Saturday, February 23, 2013

Risk Off?

I have a new article up on Seeking Alpha.  The link is  Per the title, it presents growing evidence that Treasuries may be moving to being not just a portfolio diversifier to consider, but actually a decent speculative trading buy.  Please note that I do not try to time these sorts of investments too precisely; and of course, nothing I ever write is actual investment advice.

The futures markets are seeing a hint of waning momentum in the risk on trade.  The article presents charts from Finviz that suggest that this trade has gone to an extreme, and that the speculators have not made much progress.  The spec long interest in crude oil, copper and platinum has hit an extreme, but the price has not responded.  They may have been pushing on a string and may rush to exit.  If so, it will be important to watch what support these prices have.  (Of course, prices may surge; there's no way to be sure.)

Let's speculate on what might happen if the (highly leveraged) longs rush for the exit.  If this occurs and is accompanied by data suggesting a "deflationary" economic downturn a la 2008, even if it is not "great", gold and silver will not rally and silver, at least, "should" drop more.  Treasuries would reliably rally.  If it is accompanied by "crisis", such as Signore Berlusconi becoming PM again, then Treasuries would likely rally for a while, but gold and possibly silver would rally also, I would guess.

Thus a guess is that the greatest contrarian trade now is to buy a long-term T-bond ETF.  The conservative way is TLT or a shorter duration fund.  An aggressive way is to buy one of the zero-coupon bond funds.  I am aware of EDV and ZROZ.  (I am long both EDV and TLT.)

Acting-Man presents at the end of his post a chart from Mark Hulbert showing a recent new record of bullishness toward the NASDAQ amongst newsletter writers:

Hulbert Nasdaq

It appears that after extreme readings, when sustained for a few months, begin to turn down, a price drop is coming soon and that the NAZ is thus, per Jim Cramer, a "Don't buy! Don't buy!".   It takes bulls to make a bull market, though, so not buying does not imply a great opportunity to go short.  Thus I would note that NASDAQ selloffs tend to be good buying opportunities for risk off assets such as Treasuries.

Hyperinflationists note:  one suggestion that QE may cease led to a big selloff in commodities.  There is so much leverage in the system, merely putting another trillion bucks in the system need not create much visible price inflation.  One more recession could kill wages, which are by far the greatest input to costs.  How long this situation can go on is another matter.  Counter-intuitive though it is, the monetary inflation is going first and foremost into bonds.  Not fighting the Fed may involve investing or speculating along with it and joining it in ownership of T-bonds.

With the world solidly off the gold standard, at least for now, Treasuries underpin the global economy.

They will, my guess is, endure with that status for the foreseeable future and perhaps beyond.

The most powerful government and its central bank desire very low borrowing costs.  I don't see why they cannot continue to achieve this for a good while longer, no matter whether "real" interest rates are zero or worse.

1 comment:

  1. Excellent post Doc, and I agree but I want to note one thing. Gold actually performed quite well, net, during the two previous bear markets.

    During the '00-'03 stock bear, gold went up 17.5%, 30 yr bonds 17.4% (price only) (according to Stockcharts perf chart)

    During the '07-'09 stock bear, gold went up 22.8%, bonds 15.1%, and TLT 24.87% which is total return, I believe (according to Stockcharts perf chart)

    Silver was indeed down in both; see charts above. And the ride was a lot bumpier in gold than bonds, no doubt. All this also applied to the most recent stock swoon of Jul-Oct 11.

    Just wanted to make the point that gold went up, not down during those periods when stocks took a big hit. Not consistently throughout, but nonetheless, up. That may be contrary to many people's belief about what might happen next.

    Of course if you can call the turns of gold better during the course of said stock swoon, then you'd be better off. But that can be, well, difficult, eh? And ultimately long bonds performed better than gold, but you never know, and diversification, etc.