turn, has driven the rise in leverage in the financial system. As
the risk-free rate fell, so did all other rates of return. Thus investors
turned to leverage or using borrowed money to try to gain greater rates of
return on their capital.
Today, that leverage has resulted in $100 trillion in bonds with over $555
trillion in derivatives based on bonds.
This bubble, literally dwarfs all other bubbles. To put this into
perspective, the Credit Default Swap (CDS) market that nearly
took down the financial system in 2008 was only a tenth of this ($50-$60
trillion).
When this bubble bursts, 2008 will look like a picnic.
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