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Be Rational

June 22, 2012 – 5:23 pm

Many large banks were downgraded last night by Moody’s after a sharp selloff in stocks for the day. This morning no one cares about the downgrade and the market seems to have forgotten its convulsion of just yesterday.

In the short term the stock market is like a spoiled child. Any moment it can throw a tantrum kicking and screaming. At other times it is calm and reasonable. It is in the nature of the child to have extreme reactions and so too it is in the nature of the market.

There is no other way to explain why the market has attracted so many investors to long treasuries. The yield on that investment is so low it is guaranteeing a loss of money. There is no possible way that over 10 to 30 years with inflation average over a 100 years in the U.S. of over 3% that anyone will make money on long bonds. How do you explain the love affair with those bonds? I understand safety is the primary goal and investors feel safe in the bonds, but rationally it is not a smart investment and though the principal is safe, how safe is it over 10 to 30 years? Inflation will lower buying power of that money and over time that buying power will fall sharply. So how safe is the principal? In a recent seminar I showed a chart from 1900 to 2010 demonstrating the fall in value of a $100 from 1900. Today that $100 is worth $3.48. That is risk of inflation.

Today’s long U.S. bond investors apparently think that over a 100 years of consistent inflation is going to stop. Not with my money.

Good Trading
Steve Peasley

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