Bond Bubble May Be Bursting Right Now! – Bud Conrad of Casey Research Interview

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Bud Conrad

Author of the new book Profiting from the World’s Economic Crisis, Bud Conrad holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl, and Tandem. Currently, he serves as a local board member of the National Association of Business Economics and teaches graduate courses in investing at Golden Gate University.

Bud, a futures investor for 25 years and a full-time investor for a decade, is also a regular lecturer for American Association of Individual Investors and a frequent contributor on Fox Business News. In addition,  he produces original analysis for Casey Research, including unique charts and research on the economy and investment markets.

Transcript Greetings, and thank you for joining us here at I’m here with Bud Conrad, he’s the chief economist for Casey.

Bud Conrad: Exactly Chief economist for Casey, and we’re at the Casey Summit. Thank you for joining us sir.

Bud Conrad: My pleasure. Your talk yesterday was about bonds, and I want to talk about bonds. Before we even get into the crisis that you see unfolding right now, for people who…most people invest in stocks, they’re told to have some type of mutual fund with bonds; what exactly is a bond? When people hear about treasury bonds what is that?

Bud Conrad: Treasury bond is a place for a person to invest what they think is safe money in either short term or long term government debt that is supposedly backed by the full faith and credit of the government. Same thing with a corporate bond. A corporation says it needs some money to build a new shopping center, they’ll issue some bonds to build their factory, and people will invest in the company by loaning them money and getting a fixed rate of return over a period of term. There’s nothing special about investing in bonds, most people think of it as the ‘safe’ part of their investment. They think that stocks pay a higher return and they’re more risky, but the reality is that bonds are just as risky and that this extreme what most people as investors that commonly think of this as safe money are gonna find out that it’s not safe. People investing in bonds can lose money. Okay, your talk yesterday on the underlying fundamentals and problems you’re seeing I guess kinda like a red flashing sign that a crisis could actually be unfolding. No longer a prediction of a bond bubble bursting, but there are some signs that you saw that you pointed out to everybody that it’s actually happening; it is unfolding.

Bud Conrad: The important thing to understand is the size of the bond market. And the size of the cause of these problems of government deficits. Let’s back through this a little bit. The first thing is that we have projections of retiring baby boomers that are going to require their medical care and their Social Security from the baby boomers that were all born right after World War II retiring together. That grows from around 20% to around 35% of the working population which means that to keep the people alive that are old, younger people have to contribute more than they want to. And it’s a seventy trillion dollar bubble; problem. The other problem is wars, forever wars. I was particularly upset when it looked like we were going make another incursion into Syria. Where we were gonna bomb them because there was use of chemical weapons. I thought that was guaranteed future problems and more expenditures, just like Iraq and Afghanistan and Libya. We left behind disasters in these places. It has not helped us, but it’s cost us a tremendous amount. We have standing armies, we have surveillance of ourselves, we have had to support this with a cost that decreases the strength of our economy to a level that I think it’s more dangerous than the value we get from what we spent on that military. Combination of social programs and military suggest that we’re going to have deficits that are almost out of control when you look at the growth of the debt to GDP that was projected by the congressional budget office just this September 17th. By halfway through this century it would be quite a bit bigger than it was during our last biggest bubble of World War II. And this comes without predictions of war, without prediction of recession and with low interest rates and the 5% level and inflation at the 2% level. Absolutely in my view, looking at the dangers going forward, (their predictions are) unrealistic. In other words, it’s gonna be worse than they say it is and they say it’s going to be the worst we’ve ever had. A lot of times when people project interest rates rising they go back to the seventies. You had mentioned something that’s very different from the 70’s, the United States was still a net creditor nation in the 70’s, correct? Today if interest rates go up it’s gonna hit us really hard. What does that mean for the federal government if rates go up?

Bud Conrad: We now have 17 trillion dollars of debt. If you add 800 billion a year for three years you’re at four years, you’re at 20 trillion dollars of debt of the federal government. At a five percent rate on that, five percent has not been an unreasonable historical level, five percent of 20 trillion dollars. You can do the math. What is it? Quick! It’s one trillion dollars! One trillion dollars a year! That’s in the cards, on the track we’re on. Almost impossible to change that train track. A trillion dollars a year spent on interest. The problem is you borrow that trillion because you don’t have the money to pay it, you add that into the debt and keep on going. And this thing goes non-linear. I’m an electrical engineer, and blows up. Yeah because now I think that the income revenue is 2.2 trillion, so if it was even at 5%, one trillion would be going towards just interest, not even principle.

Bud Conrad: That’s it. At that point in time you would think that the market now would turn against it, and then rates would really go, up. And then what’s the next step? A new currency?

