Friday, May 4, 2012

Marc Faber outlook for the Treasury Market

Marc Faber : There are two schools of thought. I am sure that, in the long run, Treasurys are an outstanding short. But there is also the shorter term. If you said to me, “You can buy a 10-year Treasury for less than 2 percent.” I would say to you, playing the devil’s advocate, “It’s unattractive.” And you say, “Why is it unattractive?” And I respond to you with, “It’s unattractive because in America, the rate of inflation is increasing between 5 and 10 percent.” Different people have different inflation. But non-government statistics show that the cost of living is increasing by 5 to 10 percent per annum, including health care, insurance premiums, fees to the government, educational costs, and so forth. So at 2 percent, basically you have a negative real return, inflation adjusted. But then, I can also argue, “I know that inflation is, say, 5 to 10 percent. And I only get 2 percent on Treasurys, but what about the stock market? Maybe I’ll lose even more.” So there is a lot of money flowing into Treasury notes and bonds and bills because people know that, for sure, they will be repaid since the government can print money. It is not a question that they will not be repaid, but at what value of the U.S. dollar? That is the issue. Some of my friends argue that the 10-year yields could drop to 1 percent, which is a possibility. But I think, before we drop to 1 percent on the notes and, say, 1.5 to 2 percent on the 30-year bonds, there will be so much money printing that the fiscal deficits would be so astronomical. Say you assume a 1 percent yield on a 10-year note yield. You would have to assume that we have deflation in the system. You would have to assume that we have gone back into kind of a depression stage. In a depression stage, the tax revenues would collapse. And the expenditures of the government, especially of the Democratic administration, would go up very substantially. And so instead of the deficit being, say, $1.5 trillion, it would be $2.5 trillion. I think, at some point, the market will start to question owning government debt in the U.S. - in Seeking Alpha


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