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Is it Different this Time?

August 23, 2010 – 4:50 pm

There is a lot of discussion on a bubble being inflated in U.S
treasuries. It is easy to understand the argument when the yield
on a ten year treasury is less than the yield on the S&P 500
which has never happened before. Put another way, as written in
Barron’s this week, the yield on treasury inflation protected bonds
at 1% means that if a stock traded at a 1% earnings yield the
equivalent on the bond in P/E terms is that the bond is selling
at over 100 P/E. In any sense that is extreme.

The other side of the argument is that TIPS will give you a return
not only on your money, but of your money, and you can not say that
for stocks. But can you? Stocks over any long term have always beat
bonds, just not over that last 10 YEARS! That is a long time.

So are bonds in a bubble or not? Know one really knows. Most bubbles
occur without anyone realizing they were in a bubble. In the housing
and tech bubbles many did not believe they were a bubble but others
warned that a bubble was building.

When everyone floods into an asset usually that means the run is
completed and a steep fall is coming. Is there any difference in the flood into bonds? Maybe the
difference is that baby boomers want to take less risk as they age.
That could be a long term driving force as baby boomers enter
their 50s. Of course whenever you say something is ‘different this
time’ when discussing the equities market the more I want to say, ‘no
it isn’t’. History has shown it’s never different.

Good Trading
Steve Peasley

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