Long-Term Bonds: Don’t Touch ’em With A Ten-Foot Pole

[When] bond prices [eventually] collapse:

interest rates will surge to 10%, 20%, even 30%,
federal jobs...[will be] gutted,
the economy...[will be] shattered,
the country could go bankrupt, suffer a coup d’état, be shattered by a violent revolution, or worse.

...Outright default is not the only scenario. Some nations [will] default on the sly with currency devaluations or with the drip-drip-drip of a long-term currency slide. Others [will] beg and squirm for bailouts, which is a de-facto default. Regardless of the precise path, the end of the road...[will be] ugly...

U.S. Federal Deficit to Haunt Trump

Will a bond market crisis suddenly burst onto the American scene tomorrow? No. But when it does, it will be too late for investors to protect their money — let alone for Uncle Sam to turn the tide.

Here are the critical facts:

Fact #1. Already, the Congressional Budget Office (CBO) is estimating a cumulative deficit of $3.5 trillion from 2018 to 2022, and a massive $9.4 trillion deficit from 2018 through 2027.

Fact #2. Assuming Congress makes no significant budget changes and the economy holds up well, the CBO forecasts that the deficit in fiscal year 2018 will be 2.4% of GDP. That’s a tad less concerning than in recent years but, the CBO also predicts the deficit will surge to 4.2% of GDP by 2022, and then grow even larger in later years. Plus, never forget: ANY deficit, however small, adds still more to the huge pileup of public debt.

Economists from all persuasions agree that, although some of those revenues could be recouped from better-than-expected growth in the economy, it would take a pie-in-the-sky super boom to get them all back.

Fact #3. The nonpartisan Committee for a Responsible Federal Budget, which has always been equally critical of big spenders whether Democrat or Republican, estimates that the recently proposed Trump tax plan could cost anywhere from $3 trillion to $7 trillion in lost government revenues over ten years.

Fact #4. None of these forecasts take into account financial threats from beyond U.S. borders — especially the kind of sovereign debt crises in Europe and Japan that I’ve covered over the past fortnight. When bonds collapse overseas, the collapse can spread like a contagion to U.S. markets virtually overnight, bloating the U.S. government’s interest costs, weakening the economy, or worse.

Fact #5. Wars can make mincemeat of federal budgets: When a country goes to battle against foreign enemies, the rallying cry in the capital is “deficit be damned!”

The wars in Iraq and Afghanistan alone have cost U.S. taxpayers nearly $5 trillion, including not only spending by the Defense Department but also the State Department, Homeland Security, and the Department of Veterans Affairs. A direct conflict with a major world power, even limited to conventional weapons, could cost much more.

Clearly, the deficit still matters:

In the not-too-distant future, it could make the difference between big investment successes and outright investment failures, so what do you say to someone who’s impatient for better yields and wants to lock in some extra interest with medium-term notes, long-term bonds or other long-term commitments?

Don’t touch ’em with a ten-foot pole!