Justin’s note: Argentina just issued a 100-year bond.

That’s not a typo. South America’s second-biggest country issued a bond that matures 100 years from now.

This is completely nuts. After all, a lot can happen over the course of a century. Not to mention, Argentina doesn’t exactly have the best credit history.

It’s defaulted on its debt seven times since it was founded in 1816. Three of those defaults happened in the last 23 years.

And yet, people lined up to buy these bonds. To make sense of all this, I called up Doug Casey. Below is a transcript of our conversation. We hope you enjoy.


Justin: Doug, what do you make of Argentina selling 100-year bonds?

Doug: These bonds are the 7.125’s of 2117. They’re selling US$2.75 billion of them, at around 90, priced to yield about 8%. The issue is apparently oversubscribed 3-1.

It’s all quite amazing, from a number of points of view.

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But first, I've got to say something about bonds in general, to set a context. As we speak right now, we're at the peak of probably the biggest bubble in history. Vastly bigger than the Tulipmania of the 17th century, the South Sea and Mississippi Bubbles of the 18th, and the '20s stock market bubble of the 20th combined. It's a super bubble. The current bond bubble will go down in history. As a catastrophe.

I used to think it was metaphysically impossible for interest rates to go below zero. But clearly with financial engineering absolutely anything is possible.

The very idea of buying almost any kind of bond in today’s market impresses me as incredibly stupid. But buying a bond that goes out a hundred years is the type of thing that only happens at the top of a mania. And to top it off, it’s with the government of Argentina…

The whole world—not just computers—is changing at the rate of Moore’s Law.

Justin: I know you don’t like buying government bonds because they fund wasteful governments. But what makes them such a lousy investment?

Doug: There are three things anyone who buys bonds should keep in mind, anytime. But especially now.

Number one is the interest rate risk. Interest rates are at an all-time low right now. So, there's only one way they can go: up. And there are all kinds of reasons why they will not only go up, but rise beyond levels that we saw in the early 1980s when the US government was paying almost 20 percent for money.

Number two is credit risk. Will you actually get the money back? This is the big problem with Argentina. Any Argentine government is inherently, congenitally untrustworthy. The reigning political meme here for the last 80 years has been Peronism. It’s basically a fascist philosophy they adopted from Mussolini. The State is involved in absolutely everything, all workers are unionized, most things are price controlled or subsidized, and so forth. That makes it very hard to predict anything about the economy, except that it's going to continue going downhill—certainly in relative terms. With real economic growth typically between -2% and 2%, how does anybody expect them to service 8% paper?

The third thing is the currency risk. Sure, you might get dollars back—but what will they be worth? If it was in Argentine pesos the bond would have been unsalable. Of course it's priced in US dollars. But the US government itself is bankrupt and running deficits of a trillion dollars per year. The dollar has lost like 80% of its value since 1971, and the trend will accelerate. The dollar is a floating abstraction. The prognosis is grim.

So, bonds in general are a triple threat to your capital in today’s world. They’re a trifecta of disastrous risk. That's the big picture.

I owned, and recommended, long maturity Treasuries, and many other bonds, in the '80s. But things today are quite different.

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Justin: I’m with you on the interest rates and currency risks. But aren’t things getting better in Argentina? If so, what makes these bonds so risky?

Doug: You know I love Argentina. I spend most of the year in Argentina. It's a fantastic lifestyle choice, but it's not a place where you can invest in anything other than property.

Owning real estate is fine; property rights for real estate are very good here. Because although it's the seventh largest country in the world, there are only 40 million people, and most of them live around Buenos Aires. The whole country is empty once you’re out of BA. It's not a country like El Salvador, which is tiny and full of people. Here, you can still buy 100,000 acres of land for $1 million. It's not going to be very productive farm land, but it will be beautiful. Technology will make it quite valuable in the decades to come.

But back to the bonds. They’ll eventually be worth zero. But might work out as speculation for the next couple of years.

