Buy Your Ticket for a Religious Experience Here
By Tom Dyson
November 24, 2008
A long-term Treasury bond is like 30-year IOU written by the U.S. government. When you buy one of these pieces of paper, you are lending the government $100 until 2038.
Outside the currency markets, the market for Treasury bonds is the deepest, most liquid market in the world.
I've written dozens of columns in DailyWealth over the last few years warning about the dangers of buying long-term Treasury bonds. The basic thesis is this: The government is printing an ocean of these bonds to pay for our deficits. Meanwhile, the demand for holding these bonds will fall, as other nations become less willing to finance our deficits.
I'm so sure these pieces of paper are worthless, a few months ago, I told my subscribers about an investment that profits from a fall in their prices... And I've bet on falling Treasury bond prices with my own money.
I want you to know, I've been wrong about this, I still am wrong about this, and I will probably be wrong about this for some time.
The federal government first issued bonds to finance the construction of the railroad in 1857. Right now, U.S. Treasury bonds are the most valuable they've ever been.
Just last week, the Treasury market moved to a new all-time high. Then it accelerated even higher. Thursday's move in bond prices was, I'm guessing, the largest "up day" in the history of Treasury bonds. The week as a whole was the strongest performance in Treasury bonds since the 1987 crash.
And right now, I see four reasons not to bet against Treasuries for a while:
1. Long bond prices have been in a bull market since 1982... That's a 26-year period of rising prices. They formed a peak in 2003, during the last deflationary scare, and then fell gradually for a couple of years. But in the last few months, they've risen back with new vigor. As I said, they made a new all-time high over the last couple days.
The rise of the Treasury bond market is probably the strongest trend in finance today. You can short it if you like, but in my mind, you'll end up like the swimmer who played chicken with the oil tanker.
2. The idea that Treasuries could be in a bull market is absolutely absurd. They are probably the single worst investment in the world. The U.S. government is broke. It will never be able to pay them back.
Meanwhile, the best American companies – true profit machines like Coca-Cola and ExxonMobil – trade at cash-flow yields in excess of 10%... And most investors won't touch them.
Having watched the markets for over two decades, I've come to appreciate that betting against the "absurd" is often a bad bet. The markets love being absurd. The rise of the Treasury bond market is a perfect example.
3. Treasuries are "acting well." The action is one indicator I often use to judge the future direction of a stock. If great news comes out and the stock falls, then I say it's acting badly. If the news is terrible but the stock rises, then it's acting well.
Long bonds are acting well. The news couldn't be worse. The Treasury is flooding the market with more bonds than at any time in its history. Asia is saying it doesn't want to hold so many. Plus, the recession will lower tax receipts at the IRS, the Treasury's main source of capital. Lots of supply, less demand, bad fundamentals... yet the market is running to a new all-time high. That's acting well, and it implies there's more strength to come for the Treasury bond market.
4. Finally, the credit bubble of the 20th century is arguably the greatest investment bubble in mankind's history. It popped this year. We could now see a severe deflation, despite the Fed's bailout efforts. In deflation, investors run to safety. They believe the Treasury bond market is the best place to hide in deflation.
Now, even if you agree with me that Treasury bonds could go higher, I don't recommend them. Here's how legendary investor Rick Rule puts the argument:
"Money will be attracted to the liquidity and transparency of the U.S. long Treasury market. I think this will be the final bubble of my generation. Crowding into a 20-year bond in a depreciating currency when inflation sets in, and long rates inevitably rise, will be a religious experience for the victims, in my opinion."
Let me spell it out: If you are buying Treasuries today to make 3.5% a year, and rates rise to, say, double, the value of your bond will fall 40%. You're risking a catastrophic loss to make a small profit… like a bird that picks crumbs off the freeway.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
Sign up today to read more investment ideas from Tom Dyson.
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NEW HIGHS OF NOTE LAST WEEK
Every short ETF you can think of
NEW LOWS OF NOTE LAST WEEK
It's like 2001 again!
Dell (DELL)... computers
Oracle (ORCL)... software
Cisco (CSCO)... networks
Nokia (NOK)... cell phones
Sony (SNE)... electronics
Infosys (INFY)... outsourcing
Microsoft (MSFT)... software
Corning (GLW)... fiber optics
Motorola (MOT)... cell phones
Intel (INTC)... semiconductors
Google (GOOG)... search engine
eBay (EBAY)... online auctions
Amazon (AMZN)... online retail
Yahoo (YHOO)... search engine
JDS Uniphase (JDSU)... networks
SanDisk (SNDK)... flash memory
Garmin (GRMN)... GPS equipment
VeriSign (VRSN)... online security
Symantec (SYMC)... online security
Sun Microsystems (JAVA)... hardware
Juniper Networks (JNPR)... networks
Adobe Systems (ADBE)... software
Electronic Arts (ERTS)... video games
Apple (AAPL)... iPods and computers
Texas Instruments (TXN)... semiconductors
Taiwan Semiconductor (TSM)... semiconductors
KLA-Tencor (KLAC)... semiconductor equipment
International Business Machines (IBM)... hardware
QUALCOMM (QCOM)... communications equipment
Applied Materials (AMAT)... semiconductor equipment
Crude Oil, Gasoline, Copper, Aluminum, Lead, Cattle, Orange Juice, Swiss Franc, New Zealand Dollar |
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[United Automobile Workers Union] President Ron Gettelfinger is trying to scare Congress into lending $25 billion to the Big Three.
He says one or two of the big car companies could collapse without immediate assistance, and he's urging Congress not to adjourn before it reaches an agreement. He says it's best for the auto industry and for the whole country.
Surely you remember the old saw, "What's good for GM is good for America."
I think that's still true.
It's best for GM and America if we let it fail. Long term, the more we bail out and prop up what's not working, the worse it will be for everyone. Failure is an integral part of our system. If we don't let it work, we'll regret it.
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The national average price for a gallon of gasoline has fallen below $2 for the first time since March 2005, the Energy Department and AAA say.
The chairman of the Senate Energy Committee said Monday the new Congress probably will not approve legislation to raise the federal tax on gasoline.
Democratic Sen. Jeff Bingaman said he was aware of arguments that a high "variable tax" should be put on U.S. gasoline to prevent falling pump prices from encouraging Americans to drive more while making alternative fuels less attractive.
Such a tax hike "would be very tough to pass," Bingaman said. "I don't think something like that has much prospect of being enacted in my honest opinion."
Americans pay an 18.4-cent federal tax on each gallon of gasoline they buy, plus another 29 cents on average in combined state and local taxes.
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