We thought the sub-prime housing bubble was bad, but recent signs are pointing to the next big bad bubble: long 30-yr US Treasuries. People are buying these treasuries like gangbusters right now if they’re buying anything at all, because at least you can get a 3% safe return on them, and they’re completely liquid.
But as Kevin O’Leary put it today on BNN, would you really want to tie your money up for 30 years to get a 3% return and that’s it? It’s insane. So he asked, when will the Chinese start looking for better yields somewhere else? Moreover, the Chinese also have their own economy to prop up now and they’re going to be under pressure to continue stimulus spending domestically rather than boosting foreign reserves. All of this points to downward pressure on the 30-yr US bonds.
If you agree with this scenario, there’s an ETF that is built from shorts on these US Treasuries. Its ticker is TBT-US. You don’t actually have to short the bonds yourself, you can just go “long” on the ETF.
The other bubble, of course, tied right in to this one, is the growing bubble in the US dollar. You know what happens to a balloon the more it is stretched. The material becomes thinner and thinner even as the bubble grows larger visually. Materially, however, it is getting weaker. The same thing is happening to the US dollar right now. The only thing holding it up is that it is really the possessor of the last bastion of perceived economic confidence around the world. And the big facts that apparently people want to move into large cash positions right now, so they hold dollars. And the hedge funds redeeming funds need to move into dollars. And with the 2-TRILLION new dollars just printed by the Fed, there’s a wave of unaccounted-for-future-inflation looming on the horizon. But no one’s talking about that right now because the more immediate concern is deflation. That’s why gold has been sliding down (it’s largely seen as a hedge for inflation).
This whole sub-prime-turned-credit-crisis-turned-global-recession mess is just a blip on the overall trend towards a devalued US dollar. The greenback had problems even before these last 8 months following Bear Stearns, etc. There’s a temporary HUGE rally in the dollar but it’s not due to fundamentals. The fundamentals are getting worse for the dollar. And the same thing is happening for bonds.
I say this is the time to buy quality equity stocks if you’re buying anything at all. I don’t have the extra cash since 30% of my Canadian dollar is sliced off the top with the horrid exchange rate right now that does not at all reflect economic fundamentals. Let’s hope oil doesn’t get much lower; but I’m afraid it probably might get down near $35 for sure. And then the poor Canadian dollar’s gonna tumble down to 65 cents or something ridiculous.
