A certain asset is hitting record highs in prices. The only way its price can be justified is by using the most extreme and questionable economic forecasts. Despite the nose-bleed price levels, people just can't buy enough of them, while at the same time the amount of them to buy is also hitting record amounts.
Am I talking about houses circa 2005? Or tech stocks circa 1999? No, I'm talking about Treasuries.
The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the Internet bubble, stoking concern fixed-income markets are headed for a fall.
Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute...
The new cash has helped fuel a rally and drove yields on investment-grade U.S. corporate debt down to a record 3.79 percent last week, while two-year U.S. Treasury yields fell to an all-time low of less than 0.5 percent.
When something is priced to perfection, when there is record amounts of it available, when people are still throwing their every dime at it, then that asset is in a bubble. Simple as that. Buying American bonds right now is a sure way to lose money in the near future.
bubble, bubble toil and trouble
isn't that the bottom line herd mentality? Another bubble is every single VC investment must have a "China strategy". A few years ago VCs demanded, yes demanded, part of the R&D team be offshore outsourced to India...in order to obtain funding.
Does that even make any sense in a fast moving startup to require a small design team be half way around the world?
I recall something from the 1920's about large investors hyping a stock or market, after they had bought in, to get the smaller investors to buy in at which point they sold and left them hanging.
A bubble? Don't think so.
I don't buy that bubble argument. A buyer of US treasuries is exposed to 2 risks: interest rate and inflation. There's no solvency risk. Now if the buyer intends to speculate with bonds he certainly is exposed to loose money if the interest and/or inflation changes. Happened to all the shorts on US treasuries at the start of the year. But if the buyer considers treasuries as a safe heaven for his savings he will only loose money in the form of opportunity costs. He can protect himself against inflation (TIPS) and hold the treasuries until they mature. Thus he gets his fixed income stream from the coupon and the principal on maturity.
PS: I missed the Friday movie night?!
Good points, but I still disagree
You make good points, but there are two other risks depending on how the bonds are bought.
1) if the buyer purchases them in a fund, then there is price risk because as far the buyer is concerned the bonds will never mature.
Also a vast majority of the Treasuries are not TIPS, so inflation is an ever present risk for almost all the buyers. Besides, the government is famous for understating inflation rates.
2) if the buyer is from another country, and a huge number of them are, then there is currency risk. A rapidly falling currency could cause hundreds of billions of dollars worth of Treasuries to get dumped on the market in a panic.
Normally this would mean a sovereign default, but as you point out, we print the cash that our debt is priced in, so a default will never happen. However, it does still mean high inflation and a collapsing currency.
Even if you dismiss all those scenarios, even if you have complete confidence in Treasuries, you can't ignore the fact that the current bond market has all the tells of a bubble. After a decade of bubbles and busts, I would think that Americans would be able to recognize them by now.
Sure there is always someone who can "prove" that it isn't a bubble. They "proved" that a New Economy existed in 1999, and that housing prices never fall in 2005. But common sense always wins in the end.