{"id":24233,"date":"2011-10-03T10:30:04","date_gmt":"2011-10-03T14:30:04","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/10\/03\/these-investors-are-about-to-get-slaughtered\/"},"modified":"2011-10-03T10:30:04","modified_gmt":"2011-10-03T14:30:04","slug":"these-investors-are-about-to-get-slaughtered","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/10\/03\/these-investors-are-about-to-get-slaughtered\/","title":{"rendered":"These Investors Are About to Get Slaughtered"},"content":{"rendered":"<p><a href=\"http:\/\/www.investmentu.com\/2011\/October\/welcome-to-the-treasury-bubble.html\">These Investors Are About to Get Slaughtered<\/a><\/p>\n<p>by <a title=\"Alexander Green Archives\" href=\"http:\/\/www.investmentu.com\/investment-experts\/alex-green-archives.html\" target=\"_blank\">Alexander Green<\/a>, <em>Investment U<\/em>&#8216;s Chief Investment Strategist<br \/>\nMonday, October 3, 2011: Issue #1613<\/p>\n<p>When the market turns rocky, it\u2019s understandable that some investors run to safety. But these are unusual times. And many of these investors are running straight into a buzz saw.<\/p>\n<p>If you\u2019re one of them, you need to take preventive action immediately. Let me explain why\u2026<\/p>\n<p>While attending my daughter\u2019s choral concert at her school the other night, I overheard two fathers chatting during the break.<\/p>\n<p>\u201cI finally threw in the towel on the stock market,\u201d the first said.<\/p>\n<p>\u201cMe too,\u201d said the other. \u201cI\u2019ve tucked everything away into Treasury bonds instead. I\u2019m not earning much but at least I can sleep at night.\u201d<\/p>\n<p>He\u2019s in for a nightmare instead. Nothing is more devastating to investors than when they plow huge amounts of money into a seemingly safe investment and their world gets turned upside down.<\/p>\n<p>That\u2019s the risk now with Treasury bonds.<\/p>\n<p>Please understand, I\u2019m not suggesting that the United States is a poor credit risk. No one lends money to a deadbeat at 1.9 percent for 10 years or three percent for 30 years. (That\u2019s the current yield on 10- and 30-year Treasuries.)\u00a0 But the good times for Treasuries \u2013 which began way back in the hyperinflationary early 80s when the prime rate hit 21.5 percent and long bond yields topped 16 percent &#8211; are almost certainly coming to an end.<\/p>\n<p><strong>Welcome to The Treasury Bubble<\/strong><\/p>\n<p>In the last 12 years, we\u2019ve experienced the technology stock bubble, the real estate bubble and the gold bubble. Now\u2026 welcome to the <a title=\"The U.S. Treasuries Bubble\" href=\"http:\/\/www.investmentu.com\/2010\/September\/the-united-states-treasuries-bubble.html\" target=\"_blank\">Treasury bubble<\/a>.<\/p>\n<p>Let\u2019s start with the basics. Bonds work like a seesaw&#8230;<\/p>\n<ul>\n<li>When interest rates come down, bond prices go up.<\/li>\n<li>When interest rates go up, bond prices go down.<\/li>\n<\/ul>\n<p>Yields on Treasury bonds have plunged in recent weeks, thanks to fear of recession, chaos in the Eurozone and assorted other unsavory news. That buying has driven 10-year yields sharply lower \u2013 from 3.25 percent to less than two percent just in the past few weeks. Investors, of course, aren\u2019t buying these bonds for their potential return. They\u2019re buying them for the perceived safety.<\/p>\n<p>Yet their statement values will plunge in the months (and years) ahead.<\/p>\n<p>Don\u2019t get me wrong. Despite our $14.5-trillion budget deficit, tens of trillions more in unfunded liabilities, this year\u2019s political brinksmanship and the recent Standard &amp; Poor\u2019s downgrade, the creditworthiness of Uncle Sam isn\u2019t an issue. If our government doesn\u2019t have the cash to meet its obligations, it can do something no private borrower can: Crank up the printing presses.