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A Contrarian Loads Up on T-Bonds for 2012


[Our friend and frequent contributor Douglas Behnfield thinks too many investment advisors are looking for the same thing in 2012:  rising stock and commodity prices, a weak dollar, rising interest rates and a bottom in the housing market. They’ll be wrong on all counts, he says. Instead, the enviable winning streak of those holding Treasury debt will continue.  A financial advisor and senior vice-president at UBS in Boulder, Colorado, he sent the following New Year’s message to clients last week. RA]

2011 was a confusing year from start to finish on Wall Street and the arrival of 2012 is not offering much relief. Today the popular message is that the economy is getting better in the U.S. and problems abroad can be overcome. Recession has been avoided and “escape velocity” will be achieved in the second half. Our economy can “decouple” from Europe and some of the big developing nations that have seen their economies slow such as China, India and Russia, now that they have run into trouble. Most economists and stock market strategists seem to have cut and pasted their 2011 forecast into their 2012 forecast. (How is that for the pot calling the kettle black?) But the concerns that clouded the outlook a year ago only seem to have gotten deeper. The positive messaging is focused on the following:

  • The politicians will kick the can down the road and therefore avoid the kind of austerity that could derail the recovery. The Fed will engage in more quantitative easing (a euphemism for money-printing) if the economy or the stock market falters.
  • Interest rates and inflation have nowhere to go but up, so the least attractive place to put your money is in the bond market. That is, unless you keep the maturities short and stick with “spread product” like corporate bonds and bonds issued by foreign governments.
  • The S&P 500 will be up 10% by year end. I have been in the business for 35 years and for the last 20, the prediction for the market has always been “up 10% or more.” The rationale changes but the upside prediction does not. This year the place to be is “dividend paying stocks” that pay so much more than Treasury notes and have a great track record of increasing dividends.
  • The third and fourth years of the Presidential Cycle are usually positive for stocks. Last year the emphasis was on domestic small cap, international and emerging market stocks because of their superior growth potential.
  • The dollar will be weak because our fiscal and monetary situation is worse than those other countries that we have decoupled from since they are in so much trouble. Gold will be higher because some Central Banks are substituting gold for dollars as a reserve asset and lots of women will be getting married in India.
  • Commodity prices will be higher in general. Oil and fertilizer are in short supply and all the rural Chinese are planning to motor on down to Kentucky Fried Chicken for some protein sooner or later.
  • The housing market and home prices are finding a bottom.

Based on the popular forecast for 2012, you can buy practically anything but long term bonds and probably do just fine as long as you are diversified. That is not the way it worked in 2011 and it seems to me to be even less likely in 2012. The S&P 500 was exactly unchanged in price for the year, providing only a 2% dividend return. It was like a video game where many aliens were destroyed and many points were scored, but it was game over on December 30 and we will had to put another quarter in on January 3.  Small capitalization stocks (Russell 2000) were down 5% and the Dow Jones Industrial Average, the home of dividend paying stocks, was up 6%. European and Emerging Market indexes generally delivered double-digit losses. They all had big swings during 2011, but the big story was how many times the stock indexes were up or down more than 1% (100 Dow points) or more in a day. It seemed like all of them.

Gold Down 18%

Gold and silver roared earlier in the year, but gold is down 18% from a high of $1900 just since September and silver peaked in May at $50. It is now $28. Gold was up 11% in 2011 and silver was down 10%. The dollar index was flat. Oil was up 9% but natural gas was down 37% to a multi-year low. Copper was down 22%. Corn was flat and wheat was down 18%. For the most part, confusion reigned.

But there was no confusion in the bond market. In 2011, the most abhorred investment vehicles, long term Treasury bonds and long term Municipal bonds, were the two best performing major asset classes. After a swoon in January, long term bonds just marched up in price (down in yield) practically without interruption for the remainder of the year. As is always the case when interest rates are declining, the longest maturity and highest quality bonds performed the best. The 2039 Treasury Strip (0% coupon bond) returned 62% in 2011 and the average leveraged Closed End Municipal Bond fund returned 21%. Closed End Build America Bond funds, which contain taxable municipals where the Federal government pays 35% of the interest, did even better with an average return of 28% in 2011. The important question to ask is: In what ways will 2012 be different and how will it be similar?

