Tuesday, June 29, 2010

Bearishness Inflating Treasury Mini-Bubble

John Hussman has a truly interesting weekly piece out titled Recession Warning. While I share his views that stocks are fundamentally overvalued, I find it curious that he projects a double dip recession by in part utilizing the Economic Cycle Research Institute's Weekly Leading Indicator as a proxy for another indicator (ISM less than 54), even though ECRI went on record last week that the sharp drop in the WLI did not presage a new recession. ECRI's reasoning was that its non-disclosed Long Leading Indicators look OK. Right now my working assumption is for a growth slowdown.

The Hussman piece is a fine read with many superb observations. He is forecasting a deflationary bust followed by high inflation. He therefore warns gold owners of a likely down-move ahead. We shall see. If he's wrong, and all we have is a growth slowdown or a mild recession as in 2001, money-printing will likely save the day and all that would happen to gold would be another buying opportunity.

The Consumer Metrics Institute composite index, and especially the retail index, have bounced a bit in the past week, and the bear side of matters has gotten a reasonable amount of play. Also, when so many stock charts look heavy, one wants to look for the snapback/short covering rallies. In other words, I am moving from a zero stock allocation except for Apple to something above zero. With Wal-Mart collapsed under $50 again, the bear case on retailing is well known. Perhaps some high quality GARP (growth at a reasonable price) stocks such as TJX, which I bought today, and which have huge cash flow, dividends above a 2-year Treasury yield, and high safety/low price earnings ratio, ultimately can outperform the alternatives. That is at least what Jeremy Grantham believes, who gives U. S. high quality (not large cap or small cap) stocks his top ranking for total return on his famous 7-year horizon in his last, recent update.

Regular readers know that I have repeatedly described buying Treasuries and have pointed out how unpopular they were and thus were a contrarian play. Price appreciation changes matters.
The U. S. has miserable and deteriorating public finances and lies about Fannie and Freddie being off-budget; and may well not even pass a budget for next fiscal year on the risible excuse that a deficit commission is going to report in December.

Gold is not in a bubble, but Treasuries are close. 0.6% yield yearly for 2 years? With the CPI at a minimum of 1-2%, and much more if you go with John Williams' analysis? A lot of scared money may have fled Europe for Treasuries, and can leave as quickly as it arrived. The 10-year at 3% in an expansion is a lot less attractive than it was in 2008 at over 4% with a depression on the way.

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