By Paul B. Farrell, MarketWatch
SAN LUIS OBISPO, Calif. (MarketWatch) – InvestmentNews latest cover is so powerful you can actually hear sirens atop a flashing neon billboard, megawarning in huge bold type: “Tick, Tick … Boom!”
Yes, they do expect the bond bomb to explode and are publishing “a special report on the impending crisis in the bond market.”
Yes, you heard them. “Tick, Tick … Boom!” Wake up, it’s an “impending crisis,” dead ahead. And to punctuate their message, InvestmentNews added an alarming photo of an alarm clock with huge bells, wired to rolled up bonds looking like a stack of dynamite sticks. “Tick, Tick … Boom!”
InvestmentNews is not staffed by a bunch of not alarmists, quite the opposite — conservative, trustworthy and methodical. They know the 90,000 registered investment advisers that rely on them are in turn responsible for advising millions of Americans and managing trillions of retirement assets. Yes, their audience demands reliable forecasts.
So listen closely, we’ll summarize Andrew Osterland’s lead article “Fear Rising With Rates,” along with an interview with Bond King Bill Gross. And INews editorials on “repositioning client money” with “strategies for rising rates.” And a couple of opposing portfolio suggestions: “The case for, and against, stocks.”
The Bull says we’re on “the verge of an even bigger run-up. The bear warns, if you “goal is to avoid losses, stay out of equities altogether.”
Either way, the INews report reads like a Stephen King horror story, and in the background, you hear the ticking … ticking … louder … louder … Boom!”
Bond bubble, dangerous, big, doubled last four years
Since the crash four years ago investors have been wary of stocks and have been putting their money in bond mutual funds. INew’s interview with Gross noted that “assets in bond mutual funds have more than doubled to over $2 trillion.”
Gross reiterated Pimco’s “New Normal” warning: “The future for bonds is a lower-return future than investors have come to assume. Bond investors should be expecting 2% to 3% returns over the future years … bond returns will be lower than expected, but … still better than cash and will provide positive returns.”
Interesting that Gross also warned while interest rates will go up 10-15 basis points annually, “a big spike in interest rates is certainly a worry for bonds, but it wouldn’t be friendly for stocks, either.”
Latest stock bubble even more deceptive, more deadly
Over at Bloomberg BusinessWeek, Peter Coy also picked up on the “imbalance between the Dow and the economy … Bond yields are so low that savers who used to keep their money in, say, Treasurys are being driven into the stock market in search of positive returns. They have no choice.”
Then he borrows economist Roger Farmer’s metaphor of “two staggering drunks connected by a long rope. Sometimes the stock market and the economy go in the same direction, sometimes not. But … it won’t go on forever.” The party will soon be over.
It gets worse. Rosenberg doesn’t like what’s dead ahead: “His worry is simply that no one else is particularly worried — that the stock market’s rise has been so steady, calm, and untroubled” and nobody seems concerned.
Which reminds him that “stock market volatility is back to the lows of 2006 and 2007 (right before, ahem, the biggest crisis since the Depression). Says Rosenberg: “If there’s a bubble right now, it’s in complacency.” Investors are in for a rude awakening.
Warning: ‘Investors have no idea about what’s about to happen’
Why are investors complacent? Why? Because “the public thinks bonds are safe, but they’re not … Bonds are a big problem, and most people don’t understand that yet,” said Harry Clark, chief executive of Clark Capital Management.” Deep inside, the public has a vivid memory of the $10 trillion market cap lost on Wall Street in the 2008 collapse. But after four years of being lulled into feeling safe in bonds, “they have no idea what’s about to happen to them.”
Listen to the warnings. Start planning now. You have no excuse. Something big is “about to happen” and you are not going to like it.
Fortunately for investors, InvestmentNews’ Osterland also couldn’t be more blunt: “Fear among financial advisers of a bond-market crash that could devastate the portfolios of millions of investors is growing amid improving economic news and rising U.S. bond yields,” as he also sees the “imbalance between the Dow and the economy” that BusinessWeek warns “won’t go on forever.”
But what’s really scary is not just rates going up, or bonds down, or stocks hitting a bear patch, or the economy stalling. No, what’s really scary is that investors are complacent, clueless, just don’t get it. As a result, when the ticking time bombs go off (not just the bond bomb and the rate bomb, but the stock bomb and the economy bomb) the volatility will go into a wild ride like a roller coaster that will trigger panic selling, even a full-blown crash, repeating the 2008 disaster.
“Buyer beware. There’s a big yellow sign saying, ‘Caution ahead.’ It’s not going to be pleasant when rates go up,” said David Sherman, president of Cohanzick Management.” In fact, downright insane, if you remember the last crash.
Market’s already turned … even brokers see worst-case scenario
InvestmentNews even added a warning from FINRA, the chief regulator of the brokerage industry: “Last month, the Financial Industry Regulatory Authority Inc. took the unusual step of issuing an investor alert about the vulnerability of bonds and bond funds.”
Many economists believe that interest rates are not likely to get much lower and will eventually rise. If that is true, then outstanding bonds, particularly those with a low interest rate and high duration, may experience significant price drops as interest rates rise along the way.”
Get it? “Significant” interest rate increases … bond price crashing … rippling through the stock market, and the global economy. Investors have been lulled into complacency by Ben Bernanke’s long cheap money policy.
Warning, wake up plan ahead … your complacency, everyone’s complacency will soon end with a shock when rates jump … but by then it may be too late to plan ahead, because it will right here, right now.
Do the ticking math … tick … tick … tick … boom!
Osterland relies on some solid numbers to make his point that the market’s turning has already begun and will spiral down and out of control: “The yield on the 10-year Treasury bond, just under 2%, is up more than 35% from the record low in July. Investors are almost certainly going to see negative real returns on their Treasury portfolios in the first quarter, a rare event that many feel has the potential to trigger a wider selloff in the market.”
And adding to the selloff risk, we’re coming into federal tax season and a couple more debt ceiling cliffs: “With the Federal Reserve keeping short-term rates near zero and long-term rates near historic lows with its bond-buying program, there’s little room for further price appreciation. That means … interest rates have nowhere to go but up.”
And unfortunately, he warns that “a rapid rise in interest rates would bludgeon many existing bond portfolios. Simple bond math holds that a 1-percentage-point rise in interest rates would result in a roughly 1% decline in prices for every year of a bond’s duration.” Yes, “bludgeon” your portfolio once rates start ratcheting up.
InvestmentNews takes its responsibility to America’s 90,000 professional financial advisers seriously and in this “Special Report: Tick, Tick … Boom!” it’s painfully clear it sees enormous danger ahead for a millions of complacent investors who “have no idea what’s about to happen to them. … Tick … Tick … Boom!”