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by Al Martin

Beware of the “Bond Bears”: It’s Nothing But Gray Skies Forever

(10-3-12) “Bond bears” are essentially those who consistently pooh-pooh US bonds, particularly long-dated Treasuries – from the 10 to the 30 year “paper.” This is a self-serving shill. Everyone who has an interest in the financial industry – from the brokerage houses to the financial media – has. a vested interest in pooh-poohing the bonds. Why? Because there isn’t any money in bonds from a brokerage firm’s perspective.

      The real money, from a brokerage’s standpoint – the commission revenue comes from equities and commodities – not from bonds.

      The bond fund managers, like PIMCO’s Bill Gross, become so-called “bond bears” when they start shorting the bonds. Why? Because everybody “talks their book,” when you appear on financial media. This means you “talk up” or promote your own positions. Just as retail house touts are always long the equities. It should be noted that only 14% of all equity funds can even sell short.

      In other words, if you’re going to sell to Joe Six Pack, you say – you shouldn’t be shorting because your liabilities are unlimited and it’s unpatriotic to short stocks. That’s been sold to the masses for years.

      Now the 20-somethings are learning the same thing from the financial media shills. You never hear Jim Cramer or Steve Liesman or any of the CNBC Grand Council of Shills recommending “shorting” a stock. They can’t even use the word because the word is verboten in financial media.

      The poster child for the Bond Bears has been Bill Gross of PIMCO since he’s more air time than any other bond fund manager because of his reputation, the size of PIMCO and its longevity in the market. However, in the last year, Bill has consistently tried to short the long-dated Treasuries and has consistently lost money.

      Why has he done this? Because even a guy like him, who has been in the business a very long time, cannot get his mind around the idea that a 10-year US Treasury Bond could trade down to a 1% yield. Or that a 30-year US Treasury Bond could trade down to a 2-1/4%. Guys like Bill Gross simply can’t get their minds around it.

      We haven’t been that low yet but we have been below 1-1/2% in the 10’s and we have been down to around 2-1/2% in the 30’s.

      The Bill Grosses of the world – which are literally all of the bond fund managers – simply cannot accept the fact that yields can remain so low for such a protracted period because to accept that fact would mean that they would have to admit the economic signal that the bonds are sending, namely that the planet’s economy is collapsing.

      Yields fall because money is like any other commodity which means it has its own supply/ demand fundamentals, which are expressed in terms of interest rates.

      In other words, when interest rates fall, it means demand for money is falling, so in order to prompt demand, interest rates come down which get a push down by central bank action as is the case now. This is at the very heart of monetary stimulus. If you make money cheap enough, you’re going to be able to spur demand for it.

      But thus far, it hasn’t happened. So the central banks are adopting the attitude – well, we just haven’t driven rates down low enough.

      What they don’t understand is that things have changed. The last time rates were this low was during the deflationary period that immediately occurred after the Korean War.

      Also people tend to forget that 10-year Treasury bonds traded down to ¾ of 1% yield. So to say that the 10-year bonds can’t go down to 1% and there’s no historical precedent for it is wrong.

      However if you’re a bond fund guy, you really can’t admit that. Nobody wants to admit the truth – what the bonds are signaling is a growing deflationary problem on the planet, something that central banks have very little cure for.

      Assets are continuing to deflate in value. The problem is that central bankers post 2008 wouldn’t let the unwinding of the speculative bubble occur naturally. They interfered with that so-called deleveraging process by continuously reducing interest rates.

      Nobody told them to interfere. They felt that they had to since governments are hamstrung. Not one of the G8 nation states has had a coherent budget in four years.

      Governments are polarized and can offer no credible fiscal policy that could have addressed or helped the deleveraging process. What effectively happened is that governments are passing the baton, so to speak, to the central banks.

      So how long will the ‘Bond Bears” be wrong?

      They will continue to be wrong until deleveraging of assets from the collapse of the previous speculative bubble is completed. This process is going to be made longer the more that central banks drive down rates because that interferes with the deleveraging. That makes money so cheap and you are interfering with the natural process of markets.

      Thus you make money so cheap that you have people trying to buy assets that are overvalued, since they haven’t deleveraged yet.

      As we have written before, this is tantamount -- or a back-door way – of evoking an economic Gray Skies Policy. The central banks really don’t have the ability to do this—without the help of fiscal policy by the governments.

      In this case, “back door” means lying about what their intentions are, which are to maintain liquidity, which continues to shrink, in global capital marketplaces and to try to arrange a so-called “soft landing” where asset prices can gradually deleverage, thanks to lower interest rates.

      This all gets wrapped up into politics. The government are hamstrung because the Republican or conservative line – no matter what country you talk about – is that you let prices deleverage naturally after the collapse of a speculative bubble and that you do not interfere with that process.

      You let everything come down to the basement, and then you proffer some useful fiscal policy and then you raise interest rates.

      The reason it hasn’t been done yet is that it can’t be done any longer.

      The planet’s economy cannot provide sufficient economic growth, i.e. sufficient GDP, to finance the deleveraging process.

      The best that can be hoped for --- and this is what I think the central banks are trying to do – is a protracted period of comatose markets and comatose asset prices. In this case, liquidity is maintained, but transactional volume in all asset classes continues to fall.

