The Safest Place on Earth

Posted: Jul 15, 2011 12:01 AM

Watch what they do, not what they say. 

That was an old adage that my grandfather, a Wall Street veteran of 57 years (including the 1929 crash), used to proclaim all the time.  In those days, he was referring to the titans on Wall Street who declared the 1929 stock market was truly magnificent. 

They also announced the market had put an exclamation point on the tremendous success of the roaring 20’s, and encouraged everyone to buy stocks for the long term.  However, behind the scenes, those same titans were creating syndicates in order to off-load stock on an unsuspecting public.  Many were also building extensive short positions for the ultimate market pinnacle.   

Today is no different.  We continue to hear that no matter what happens with debt, budgets, QE2, QE3, QE4, defaults, or even restructuring, the inevitable outcome will be much higher interest rates. 

Every sell-side analyst on CNBC, Bloomberg, or any other financial outlet continues to pontificate how the worst investment in the world is the U.S. Treasury bond.  First, they’ll say that the return will never keep up with the inevitable inflationary spiral that’s headed our way.  Next, they’ll point out that as interest rates inevitably go higher, principal will go dramatically lower. 

Of course, they’ve been saying that since the 10-year yield was at 3.6%.  Thus, if we listen to their words, we understand that they and their houses are avoiding treasuries like the plague. 

HOWEVER, in the most recent treasury auctions for the 3-year, the 10-year, and even the 30-year, the most aggressive buyer has been, surprisingly, the direct buyer. 

That’s right, domestic mutual funds and other institutions which buy treasuries for investments, not for flipping.  In fact, they’re even scooping up these bonds at almost three times the normal rate. 

Therefore, if they truly believe that treasuries are so bad, then why are they loading up on them?  Could it be that given a choice of where to place bond money, the U.S. is still the safest and maybe the best place to be?  Without the constant media hoopla, is it really a tough decision?         

As grandpa said, watch what they do not what they say.