What Bolivia, Iceland, and the Fed have in common — and what it means to YOU!

Mike Larson

Man oh man are things getting surreal in the yield chasing saga I’ve been discussing. Just when you think that investors won’t venture any further into the Twilight Zone looking for higher rates — regardless of the risks involved — you get shocked again!

The latest example? News this week that Bolivia … BOLIVIA … is looking to sell as much as $500 million in bonds to raise money in the international capital market.

I don’t mean to sound alarmist. But back in 2007, credit market tremors in the small nation of Iceland ultimately presaged the epic credit collapse and flight from risk we saw begin in earnest a few quarters later. I can’t help but shake the sense of déjà vu I’m getting now, and today I want to explain why!

More Signs of the
Yield-Chasing Apocalypse!

Landlocked Bolivia has historically been one of the most isolated and impoverished countries in South America. It has also been somewhat of an international market pariah, thanks to steps taken in recent years by socialist president Evo Morales.

Bolivia's Evo Morales has been taking over private companies for years. Now he has hired Wall Street bankers to help him go after yield-starved investors' dollars.
Bolivia’s Evo Morales has been taking over private companies for years. Now he has hired Wall Street bankers to help him go after yield-starved investors’ dollars.

In 2006, he up and decided to nationalize the oil and gas industry in his country in an attempt to keep production profits from going to private companies. In 2008, he effectively did the same thing with the country’s biggest telecommunications company.

Then this summer, Morales grabbed control of a tin and zinc mine run by the global commodities firm Glencore. And he just did the same with a silver mine operated by Canada’s South American Silver. To get a better idea of Morales’ political bent, it’s worth noting that one of his closest buddies is Venezuelan President Hugo Chavez!

Yet despite the long history of anti-capitalist moves … and the risks inherent in any emerging market investment … Bolivia is now shopping a $500 million bond issue. It has hired crack investment bankers at Goldman Sachs and Bank of America Merrill Lynch to drum up demand with a global road show. And if it succeeds, it will be the first time the country has sold bonds on the global market in almost a century!

Now it’s true that Bolivia has been reducing its debt-to-GDP burden over the past few years, and that it is running a current account surplus. But is that REALLY why investors are poised to lend the country hundreds of millions of dollars?

Of course not!

What’s really at work is the ongoing influx of hot money into anything that yields more than Treasuries! So much hot money has poured into emerging market bonds, that countries have already been able to sell $55.7 billion in such debt this year. That’s more than the $55.3 billion sold in ALL of 2011, and we still have a couple months left in the year!

Still not convinced this is another example of yield chasing gone wild? Or that we’re rapidly heading toward bubble-icious territory?

Then take a look at this chart of the iShares JPMorgan USD Emerging Market Bond Fund (EMB). This ETF holds more than 140 emerging market bonds issued by the likes of Brazil, Russia, the Philippines, Mexico, Venezuela, and Peru. It has total assets of more than $6 billion, and it’s trading like a housing stock circa 2005!

iShares JPMorgan USD Emerging Market Bond Fund (EMB)
Click the chart for a larger view.

History Repeating Itself Again—
Be Wary!

Does any of this mean the market for risky bonds is going to implode tomorrow? Next week? Or even next month? No, it does not. We have repeatedly learned over the past several years that easy money-fueled bubbles can persist for longer than they should.

But we’ve also learned that Wall Street and the major ratings agencies are essentially useless when it comes to giving you an advance warning to get out before those bubbles burst.

And most importantly, we have repeatedly learned that waiting for the Federal Reserve to recognize or acknowledge the new bubbles they’re creating — in an attempt to mop up their past bubbles — is a complete waste of time.

Instead, your best bet is to listen to independent thinkers who have no axe to grind and no agenda to push. I’d like to think we at Weiss Research fit the bill, so here goes:

If you own ETFs like EMB … or emerging market bond funds … or some of the other over-inflated assets out there that are levitating on a flood of Fed-fueled easy money, now is a good time to start bagging gains.

After all, as PIMCO Chief Executive Officer Mohamed El-Erian just wrote in the Financial Timeson October 11:

“The Fed is inserting a sizeable policy wedge between market values and underlying fundamentals … Many asset prices have been taken close to what would normally be regarded as bubble territory, with some already there.”

I couldn’t agree more. And that’s why I suggest lightening up!

Until next time,

Mike Larson

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