A Bubble in Bonds?

Before delving into tonight's topic - the supposed bubble in bonds - I thought it would be instructive to discuss the unraveling of the alternative investment bubble.

The FT reports that hard times are putting pressure on private equity assets:

The economic and market collapse that devastated institutions' traditional stock and bond holdings in 2008 also laid waste to many cherished portfolios of alternative assets - in particular private equity, where pre-2008 returns ran at 20 per cent and higher, but estimates of the 2008 drop in fund values from original cost are as high as 75 per cent.

The portfolio losses alone would be bad enough but many pension plans and endowments with large allocations to private equity also face having to make good on calls from fund managers for fresh capital.

With free cash in short supply, many are looking to trim or reorient their holdings in the private equity secondaries market. Historically, it has been a small market that private equity general partners frown upon, but today there is strong interest among secondaries specialists in sought-after funds at depressed prices.

"Looking across the next three to five years, I would expect a volume of secondaries transactions of $80bn$100bn [£54bn-£68bn, €57bn€71bn]," notes Elly Livingstone, a partner and secondaries specialist at London-based private equity manager Pantheon Ventures.

Historically, secondaries have been just a sliver of the private equity industry: the volume of secondaries brought to market in recent years has been from $10bn to $20bn, while the most recent estimate of private equity assets by researchers at Private Equity Intelligence was $2,000bn at the end of 2007.

"A pension fund with a mature private equity programme has relationships with many managers, and these sponsors have gone to the secondaries market in the past to tidy up their portfolios and focus on key relationships," explains Jane Welsh, head of private markets at consultants Watson Wyatt Worldwide.

But in the hard times of 2008, private equity owners saw the secondary market in a new light. "Financial institutions always buy high and sell in distress, so there's no surprise there. Family offices are selling too, but we've seen that before," says one veteran US private equity manager in New York, whose funds buy opportunistically in the secondary market.

"What's different today is that some long-time investors, such as endowments and foundations, are looking at selling because of liquidity issues - a desire to get rid of the future obligations. That need for liquidity is a good thing for buyers."

Institutions can invest in secondary private equity interests via dedicated funds, through brokers, or directly from the original investor. However, managers of primary funds have the right to approve who buys a limited partnership interest.

(In the stressed markets of 2008, however, most managers have given up insisting on so-called "stapled secondaries," which commit buyers of secondary interests to participate in a future primary fund.)

Broader selling interest means a greater variety and quality of assets, so when portfolios come to market, "it's the good, the bad and the ugly", says Frank Morgan, a partner at Coller Capital, the leading private equity secondaries fund manager. "But there has to be something in the package to attract buyers, so some decent names are being sold too."

Sellers tend to bring entire portfolios to the markets, while secondary investors typically would rather buy individual partnership interests, to complement their existing holdings.

"When someone wants to sell an entire portfolio, it may end in a reduction in price simply to get the liquidity," says the opportunistic New York investor. "Our goal is to buy quality assets from distressed sellers, rather than distressed assets at distressed prices."

Much of today's secondary inventory comes from the recent vintages of mega buyout funds, which raised close to $90bn in capital in 2006 and 2007 combined, according to Private Equity Intelligence. Now mega buyout partnership interests are said to be offered at discounts of 70 per cent and higher to the original cost.

"You know the acquisition prices were too high, and the leverage is high. Ugh!" says the New York manager. "When the senior debt of these companies is trading at just 25 cents on the dollar, how could you buy an equity interest?"

His feelings are echoed by the head of a large US corporate pension plan: "What we are seeing come to market are things we didn't want in the first place, because we don't do LBOs [leveraged buy-outs] and financial engineering. They're at a cheaper price, but we still don't want them. But we did buy one small piece this year, and we'll be active in secondaries when we see assets that match up with positions we already have."

But with so little visibility on the economic picture for the next few years, the secondary market for the time being is mostly talk. "A lot of discussions take place on transactions that never happen, so the actual number of trades getting done can be quite low," says Mr Livingstone of Pantheon Ventures.

He also cautions that the outsized discounts investors report can be misleading: each portfolio is unique, so there is no real-time market.

Another factor constraining trades is the 2008 year-end valuation, slated to reach investors in April 2009. "Sellers might have difficulty selling at a 50 per cent discount to today's value," says Monte Brem of StepStone Group.

"And the buyers don't want to look bad by purchasing interests at a 35 per cent discount to stated value, only to have the portfolio written down by 50 per cent after year end.

"Resetting the valuations in a few months will remove a psychological barrier, and it will be easier for buyers and sellers to find mutually acceptable prices."

