Not to be all dramatic or anything, but the above graph is, I believe, the roadmap to the end-game for the bond bubble. In investing there are really two important questions: how and when. People always get stuck on why. “Why,” does not make us any money. “Why,” in the realities of the capital markets really doesn’t matter. “Why” there is a debt bubble is of no concern to us, because it just is. “How” it ends and “when” it ends is how we don’t get crushed and make some money along the way, which I think is the whole reason “why” :) we are doing this. The “how” provides us a road map – also here’s a hint: it is also why I use “Views from the Crow’s Nest” as the title for these ramblings of mine! Until one learns to take a big enough step back and simply observe, you know, step one in our investment process, it is very difficult to make money.
The US dollar holds the keys to “how.” Just to put this into perspective, I’ve been saying it for a couple of years now. These events evolve over time. An unwinding of 30 years of a bad habit will take some time. Contrary to what many think, the capital markets are really quite slow to react. But make no mistake about it, once the reality sets in and the marginal player has lost confidence, the dominos will fall swiftly. This is why there is a saying about assets rising like an escalator, but falling like an elevator. So how does the dollar provide us this road map? Unfortunately, central bankers around the globe have all bought off on debt-financed growth coupled with an arrogant belief that somehow their buttons and leavers can control the business cycle. While anything in moderation is fine, we are a few rounds past moderation.
Bankers have pushed the debt beyond any reasonable limits and literally are like a car swerving on an icy road, have over-corrected – read negative interest rates. You all know what happens at this point. You’re going into the ditch. Sure you may get another chance to steer the other way, but in reality your just delaying the inevitable. The beauty of this situation is that if we are all passengers in the car with Yellen at the wheel (and just to be fair to her, she did inherit this mess), we don’t have to stay in the back seat all buckled-up hoping and wishing for the best. Let me be clear, we are not all in the same boat together. We can choose to be in this other boat, or car this case, over there. We can seek to avoid the financial pain so many millions of people will experience!
The world is awash with too much debt, but what does that have to do with the US dollar? Enter our investment banker, who hands us his or her business card with the initials GS on it – of course. Our investment banker friend is all too happy to provide us unique financing structures to “save” on interest expense. Debt taken out in one country who’s notional value and interest expense is not based in its own currency, but another country’s currency is pure genius until it is not genius. I’ve seen many numbers try to quantify the scale of US dollar denominated foreign debt, but just know it is a huge figure. These instruments are effectively all short US dollars. As the US dollar goes higher, their debts and interest payments go through the roof. This is the “how.” Now for the “when.” The US dollar typically moves in swings of six year cycles. Given we are already into this move two years, I’d say the bond bubble pops in another two to four years (2019 – 2021-ish). It’s a little like I’ll know it when I see it, so that date will get tightened up as we move along. There is a history for how this sort of thing plays out. Contrary to what you may read, this is not unchartered territory. People just fail to go back far enough in time.
Humbly,
P. Franklin, Jr.
November, 25th 2016
All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.
Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.