Thursday, February 10, 2011

Bond Market, The Most Dangerous Bubble of All

Why the Bond Market Is Undeniably a Bubble

The most obvious, telltale sign of a bubble is when asset prices are artificially driven higher by misguided government supports, subsidies, bailouts, or sheer greed and stupidity.
That was certainly the case of the housing bubble.

It was also true for some of the greatest bubbles in history — the Dutch Tulip Mania in the 17th century, the South Sea Bubble of the 18th century, the stock market bubble of the 1920s, plus many others.

And it’s definitely the case here — not only in recent years, but going back for over a decade.

In fact, since the year 2000, one of the most frequently used — and abused — policy tools of the Federal Reserve has been to cut rates and artificially bubble up bond prices.

    * The Fed cut interest rates and supported bond prices to fight the technology bust, the 9/11 aftermath, the housing bust, the mortgage meltdown, the credit crunch, and the debt crisis.
    * The Fed did it again to help avert deflation, debt defaults, and other disasters. And …
    * The Fed is still trying to do it AGAIN now, but with a big difference: Its bond-market buying binge is finally starting to backfire.

Dr. Weiss began his career in 1971 when he founded Weiss Research, dedicated to evaluating the safety of financial institutions and investments for consulting clients.  He is the publisher and contributing editor of the financial newsletter, Safe Money, known for its track record in picking major turns in interest rates, and serves as co-editor for a number of Premium Services. He is also the author of The Ultimate Safe Money Guide and The Ultimate Depression Survival Guide.

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