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Bonds Will Be the Last US Market Bubble

By    |   Thursday, 01 Jul 2010 03:07 PM

Bubbles usually have two major features.

• There is irrational buying. Prices go up just because ... they are going up. These increased prices create more buying.

• There is a sense that because prices have always gone up, they can’t go down. The market is insanely overvalued. Because there hasn’t been a serious bear market for a long time, prices continue to go up.

This is where we are now in the long-term bond market. There is a momentum aspect to bonds at the moment. They aren’t going up in price because of worries about the economy. They are going up because that is all they have done for the past few years.

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Even as stocks roared in 2009, money still poured into bonds and has continued to do so. This is quite a shift from the 1990s when money poured into equities.

We must remember that the argument for equities in the late ‘90s was that stocks had been going up for 20 years. People thought there was no downside as most investors then have never lived through a bear market.

That is the same argument being made for bonds now because bonds have been in a bull market since September 1981. And most people think you can only make money in bonds.

It seems that we have shifted from a bubble in equities, then to housing — and now to long-term government bonds.

In retrospect, bubbles are always crazy. People putting multibillion-dollar price tags on pets.com or theglobe.com was crazy. But it did happen.

I think 10 years from now, people buying at the end of a 29-year bull market and willing to take 3 percent a year from the bankrupt U.S. government will be looked upon as ludicrous.

In bubbles, to paraphrase John Maynard Keynes, things can remain irrational longer than you can remain solvent — so the bond bull market could continue for a while.

However, if you are someone with a large bond position, I would be very wary.

The Government Bond Market has all the makings of the final asset bubble in the United States.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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Bubbles usually have two major features. • There is irrational buying. Prices go up just because ... they are going up. These increased prices create more buying. • There is a sense that because prices have always gone up, they can t go down. The market is...
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2010-07-01
Thursday, 01 Jul 2010 03:07 PM
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