Playing by the Old Rules

As previously mentioned, the majority of pundits think that even though they missed the boat in 2011, it is only a matter of timing and it will sail in 2012. That sentiment is understandable, but the expectation that the economy is going to return to a trend of expanding organic growth and a return to the secular credit expansion lacks credibility (no pun intended). To paraphrase Bob Farrell, in the early stages of a new secular paradigm the market is adapting to a new set of rules while most market participants are still playing by the old rules. But the old paradigm of credit expansion must resume if stocks and commodities are to appreciate, housing prices are to stabilize, the government is to avoid raising taxes and slashing spending and interest rates are to rise. As disappointing as it is, a far less rosy outcome is more likely.

The magnitude of the economic reversal that occurred in 2007 has left the developed world with an enormous debt overhang that will require a very long period of time to unwind. That is why our economy has not responded very much to the enormous amount of monetary (0% interest rates) and fiscal ($1.5 trillion annual deficits) stimulus that has been delivered in the last 3 years. That is also why Europe seems to be going through a fiscal crisis similar to what we already went through 3 years ago. Austerity is engulfing the developed world.

Time to Pay the Piper

The solution to underfunded Baby Boomers on the threshold of retirement, a $15 trillion national debt (plus unfunded liabilities), bad assets in the global banking system and sovereign fiscal crisis in Europe and Japan (to name a few) is not a return to an expanding credit cycle. The solution is going to include a large dose of paying the piper, which works against economic growth. Paying down debt is a powerfully deflationary force and central bankers will be trying to cushion it by keeping short term borrowing rates at rock bottom for the next couple of years, at least.

Generally speaking, the only two economic forces that correlate to the trend in long term interest rates are Fed policy and inflation. Other than hope, there is little solid rationale for the Fed becoming restrictive or the 30-year downtrend in inflation reversing any time soon. In 2011, the yield on 10-year Treasury notes declined from 3.3% to 1.9% and the yield on 30-year Treasury bonds declined from 4.4% to 2.9%. There is a high likelihood that the bond market stages a repeat performance of 2011 in 2012, if not quite the same magnitude. Rates have declined in lock-step with inflation since 1981. In addition, a clear trend toward risk aversion and a desire to invest for income is developing among individual investors who remain generally underexposed to the bond market compared to their allocation in stocks, real estate and bank deposits.

Profit Margins Peaking

As far as the stock, real estate and commodities markets are concerned, they all displayed an enormous amount of risk (as measured by volatility) and nothing consistent in the way of positive returns in 2011. We may not be so lucky in 2012. Financial and political pressures appear to be mounting globally and the “green shoots” displayed in some of the consumer spending and employment data of late here in the U.S. have not been accompanied by improving household finances. The savings rate has come down and household income has not kept up with what little inflation we have experienced.

I won’t go into real estate or commodities here, but as far as stocks go, profit margins appear to be peaking along with profit growth and global trade is at risk of succumbing to increased protectionism. “Dividend paying stocks” are tough to argue against, but two quotes come to mind. The first is Bob Farrell’s Rule #9; “When all the experts and forecasts agree, something else is going to happen.” The second is from Yogi Berra; “Nobody goes there anymore, it’s too crowded.” Think Intel or Microsoft in 2000. The story was right but Intel still dropped from $76 per share to $12 per share. Back then, the fact that they did not pay a dividend was a reason to buy: they were retaining all their earnings to power their growth. I like hamburgers as much as the next guy, but at $101 per share up from $60 two years ago and yielding less than 3%, McDonald’s seems risky.

David Rosenberg’s Call

All that being said, interest rates can only drop so much. David Rosenberg, who was one of the few who got the call right on interest rates for 2011, expects the 10-year and 30-year Treasury yields to dip below 1 ½% and 2%, respectively in 2012.  A decline of that magnitude would deliver substantial total returns at the long end of the Treasury market, though not quite as great as the 2011 return. If we see 2% on the 30-year Treasury bond, that may be the end for the Great Bull Market in Bonds that began in 1981. On the other hand, long term investment grade municipal and Build America bonds offer yields near 5% and the leveraged closed end funds that invest in them yield between 6.5% and 7.25%. It would seem that demand for those vehicles should remain strong in 2012, barring a severe reversal in municipal credit quality, which has been on the rise in the past year. Municipal bond issuance is down substantially from years past, restricting supply.

