CNBC & US Treasuries – More Things Change, More They Stay the Same

Editor’s Note: This
is an article about financial television and financial media in
general. It is not an investment article and no one should base any
investing decisions or conclusions based on anything written in or
inferred from this article. Investing is a serious matter and all
investment decisions that should only be taken after a detailed
discussion with your investment advisor and should be subject to your
objectives, suitability requirements and risk tolerances. .

On August 23, 2008, we wrote about the disdain expressed by CNBC Anchors about the highest quality investments available in the world – US Treasuries. The article was titled “Are CNBC Anchors on a Mission Against US Treasuries – A Viewer’s Perspectives”–a-viewers-perpsectives.aspx

In that article, we provided charts from two renowned investment gurus that demonstrated that a safe, staid asset like US Treasuries (specifically 25 year Treasury Zero Coupon Strips) can provide returns that put equity returns to shame.

As CNBC continued to ignore this great asset class, we followed up with our article “Did CNBC Anchors give us a Market Signal? – Yes they did”

What a market signal it was? US Treasuries exploded in price in the final quarter of 2008 to post stellar returns. According to the compilations from a respected research firm,

  • 25 Year Treasury Zero Coupon Strips returned 55% in 2008, their best year since the 66% return in 1986.
  • 30-Year Treasury Bonds returned 41.20% in 2008, comparable to the 40.37% return in 1982, the year in which bull markets in stocks and bonds began.
  • 10-Year Treasury Notes returned 20.06% in 2008, their best year since 22.17% return in 1995.

In stark contrast, the CRB (Commodities) Index lost 35.4% in 2008, its worst year ever and S&P 500 stock index lost 36.99%, its second worst year ever.

Bubbles and Media Behavior

We were away for six weeks and when we returned, we expected to hear remorse from CNBC Anchors or CNBC Fast Money traders about having missed a great investing opportunity; we expected to hear CNBC Anchors extolling virtues of safe investing in Treasuries.

Instead. we found that  the anti-Treasury jihad of CNBC Anchors has reached a crescendo with daily claims of how Treasuries are the New Bubble; we found Sue Herrera, Bill Griffith & Michelle Caruso Cabrera (Anchors of CNBC PowerLunch) openly advocating shorting of US Treasuries. Talk about jihadi tirades!

Of course, CNBC was not alone. The Financial Times and other Newspapers had joined the “Treasuries are the New Bubble” chorus.

Let us be fair though. The rally in Treasuries exceeded our wildest expectations. In our September 20 article, we had suggested that the 30-Year Treasury Bond yield could fall to 3%. But, in December, it fell just below 2.50% (an additional 10% price increase). – See “Why do we watch CNBC? How do we “safely” watch CNBC?”

By the end of 2008, Treasuries (especially the 10-30 year maturities) became very expensive in price and most investors should have taken profits in such long-duration Treasuries.  A healthy correction had to take place and it did in the first week of 2009.

But was that a bubble? Usually you can recognize a bubble by the behavior of CNBC Anchors and their print colleagues. The financial media goes gaga over the profits you can make in the bubble asset class and they invent reasons to rationalize the bubble. For example,

  • We can still hear CNBC’s Joe Kernan and David Faber yelling “Qualcomm, Qualcomm” in March 2000 – they told you every day the wonders of technology and how it was going to change the world.
  • In June 2007, Dylan Ratigan waxed eloquent about the rise in inflation fueled by oil and other commodities. CNBC Fast Money could not stop telling you about the huge profits you were going to make in Freeport McMoran and Solar Stocks.
  • Maria Bartiromo kept shouting about the new era of global growth and global liquidity fueled by the great investors of private equity.

In start contrast, CNBC keeps insisting that Treasuries are bad for you; newspapers keep writing about how much money you could lose in long duration Treasuries. CNBC Anchors have become so fanatical that they do not even pay heed to their best man, Rick Santelli, who kept interrupting their tirades by telling them that there might be one more buying wave in Treasuries.

Remember the tech bubble – many investors are still  waiting for their Sun Microsystems to go back to $200 and their Cisco to get back to $80. A bubble destroys your capital for ever. Treasuries, on the other hand, guarantee the return of your money, both the principal and interest.  That is why Treasuries may get expensive but they will never be a bubble.

So, in our opinion, the recent correction in long Treasuries is a healthy correction which will lead to another rally when the euphoria about the Chinese Stimulus and the upcoming American Stimulus subsides. It has been a short, brutal correction that is typical of bull markets – Long zero coupon strips are down 15-20% and the 30-Year Bond is down about 10%.

Fundamentals of US Treasuries and Investor Demand

Reading the work of smart investors who have been 100% right on Treasuries persuades us that the fundamentals of US Treasuries remain very strong:

  • Look around you. America is in the midst of a severe deflationary cycle. Americans are beginning to become frugal and have begun saving.  This creates a huge deflationary wave because the US consumer is 70% of American economy.
  • Inflation is too much money chasing too few goods. Conversely, deflation is too many goods chasing too little money. Look all around you. Prices of all things are go lower.
  • In a deflationary cycle, institutional investors demand the CERTAINTY of returns for a very long period of time. That is why the longest Treasury, the 30-Year Treasury Bond,  becomes the best performing asset during deflationary times.

Last week, the New York Times joined the anti-Treasury chorus by warning readers that China has curtailed its appetite for American Debt. CNBC latched on to this article to create fears that US interest rates would zoom upwards because of lack of Chinese demand.

Neither the New York Times nor CNBC told you that, in the opinion of experts of this data, the Chinese have stopped buying agency bonds (such as Fannie Mae and Freddie Mac) but they have increased their buying of US Treasuries.

They also do not tell you that during every recession, Americans buy massive amounts of US Treasuries for rational, logical reasons. This is especially true of US Banks. See for yourself  in the chart below sent to us by a reader.

Just think, had Citibank, Bank of America and other American Banks had bought US Treasuries for their own account instead of CDOs, CLOs and toxic mortgages, the American Financial System would be in far better shape today. If you believe in reversion to the mean and if you believe that US Banks want to build healthier balance sheets,  you got to believe that American Banks might just start buying Treasuries in bulk. That may be where the TARP money is going.

But let us be clear. US Treasuries are nowhere as cheap as they were in 2007 or when we began writing in August 2008. There may be many other debt instruments that might be more attractive, albeit with more risk, than safe US Treasuries.

But, US Treasuries are NOT in a bubble. Finally, do not listen to CNBC’s Sue Herrera, Bill Griffith, Michelle Caruso Cabrera. Unless you are an aggressive and very fast trader, shorting Treasuries would probably prove highly injurious to your investing health.

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