Bud Conrad: One of our speakers just said at the conclusion of his talk that this is not a question of whether this will happen or not. He said it will happen. He was then asked the obvious next question, When? Which is what you sort of started to ask me a while ago. That’s sort of the punch line of this. I’ve been looking at the Federal Reserve creating new money and therefore increasing its balance sheet and that has been able to drive interest rates down as they buy up treasuries and government issued debt, as well as mortgage securities, and that adds liquidity to the market with the claim by the Federal Reserve that’ll improve our economy. Our economy hasn’t been improved that much. When you look at the unemployment statistics not measured as a share of the work force, but just how many people have jobs. It hasn’t grown much. It’s just barely kept with the population at a much decreased level from what it has been. So my point is that the adding of liquidity hasn’t helped the economy that much. It drove interest rates down, and this is the key point: until this year. This year the interest rate has gone up as the Fed continued to add liquidity and try and drive the rate down. The ten year treasury has gone from one and a half percent to about three percent since last May. Roundish numbers to make the point. Double. I say the bond bubble is breaking now. I’m not saying in the future. I’d say it’s already broken at the level that you should really notice. You don’t think the Fed can just take QE up to a hundred billion a month and suppress the rates back down?

Bud Conrad: They may be trying that too. I think it’s more likely they’ll do that than dropping it to 50 billion a month, which is the tapering that was part of that reason for concern in rates rising. Do you think the Fed knows they’ve lost control?

Bud Conrad: No. They don’t want to admit it if they do, but they’re gonna keep trying. It is their golden goose. They’re gonna keep squeezing the eggs out of it as long as they can. And guess what? Even though the benefits are spread around, they’re spread less equally between government and banks compared to the rest of us. In other words, we’re on the hook as taxpayers to make that happen, and I think it’s a risky situation when people figure it out. You talked about profiting from this yesterday. What can people do to profit from the bond bubble.

Bud Conrad: Well, some people say just be cautious, remove your money from the bond market and not take the risk that you’ll have a decrease in value because interest rates rise. I suggest: Live with it. Expect it, and bet on it. You can invest in such a way that you make money as rates rise. There are ETFs that are a bet on the interest rates themselves, there are futures markets that give you contracts to bet on the value of the bond markets and the combination is the one where if you want to take the risks, you can actually prevail and do quite well as the world’s biggest bubble breaks. And the point of that is bonds are maybe twice…38 trillion dollar; stock market capitalization is more like 18 trillion dollars. Almost 2 to 1 bigger than the stock market. So when the bond bubble bursts it’s an even bigger burst than is the destruction of the stock market that we felt so viciously in 2008. This is not a small break that’s coming. When this thing blows up what does it do to stocks?

Bud Conrad: Stocks are forced two different ways. ‘Cause the blow up occurs from lack of confidence in the currency, which is the base unit. If inflation gets wild then of course interest rates get wild. In which case stocks are a claim on an asset and could not maybe benefit from inflation. But in the short term, rising rates in a not too inflationary market, which is the basic consideration of the short term from what I expect, are somewhat damaging to stocks because the bonds become a better investment than stocks and because corporations have to borrow at the relatively higher rates. Bud, it is very interesting that the bond market could be happening real time, because we’ve heard about this bubble for years now. Does it concern you at all as far as society itself? I mean, people really aren’t ready for this to happen; at all.

Bud Conrad: That’s the funny thing about our society. I mean even here at this luxurious hotel as we’re interviewing; it’s easy to just slip back and say: “Well just let them worry about it.” And I particularly have to say the youth of America is not the youth that I grew up through. We were throwing Molotov cocktails at the pigs, the cops. We were saying don’t trust anybody over thirty. We were much more activist and were concerned, particularly about the Vietnam war and race relations and other things. The youth of today are much more polite. They’re not the activists that wants to change things. A few of us that look forward like yourself, me, this conference of people, are concerned. We would like to change the trajectory that we see. But unless a wider segment of our society as maybe evidenced by Ron Paul who was speaking here, that suggests we should take different paths; wake up and actually take those actions, I don’t think it’s going to change. We’re already on the trajectory of too much deficit, too much debt, and the destruction of our currency. Your last side was probably the most important slide. It was your family. And I think that’s important for people to remember when they’re concerned about all of this. Ultimately we’re here, we’re living this life. And really I’m happy to see you so happy with your family. Are you all local? Or is your family split up?

Bud Conrad: It’s one of the things that of course keeps me in this country and in California, and yes, they’re within an hour drive of my home and I’m very happy with my family. That’s awesome. Sorry about the sun during the interview. If anybody would like to reach out to Bud, Can they subscribe to a specific newsletter to get your writings?

Bud Conrad: I usually write for the Casey Report which is sort of a big picture view of the economy and where things may be going in the future because of all these economic things. But thank you so much, appreciate your time.

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