      This is what we’ve seen since September 2008. Thus the deleveraging process is being stretched out. It has to be stretched out because the planet cannot produce a global GDP of 3-4% any more. That will never occur again.

      What we are now seeing is a new norm in global GDP where the optimal is going to be 2 to 2-1/2%. That’s the most that can be obtained.

      Nobody is talking about it because that’s the “back door” nature of it. They can’t come out and say it because the central banks would threaten their own independence if they did that because the governments and politicians would be so frightened of the truth that they would act to impede central bank independence and make central banks the whipping boy.

      Right now everyone wants to maintain their little fiefdom when you get into the political realm because not everyone in the political realm is where they want to be financially.

      Therefore they want to maintain their little fiefdom for as long as they can and then ultimately put it off on somebody else – and let it all unravel. Everyone wants to get theirs before it all falls apart.

      This ends either one of two ways. Either it doesn’t end well at all or the best way it can end is what the global central banks are trying to achieve through the “back door” without admitting it – and that is a global gray skies policy, wherein the planet has a protracted period like a decade or two decades of an average GDP rate of about 1.5%.

      So what happens to all the dispossessed?

      That’s something governments have to handle and that is government’s only remaining job or duty. Since they have abdicated responsibility for fiscal policy and since no governments have any coherent domestic policy anymore, their only remaining responsibility – and I would think this is being done on purpose – particularly the industrialized world where the problems are the greatest – is divesting themselves of all other policy initiatives so their only concern comes down to one thing and that is to maintain order and the rule of law in their own countries by any means necessary.

      If anything is going to continue to work and since government is unable to do anything else, then the last and most important responsibility of government while economic collapse is coming is to maintain the rule of law.

      It’s my contention that you have to have a Ruling Class; otherwise everything will break down. The problem is that the Ruling Class is only interested in getting theirs and getting out, while laying off the problem on somebody else.

      The Ruling Class will still control governments as they always have. Then it becomes the government’s job to protect the Ruling Class. That’s not going to change. Members of governments have too close a connection with the Ruling Class because that’s where the money is.

      After all – who in government stays 30 years to get a pension? Nobody does that.

      Government is simply a stepping stone and a springboard. But government has to hold up its end for everything to work and so far it’s working since you don’t see riots in the streets in the United States. Not yet at least. But the likelihood is that you wouldn’t see that no matter what regime comes next because it won’t allow chaos in the streets.

      After all Homeland Security has allegiance from revitalized patriotic and vigilante groups who are very right wing politically who would take up arms – even as they keep harping about conspiracies in Homeland Security. In the last analysis they have a lot in common – to maintain the rule of law and keep everything working.

      Why? Because only a small minority within the so-called patriot community believe in the idea of an underground shelter and 700 cans of peas. Most of them have enough brains to know that that’s stupid.

      Governments in times of stress have always turned to the “vigilante groups” -- or whatever label you want to give them – whether right-wing groups of civilians, or those with paramilitary or survival training.

      Governments have always turned to that segment of the population within their own nation state, when they’ve had to do so in order to maintain control and the rule of law.

      Why? Because if you get some pot-bellied yahoo and his pals in Arkansas, who go out on the weekends with their guns and camouflage outfits and call themselves a patriot movement, and you give them a badge and some official status and they’ll do whatever they’re told to do.

      But the “bond bears” have been consistently wrong – and will continue to be wrong – because the planet’s economy is in trouble. GDP continues to fall and inflation continues to fall.

      This concept that the bond bears try to peddle of global central bank money-printing as being inflationary is wrong, since, as we’ve said before, it’s not inflationary -- until it is turned into consumption.

      Meanwhile consumption continues to fall and rates of inflation continue to fall. Asset prices, ex of equities, continue to fall. It’s easier to pump up equity prices, but it’s not so easy to pump up other asset classes.

      The most liquid asset classes are always the easiest to put on steroids. When you print money, you put them on steroids. Equities and commodity futures are very easy to pump up in value because of the liquidity in them. It isn’t so easy to turn around other asset classes like housing.

      What people want increasingly in a falling and contracting economic environment is they want to be involved in an asset class which has the greatest degree of liquidity -- and there is no asset class that can compete with the liquidity that equities and commodity futures have.

      These are asset classes when you can hit a BUY button and own them in three seconds and hit the SELL button and not own them three seconds later.

      People increasingly want that liquidity in a deteriorating environment.

      So who “owns” bonds anyway? The principal owners of bonds at the retail level are old people, who hold them for the very long term for income.

      As interest rates have come down, those who are being made to suffer by central bank (Fed) policies are the old who depend on bond coupons as a substantial part of their retirement income. Because rates are falling.

      So what now? It’s pretty simple. We continue to trade the long Treasury bonds from the long side on dips. That has been THE trade all year and that will continue to be THE trade. As long as global economic growth continues to decline.

      Because as long as global economic growth is declining, global central banks will attempt to bring rates down at the long end through ENDLESS quantitative easing.

      Why? Because they have to -- and there is no other monetary policy they can exercise, other than to try to bring long rates down to the point where you attract demand for money again. Which hasn’t happened.

      And isn’t going to happen -- because of the continuous and ever increasing uncertainty that governments are creating by their inability to act. That’s the story.

    * 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," ( 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, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

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


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