This week, stock markets continue to rally and some analysts have predicted the uptrend momentum to last till January next year. While I am more than happy to see my portfolio receive a boost, I am cautious about the sustainability of this stock rally.
A lot of economic data are gloomy and suggest bitter months ahead. A bull run in anticipation of a turnaround in the real economy one to two quarters down the road is too optimistic. Long term trend is still bearish. To temper the exuberance, look at the 8 scary predictions – Dow Jones 4,000, food shortages, a bubble in Treasury notes, etc.
I don’t expect the Dow Jones to reach 4000 after all the bailouts, stimulus package, loans, and interest rate cuts. If that materializes, we will be facing an unprecedented meltdown of wealth since the Great Depression.
But speaking of Treasury bills bubble, it is a real possibility. To be sure, there are plenty of liquidity being hoarded by risk-averse investors and they are not in a rush to get back into equities and credit markets.
The US government sold $30 billion of four-week bills on Dec. 9 and investors snapped up everything. The Treasury zero percent interest was not a consideration at all. As for three-month bill rates, they had already turned negative for the first time since the U.S. began selling the debt in 1929. Yields on two-, 10- and 30-year securities also touched record lows this month.
Short term Treasury bills are actually not much of a worry given that the US economy is heading for deflation rather than inflation. Long term treasuries pose a bigger concern – at the pace the US government is ramping up its deficit to fund the trillion dollars rescue programs, investors should be shunning the pathetic rates being offered for long term treasuries.
This fancy for Treasury bills is no longer a flight to quality. It is an exodus away from all asset classes, followed by a musical chairs version of quality. If investors were to regain their risk appetite and start buying riskier assets in the U.S. such as stocks, corporate bonds, and real estate, then the effect (decline in face value and the US dollar) could be spectacular.
For now, I will rather stay cautious as the best asset class is still cash. Not that I have been staying away from the stock market but to chase the uptrend by taking huge positions is like going to the casino and of late, I am valuing my cash a bit more than to partake in such adventures.