Wednesday, May 19, 2010

Roubini Says Short Treasuries: DON'T DO IT!

Nouriel Roubini, according to this article - May 19, 2010 - says you should short US Treasuries because "bond vigilantes" are going to run up interest rates, killing the value of existing bonds. The rational, roughly, is that the US has a lot of debt and rates are low now, so they'll go up. Yup.
Roubini Thoughts.

In particular, he says:
> To me, it's clear from the chart that Treasury Bond yields have hit a
> low
Chart:




Duh. I mean, yes, treasury bond rates are low. Obviously. The will go up. That's not news.
The questions are:
Will the $ remain stronger than alternative currencies? (Sure looks like it. The dollar is strengthening against everything)
Will there be big inflation (doesn't look like it so far...)
WHEN will rates go up?

Take a look at this. Look at the interest rate scale on the left. 1/2 - 2%. Scale on the bottom is 2000 - 2010.

That's the yield on Japanese Government Bonds (10 year bond) over the last 10 years.
They're low. They stayed low for 10 years. Our boat is not so different. The Japanese Government had a massive stimulus package too.
They took on tons of debt. That's what happened after their real estate bubble.
(I Just noticed that Roubini dismisses the Japan argument because Japan is "a country of savers." The US Savings rate has risen very significantly.
Just this month there has been another drop in mortgages for buying houses as opposed to refinancing). And another drop in mortgage rates.
People are borrowing less. )

So Roubini saying something is "clear from the chart" is just crap.
It's worth remembering the Roubini was dead wrong for a good long while about the market collapse, about bubbles and so on.
Then finally he was right! And he's a genious? He has said himself that a lot of his opinions aren't from data analysis or research - but from his gut.
He's a lot like that guy who wrote the Black Swan (Taleb). The more publicity he gets, the more arrogant he gets and the less substance there seems to be to his arguments.

Of course, he will be right again. Bond yields will go up. Maybe in 2020, but they'll go up!
They might go up sooner. I'm just saying no one knows the timing.
Right now the signs are mostly pointing the other way.
The Fed may start raising rates a little, but short term rates are not long term rates.

Another thing: He suggests GOLD as a good hedge against inflation. Gold is a terrible inflation hedge. It has very little correlation with inflation.
Inflation has been nearly flat and low for a good long long while now. Has gold been flat? Nope. It's gone up and up and up.
Almost certainly a bubble. So ... buy gold? That's supposed to be a good investment against a rise in interest rates?
Ugh.
His suggestion of shorting Treasury shares is at least a bit more direct. There are other factors besides rates the impact that stuff (volatility for example).
And he doesn't mention that not only do you lose interest on any money you put in the short TBT exchange traded fund, but you lose another 1% on top of that (built in fee -- it look slike just from glancing at their site).
TBT ETF from ProShares

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