Wednesday, August 17, 2011

Conventional Wisdom Wrong Again--At Least So Far

A couple of items of conventional wisdom have been that the U.S. dollar is doomed to plummet even further (more on that in the next day or two), and that only a fool would own U.S. Government bonds.  

The fiasco over raising the Federal debt ceiling, combined with S & P's rating downgrade of U.S. Government debt led most investors, including some savvy institutional managers, to avoid--or even short--U.S. Bonds.  Yet over the past few weeks, the U.S. Treasury (20+ yr.) ETF (ticker TLT) has risen 15%.  The yield on the 10-yr.  Treasury Note is now only 2.16%.  Look at that number again and let it sink in.  The annual interest income from lending money to the U.S. Government over the next ten years is two point one six percent!  

Though the conventional wisdom on this might be right eventually, it is yet another example of the investment imperative to be skeptical of the conventional wisdom, or even to be an outright contrarian (if you have the temperament for that).

It is becoming increasingly clear that the U.S.--and Europe--face a period like that of Japan over the last two decades.  That would be stagnant economic growth, historically low interest rates on government debt, and periodic rallies and declines in stock prices.  As in Japan, government officials in Europe and the U.S. seem stymied by the conditions their countries face.

Steve Lehman

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