Inflows into bond funds have been setting records in recent months; the money is coming out of money markets and stocks. This is highly predictable. It is also—indeed, this may be a redundancy—insane.

Show me an asset class that is experiencing record net inflows—bonds in this case, and also the gold ETF, but there I go again—and I’ll show you an asset class which is probably going to underperform, and perhaps underperform significantly, over the next block of time. Show me an asset class from which the public is flying, and I’ll show you the next outperformer. These are axioms, not so much of investment policy as of human nature.

In a recent Client’s Corner essay, I noted that massive inflows into bonds were not evidence of a reasoned investment policy decision, so much as they were a cautious edging out along the yield curve: a post-apocalyptic readiness to exit the agony of zero-return cash, but with nowhere near enough conviction to go all the way to equities. In that essay, I offered this conclusion as just one more reason to believe that the resurgence in equity values which began nearly ten months ago has nowhere nearly run its course.

What I wish to focus on in this brief note is that, as it always does, the investing lumpenproletariat is moving into the higher-risk asset class. The risk isn’t in equities—not relatively, at least, and that’s what we’re discussing here. The risk is in bonds.

All of the phenomena that are popularly decried as the next major economic problems—unprecedented government borrowings, debasement of the currency, inflation risk and the need for the Fed to mop up all that excess liquidity before inflation flares out of control—aren’t so much a commentary on the risk/reward ratio of equities as they are a statement of the inevitability of a long period of rising interest rates. Indeed, starting from zero, where else could rates go? Rising rates—and concomitantly falling bond prices—are therefore not even a question of "if." They’re a question of "when."

Journalism reports that the consensus is that the Fed will start raising rates in the third quarter of 2010. (One is never sure if this "consensus" has been reached by economists or by journalists themselves, but give it the benefit of the doubt for a moment.) This suggests a number of scenarios more or less guaranteed to have all those massive bond fund inflows of this autumn significantly under water before the leaves fall again.

Assume the consensus is right: that a policy of massive monetary accommodation which has no precedent in the history of central banking will finally reverse in the third quarter. It should be clear that the markets will start pricing in higher rates—and perhaps much higher rates—well before that. Your choices, in this scenario, have narrowed down to the first and the second quarters. To a long-term investor—indeed, to anyone with an investment time horizon longer than that of a mayfly—this range of estimates of when bond prices will swoon equates to "any minute now."

And that’s assuming the consensus is right, which it hasn’t been for nigh on to a year now.

The consensus has consistently, and quite spectacularly, underestimated the speed and strength of the global economic upturn. It has maintained that the recovery from the swiftest and most savage decline in economic activity in our lifetimes would be painful, gradual, and very, very grudging. The fact that there is no historical precedent for such a scenario—that in fact the prevailing historical pattern has been that of the slingshot effect—has not seemed to bother the shapers and reporters of "consensus." But neither, for that matter, have the facts.

The facts are that this has been a very powerful V-shaped global recovery just about from minute one. This is a source of literally inexpressible agony to the nattering nabobs of negativism, who cling desperately to any floating snippet of bad news like Ishmael to Queequeg’s coffin. Unemployment—always in the caboose of recovery—is obviously the prime example of this phenomenon. But we true connoisseurs of journalistic naysaying particularly relished the universal shrieking and rending of garments which followed the momentary downturn in housing starts in October—which was merely the coldest and wettest October in the United States since the early 1920s. But I digress.

My point is that, if and to the extent that the consensus is inferring the timing of the reversal in interest rates from its wildly behind-the-curve view of the recovery itself, then rates may well turn up, and bond prices crater, long before the third quarter. Which would make buying bonds here look like slipping past the entire Bolivian army so you could join Butch and Sundance down there in that stable.

One hopes and believes that this essay is the moral equivalent of preaching to the choir—that this newsletter’s readers, eyes fixed firmly on the prize, are continuing to preach the healing and salvation which can come only from owning The Great Companies in America and The World for the long term, and indeed multigenerationally.

But just in case, be reminded of your mantra: equities…life; bonds…death. And right about now: bonds…sudden death.