Speaking from Singapore, famed commodities trader Jim Rogers of Rogers Holdings urged investors to run from bonds and avoid a serious knock to your purchasing power during, what Rogers believes will be, the upcoming mother of all post-WWII inflation.
For those who remember the ‘stagflation’ of the late 70s, now picture how the US would look after a double dose of the Arthur Burns/William Miller Fed policy of the 1970s hits the US economy today. Times were very bad then for those holding paper assets. And Rogers expects that we’ve seen nothing yet.
“As the inflation numbers get worse and as governments print more money and as governments have to issue many, many more bonds,” Rogers told CNBC on Friday, “Somewhere along the line we get to the point when (bond prices) go down.”
Between the years 1974 and 1980, consumer prices jump more than 8 percent on a compounded basis each year. On average, the cost of living rose more than 50 percent during that 5-year period, while inflation-adjusted household net worth plunged more than the wealth destruction following the wake of the Great Depression.
Unemployment peaked at 9 percent (BLS U-3) in the Spring of 1975. Loans were expensive and the roads were littered with older-model cars. Stocks went no where and bonds tanked during the long decade of the 1970s.
Under a Rogers scenario, money-supply induced inflation, the bulk of it exported by the Fed, will return to US shores soon amidst a steepening decline in the dollar. Rogers insists US bonds are aching for a big fall when the dollar falls.
“I wouldn’t advise anybody to buy bonds, I would advise you to sell bonds,” he said. “If I were a bond portfolio manager, I would get another job.”
Rogers scoffs at the notion of the US mirroring the Japanese experience of multi-year low yields despite loose monetary policy from the BOJ. The comparison is flawed, said Rogers. The US dependency on foreign sovereign debt purchases is off the charts—it’s historic. Japan funds a lot of its debt through exports and domestic debt purchases.
“A difference is when Japan did that they were the largest creditor nation in the world,” Rogers explained. “America is the largest debtor nation – not just in the world – but in the history of the world and the U.S. dollar has been – and is the world’s reserve currency. So there are some factors that might not keep the interest rate down in the U.S.”
For the US to fund its ever-increasing deficits, foreign buyers of Treasuries must buy at ever-increasing rates, a situation that won’t square with a slowing global economy, a Europe engulfed in a protracted financial crisis, and in the midst of a budding trade war with the no. 1 buyer of US Treasuries (after the Fed), China.
According to Shadowstats.com John Williams, after backing out the heavily massaged consumer prices index (severely revised methodologies for calculating CPI, post-Reagan), CPI has already breached double digits.
“As the inflation numbers get worse and as governments print more money and as governments have to issue many, many more bonds – somewhere along the line we get to the point when (bond prices) go down.”
Rogers is looking into the future, of course. But could the foreign exodus out of Treasuries be in progress? It’s tough to say until the TIC data come in, but recent Fed statistics of the last 9 weeks regarding its custodial account suggest something is going on—right now.
Fed data series H.4.1 reveals that since the week ending Aug. 17, foreigner(s) have unloaded nearly $83 billion of US Treasuries, or nearly 2.4 percent or the total held by the Fed, within a 9-week period. That calculates to a 14.4 percent annualized simple rate of decline of the account, at a most inopportune time, as the Fed needs a dramatic increase in foreign participation to avoid monetizing even more US debt (contrary to Bernanke’s statements, the Fed is monetizing, though the technicality of waiting a few weeks after auction to buy debt from its primary dealer network, he thinks, allows him to fudge the truth).
Zerohedge states: “ . . . in the week ended October 12, a further $17.7 billion was ‘removed’ from the Fed’s custodial Treasury account, meaning that someone, somewhere is very displeased with US paper, and, far more importantly, what it represents, and wants to make their displeasure heard loud and clear.”
China, maybe? We’ll wait for the TIC data.
In the meantime, the Bernanke Fed operates increasingly more in the shadows to keep the US bond market alive—but when the Fed stops (if it does stop) buying the overhang of escalating additional debt, the bubble burst will be that much louder, according to Rogers.
“Bernanke is obviously backing the market again and the Federal Reserve has more money than most of us,” Rogers said. “so they can drive interest rates down again. As I say they are making the bubble worse.”
“In the 70s you didn’t make much money in stocks, you made fortunes owning commodities,” said Rogers.
Additional articles published by Beacon Equity Research can be found on their website at www.BeaconEquity.com
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