<\/p>\n<p><strong>Why Treasury Bonds Are Still a Big Risk<\/strong><\/p>\n<p>I hope it doesn\u2019t come to that because it would likely be inflationary. Yet aside from any inflation risk down the road, <a title=\"Long-Term Treasury Bonds\" href=\"http:\/\/www.investmentu.com\/2010\/July\/long-term-treasury-bonds.html\" target=\"_blank\">Treasury bonds<\/a> are still a big risk. And most investors don\u2019t understand why. For example, the other day a friend told me he had recently plunked for the <strong>Vanguard Long-Term Treasury Fund<\/strong> (<a title=\"Vanguard Long-Term Treasury Fund\" href=\"http:\/\/www.google.com\/finance?q=MUTF:VUSTX\" target=\"_blank\">VUSTX<\/a>).<\/p>\n<p>\u201cWhy?\u201d I asked.<\/p>\n<p>\u201cWell, because Treasuries are safe and the fund has returned 8.3 percent annually since its inception 28 years ago.\u201d<\/p>\n<p>Never has the boilerplate \u201cpast returns are no guarantee of future results\u201d been more apropos. It isn\u2019t just unlikely that this fund will generate this kind of return over the long haul. It\u2019s mathematically impossible. And the only way it could generate a decent return in the short term is if the United States enters a full-blown deflationary depression, a long shot at best.<\/p>\n<p>U.S. Treasury bonds are priced for calamity. Granted, times aren\u2019t the best right now. We may get a double-dip recession. Perhaps even a nasty one. We may see Greece default on its sovereign debt. (In fact, I hope we do. That would be the first step toward cleaning up the mess in Europe.) But \u2013 despite the many Chicken Littles out there \u2013 we\u2019re not on the verge of economic Armageddon. That means Treasury bonds will soon start to fall. Hard.<\/p>\n<p>Short-term Treasury notes and bills aren\u2019t terribly risky. (Although they pay almost nothing.) But Treasury bonds (and <a title=\"U.S. Treasury Bonds\" href=\"http:\/\/www.investmentu.com\/2010\/June\/us-treasury-bonds.html\" target=\"_blank\">Treasury bond funds<\/a>) are an extraordinarily poor bet for the short to medium term.<\/p>\n<p>If you own them \u2013 and prefer not to learn the hard way \u2013 do yourself a favor and get out of them.<\/p>\n<p>Now.<\/p>\n<p>Good investing,<\/p>\n<p>Alexander Green<\/p>\n<div>\n<a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=kf_ouslflIA:3Cj6_SEZuTY:yIl2AUoC8zA\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=yIl2AUoC8zA\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=kf_ouslflIA:3Cj6_SEZuTY:V_sGLiPBpWU\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=kf_ouslflIA:3Cj6_SEZuTY:V_sGLiPBpWU\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=kf_ouslflIA:3Cj6_SEZuTY:qj6IDK7rITs\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=qj6IDK7rITs\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=kf_ouslflIA:3Cj6_SEZuTY:gIN9vFwOqvQ\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=kf_ouslflIA:3Cj6_SEZuTY:gIN9vFwOqvQ\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=kf_ouslflIA:3Cj6_SEZuTY:F7zBnMyn0Lo\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=kf_ouslflIA:3Cj6_SEZuTY:F7zBnMyn0Lo\" border=\"0\"><\/img><\/a>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/InvestmentU\/~4\/kf_ouslflIA\" height=\"1\" width=\"1\" \/><\/p>\n<p>Article by <a href=\"http:\/\/www.investmentu.com\/\" target=\"_blank\">Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"<p>These Investors Are About to Get Slaughtered by Alexander Green, Investment U&#8216;s Chief Investment Strategist Monday, October 3, 2011: Issue #1613 When the market turns rocky, it\u2019s understandable that some investors run to safety. But these are unusual times. And many of these investors are running straight into a buzz saw. If you\u2019re one of &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/fx\/2011\/10\/03\/these-investors-are-about-to-get-slaughtered\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;These Investors Are About to Get Slaughtered&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-24233","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24233","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=24233"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24233\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=24233"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=24233"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=24233"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}