Marc Faber and Peter Schiff on the U.S. Bond Bubble

Marc Faber and Peter Schiff on the U.S. Bond Bubble

THURSDAY, AUGUST 26, 2010

One of the things I strive to do as an investor is to stand apart from the herd. By understanding human psychology, which basically explains bubbles and panics, removing myself from the herd becomes a lot easier.

There is a monumental bond bubble brewing that is incorrectly being justified as fundamentally sound (much in the way inflated home prices were 4 years ago). I just don’t see the risk/reward being in my favor by investing in a 29-year secular bull market. It is always when a bubble is about to burst that bullish sentiment reaches a crescendo. We are not quite there yet, but given the outflows of capital from stock funds and into bond funds, that time is quickly approaching.

The lesson to take away from the bond bubble will be the same as with any bubble: Invest according to fundamentals, not the madness of crowds. Massive and growing budget deficits, unfavorable demographics, waning demand from foreigners, bankrupt states - these are all trends to keep an eye on.

Peter Schiff and Marc Faber appeared on CNBC recently to give their thoughts on the bond market. I’ve included some of their more interesting quotes below:

Peter Schiff

"The bond market is the mother of all bubbles right now, and I think when it bursts, the losses will dwarf the combined losses of the stock market bubble and real estate bubble."

"This decade is gonna be the worst decade for bonds in U.S. history. Bond holders are going to be wiped out"

In response to a comment that risk-aversion explains the flow of capital into treasuries, Schiff said:

"If you really are risk-averse you don’t want to own treasuries, you want to own gold."

Marc Faber

"I think the concern is that because of a weak economy, the deficits, the budget deficits, the fiscal deficits will remain very high. And with Mr. Obama as President there is a very good chance that the deficits will actually go up...And one day the interest payments on the government’s debt will become unbearable."

In response to a comment that foreign demand of treasuries remains robust, Faber said:

"In 1999 and 2000, foreigners also wanted to buy the Nasdaq. I would not point to foreign buying as an intelligent leading indicator."

Click here to watch the video:
http://www.expectedreturnsblog.com/2010/08/marc-faber-and-peter-schiff-on-us-bond.html