So the need for liquidity and asset allocation are the primary factors driving activity in the secondaries market, but I can also tell you that some pension funds did not take vintage year diversification risk very seriously and they were overexposed to certain vintage years. Huge mistake.

The other bubble that is bursting fast is commercial real estate:

This year will be among the worst for the U.S. commercial real estate industry, as unemployment leads to a drop of as much as 30 percent in rents in some places and more office towers from Washington to Chicago and Los Angeles sit empty, according to several research reports from large commercial real estate service companies.

"2009 is going to be dismal for commercial real estate," said John F. Sikaitis, director of research for Jones Lang LaSalle, a real estate services company. "Demand for space is way down. Sales activity is down. Rents are falling dramatically and vacancies are increasing. That's forcing landlords to compete and lower their rents."

Nationally, rents are expected to drop 10 to 15 percent. Manhattan rates could drop as much 30 percent. Nationally, the vacancy rate is likely to rise to 18 percent from 15.3 percent, Sikaitis said. Especially hard hit could be places where there's a lot of office construction, including the Washington region, Miami, Atlanta, Chicago and Houston.

This comes as billions of dollars in loans on office buildings, malls and warehouses are coming due in the next few years and real estate owners are struggling to refinance their deals. That could lead to banks taking back properties and force some owners to sell at a loss.

Roughly $107 billion worth of hotels, office buildings and shopping centers are in trouble, ranging from mortgage delinquency to foreclosure, according to a report from Real Capital Analytics, a research firm.

"It's not going to be a good 2009," said Dan Fasulo, managing director at Real Capital. "We're at the point where a normal, functioning market doesn't exist. Buyers are there, but they don't necessarily want to make an acquisition. Pile on top of everything that we don't have a functioning debt market. It creates paralysis in the market."

New York is projected to be among the hardest hit. The financial services industry there has been decimated by job losses, and companies are dumping office space back on the market. In Chicago, a 12 percent vacancy rate is expected to reach 15 percent or higher by the end of 2009. And in Orange County, Calif., vacancy rates could hit 19 percent from 15 percent in 2007.

In the District, vacancy rates could hit double digits for the first time in a decade, as 9.3 million square feet of office space is under construction. It could take four years to lease that much space, according to Cushman & Wakefield.

Kevin Thorpe, vice president of research at Cassidy & Pinkard, said the vacancy rate in the District could reach 11.9 percent in 2010, making it the "highest since the S&L crisis of the early 1990s."

The Washington region, unlike other places, is expected to add between 20,000 and 25,000 jobs this year, which will create a demand for office space.

"You've got $8.6 trillion that has been pledged to address this financial crisis and that's going to require significant oversight in the D.C. region," Thorpe said. "That has to translate to job growth and a demand for office space among law firms, accountants, consultants and others. Over time, demand will increase."

For landlords, weakness elsewhere in the private sector is creating a new "love of government tenants," said Keith Lipton, executive vice president and managing director of Grubb & Ellis's Washington-area offices. "They're the best tenant you're going to find. People who shied away from government tenants are now pursuing them. They are the strongest, most stable tenant out there."

To add to the woes of commercial real estate, the Federal Reserve policy makers saw “substantial” risks to the slumping economy last month as they cut the benchmark interest rate to a record low and pledged to expand emergency loans if necessary:

Central bank officials believed “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to the minutes of the Dec. 15-16 Federal Open Market Committee meeting released today in Washington. The FOMC discussed setting an inflation target to discourage expectations that price increases will slow “below desired levels.”

Fed Chairman Ben S. Bernanke has more than doubled the central bank’s balance sheet to $2.3 trillion in the past year while increasing loans to financial institutions reeling from $1 trillion in writedowns and losses. The New York Fed began buying mortgage-backed securities yesterday as part of a $500 billion program to bolster the U.S. housing market.

“Rates are going to be low for a long time,” said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. “They see the economy as extremely weak. It is a dark document.”

The preceding discussion sets the stage for tonight's topic: is there a bubble in bonds? I happen to believe that the risks of debt deflation are high and that is why you are going to see global interest rates stay near zero for a very long time.

But there are other investors who are adamant that it's only a matter of time before the bubble in the bond market bursts. One of those, legendary investor Jim Rogers, asks whether it is Time to Short the Long Bond?:

"I was shorting the long bond in October and in November but I had to cover. I plan to sell them short again along the line. Bonds are the last bubble, its clearly a bubble. Everybody is pumping bonds like crazy."

Marc Faber also sees a big bubble on the Treasury Market, on the Long Term Government Bonds. In Marc Faber's blog there is a nice article regarding the Bond Bubble and a related Barron's article.

