Professor Elam

Thursday Jan 28 2010

TLT is a closed end fund of bonds averaging 25 years in maturity. The market has been descending in price and increasing in yield since the top last October. It should now be falling in a fifth wave for this formation. The action after that daily fifth wave bottom will perhaps provide some clues as to just how high interest rates are liable to go. Note that RSI is failing at the 50% level at top and MACD is working its way down at bottom. 

DUring the 1930s long term T Bond rates fell to 1.7%. If that happens this time, bonds are the way to go at over 4%, that would offer a potential double in capital gain while earning a nice 4% dividend. The argument FOR bonds is that in a deflationary environment, prices will continue to fall, money will exit virtually all other investments, real estate, stocks, etc, and find a home in safety. Corporate and municipal debt will be in doubt as to whether it will be paid, expect interest rates to go up but principal to be in danger, witness the recent action in Greece for example. In addition one can argue that if a currency is going to crash it is more likely to be the Euro what with Portugal Italy Spain Greece not to mention the Eastern European problems. 

On the other hand, in the 1930s the US was a net creditor, the world owed the US. Now however the US is the world's biggest debtor. As I write the Congress wants the debt ceiling raised to over $14 Trillion. This strikes us as the drunk asking for another round. In the 1970s Britain had to pay higher and higher interest rates as its entire economy became more mired in socialist programs that could not support themselves.  Finally Margaret Thatcher put the brakes on endless borrowing, privatized entire industries, and brought Britain back. Today Britain is in much the same shape as it was in 1979. Indeed various writers are suggesting that Britain will be the model for what is about to happen in the US.  Is there some point at which the Chinese and PIMCO say  enough, no more debt, we want more interest. Can Bernake permanently keep rates at zero short term while running a printing press to make all the money he wants. Can the US borrow its way to prosperity, Bernake seems to think so. 

At the moment or at least for the next two weeks, the bond market is demanding a higher rate of interest. Bottom line the action after a daily fifth wave bottom in TLT will likely tell us a great deal about the appetite for US debt.