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Bond Bubble Will Be Bigger Catastrophe than Real Estate Bust: Casey

Lauren Lyster
Daily Ticker

Weak hiring is restraining U.S. growth and the economy has grown at a "modest" or "moderate” pace since November. These were a few of the conditions reported in the Federal Reserve’s Beige Book Wednesday. And as The Wall Street Journal notes, it’s a story that is largely in “in line with how the economy has performed for much of the last two years" and the “latest sign that economic growth remains subdued overall.”

Yet take a look at the stock market and it tells a different story.

The S&P 500 (^GSPC) ended 2012 up 12%, while Barron’s (citing mutual-fund watcher Lipper) reports that the week ended Jan. 9 saw the fourth biggest weekly cash flow into equity funds in 20 years. As Barron’s columnist Brendan Conway notes: “The plaint about individual investors’ ‘cash on the sideles’: Maybe it’s finally going to retire.”

Related: Growing or Slowing? Investors Struggle to Digest Mixed Signals

But how should an individual investor navigate the divide between the stories markets and the economy are telling?

Doug Casey, Chairman of Casey Research tells The Daily Ticker the trend of the economy being separate from the market will continue.

“There are going to be other bubbles created by all the money central banks are printing," he says. "And, they’re likely to be in the stock market."

Casey’s not alone.

Bloomberg reports Federal Reserve officials from Chairman Ben Bernanke to Kansas City Fed President Esther George have been voicing concern in speeches over the last few weeks “that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.”

“I’m of the opinion we entered the ‘greater depression’ back in 2007,” Casey explains. “Look at it as being a hurricane. We passed the leading edge of the hurricane of 2007 - 2009. We’re now in the eye of the storm, which was created by these governments creating trillions of currency units. I think 2013 we’re going to come out through the trailing edge of the storm, and it’s going to be much worse and much longer than what we saw in 2008.”

The renowned contrarian investor, and author of the new book Totally Incorrect: Conversations with Doug Casey offers The Daily Ticker some advice from his decades as a speculator. Here’s more of his 2013 view:

  • Doesn’t like real estate. “The problem, even though it’s cheaper than a few years ago, is that it’s floating on a sea of debt.” When interest rates rise Casey says it will be very bad for real estate.
  • Stocks are overpriced. They could go higher because of a panic out of dollars.
  • Bonds are a triple threat to capital. “Worst possible place to be is in bonds of any type,” he says, although people are “panicking into them. This is going to be a bigger catastrophe than real estate when the bond bubble bursts.” Casey said in his Jan. 2 Casey Daily Dispatch newsletter, bond owners face huge default risk, huge interest rate risk, and huge inflation risk. He has also conceded that he’s been saying this for awhile and thought the bond bubble would pop last year.

Related: The Fed is Key to Where Stocks are Heading: Ritholtz

While Casey is not a fan of traditional investments, he remains bullish on precious metals, gold in particular. He cites its historic role as money and its role as a financial asset that is not someone else’s liability, as reasons why. He weighed in on reports that Germany’s central bank, the Bundesbank, will repatriate some of its gold holdings at the New York Fed and the Bank of France, saying while it may reflect distrust between central banks it has not had any impact on the gold market, nor does he expect it to.

And while a report from Reuters earlier this week noted that platinum was set to reach parity with gold after rallies in recent weeks, Casey clarifies that Platinum is an industrial metal and has be be put in the same class as copper, nickel, and cobalt.

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