Edward Chancellor, a member of GMO’s asset allocation team, recently wrote an article in the FT stating that another bubble is brewing - bonds:

Central bankers around the world have promised to pay more attention to the dangers posed by asset price bubbles. Yet they seem unable to refrain from inflating new ones. The recent surge in the market for US government bonds has several characteristics of a classic bubble.

A bubble is defined by extreme overvaluation. Ten-year Treasuries with yields at half-century lows meet this description. The current yield of little more than 2 per cent provides no protection against the return of inflation any time over the next decade. In normal times, there would be no argument that Treasuries are overpriced. These are not normal times, however.

Another essential attribute of a bubble is that it should be sold with a great story. A decade ago, overblown expectations for internet commerce fuelled the technology boom.

Today’s great hype is deflation. Tales of global recession and collapsing financial markets are embroidered with lurid narratives from the 1930s and Japan in the 1990s. This bubble is motivated by fear rather than greed. Investors are seeking to protect themselves against deflation and declining stock markets by blindly acquiring “risk-free” government bonds.

The behaviour of institutional investors also contributes to the bond bubble. Pension funds, insurers and others have sold off toxic securitised triple-A rated bonds and replaced them with Treasuries. Government bonds are also attractive for diversification purposes since they have held up while just about everything else in their investment portfolios has collapsed.

Many of the more sophisticated bond bulls are playing a “greater fool” game. Like dot-com speculators of the late 1990s, they know there is a danger the market will sell off at some time in the future. Nevertheless, they are staying for the ride and hope to bail out before it is too late.

A common feature of great bubbles is that they enjoy the support of the authorities. In 1720, the public acquired shares in the South Sea Company secure in the knowledge that the bubble was promoted by the government of the day.

Today’s bond buyers place their faith in Ben Bernanke. The Fed chairman has long made it clear he sees low long-term rates as a tool for combating deflation. In December, the Fed announced it was considering purchasing government bonds. Just as the “Greenspan put” emboldened stock speculators a decade ago, the “Bernanke put” has placed an apparent floor under the market for Treasuries.

The deflation story that drives the current bond bubble is more plausible than the dotcom pipe-dreams of yesteryear. Deflation is sparked by a combination of bank losses and tighter lending standards, increasing risk aversion and a rise in the demand for money, falling household consumption and higher savings, together with mounting unemployment and a widening output gap.

All these conditions pertain today. If this crisis were left to its own devices, the result would likely be a pronounced and prolonged decline in the price level as occurred in the early 1930s.

However, the authorities are not standing by idly. Instead, the Fed is bolstering the credit markets in numerous ways and has cut short-term rates to near zero. Some $7,200bn (£4,930bn, €5,150bn) has been pledged to support the US financial system, of which $2,600bn has already been spent. Although bank lending is currently stagnant, the monetary base climbed by 775 per cent in the year to November.

Broader monetary aggregates are also expanding. The St Louis Fed’s MZM measure climbed 11.2 per cent over the past year. Nor is there evidence of widespread deflation in the economy. Although, the consumer price index has started to fall, only transportation has showed a pronounced decline.

There is also the fiscal response to consider. Morgan Stanley projects that in 2009 the gross US fiscal deficit, including asset purchases from the private sector, will exceed 10 per cent of GDP.

Mr Bernanke gained his moniker “Helicopter Ben” after his famous November 2002 speech in which he outlined the various ways by which the authorities could combat deflation. “The US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices of those goods and services,” stated the former Princeton economist and future Fed chairman.

“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” Investors who purchase long-dated Treasuries at current prices are betting that a determined man with the dollar printing press will fail in his battle against deflation.

In an interview with Forbes, legendary bond investor Bill Gross stated what he is buying:

Forbes: Treasuries hit a record low today. What does this mean?

Bill Gross: Government bonds happen to be the one asset that people want to own during a deleveraging cycle. They weren't leveraged up by hedge funds and mom and pop investors. We were busy buying homes and stocks and risky assets…

…Now we're deleveraging, and [almost] all assets are going down in price. This is staggering.

How much deleveraging is left?

I think we're 75% of the way through. The question is, "What's the size of the government checkbook and can it match deleveraging in the financial sector?" We think the checkbook is substantial, and sometime in 2009 assets will stop going down.

What are the long-term effects?

The damage from this Wild West of capitalism…is irreparable…When you lose half your 401(k) you care more about the return of your money than return on your money. The lack of animal spirits will influence investing for years to come. The government will have to play risk taker of last resort.

You're guessing at the psychology of 300 million people.

It's not a slam dunk. It's my odds-on bet.

Is this cathartic for the economy?

