Bond Market Out to LunchMontreal, Canada
The American dollar might be embarking on another in a series of bear market rallies this summer but it should eventually run out of gas. That’s because the prospect of higher short-term interest rates in the United States is next to nil over the next 12 months and beyond. The Bernanke Fed will keep rates low for a long time.
It’s pretty hard to love the U.S. dollar these days. Just about everyone is a dollar-bear, including my dog, Deutschemark.
Go to investment conferences and you’ll see an overwhelming show of bearish votes against the sad buck. And who can blame the bears? You won’t see a dime in real spending cuts this year or next year (an election year).
Yet despite the hatred of the dollar among the investment savvy, these same people also dislike Treasury bonds. Amazingly, T-bonds have been a great place to park cash since April as bond yields rally south; however, I would argue that perhaps the bond bear market has already started because longer term rates are rising year-over-year while short-term rates are stuck around 0.50%. The 10-year Treasury is up just 1.9% over the past 12 months. Before last week, bonds were down year-over-year.
The plague spreading across Europe’s weak periphery is a disease that’s ultimately coming to the United States Treasury market; this seems inevitable because long-term entitlement spending alone wll bankrupt the nation, in addition to interest expense on the debt that will eventually suffocate the government’s revenue stream.
I’m not sure what the math is exactly, but it’s pretty clear to the most novice number-cruncher that another 2% or 3% (or more) charged on longer term Treasury yields means big trouble for the country. Jim Rogers thinks one of the best shorts in the world over the next several months or beyond is betting against 30-year Treasury bonds. “Who is stupid enough to lend to the United States at 4.4% for thirty years?” laments Rogers. I couldn’t agree more.
In addition to holding some dollars, I would focus on gold bullion as the ultimate inflation hedge and protection against currency wars. It’s very obvious to me that the dollar has lost control as reserve currency anchor and the EUR is now part of the drunken lot; only Germany and Holland offer any real fiscal restraint and prudent economic management. The rest are a bunch of drunks at the bar.
I also like a few surplus currencies. There aren’t many. These include Norway, Sweden, Singapore, Hong Kong and Switzerland. I wouldn’t buy the franc now at these nosebleed levels, however. But I’m finding great values in the Scandinavian units (except Denmark) and Singapore and Hong Kong.