INVESTMENT COMMENT

Today’s Treasury Sale Signals National Mania (8/26/2010)
Today the Department of the Treasury sold 7 year notes for an interest rate of 1.99%. The 10 year note is now yielding 2.54%. The 30 year Treasury bond is now yielding 3.54%.
Let’s put this in context.
The average rate of inflation is 3%. These bonds appear to have priced in an inflation rate of 0%.
Average taxation is about 25%. If you have a tax rate of 25%, the real return to a 10 year note is 1.9%. For a 30 year bond, the real return is 2.66% after taxes.
So in terms of purchasing power, anyone who buys these outside of a pension plan will almost surely lose money.
The only way they will make any money at all…and that marginally…is if the economy of the United States simply fails. If we go nowhere for the next 10 years, these will be a reasonable investment, if interest rates don’t rise.
If interest rates rise, we may expect a 30 year Treasury note to lose up to 30% of its value. So these are, in fact, high risk investments at this time.
In all sincerity, in such a situation we are better off buying pistols. History tells us that a good 1911 .45 ACP by a well-known maker such as Colt or Springfield will retain its value in economic depressions and go up in value during times of inflation. These pistols should appreciate more than 3% a year. But is the world situation really that dire?
If you feel it really IS that dire, then a 1911 .45 ACP purchase is in order, since you will also be able to use such a pistol for barter or self-defense. If that’s where your head is at. Be sure to store it safely if you buy.
From another vantage point, the yield on the stock market now is about 2%. So we can buy a stock market index fund and get more YIELD than we can get on a 7 year Treasury note. Where do you think the stock market will be in seven years? Unless you subscribe to the end-of-days scenario, it will probably be higher than it is now.
Please think back to the happy heady days of 2007. House prices were going up multiple double digits each year. 20%. 30%. And we were informed by many experts that this would continue ad infinitum.
Now these same experts are telling us that we will go nowhere financially for the next 30 years.
I am not a fortune teller. These experts may be right. But in my living memory, and in the history which I study, at its extremes the consensus opinion is ALWAYS WRONG. I will be happy to change my opinion: just show me one time in history at a market high or a market bottom when the public mood was accurate.
Just show me ONE TIME!
If that is indeed the case, then it’s time to stay diversified and rebalance TOWARDS stocks. In real terms, based on the extreme negativity which surrounds us, the future looks bright to me.
It may take a few years. The path may be rocky, fearful, and uncertain. But history tells us that we will thrive again.