Yeah, like divorce. Years later you say it was good because you found a new path in life. But it's painful now.

What's the impact of government bailouts?

I'm a registered Republican, and I want little regulation and low taxes. But the government already owns 20% of the banking industry and guarantees 75% of its liabilities. No government coming to the rescue [like this] would allow us to go back to the prior stasis…The government will overdo it, it will muck it up--but it has no choice.

…It will take 15 to 20 years to escape this [new] regulatory environment and the lack of risk taking.

How much further will home prices fall?

If the government is able to establish a 4.5% interest rate for all home purchases over the next 12 to 18 months, that's a magnificent step to stop prices from going down. If this program is put into place, [expect] another 5% drop. If it isn't, then 10%, 15% or 20%.

What should investors do?

We're buying bank preferred stocks -- JP Morgan Chase, Bank of America and Wells Fargo. The government is in the market [through its Troubled Asset Relief Program] to the tune of $150 billion. Its interest rate is 5%. With its equity warrants, that effectively boosts the yield to 6%. We can buy--the public can buy--[similar] preferred shares for yields of 12% or 13%.

How safe are these securities? There's no government guarantee.

In for a nickel, in for a dime. Or in this case, in for $150 billion, in for $300 billion… It's close to a guarantee. [The government] is assuming the survival of these companies…

…The banking industry has been nationalized. People don't realize that. There are so many programs. It's hard to keep up.

What asset can you buy today, forget about for the next 20 years, and still get decent returns?

I'd say you got to buy TIPS. You want inflation protection, and the value of TIPS is near historic. If this [government bailout] is successful, the economy will reflate.

What are the odds of the opposite, deflation? Or a "black swan," a depression?

Since Lehman [collapsed], the chances of it have gone up…maybe they were 1% before. Now, maybe 10%.

How do you define "it"?

A permanently lower standard of living, unemployment at 10%-plus, corporate profits stagnating (and at a significantly lower level), common stocks at existing levels or lower for years to come, the government acting as employer of last resort, not just lender of last resort.

Over the next 10 to 20 years we'll be lucky to grow at 2% [annually]…This means a lower standard of living, a threat to the dollar as a reserve currency and a decline in U.S. hegemony.


We'll be lucky to stop at 9%. There won't be breadlines but there will be a lot of people out of work.

How will stocks fare?

I'm notoriously unsuccessful at this. But [the Dow] going back up to 14,000? That was predicated on paper and leverage, as opposed to the new world of production and deleveraging. Stock prices can't go back to where they were for at least another decade. Double-digit returns are a thing of the past. Maybe they'll return 6% or 7% a year, if we're lucky.

Stocks were viewed in the 30s and 40s as yield vehicles, not growth instruments. I think we're going back there a little. People just haven't made the switch yet.

Finally, take the time to read what the London Banker posted on RGE Monitor, that deflation has become inevitable:

For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy.

I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.

In Lombard Street, Bagehot’s seminal tome on fractional reserve central banking, Bagehot advises any central bank facing a simultaneous credit crisis and currency crisis to raise interest rates.

By raising rates they will ensure that foreign creditors remain incentivised to maintain the general level of credit available while the central bank resolves the local liquidity crisis through liquidation of failed banks and temporary liquidity support of stressed banks.

The very opposite policies have been pursued by central banks in the US, Europe and UK since the beginning of the sub-prime crisis in August 2007. They have cut policy rates drastically, and as the crisis escalated and spread, the yield on government debt has dropped to negative territory.

Meanwhile they have shielded those responsible for the creation of record levels of bad debt from any regulatory accountability, relaxed transparency of accounts, and provided massive taxpayer-funded financial infusions to prevent failure and liquidation.

While in the short term these policies have expediency and the maintenance of market “confidence” on their side, in the longer term these policies must undermine any confidence a rational and objective saver or investor might have that savings or investment in the US, EU or UK will be fairly remunerated at an above-inflation rate, or that savings and investments will be protected by effective oversight and regulation from the sorts of executive debasement and outright misappropriation and fraud that are beginning to colour our perceptions of the past decade.

Anyone sitting on a pile of cash now is unlikely to want to either (a) place it in a bank, or (b) invest it in the stock market. As a result, the implosion of the financial and real economy must continue no matter how big the central bank’s aspirations for its balance sheet or the treasury’s aspirations for its deficit.

If US, EU and UK had substantial domestic savings to fund their banks (as in Japan in 1990), then perhaps the consequences would not be so imminently disastrous. Lacking sufficient domestic savings, however, their actions will likely make foreign creditors in Japan, China, the Gulf and elsewhere question whether it is worthwhile to keep pumping scarce savings into such flawed and reckless economies.