Why? Because Mauricio Macri, the current president is doing, and has done already, a lot to make things better. He’s probably the most decent person running any major government in the world today.

But making economic reforms in a country that’s become corrupt because of so much state involvement means that there's a lot of pain—a lot of people are getting fired and a lot of uneconomic businesses going bust. So, what may happen is Macri fills the treasury until the next election in three years, at which point there's again something for the Kirchneristas or some other Peronists to steal. They’ll promise the bounty that Macri has built up will be distributed to the people.

Justin: I see. So, you’re optimistic about Argentina in the near term…but less optimistic over the next 100 years or so. Is that correct?

Doug: In the short run that $2.75 billion will feel good.

Some of it will be stolen with crony contracts and such, but since Macri isn’t corrupt himself, most of it will be invested in infrastructure. As opposed to dissipated in freebee handouts to the people, and foreign bank accounts for the nomenklatura, which is what would have happened if the Kirchneristas had been reelected.

The money’s going to improve the country. Debt always feels good—before you have to start paying the interest. But it's never going to be paid back for the reasons that I gave earlier. Maybe they’ll be able to run up their foreign debt to $100 billion again, like they did the last time. Then it will truly be worth the aggravation of a default. In the meantime, it could be an OK short-term speculation as things look good for another couple of years, but it's a hot potato. Include me out.

Justin: Yeah, it seems that the only way to make money on these bonds is to sell them to someone else before they blow up in your face. In other words, you have to find a “greater fool.”

Doug: To me, it's the bell ringing at the top of the market. I don't care if it's at eight percent interest. That people buy 100-year maturity bonds from not just Argentina but any government, you know it's the bell ringing at the top of the market. Just to show that the US can learn from Argentina, Mnuchin, the US Treasury Secretary, said he liked the idea. The US has been taking a lot of lessons from Argentina in recent years.

Justin: Argentina isn’t the only country that’s issued this crap, either.

Mexico, the United Kingdom, and Ireland have issued 100-year bonds of their own. Giant multinational corporations like Walt Disney and Coca-Cola have also gotten in on the act.

What’s fueling this, Doug?

Doug: There are two things.

One is low interest rates. Borrowing money today is like a gift.

The second thing is quantitative easing, the new name for currency inflation. Because there's no question that all world currencies are going to turn into toilet paper over the next 20 years.

In Buenos Aires, I have a fat envelope, full of currencies from various countries that I’ve visited in just the last decade. You always wind up with some banknotes that you didn't spend before you left… and already half of them are worth little or nothing from the level that I acquired them. Currencies from Cambodia, Vietnam, Bolivia, Seychelles, Mongolia—all these crazy places. The paper is essentially worthless. In fact even if I go back to these countries they probably won't even accept the banknotes, because they'll have changed them, even if the monetary unit still exists.

This happened in Europe to all the people that owned German marks, French francs and Italian lira a couple of years after the Euro came on. All those pieces of paper that you might have had stuffed away are worthless now, totally irredeemable. You can frame them as decorations for your wall—like most of the bonds governments have issued over the years.

All these governments are creating trillions and trillions of new currency units as we speak. Where’s all that money going? Into the bond markets—like that of Argentina. It's crazy.

It’s the bell ring at the top of the market when people will lend that government money for 100 years…

Justin: Exactly. You can add 100-year bonds to the long list of reasons for why you should own gold. Anyway, that’s all I have for today. Thank you for sharing your insights, Doug.

Doug: Sure thing, Justin.


Justin’s note: Doug will give a presentation at the upcoming New Orleans Investment Conference (NOIC) 2017, which takes place October 25-28.

This is where some of the world’s most sophisticated investors gather to discover new opportunities and strategies, exchange ideas, plan for the coming year, and enjoy the camaraderie of like-minded individuals in a fascinating and entertaining city. For more details and how you can join, click here.

Be sure to use the code FREEGOLDCLUB to get free Gold Club access ($189 value).