Along with all the uncertainty that we face in the coming year, investment risk appears to be mounting. Our current asset allocation seems appropriate considering the deflationary risks that we have identified. I remain very concerned about avoiding dogma and overstaying our welcome in this defensive strategy. However, preservation of cash flow and preservation of capital are the most basic investment objectives for those of you who have accumulated substantial wealth. In the meantime, we have enjoyed excellent absolute and relative performance, particularly on a risk-adjusted basis, in 2011.

I hope that you will share this information with friends, family and associates. Many investors are very confused about how to position their portfolios and could benefit from at least being exposed to our perspective.


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  • bc January 10, 2012, 12:38 am

    We are a brain dead behemoth. So what’s your point? One way we are brain dead is we have turned our backs on capitalism and free markets. If you don’t agree, you are IMO on the wrong board. Go to FabiusMaximus blog for details, and Cheers. It’s the end of the world as we’ve known it.

    • Mark Uzick January 10, 2012, 11:48 am

      bc: “One way we are brain dead is we have turned our backs on capitalism and free markets. If you don’t agree, you are IMO on the wrong board.”

      If you can imply that Robert – the smartest and most principled person on this message board – doesn’t believe that the depredations done to the free market by the state are stupid and evil, then you either need to learn to read and or think; otherwise just don’t bother posting your nonsense – you only make defenders of liberty look like fools – unless that’s your real agenda.

    • Robert January 11, 2012, 7:01 pm

      I am afraid that is not accurate, Mark.

      I am nothing more than a Gold loving cement-head who is going to lose everything and end up on the street with a tin coffe can full of Krugerrands when Divergent Opinion’s global deflation finally drives my net income (and my net worth) to zero, because D.O. has cleverly (if inaccurately) deduced that I I am a gold bug who maintains no dollar denominated savings; and will therefore miss the greenback’s parabolic rise which is due to kick off any minute now.

      Deflation is going to bury me as my myriad of skills become irrelevant, and my annual debt to income ratio (which is presently about 12%) gets hammered all the way up to 100% +

      {yawn} I am so stupid that I am beyond help.

      However, D.O’s observations have made me consider that perhaps I do only express observations in Rick’s forum that portray a point of view that is more “limited” than my actual outlook on things really is…

      I post mostly about market action in the PM’s because that is the sector I most frequently/actively trade in, but the REALITY is that my total portfolio exposure to that sector is never more than about 20%.

      If D.O’s deflation struck tomorrow, my tin coffe cup would actually have more Mexican Pesos in it than Krugerrands… 🙂

      Did you know that Mexico’s officially stated unemployment rate is 45% lower than the US’s…?

      Their REAL unemployment rate might actually be 70% better than ours.

      That house on the beach in Baja is sounding pretty darn nice… Lots of strapped Californians are fire-selling their beach front properties in Mexico.

      So many great real estate deals, and so little time…

  • Jim Kenney January 9, 2012, 9:55 pm

    How is it possible for inflation to be raging at 11%, but T-Bond rates drop?! Isn’t that is a complete contradiction of basic economics?

    IMO the T-Bond market is the biggest financial bubble in history, and when it pops those still holding the bag will be wiped out. But, like the stock market in 1999 and again in 2007, those who bailed out too early missed out on great returns. I am not good enough to know when the top has been reached and it is time to bail out. I doubt anyone is good enough. The reason this is true in the present world is these markets are not free markets, but manipulated markets (apply this to my opening question). When a market is manipulated, the market fundamentals and technical analysis fail, and no market guru who is not receiving inside information can predict a short term market outcome. And no market is more manipulated than the T-Bond market, and only the Fed members know when they either won’t or can’t continue the manipulation to the downside (profit for bond holders).

