Jubilee Prosperity

We may not want more credit if we really understand deflation and staying solvent. Why borrow when the compounding cost may be higher than the economic return?

Banks and brokers may end up owning properties and securities nearer the bottom, after the economy and indebted assets contract faster than income compounds and equity affords.

Leaving Bonds, Notes and Bills

In 1981 Merrill had a major campaign called the Dawn of a New Bull Market. We bought long term Municipal and Treasury bonds yielding lifetime highs, 11% on certain tax free zero coupon bonds including Exxon, and 13% in the case of zero coupon Treasuries.

We bought more such AAA bonds on dips in price and increases in yields, notably during the 1982 WPPSS and 1990-1991 S&L crises.

One of our clients, a Comptroller who bought Treasury bonds on 12 times leverage, borrowed from his credit card to pay a margin call.

A CFO bought zero coupon Treasury yields at the peak maturing for his children’s college education. Still others bought double digit yield zero coupon treasuries for their retirement plans.

For 28 years there was a geometric increase in prices as yields declined. For the last decade, bonds, notes and bills (cash) outperformed equities.

Our EDV Extended Duration Vanguard zero coupon Treasury yields fell in 2008 from 4.47% at the end of Summer to 2.50% on 5 December 2008. EDV prices went from 79.63 to 143, up 78% in three months. Parabolic ascents often marked the end of major market moves.

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Re the EDV outlook in particular, it is possible long Treasury yields may decline this winter to all-time lows below the 2.5% reached on 5 December 2008. It might take a lot more bankruptcies and financial implosions with fewer bailouts. Right now, EDV prices are targeting a decline to 108 from 143, so beware.

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This entry was posted on Monday, April 6th, 2009 at 12:28 am and is filed under Prosperity. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.