How Many Times You Can Be Wrong About Bonds
Wrong about bonds - again!
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I bought the "kool-aid" for the first time around 2007: short the 10-year Treasury. All the arguments were there, sound as can be. The U.S. fiscal deficits that grew exponentially under Bush, the national debt that had no hope of ever being repaid. Who in their right mind would buy treasuries? As for all the folks who owned them, there would be a rush for the exits as the government continually showed us all how fiscally irresponsible they were - and continue to be.
But then in 2008 came the "year of collapse." The price of everything dropped like a stone. The price of homes, already falling, continued down with a vengeance. Even gold - albeit for only a short period - fell, all the gold "late-comers" selling what was sold to them as sure-thing speculation, along with the traders who sold gold as the only item they had that was liquid enough to sell to raise cash for their margin calls.
There stood U.S. Treasury bills, notes and bonds, proudly looking down upon that collapsed heap of just-about-everything-else.
And still the call went out: short the 10-year Treasury. It's a sure thing. And so, finally, after its big run-up, we did. And, sure enough, the trade looked good for a while. "Great timing!" we thought. A long-term hold in a world where "buy and hold" had become a dirty phrase for many of us.
But then a funny thing happened. The sure bet, the trade of our lifetimes, started to go sour. The green turned red, bounced around a bit - green-red-green-red - then just staying red. The calls kept coming to short, but the screen kept saying "Why? You're not making money? Are you so positive this is such a safe, sure thing?" And so first we cancelled our plan to buy more. And with the red getting slightly redder, we finally closed the trade and started thinking about what went wrong.
Okay, so markets don't always act rationally. And even this absolutely sure thing, based upon insanely awful fiscal policy, with not hope of a dysfunctional government ever straightening things out, and - well, I could go on and on with all the reasons, still rational, solid-as-a-rock reasons for why U.S. Treasuries "had" to fall, and fall hard.
Meanwhile, the likes of Gary Shilling sums it all up nicely, saying "everyone has said, rates cannot go lower, they will go up, they will go up. They have been saying that for 30 years."
And you know what? When you look back, he's exactly right. Bonds turned around at a time when everyone said the U.S. dollar was history - kind of like what you hear folks say now - and headed up, after going down for about 40 years. And here we are 32 years later with bonds still holding up, after 30 years of folks predicting, year after year, that they'd go down.
So now you hear that it'll be 2013 - you know, after the election - when bonds finally fall. The collapse is just around the corner. Short the 10-year Treasury. Do it now, while there's still time. Everyone's going to run for the exits when "it" happens.
No thanks. I think I'll pass. It turns out that that old idea that the markets can remain irrational longer than you can remain solvent is one of those sayings you don't want to ignore.
You wanna take a chance this time around, be my guest.
.
I bought the "kool-aid" for the first time around 2007: short the 10-year Treasury. All the arguments were there, sound as can be. The U.S. fiscal deficits that grew exponentially under Bush, the national debt that had no hope of ever being repaid. Who in their right mind would buy treasuries? As for all the folks who owned them, there would be a rush for the exits as the government continually showed us all how fiscally irresponsible they were - and continue to be.
But then in 2008 came the "year of collapse." The price of everything dropped like a stone. The price of homes, already falling, continued down with a vengeance. Even gold - albeit for only a short period - fell, all the gold "late-comers" selling what was sold to them as sure-thing speculation, along with the traders who sold gold as the only item they had that was liquid enough to sell to raise cash for their margin calls.
There stood U.S. Treasury bills, notes and bonds, proudly looking down upon that collapsed heap of just-about-everything-else.
And still the call went out: short the 10-year Treasury. It's a sure thing. And so, finally, after its big run-up, we did. And, sure enough, the trade looked good for a while. "Great timing!" we thought. A long-term hold in a world where "buy and hold" had become a dirty phrase for many of us.
But then a funny thing happened. The sure bet, the trade of our lifetimes, started to go sour. The green turned red, bounced around a bit - green-red-green-red - then just staying red. The calls kept coming to short, but the screen kept saying "Why? You're not making money? Are you so positive this is such a safe, sure thing?" And so first we cancelled our plan to buy more. And with the red getting slightly redder, we finally closed the trade and started thinking about what went wrong.
Okay, so markets don't always act rationally. And even this absolutely sure thing, based upon insanely awful fiscal policy, with not hope of a dysfunctional government ever straightening things out, and - well, I could go on and on with all the reasons, still rational, solid-as-a-rock reasons for why U.S. Treasuries "had" to fall, and fall hard.
Meanwhile, the likes of Gary Shilling sums it all up nicely, saying "everyone has said, rates cannot go lower, they will go up, they will go up. They have been saying that for 30 years."
And you know what? When you look back, he's exactly right. Bonds turned around at a time when everyone said the U.S. dollar was history - kind of like what you hear folks say now - and headed up, after going down for about 40 years. And here we are 32 years later with bonds still holding up, after 30 years of folks predicting, year after year, that they'd go down.
So now you hear that it'll be 2013 - you know, after the election - when bonds finally fall. The collapse is just around the corner. Short the 10-year Treasury. Do it now, while there's still time. Everyone's going to run for the exits when "it" happens.
No thanks. I think I'll pass. It turns out that that old idea that the markets can remain irrational longer than you can remain solvent is one of those sayings you don't want to ignore.
You wanna take a chance this time around, be my guest.
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