    Maybe the real question is: How long can the Fed continue to force T-Bond rates down before the natural market pressure overwhelms the Fed manipulation? Personally, I’ve been in sheer amazement at how long the Fed has been able to keep it going. It should scare the hell out of any free man to realize the sheer wealth and power the Fed has to be wielding. Consider that the Fed has to sell $1.5 Trillion of new T-Bonds each year, as well as rollover some $500 Billion in short term bonds. They have to do this in an environment where foreign countries are no longer buying, but in fact have been selling their USA T-Bonds (China and Japan). The Fed is the buyer of last resort, and that means they have to print more money to buy those bonds (to keep the rates from rising). The problem being that the more money they print, the more inflation, the more natural market pressure for T-Bond rates to go up. In other words, the more the Fed manipulates the rates downward, the more pressure builds on those rates to rise. Although the derivatives market is not regulated, and therefor statistics are murky, we know the Fed has nearly $700 Trillion in Interest Rate Swap derivatives, having added some $70 Trillion in new IRS just last year. This is the artificial ‘demand’ mechanism for bonds. Just get a handle on that number: $700 Trillion. My God, the national debt is only?!): $16 Trillion. Talk about leverage!

    And here is one last thought: The money printed by the Fed to purchase T-Bonds is sent directly into the country’s economy, as the government spends those dollars to run the government. Wasn’t inflation last year 11%, even while money velocity was reaching historic lows?.

    How long before the Fed blows a gasket? If, or rather when, they do I sure don’t want to be holding bonds. Good luck with your timing!

    • bc January 9, 2012, 10:24 pm

      Agreed. Charles Hugh Smith has a nice post up today at OfTwoMinds.com describing how WWII got us out of the Great Depression and how current Fed policy is the antithesis of that. No place to hide will soon be the rule, and cash will be king in that environment. This year? Who can guess, but picking up nickels in front of steam rollers is a foolish way to get crushed.

    • Robert January 9, 2012, 11:08 pm

      “Charles Hugh Smith has a nice post up today at OfTwoMinds.com describing how WWII got us out of the Great Depression and how current Fed policy is the antithesis of that”

      – I humbly submit that you COMPLETELY missed the point of CHS’s article today.

      He is not arguing the WWII got us out of the Depression.

      What WWII did was give the government a reason to go on a borrow and spend binge when the initial credit bubble (fueled by fraud and extravagance) popped.

      Destruction is NEVER productive. Therefore, it is never a viable path to growth.

      WWII did not end the Depression. It masked it behind a veil of even greater ugliness.

      There is a commonly promoted fallacy that the 50’s were a boom time after the war. Try running this observation about the 50’s past any 60-something Brit, French, Russian, or any of the other non-USA “winners” of WWII… See what they have to say about the post-war prosperity. On the other side of the world, the 50’s were about little more than the quest to stay warm, fed, and clothed, even for the Victors.

      This is probably why the entire world now thinks the US is a brain dead behemoth. We keep waging wars and waiting for the post-war uphoria to sweep over us…

      Complete and total retardation.

  • John Gallie January 9, 2012, 8:55 pm

    An intelligent broker…. definitely an endangered species, if there ever were one!

  • roger erickson January 9, 2012, 8:44 pm

    Gold Could Hit $1940 an ounce in ’12: Goldman

    [Goldman Sachs Group Inc. (GS) is staying “overweight” on commodities as a rebound in demand revives speculation of shortages, with gold a favorite for 2012 as investors seek a hedge against Europe’s debt crisis.]

    Are these guys the most deceitful pirates in history? Because they’re getting away with causing whatever policy they want … to happen?
    Their strategy will keep working … ’til it doesn’t.

    • Robert January 9, 2012, 9:26 pm

      One could argue that Goldman is simply using its influence to “coordinate” a desired outcome, yes….? 🙂

      Perhaps they are not Pirates at all. Perhaps they know that the Gold Standard’s return is imminent, and they are begging people to be prepared. (sarcasm, in case anyone was wondering)

  • Marketace January 9, 2012, 7:49 pm

    Sure glad this guy is not my financial advisor. Foreign entities are dumping US Treasuries and the bubble has to burst someday soon. The only market for Treasuries right now is the FED and their zero sum game of printing more dollars to buy more Treasuries is self defeating in the end. Sure Treauries are “safe” becasue the FED can print dollars and you will get paid, but getting back toilet paper for my hard earned money is not my idea of “safe” and the yields suck. I will take high dividend energy stocks over Treasuries any day.

