SeriousBull

Get out of Treasury Bonds now.

Tags: Bonds + Economy + Fed + Interest Rates + investing + Stocks

Interest rates are expected to be lowered again in the US and almost certainly will be lowered in the European Union if an economic slowdown marked by rising unemployment occurs as it seems to be in England, particularly London. Yet the global markets ex US & England are witnessing  something quite different.  While

lower rates are expected as a stimulus to slowing global growth, because banks have lost so much reserve capital, commercial loan rates have been stubbornly high and in fact have been rising particularly for higher credit risks. Bloomberg reported that in the Asia-Pacific region where growth is still strong, borrowing costs have risen to a 404 basis points or 4.04% spread above US Treasury securities.  In part this rise is also due to repricing of credit risk. The US stock market is seconding that the rate decreases may be near an end. So the question of the day is who is right and what should investors do?

There is a law of investing that can be steadfastly relied upon in cases like this. That is, investors seek return and strive to avoid risk. With no end in sight to US ills and a high probability of a slow domestic economy, astute investors are more likely than not to invest where deflation won’t erode their money and where they can get a greater return on investment. With energy and commodities priced in dollars that means inflation in prices will persist until global demand declines. With China, India, Russia, and UAE countries all experiencing a new expansionary development era, this is not likely to happen soon. Instead the US will have to slow its internal economic investment, cut spending, and raise taxes to curtail its rising deficits. Moreover, with attractive domestic investment opportunities foreigners have excellent investment choices at home.  Whether or not the next American President acts quickly to pull the US out of Iraq, the uncertainty that will follow in either case will support high or increased oil prices and rising basic material prices. Under such conditions their is greater than an even chance that the US will lose control of the short end of the yield curve and be pressured to raise interest rates to keep its deficit financed because foreign investors have for too long now financed US deficits a puny interest rates. Unless the US opens its doors to massive Petro dollar and Chinese foreign investment in the US, the need for capital both by the US government and US financial system will mean bond yields rise and prices fall. Smart investors should bail out of US Treasuries now and protect themselves as the gains in US government guaranteed fixed income securities have all been made. Or put in terms of probability, there is a greater probability that interest rates rise from current levels than decline to lower levels from here. Making the mistake to stay invested as a safe haven is paramount to betting against the improbable–not to mention certain global inflationary tides. One further word of caution. All this is not to say go fully long in stocks. We are not out of the woods yet despite the recent market rallies and the market is surely ahead of itself in future earnings in several industry groups.  What’s more is the fact that this market is at levels far above 2005-2006 when the US economy was considerably better than now. For the balance of this year investors should look to get paid while they wait in stocks paying safe dividends supported by exports. Speculation should be concentrated in potential takeover targets of US companies with global recognizable brands and/or those who have valuable distribution channels.  This said, save some powder. There is likely to be better prices on most all US stocks down the road in 2008.

April 18, 2008 - Economy, Markets