Revelations at Dawn

I had a revelation this morning... while walking around my neighborhood at dawn.

You see, whenever a great investment idea hits me, I can never sleep. My brain does flips and my feet twitch as I lie in bed.

Pretty weird, huh? My wife always knows when I have a trade on my mind. “I hope you’re not shorting gold,” she says.

Last night was rough. I lay awake all night. When it started getting light outside, I put my slippers on and took the dog for a walk.

Some people make this idea seem very complicated. I fell into that trap last night and it cost me six hours of sleep.

But it doesn’t have to be complicated. In fact, as I wandered the streets at five a.m., I realized it’s actually very simple. Here are the important facts:

1) This asset is virtually indestructible. Production of this asset is accelerating even though vast supplies already exist. 

2) The attraction of this asset is eroding.

And here’s the best part...

3) Prices are about as high as they’ve been in decades – far, far above their fair market value – propelled by a strong dose of government intervention. This intervention is ending.
 
I’d just discovered the opportunity of the century. It felt like a revelation. I ran home and placed the trade.  

In my mind, the outcome of this trade is a certainty. Trouble is, markets can remain irrational much longer than a trader can stay solvent. To win this one, we have to time it right. We need evidence the government intervention is ending and the trend has changed before we trade.

Today, dear readers, we got both.

The asset I am talking about is the government bond. Not just the government bonds of the United States, but of every major government in the world. They are all overvalued.

Look, government bonds never get used up. They just pile up. Governments crank them out – and will keep cranking them out – as long as they need to borrow. This is the supply I’m talking about. It’s infinite.

Next, demand. I said the attraction of bonds is in decline. Inflation is the reason. Bond investors hate inflation. When inflation rises, the present value of their bond declines...

We have inflation now. Wherever you live in the world, your cash has lost half its purchasing power in essential items over the last five years.   Think real estate and medical care here.

Let’s recap. The governments of the world will keep borrowing money to finance their debts, and the supply of bonds will increase. Demand for bonds is eroding. So far, government intervention has kept prices high. Simple. We won’t make this more complicated than we have to...

Next we look at intervention.

Jim Rogers says betting against government intervention is the surest money in finance. In this case, Asian countries intervened in the bond markets by making huge purchases of bonds. We know why bond prices are still so high (and yields are so low) and that’s all we need to know. 

But when will it end?

Here’s the evidence I’ve been waiting for.  From the The New York Times:

“Persistent labor shortages at hundreds of Chinese factories have led experts to conclude that the economy is undergoing a profound change that will ripple through the global market for manufactured goods.

The higher wages come at a time when costs are already rising sharply across the country for energy, [raw materials] and land. On top of a strengthening Chinese currency, this is likely to mean that the cost of consumer goods shipped to the United States and Europe will rise.”

Bingo! The golden period of cheap Chinese goods is fading, and with it, the end of intervention.

The bond market knows it too. This week, Japanese interest rates hit 5-year highs, U.S. rates touched four-year highs and Eurozone rates made 18-month highs.

The trend has turned. Supply is growing, demand is eroding, and artificial support is about to disappear...

Bet on rising rates. You can do so with the Rising Rates Opportunity ProFund (RRPIX)
 
Good investing,

Tom