    • Robert January 9, 2012, 7:53 pm

      Geothermal sector, baby…. 🙂

  • Richard Landwirth January 9, 2012, 6:33 pm

    Rising long rates, huh? Maybe some day-maybe this yr even–but for the past 2 yrs, I’ve had friends who lost a ton of money thinking contrarily buying the TBT. Even Bill Gross lost a tidy packet.

    • Robert January 9, 2012, 7:51 pm

      Yup, timing is what makes market heroes.

      I have considered that the proliferation of heavily leveraged inverse performing ETF’s might be a contributing factor to the move that is creating mass pain for the most leveraged.

      Hasn’t his always been the case in markets? Wherever teh leverage is- squeeze the opposite way until people either abandon the fundamentals, or submit to their own self doubt.

      If tons of money is moving into these leveraged short vehicles, and if the easiest way to move that money from the former holders to yourself is to make a simple, non leveraged bet on the other side of the trade, then that pretty much seems like a no brainer, right?

      It amounts to a call against another player’s “all in” bet that only risks a few of your own chips…

      When everyone is convinced they have the best hand, that’s when the pot grows enormously due to several players going all in at once…

      Of course- there is typically only one winning hand at the table. 🙂

  • Robert January 9, 2012, 5:46 pm

    A well thought out and well presented argument By Doug B.

    I have a couple reservations about the premise, however…

    1) Rick calls Doug’s viewpoint Contrarian, and yet Treasury volumes are stratospheric. Even with record new issuance by the Treasury, and even with the Fed (currently) out of the buyer rotation pool, Demand still looks pretty brisk to me- Pimco seems to be the only big player sitting out.

    2) The phrase from Doug: “the most abhorred investment vehicles, long term Treasury bonds and long term Municipal bonds, were the two best performing major asset classes.”

    Abhorred? Have you talked to anyone 65 or older? Having the fortune of living in the US’s most heavily populated retirement and snowbird destination, I get to chat on the golf course with the well-moneyed 70+ crowd every weekend.

    Guess where all of them have their money. Gold? No chance. One guy even said “After what happened to me in the 1980’s I’d never mess with Gold again”. Stocks? Hah- the 70’s and up crowd are the primary source of the mass mutual fund drain that has been going for 3 years now.

    They are ALL in US Treasuries, and some of the real card playing risk takers are also in Munis.



    a) They don’t manage their own money- their Financial Advisor does, or

    b) Bonds are where retirees are “supposed” to have their money.

    It’s that simple- the US generation with the most capital out there is not the boomers- it is the boomer’s parents, and they are all putting their capital where it is “safe” and provides them an income.

    The stage is being set for the most deceitful currency devaluation in US history. These people are 100% guaranteed to preserve the nominal dollar value of their income, but any capital left as inheritance to their kids and grandkids will also only have nominal value.

    Lastly- I’ll point everyone to Exter’s inverted liquidity pyramid. If there is still room for bullish moves in the bond market (which I can easily imagine), then that simply means we are still a while away from reaching the REAL (not nominal) bottom of this economic downturn… Nominal interest rates can stay near zero percent FOREVER thanks to the actions of the policy makers and the global 3 card monti of “You print your currency, and we’ll swap you ours”; then we’ll print our and you swap us yours” … but real interest rates can NOT follow suit. That is because real growth can not occur without capital investment, and real capital can NOT be free (or even super-duper cheap) forever.

    Real Capital must be the product of REAL savings, and these savings must be a by-product of REAL work.

    If capital is free, then there is no reason not to simply generate infinite growth with zero work, because when you increase the money supply in an economy you are devaluing the percieved value of labor.

    The magnitude of this fallacy violates more than just economics- it violates nature.

    So, stick with your Bonds, Doug. I just hope your market timing skills are more attuned than Bill Gross’s.

    • roger erickson January 9, 2012, 6:36 pm

      How big a proportion is held by “REAL PUBLIC INITIATIVE” in your REAL CAPITAL pool? How much is possible again, at any time?

