January 24th, 2009 | by Joom |
titleA New Bubble in the Making?/titlecategory9/categorypbbr //b/p
After a few more-than-welcome trading sessions finally exuding optimism in North America, does anyone really have either the strength or inclination to talk about bubbles? Unfortunately, it is not a question of strength or inclination, but a simple matter of prudence and real risk management.br /br /I dont have to remind anyone of all the bubbles that have imploded and exploded in the past decade, but a quick review doesnt hurt. First, there was the tech bubble. Then there was a housing bubble. Then came the credit bubble. Then there was the emerging markets bubble. Somewhere along this trail was also the commodities bubble. All connected, all feeding off each other, all eventually bursting, some more spectacularly than others. And just when you thought there couldnt possibly be another bubble left to pop, believe it or not, there could be — government debt!br /br /There are very few financial gurus out there who warned us about the collapse of the real estate market long before it happened, Michael Lombardi being one of them. After being referred to as bad news bears who cried wolf one too many times, people now tend to listen when these guys speak. Im willing to stop and listen for a moment, too. br /br /Here is one reason why some of the bad news bears believe that U.S. government debt could be just another dangerous fantasy. Currently, the 30-year Treasuries are barely managing yields of three percent. Working out the risk versus return scenarios, inflation over the next three decades would have to be a virtual zero for investors to make any money. Does anyone really think inflation would cease to exist? Apparently, there are quite a few investors who must think exactly that. Otherwise, how do we explain why bond yields have plunged so low, so fast? br /br /There are two plausible scenarios driving bond yields down. The first is the one that I think investors are betting on the most, which is the collective expectation of the bond market that the economy is facing a potentially decades-long depression, accompanied by extreme deflation. br /br /But there is another variable in this bubble-making equation — short-term factors are the main culprit behind why bond prices are shooting up and yields are plummeting down. Of course, government bonds are expensive, particularly taking into consideration the absurd state of public finances in the U.S. Yet, just as NASDAQ stocks were ridiculously priced in 1999 and just as you couldnt buy a decent bungalow in Austen without parting with a million bucks in 2005, there are still investors who believe theres someone even more scared than they are out there, willing to spend premium dollars on an inflated asset under the assumption they are buying something safe. br /br /Ive talked about the relationship between risk and return quite thriving as a lesson to take from the Financial Debacle of 2008. But I also talked about diversifying your investments horizontally. Just because an instrument is offering a low return, it does not necessarily mean it is free of risk or just about. Flocking into irrationally expensive government debt now and locking your returns long-term just because short-term factors are driving you insane is not valid thinking. I understand that no one really plans to hold government debt for 30 years. But betting therell be someone waiting and willing to pay the top dollar when youre ready to flip your investment is a fools rationale and, by its very nature, the essence of any bubble. br /br /Profit Confidentialbr /br /—br /br /http://www.profitconfidential.com/br /br /LOMBARDI PUBLISHING CORPORATIONbr /News, Analysis, and Information Services Since 1986.br /One Million Customers in 141 Countries.br /br /Lombardi Publishing Corporationbr /Financial Publications Divisionbr /350 Fifth Avenue, Suite 3304br /New York, NY 10118-3304br /br /—br /br /Copyright 2008; Lombardi Publishing Corporation. All rights reserved. No part of this e-newsletter may be used or reproduced in any manner or means, including print, electronic, mechanical, or by any information storage and retrieval system whatsoever , without written permission from the copyright holder. br /br /
pbAbout the author/b
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divInya Ivkovic, BA, MA, Senior Editor at Lombardi Financial, is the editor of Explosive Mine Stocks, Bio-Tech Breakthroughs and Payload Stocks. She is co-author of The Revenge to Riches Strategy: How You Can Profit from the Secret Greenspan Plan. Before joining Lombardi, Inya held several positions with large North American financial institutions, and has been an academic specialist for a securities institute, a trader, and an investment advisor. Inyas diverse market background and passion for stocks delivers an institutional perspective to Lombardi Financial readers.br /br //div
/pTags: 30 year treasuries, bad news bears, bond market, bond yields, bubbles, collapse, credit bubble, emerging markets, expectation, financial gurus, government debt, housing bubble, inclination, michael lombardi, optimism, plausible scenarios, prudence, simple matter, three decades, trading sessions
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Tags: 30 year treasuries, bad news bears, bond market, bond yields, bubbles, collapse, credit bubble, emerging markets, expectation, financial gurus, government debt, housing bubble, inclination, michael lombardi, optimism, plausible scenarios, prudence, simple matter, three decades, trading sessions