During the reckless boom years, savings collapsed in bubble economies as retail and commercial and financial actors alike chased speculative yields with greater and greater leverage. During the reckless bust years, savings will collapse further as retail and commercial and financial actors chase safety by hoarding their meagre remaining assets from further erosion by refusing to lend at negative returns and refusing to finance failed corporate and investment models that only enrich poltically-connected management and intermediaries.

The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations. It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated government securities.

The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract.

Irresponsible central banks and governments can try to bail out the failed banks, businesses and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout. Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business.

It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return.

In the EU, I will be very selective, preferring those conservative states like Germany that never embraced the worst excesses, although sadly still have fall out from individual banks' stupidity in buying into foreign excess. I will know when it is safe to reinvest when policy interest rates, bank/intermediary oversight and accounting standards give me confidence I am better protected than the corporate or financial elite.

While it may take the Asian and the Gulf State investors longer to embrace my analysis, I have no doubt that they too will eventually conclude that parting with their savings under the terms now on offer will only deepen their losses. They would be better off keeping the money at home, investing locally under local laws and vigilance, and letting the US and UK implode.

The argument against this has always been that with trillions already invested in the US during the deficit years, the Chinese and Gulf States would suffer even more horrible losses from a collapse of the western economies.

This is accurate, but not complete, as it ignores the relative value of cash investment at the top and bottom of a bursting bubble. Once the collapse has bottomed out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a proper balance of investor protection and intermediary oversight.

Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central bank or treasury finance. The market has failed, and officialdom is collaborating in perpetuating that failure.

Should the western economies implode in deflation, however, there will be new opportunities to return to market-based policies that reward effective, efficient management and punish corrupt, debased management. Until that happens, those that invest will continue to lose money. Once deflation is exhausted, then those that invest can expect to make and retain profits again.

I think it took me so long to feel confident about predicting deflation because the floating currency system under dollar hegemony and Bretton Woods II distorts the workings of both inflation and deflation.

Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance, the US dollar has recently strengthened as deflation globalised. The US exported inflation in the boom years, and now exports deflation in the bust years.

Since spring 2008, as US investment banks sold off assets, imposed margin calls, and used access to unsegregated wholesale assets in custody in the rest of the world to upstream liquidity to their US-based parents and affiliates, the dollar has strengthened relative to other currencies.

The media reports this as a “flight to quality”, but it is more like a last looting of the surrounding countryside before dangerous brigands hole up in their hilltop fortress. The brigands appear temporarily wealthy compared to the peons left stripped and penniless and facing winter.

When the brigands have eaten all the stolen grain and livestock, however, they will have no means to replenish except to use force to raid the countryside again. The peons can always hunt, forage, farm and carefully husband a surplus to gradually increase their wealth. If the brigands raid too thoroughly or too regularly, the peons have no incentive to grow crops or keep herds (negative savings returns) and everyone starves (deflation).

In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks to ensure that their peon children prosper and the brigands die off. That would be the end of Bretton Woods II, and the rise of China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional growth.

I reread my piece on Fisher’s Theory of Debt Deflation in Great Depressions the other day. One of the more confusing aspects is his assertion that the dollar “swells” as debt deflation takes hold. What he meant, of course, is that deflation increases the quantity of assets and the likely investment return each dollar purchases as deflation wrings debt and misallocation of capital out of the economy.

It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world.

Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will "swell" to buy more assets in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.

I have quoted Mr John Mill before, but it bears repeating: ““Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”

The extent to which capital has been betrayed in the past quarter century under Bretton Woods II, bank deregulation and the Basle Capital Adequacy Accords is unrivaled in the history of fiat banking.

The bankers, lawmakers, regulators and academics who collaborated in the betrayal still hold power, like the well-armed brigands in the fortress, and their continued collaboration to prevent accountability must inevitably discourage honest savers from risking further loss. Even so, it is the savers/peons who hold the ultimate power as they can starve the brigands.

Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.

When that happens, if reason is restored in markets with effective oversight, I might consider investing again, very selectively, in whatever productive works might then be on offer and only when secure in realising - and retaining - a positive yield.

So you be the judge. Is there really a bubble in bonds? Or are we on the cusp of a protracted period of debt deflation that will rinse the financial system of all its excesses?

As much as I respect Jim Rogers and the GMO asset allocation team, I am with the London Banker, fearing that deflation will wreak havoc on the financial system and the global economy.

If deflation does develop, what seems like a bubble in bonds today, will be nothing compared to what will happen when investors throw in the towel and just buy bonds for the long-run.