    • Robert January 9, 2012, 7:35 pm

      Real public initiative is merely the incentive to do real work…. And what generates incentive?

      I use the little euphemism “Need, and then Greed”

      We HAVE to work so long as our basic needs are not met. Beyond the point of meeting our basic needs, and as our productivity moves into a savings-generating excess, our continuing incentive is born of the desire for an elevated standard of living.

      Simple concept, right?

      The mother in Zimbabwe panning gold flecks out of sand is not thinking about the Price of Gold being 18% off its record highs… she is looking for a way (any way) to scrape enough tradeable capital together to procure some bread for her kids.

      If Gold has no value, then why would she go through the effort to pan for it? Why would she not simply bag up the sand itself and sell it to concrete or playground companies? Wouldn’t it be a much easier option for her to simply increase the liquidity in the sand market, and smoke her competitors on the margin?

      The real reason she puts the effort into extracting the Gold is self obviating- She has to WORK to generate capital.

      This is why I challenge your “Return on coordination” premise, Roger.

      Coordination does not ADD value to work. It might channel work into certain forms of productivity instead of others, but it does not add or subtract value in a cumulative sense.

      Take a simple example- If I can bale more hay than you because I have taught my employees a faster method of tying and loading, then my “Return on Corrdination” coefficient should be higher than yours; but the market price of hay will be born out of the cumulative amount of hay I send to market COMBINED with the cumulative amount of hay YOU send to market….

      I did not add value by being more efficient. I simply generated a bigger piece of the revenue (and profit) pie than you did, but adding efficiency and coordination did not make the pie any bigger.

      Central Bankers want you to believe that new currency issuance creates bigger pies, and they want you to work harder to get your bigger piece…A classic ruse…

    • roger erickson January 9, 2012, 8:41 pm

      “That’s why I challenge your ‘return on coordination’ premise, Roger.”

      At the local level, yet, it always looks local. At the macro level, though, you’re going against 3.5 billion years of evolution of increasingly more coordinated life on earth.

      Of course we can’t see the coming returns on coordination. They’re unpredictable, always have been, and always will be – that’s been mathematically proven. Yet they’re always eventually recognized & selected once obvious enough to enough members.

      Don’t piss into the wind too long. It’s a losing strategy, even if you can’t see the wind coming … yet.

    • Robert January 9, 2012, 9:20 pm

      3.5 Billion years of increasingly more coordinated life on Earth….?


      The visualization you are referring to is what I have already coined (and trademarked) as “terrestrial dolphinhood”… it is analogous to domestication.

      Well guess what? Domestication leads to nothing but the emergence of feral tendancies. One need look no farther than Detroit to see this is all its glory…

      Coordination requires a plan; and here’s a news flash:

      There ain’t no plan. No New World Order, no returning Gold Standard, no new global prosperity funded by unlimited amounts of one global super fiat currency.

      There is, beneath it all, simply the power to choose.

      I choose to work, and to trade the value of that work for the things I need (first) and the things I want (second)

      If I don’t value it, then I don’t want it, and I absolutely don’t NEED it… therefore it makes no logical sense that I should trade my productivity for it.

      Such a simple, basic and uncorruptable point of view has made me wealthy. I can’t imagine a world where it will make me poor, unless someone willfully chooses to destroy my wealth with explosives via war, but if that day comes, then I will simply have to go in search of other peaceful people to trade my work with… because war (and all forms of waste and destruction) are the pinnacle of stupidity, and I choose to avoid stupidity whenever I can.

      If increasing activity coordination is our best future, then we are indeed losing our freedom to choose. This (I think) would more analogous to the work of Satan than to God.

      We are the only known species able to rationalize the power of choice. We see Dolphins choose, and we see Chimps choose, but there is no evidence of either species pontificating on WHICH choice will serve them best (or over the longest horizon).

      Choice and reason yield the ability to hold mastery over your own animal instincts.

      Coordination is the act of believing that others are somehow more worthy of following than your own choice (intuition) is… Sorry, but that’s just not my cup of tea.

  • fallingman January 9, 2012, 4:32 pm

    Well written article. Thanks.

