See how bonds, inflation and commodities might all be in the process of changing trends…
The World’s Biggest Financial Bubble Is Coming to an End… Here’s How to Keep Your Money Safe
By Justin Spittler
Doug’s absolutely right. The bond market isn’t safe.
Yesterday, we shared a recent essay by Casey Research founder Doug Casey. In it, Doug discussed how a Donald Trump presidency could impact global financial markets. He also offered actionable advice.
He said investors should lighten up on property. He said they should be careful about what stocks they own. And he encouraged investors to own gold and silver before piling into conventional investments.
Most importantly, Doug urged readers to get out of bonds. According to Doug, the bond market is in the biggest financial bubble in history, and it’s about to pop.
• Doug isn’t the only serious investor who thinks this…
Ray Dalio thinks the bond market has topped out, too.
Dalio runs Bridgewater Associates, the world’s largest hedge fund. Last month, he said, “we think that there’s a significant likelihood that we have made the 30-year top in bond prices.”
Jeffrey Gundlach also thinks the 30-year bull market in bonds is coming to an end.
Gundlach, like Dalio, is a world-class investor. He runs DoubleLine Capital, an investment firm that oversees more than $100 billion. He’s also one of the world’s top bond experts.
According to Barron’s, Gundlach turned bearish on bonds over the summer:
Gundlach says, he turned “maximum negative” on bonds on July 6, two days before the 10-year Treasury yield hit a multidecade closing low of 1.366%. He predicted shortly thereafter that the 10-year yield would top 2% by year end.
• Investors aren’t used to hearing this…
After all, bonds have been in a bull market since 1981. This historic bull market has survived three recessions, the dot-com crash, and the 2008–2009 financial crisis.
But it looks like the good times are coming to an end…
• Bond yields are skyrocketing…
On Monday, the yield on the U.S. 10-year Treasury jumped above 2.50% for the first time since September 2014.
The yield on the U.S. 10-year is now nearly twice as high as it was in July, when it hit an all-time low.
That might sound like a good thing. After all, who doesn’t like earning more interest on their bonds? But you have to remember something: A bond’s yield rises when its price falls.
• U.S. bondholders aren’t the only ones getting scorched, either…
According to Bloomberg Markets, the yield on German 10-years hit the highest level since January on Monday. The yield on Japanese 10-years hit the highest level since mid-February that same day.
Now, soaring yields tell us that bonds are falling. But they don’t tell us why. As you’re about to see, a perfect storm has hit the bond market…
• For one, inflation is picking up…
Inflation measures how fast prices for everyday goods and services rise. The higher the inflation rate, the quicker prices rise.
High inflation hurts everyday people. It means they have to spend more money on groceries, gas, and clothing. It also hurts people who own bonds…
Let’s say you own a bond with a 3% yield. If inflation is 0%, your “real” return (a bond’s yield minus the inflation rate) at the end of the year will be 3%.
If the inflation rate jumps to 2%, your real return would fall to 1%. If inflation hits 4%, your real return would be -1%. You would actually lose money holding the bond.
In short, inflation chips away at bond returns.
• The annual U.S. inflation rate has more than doubled since July…
According to the Consumer Price Index (CPI), it’s now running at 1.60%.
This might not seem like a big deal. After all, inflation topped 10% during “the great inflation of the 1970s.”
But you have to keep in mind that global interest rates hit a 5,000-year low this summer. With most bonds still paying next to nothing, it won’t take much inflation for the bond market to become completely unglued.
• The commodity market is “pricing in” higher inflation…
The Bloomberg Commodity Index (BCOM), which tracks 21 different commodities, is up 12% this year.
Many individual commodities have done even better. Silver is up 23%. Oil is up 43%. And zinc is up 70%.
This could mean that inflation is headed much higher. You see, commodities are raw materials. If they keep rising, it’s only a matter of time before high prices show up in finished goods.
And we have good reason to believe commodities will keep rallying.
• Commodities were in a bear market for the better part of the last five years…
But, as regular readers know, the BCOM “carved a bottom” back in February. This happens when an asset stops falling, trades sideways for a period of time, and then starts rising again.
Assets that carve bottoms tend to keep rising. You can see this happening in the chart below. According to the BCOM, commodities began a new bull market in June.
