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Monday, May 20, 2013

Ben Bernanke's Bond Bubble!


One of the great lies of these last few years is Ben Bernanke's QE parade of bond buying. He keeps saying that he is going to do it until unemployment gets below 6.5%, but in reality, he is doing it to try to recapitalize the banking system. The banking system would collapse without it. If you have paid much attention, you may have noticed that they are not really loaning it out in traditional banking fashion....they are in fact primarily taking risky investments with it instead. They actually remain too big to fail again.....only in a larger and more concentrated fashion. So now on the money shows, you are hearing talk of ending the bond buying process, and every time it is even mildly hinted at, the market drops. So if you are lucky, you got your money back from the 6 year bear cycle, and if you were cautious and held your money in savings or bonds, you have not kept up with real inflation, which is close to 4%. So what will happen when the bernanke bubble bursts and QE ends and other countries that hold our treasury debt demand a real rate of return for their bonds? We will find ourselves in a market with absolutely no where to hide.
The PE ratio for the S&P has historically averaged approximately 16 over the past 120 years.....it is currently at the bargain price of 23.....really expensive. So if every time there is even a hint of the ending of QE, the market gets spooked....what happens when it really ends. And each 1% rise in the interest rate on bonds represents an approximate reduction of 17% in principle value.....what if we were at three or four percent vs the current ten year treasury rate of just below 2%.
So where on earth can you hide. In the long run comodities do well in inflationary periods, so long as there isn't a global recession which would erode demand. Similar situation with gold. As everyone prints money, especially in the case of Japan which is making Ben look cautious, gold should work. Cash is useless as an inflationary hedge. Real estate might work for rental property, but as interest rates go up, the home market will soften again. So you have very few safe choices to make a buck. I have some dollars in TBF, an ETF that shorts the 20 year treasury bond. This will only work when interest rates actually rise. One other position I have for the short term, is DTN, the japanese etf that excludes financials, but this could become very volitile. So otherwise, you sit with cash, wait for Ben to fold, and then pick thru the rubble after it all corrects.....

1 comment:

TerribleTerry said...

put all your money into an MRI machine and a billboard.