There’s an old adage that goes, “If you live long enough, you get to see everything.” And that’s exactly how I feel today.
In my lifetime, I never thought I would see the day when investors would get negative returns on the money they invested in Treasuries. It happened this Monday.
Two days ago, the government sold $10.0 billion of U.S. TIPS Treasuries at a yield of negative 0.55%. TIPS stands for Treasury Inflation Protected Securities. Of course, the negative 0.55% yield is the lowest on record for TIPS. The $10.0-billion five-year bonds were only part of the more than $100 billion the government is offering in Treasuries this week.
I have two problems with the scenarios unfolding in the bond market.
First, it’s a continued anomaly for me that investors would purchase billions in bonds from a bankrupt country. But the U.S. seems to have no problem peddling its junk — in fact, it has a line-up of buyers. Just the fact the government needs to sell over $100 billion in bonds this week to finance its drunken spending spree is something that should alarm investors. Instead, they are buying these Treasuries en masse.
Second, investors are so scared about the safety of their capital, so convinced that the Federal Reserve will jump start inflation, that they are willing to get a negative return on their money to get their hands on these TIPS bonds. This is ironic. If the Fed is successful at its inflation attempt, it doesn’t that mean interest rates will rise quickly, affecting the value of the TIPS bonds.
Am I the only one that sees a bond market bubble developing right before our eyes?
What happens in 2011 if interest rates start to rise to support our declining currency and to entice weary investors to our bonds? This may seem unthinkable today. But I’ve seen stranger things happen. Who would have believed the Internet stock bust of 1999-2000 could have been so bad (the NASDAQ is still down 50% from then)? Who would have thought the housing bust of 2007 would have been so sour?
Is it logical that the U.S., in the White House’s own estimate, can increase the national debt to $20.0 trillion by the end of this decade and interest rates will remain low? The answer is a big NO!
Interest rates will rise and the bond market will be the next big bust. May not happen this year, but chances look very good for 2011. In fact, the rise in the price of gold bullion is a bet on it.
Michael’s Personal Notes:
When Nicolas Sarkozy was first elected as President of France, I have to tell you, I wasn’t too crazy about the fellow. I thought he presented as arrogant. I also didn’t like how he blamed the U.S.’s lack of banking oversight for the cause of the global recession. After all, who has the right to blame America but Americans?
But I’m really starting to like this Sarkozy character. In spite of the public outcry and protests over having the government change the official retirement age in France to 62 from 60, Sarkozy ploughed ahead with the legislation (likely to get passed today).
Massive strikes in France protesting the change in the official retirement age is costing the national economy $500 million a day, according to the government. The rotting garbage just keeps piling up all over the country. Many gas stations have run dry of gas. Sarkozy’s popularity is at record low.
But Sarkozy understands he needs to set the example in Europe. He needs to do what Greece failed to do.
Britain is following France’s steps with its own austerity measures. When will the U.S. come to bat and face the dark reality that governments eventually run into crisis unless they get their spending under control?
Where the Market Stands:
Okay, so I’ve been bullish on the stock market all year long. And given what I’ve said above, how I’m calling for the bond market to bust as investors rush to buy bonds with no real returns, the question now becomes: why wouldn’t investors own stocks?
Here’s a personal question for you: would you rather buy the bond of a country that is bankrupt (but doesn’t want to admit it) or would you rather own the stock of company that makes a profit selling goods/services that are in demand by consumers/businesses?
The Dow Jones Industrial Average starts this fine Wednesday morning up 7.1%. The bear market rally that started in March 2009 is alive and well.
What He Said:
“What group of stocks is next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009. In March 2009, Michael turned bullish on all stocks, including the retail stocks. Since then, the Dow Jones Retail Index has risen 59%.