  • Rich January 9, 2012, 4:26 pm

    AAPL pennies away from 17 October 2011 all-time high, Asian and Euro Bourses, Crude and PMs nibbling higher this AM could draw the lemmings in and over the cataracts like that Aussie Erin on a broken bungee over Victoria Falls in Zambia on the Zambezi River:


    PIMCO punting bonds again might also do the trick…

  • PhotoRadarScam January 9, 2012, 4:25 pm

    The ECRI is clearly pointing to a second recession, so Doug is going to be wrong about that one. The ECRI usually calls it pretty accurately.

  • Clive January 9, 2012, 3:01 pm

    Time to have a look at the ´Greenspan-Guidotti rule

    ” [Back in 1999] two well-known economists – Alan Greenspan and Pablo Guidotti – published a secret formula in a 1999 academic paper. The formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world’s largest money-management firm, PIMCO, explains the rule this way: ‘The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support.’

    The principle behind the rule is simple. If you can’t pay off all of your foreign debts in the next 12 months, you’re a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

    Greenspan-Guidotti means the U.S. is likely to have a severe currency crisis within the next two years. How high will gold go during this crisis? Nobody can say for sure. We’ve never been in the situation we are now. The numbers have never been so large and dangerous but I wouldn’t be surprised at all to see gold at $10,000 an ounce by 2012. Make sure you own some.”

    • mario cavolo January 9, 2012, 3:38 pm

      Hi Clive, I was thinking wouldn’t “you’re a terrible credit risk” be a “relative” statement in today’s unprecedented world of finance? We’re in new territory indeed…Cheers, Mario

  • mario cavolo January 9, 2012, 7:36 am

    Doug….lucid, intelligent, outstanding…every investor on the planet should read this…thanks much to Rick for reposting it. And I’m even more proud of my “Say Goodbye to Yields” article which I posted 15 months ago in Oct 2010 … http://beforeitsnews.com/story/221/336/Say_Goodbye_to_Yields.html

    Cheers, Mario

  • John Jay January 9, 2012, 5:12 am

    I agree about US Treasury paper. Ben of the Fed knows he can never let interest rates go back to historical levels.
    Just imagine what 8% on a thirty year mortgage would do to our punch drunk housing market. And 5% on a one year T-bill, with the rest of the maturities going up the yield yield curve as they roll over 15 or 20 trillion dollars in federal debt over time. Global flight to safety makes Ben’s job easier for now, and delays the day of reckoning for the USA. One year at a time, and I think TPTB can hold it together through 2012. However, retired citizens, trying to survive on SS and 1% CD rates will continue lose ground in increasing numbers for another year. In other words, Situation Normal, A.F.U.

  • Rich January 9, 2012, 1:12 am

    Doug certainly was in and on the money in 2011 with Boring Bonds, Rick, along with Gary Shilling and Rosie.

    Yes, the Dollar is currently targeting +17%, perhaps the best of bad fiat for now.

    Meanwhile, Dr Ron Paul, whose firm I used to buy silver and gold from at much lower prices, told America clearly in the New Hampshire Debates, that this down economic trend is not over until the bad debts are liquidated and sound money is restored.

    Presumably this eventually includes some Corporates, Dollars, Zeroes, Munis and Treasuries at some point, albeit with COY currently targeting +83%, EDV -32%, MUB +31%, UST +15% and USB +5% it may take some time.

    Is it too much to think with the Three Stooges still in charge, that SPX somehow rallies an unexpected +12% or more sometime before the end of 2012?

    Meanwhile, PM futures are targeting lower, with Gold targeting -15% and Silver targeting -37%.

    Methinks physical coins in hand, like the legal tender non-reportable American Eagle Silver Bullions flying out of the US Mint, may be the exception to the long-term trend…

    • mario cavolo January 9, 2012, 4:52 pm

      Hey Rich!

      Let’s say just ONE thing confidently. U.
      S. Treasury rates will be even lower in one year than now. If that one item is true, and that’s a big item :), then can that tell us anything definitive about the values of the other asset classes in one year? I would say then that means while USD will stay competitively up and even rise a bit, U.S. equities will not crash hard without a damn good reason…equity valuations aren’t that high and enough investors/institutions will be chasing better yields. …Cheers, Mario

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