The Bond Bouble

Government bonds have been in a bull market for 35 years. However, the bull run that started in 1980 is now almost certainly over, and we are heading into a bear market that is likely to last some 20 years or so.

Last time the bond market was in a beer market was from 1960 to 1980. During that time, gold did tremendously well, and it is reasonable to expect this to happen again this time. However, don't expect a spectacular run on gold any time soon. Quite a few other things will do just as well as gold, if not better, in the years to come. That is, before the final leg of the bond bear market where gold will go parabolic.

With central banks eager to prop up "confidence" in the economy, they will not let stocks and real estate down. They will interfere directly in the markets to ensure that prices of these assets stay high.

This is already happening. There's no secret that the Swiz National Bank owns shares in companies like Apple. Nor is it a secret that the Chinese Central Bank is an active "investor" in Chinese real estate.

Central banks that used to prop up "confidence" in the market through the purchase of bonds will increasingly do so through direct purchase of stocks and real estate. The reason for this is that the bond market has become too big for them to control. All the money they pushed into that bubble has made it extremely difficult to inflate further. Direct interference is much more efficient.

This means that we will see interest rates increasing over the years to come. Interest rates in the double digits some 10 to 15 years from now is quite likely. However, real estate and shares will continue to rise as if by magic, and we will see some very strange things happening.

We will see companies with sky high valuations collapsing suddenly, practically over night. This already happened to Toys R Us. It will be increasingly common in the future. The reason for this is that pricing of stocks will have very little to do with their actual value. Completely insolvent companies will be valued as if they were healthy and debt free.

In some cases, central banks may decide to rescue a company that they are invested in by buying their debt. The Bank of Japan did this with a Steel producer the other day, and it will become increasingly common to see this kind of rescue operations in the future.

Which companies get bailed out and which won't will be fairly arbitrary, but a general rule will be that the big ones get the bail while the small ones go down.

This will lead to a zombie economy in which huge corporations continue to operate despite running at a loss. A general impoverishment of the population will be the result. There will be no wage growth, yet interest rates will continue to go up.

The average person will have to sell their house and other assets to the central banks in order to make ends meet.

This in turn will lead to price deflation on all goods not invested in by central banks. Overcapacity of industry combined with an increase in interest rates will force prices to go down.

However, at some point, central banks will no longer be able to prop up the zombie economy. Insolvencies will result in defaults.

Seeing that shares and real estate prices go to zero practically over night, people will pull out of these markets. Liquidity will be let loose on the rest of the economy as if someone opened a flood gate, and we will see prices of commodities taking off.

Everything will suddenly become expensive, except for the things that central banks have been propping up. Food and everyday necessities will go straight up in price together with gold and silver, while everything else comes crashing down.

In the medium term, staying in stocks and real estate will remain a good position. Cash will do rather well too. Gold on the other hand may under-perform these asset classes for a while before spiking towards the end of the bear market in bonds.

Relative to bonds, everything will go up. The biggest looser in all of this will be the ones holding bonds. That is the pension funds and the like who have most of their assets in the perceived safe haven of government "securities".