Long-Term Case for Stocks and Commodities Stronger than Case for Bonds

By: Chris Ciovacco | Wed, Aug 18, 2010
Print Email

In their understandably concerned state of mind in the present day, investors may have lost sight of the longer-term drivers of asset prices. Bonds, especially U.S. Treasuries, have merit presently as high levels of debt have sparked concerns about deflation. However, in the long-run, the case for stocks, commodities, commodity-related currencies, and precious metals looks quite a bit stronger than the case for bonds.

In the current 24-hour news cycle, we have three separate stories that are significantly intertwined and related to this topic:

The long-term outlook for U.S. Treasury bonds is questionable at best, yet investors continue to make bigger and bigger bets on government IOUs. Earlier this year, the Congressional Budget Office (CBO) said the government faces a "daunting" fiscal future. Federal budget deficits will average $600 billion over the next decade, according to CBO's outlook. "U.S. fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering," said CBO Director Douglas Elmendorf.

Despite the "daunting" and "unsustainable" state of the government's finances, Tim Geithner's comments yesterday gave no indication taxpayers would be leaving the cash-draining mortgage business anytime soon. In the end, losses at Fannie and Freddie related to the financial crisis may cost taxpayers $305 billion, according to one estimate recently published by Mr. Zandi and Alan Blinder of Princeton University.

The further we go out into the future, the higher the probability the government will turn to the printing press, which is not good news for longer-term inflation rates, nor holders of U.S. Treasuries. Recent policy moves by the Fed and James Bullard's paper making the case for further quantitative easing signal to the markets the Fed is willing to print more money if needed.

Treasury bonds may have appeal in the short-to-intermediate-term as markets wrestle with deflationary forces. However, do bond holders really believe the political will exists today, or will suddenly surface in the future, to address the "unsustainable" state of U.S. financial affairs? It is much easier to print money than to cut budgets or raise taxes. The U.S. will be forced to make some hard decisions related to spending and taxes, but you can bet money printing will be part the equation in the foreseeable future.

The harsh reality we are faced with prompted Warren Buffet to remark:

A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it's going to inflate its way out of the burden of that debt.

Not only are the long-term fundamentals unattractive for holders of U.S. debt, but valuations are also prompting comparisons to the tech bubble of the late 1990s. From this morning's opinion page in the Wall Street Journal (The Great American Bond Bubble, Siegel and Schwartz, 08/18/2010):

In Stocks Continue to Walk a Fine Bull-Bear Line, we acknowledge the short-to-intermediate term outlook for stocks, and risk in general, remains bullish, but very fragile. Longer-term, the fragility of the bullish outlook for stocks, commodities, and precious metals will probably be strengthened by macro forces that point in the direction of money printing and inflationary outcomes. Therefore, an investor should keep oil, copper, gold, silver, the Australian dollar, Canadian dollar, and commodity-related stocks on their long-term radar.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

Copyright © 2006-2014 Chris Ciovacco

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/