Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Long-Term Investment Case for Stocks and Commodities Stronger than Case for Bonds

Stock-Markets / Investing 2010 Aug 18, 2010 - 11:33 AM GMT

By: Chris_Ciovacco

Stock-Markets

Best Financial Markets Analysis ArticleIn their understandably concerned state of mind in the present day, investors may have lost sight of the longer-term drivers of asset prices. Bonds, especially U.S. Treasuries, have merit presently as high levels of debt have sparked concerns about deflation. However, in the long-run, the case for stocks, commodities, commodity-related currencies, and precious metals looks quite a bit stronger than the case for bonds.


In the current 24-hour news cycle, we have three separate stories that are significantly intertwined and related to this topic:

  • According to the Washington Post, the Obama administration opened its conference on the future of housing policy yesterday with Treasury Secretary Tim Geithner promising both an overhaul of Fannie and Freddie and a continued federal role in backstopping mortgages
  • James Bullard of the St Louis Fed told The Wall Street Journal the Federal Reserve might need to commence a program of moderate purchases of U.S. Treasury bonds if inflation continues to fall.
  • In the Great American Bond Bubble (WSJ), Jeremy Siegel and Jeremy Schwartz, compare the current state of the U.S. Treasury market to the tech bubble of the late 1990s.

The long-term outlook for U.S. Treasury bonds is questionable at best, yet investors continue to make bigger and bigger bets on government IOUs. Earlier this year, the Congressional Budget Office (CBO) said the government faces a “daunting” fiscal future. Federal budget deficits will average $600 billion over the next decade, according to CBO’s outlook. “U.S. fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering,” said CBO Director Douglas Elmendorf.

Despite the “daunting” and “unsustainable” state of the government’s finances, Tim Geithner’s comments yesterday gave no indication taxpayers would be leaving the cash-draining mortgage business anytime soon. In the end, losses at Fannie and Freddie related to the financial crisis may cost taxpayers $305 billion, according to one estimate recently published by Mr. Zandi and Alan Blinder of Princeton University.

The further we go out into the future, the higher the probability the government will turn to the printing press, which is not good news for longer-term inflation rates, nor holders of U.S. Treasuries. Recent policy moves by the Fed and James Bullard’s paper making the case for further quantitative easing signal to the markets the Fed is willing to print more money if needed.

Treasury bonds may have appeal in the short-to-intermediate-term as markets wrestle with deflationary forces. However, do bond holders really believe the political will exists today, or will suddenly surface in the future, to address the “unsustainable” state of U.S. financial affairs? It is much easier to print money than to cut budgets or raise taxes. The U.S. will be forced to make some hard decisions related to spending and taxes, but you can bet money printing will be part the equation in the foreseeable future.

The harsh reality we are faced with prompted Warren Buffet to remark:

A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt.

Not only are the long-term fundamentals unattractive for holders of U.S. debt, but valuations are also prompting comparisons to the tech bubble of the late 1990s. From this morning’s opinion page in the Wall Street Journal (The Great American Bond Bubble, Siegel and Schwartz, 08/18/2010):

  • A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds.
  • We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.
  • The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
  • Those who are now crowding into bonds and bond funds are courting disaster.
  • If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield. Is there any doubt that interest rates will rise over the next two decades as the baby boomers retire and the enormous government entitlement programs kick into gear?

In Stocks Continue to Walk a Fine Bull-Bear Line, we acknowledge the short-to-intermediate term outlook for stocks, and risk in general, remains bullish, but very fragile. Longer-term, the fragility of the bullish outlook for stocks, commodities, and precious metals will probably be strengthened by macro forces that point in the direction of money printing and inflationary outcomes. Therefore, an investor should keep oil, copper, gold, silver, the Australian dollar, Canadian dollar, and commodity-related stocks on their long-term radar.

By Chris Ciovacco
Ciovacco Capital Management

    Copyright (C) 2009 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

Chris Ciovacco Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in