The Bond Bubble Revisited

In last Sunday’s post, I talked about how to deal with media reports that may have you question your current investment allocations.

The recent WSJ report on the potential bond bubble had some readers scrambling and making hasty and possibly incorrect investment decisions.

Bill Fleckenstein approached the subject in a different way in “The next bubble is in punditry:”

The Aug. 18 Wall Street Journal contained an op-ed headlined “The great American bond bubble,” which offered some arguments that I felt could not go unchallenged.

The authors were Jeremy Schwartz, WisdomTree’s director of research, and well-known economist Jeremy Siegel, the latter a man who was wildly bullish about stocks during the biggest equity bubble in history (his cautionary Wall Street Journal op-ed in March 2000 regarding tech stocks with huge multiples notwithstanding).

Over the past year, I have made no secret of my belief that bonds are going to cost investors a lot of money at some point. However, when someone such as Siegel shows so much confidence that the bond market is a bubble about to burst that he’s willing to write about it in The Journal, I have a feeling those looking to make money by shorting bonds might need a bit more patience.

The commentary begins in a rather misleading fashion, considering Siegel’s continued cheerleading during the stock market bubble of the late 1990s:

“Ten years ago we experienced the biggest bubble in U.S. stock market history — the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago.”

The problem I have with that statement is that the authors seem to be taking a page out of former Federal Reserve chief Alan Greenspan’s revisionist history textbook. Yes, the aftermath was predictable, but it wasn’t the one Siegel had predicted, as it wasn’t those few stocks that were the problem. It was the “cult of equities,” in which people felt stocks had no risk — a view Siegel helped promote.

Just to show that Siegel (along with his co-writer) really doesn’t understand what happened, even with 10 years of hindsight, the Wall Street Journal piece ends with this statement: “One hundred times earnings was the tipping point for the tech market a decade ago. We believe that the same is now true for government bonds.”

That isn’t true at all. Legions of stocks sold for far in excess of a hundred times earnings and in fact were priced in terms of eyeballs and other goofy measurements. There was no magic tipping point related to valuation. The bubble burst — i.e., “tipped” — as it always does, when it became exhausted.

The bond market, too, will become exhausted somewhere along the way, but I would not look to Siegel to identify when, especially considering that he believes the outlook for the country is on the OK side — that is, stocks discount the risk and therefore should be bought (thus Treasuries are vulnerable). Perhaps if he understood that the bond market is a train wreck because we’re living beyond our means and are headed toward a funding crisis, I might be able to take him more seriously.

I don’t want to make too much out of one column, but if I were even thinking about selling bonds short in the near term, I would have to think twice about it based on this one.

While I don’t often agree with Bill, this one is right on the mark. Over the past few years, I have reviewed one of Siegel’s books on ETFs, and found him to be a staunch buy and hold representative. As history has shown, he could not identify an equity bubble or a trend reversal if it slapped him in the face.

Now, however, he seems to have found religion by assuming that he can identify an impending bond bubble. It’s this type of inconsistent thinking that bothers me, especially when I see the effect it has on the investing public.

If you read articles like the one in the WSJ, consider them nothing but entertainment with absolutely no value as far as your investments are concerned. Keep in mind that the media in general has a zero percent batting average when it comes to calling turning points in the market place or the economy in general.

Follow the trends and consider them as your friend, since only they give you an accurate view of “what is” without any bias.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Uncategorized. Bookmark the permalink.

Comments are closed.