• Inflation could also soar under Trump…
You’ve probably heard Trump say that he wants to bring jobs back to America.
This sounds great…in theory. Who wouldn’t want more jobs for Americans? But Trump’s plan to “Make America Great Again” could come at a steep price…
• Trump isn’t a fan of current U.S. trade policy…
He says it benefits our trading partners but does little for us. He wants a better deal…
He’s already talked about imposing tariffs (taxes on imported goods and services) on our trading partners. According to Fortune, he’s threatened to “institute 45% and 35% tariffs on goods from China and Mexico.”
He also wants to pull out of the North American Free Trade Agreement (NAFTA), a long-standing trade accord between the United States, Canada, and Mexico.
If Trump did pull the U.S. out of NAFTA, he would certainly have a lot of leverage when negotiating new trade deals. But Trump’s threats could also trigger a global trade war, which would send inflation through the roof.
• You see, most of the products we buy come from overseas…
We get our iPhones from China. A lot of our televisions come from South Korea. Many of our cars are built in Mexico.
If Trump makes good on his promises, much more of our stuff will be built in America.
Again, a lot of people like the sound of that. There’s just one problem…
U.S. workers aren’t cheap. According to the Economist Intelligence Unit (EIU), the average U.S. worker makes about 76 times more money per hour than a factory worker in Indonesia.
And companies that pay their workers more charge higher prices. In other words, Trump’s protectionist policies could lead to much higher prices for phones, televisions, and cars.
• Trump also plans to spend hundreds of billions of dollars on U.S. infrastructure…
He wants to repair the country’s crumbling roads, bridges, and underground pipes.
Again, this is something many Americans can get behind. But America is flat broke. It’s $20 trillion in debt and counting. And that figure doesn’t even include massive liabilities like Social Security or Medicare.
To fix America’s infrastructure, the U.S. will have to borrow more money. That means it will have to sell more Treasurys, and selling Treasurys into a “seller’s market” is only going to put more pressure on bond prices.
• You’re much better off owning “hard assets” than bonds…
Regular readers know our favorite hard asset is physical gold.
Like other commodities, gold should do well if inflation rises. But unlike other commodities, gold is a safe-haven asset. It can do well even if the economy is struggling.
That said, we don’t view gold as an investment. We see it as money. After all, it’s preserved wealth for thousands of years and outlived countless paper currencies.
We think every investor should own at least a little bit of it.
We also think you could make a lot of money by owning companies that discover, dig up, and produce raw materials.
If commodity prices keep rising, miners could see their profits surge. Also, Trump’s plan to rebuild America’s aging infrastructure is going to require a lot of iron ore, copper, and zinc. That should keep miners very busy for at least the next four years.
• Louis James, editor of Casey Resource Investor, just recommended a top diversified miner…
This company is already profitable, paying dividends, and growing. But Louis says the company could “see huge profit increases” under Trump, and that should “translate into huge gains” for his readers.
You can learn all about this company by signing up for Casey Resource Investor. If you sign up today, we’ll give you a full 90 days to test-drive the service. If you decide it’s not for you, we’ll give you a 100% refund.
• This afternoon, the Federal Reserve raised its key interest rate by 0.25%…
It’s the Fed’s second rate hike since 2006.
Now, this wasn’t surprising. As of Monday, Bloomberg Markets reported that traders had “priced in” a 100% chance that the Fed would hike rates.
Still, today’s Fed meeting could have a huge impact on your money. We’ll explain why in tomorrow’s Dispatch.
Regards,
Justin Spittler
Delray Beach, Florida
December 14, 2016
RED ALERT: Cash Transaction Bans above $1,080 Are Now in Effect…
Editor’s note: The War on Cash is gaining steam…
Last week, Spain got in on the action by announcing that they are going to limit all cash transactions to 1,000 euros (about $1,080). They’re doing this to increase tax revenue.
The Spanish ban is just the latest domino to fall in the global War on Cash. Other European countries like Belgium, Portugal, Greece, and Italy have enacted similar measures.
Today, we’re sharing a recent video from Palm Beach Letter editor Teeka Tiwari that explains what this trend means going forward…and more importantly, how you can protect yourself.
To watch this eye-opening video, click below.
Teeka also recommends an alternative currency that could turn every $200 invested into a rare, once-in-a-lifetime return of $6,850. To find out what it is, click here.