The Current Bubble

Here is a great investment for you -- one where the price has zoomed to unheard-of levels in recent months, yet for which the natural heavy buyers have all the reason in the world, both from a desire and an ability-to-buy point of view, to stop buying. Furthermore, it is known that the supply of this investment will expand next year at a rate that has rarely been matched in history. As an added kicker, you know with certainty that cash flows from this investment will never go up. Sound good?
 
So what is this fabulous gem of an investment? Why, good old-fashioned treasury securites. Lock your money up for 10 years and get the princely return of 2.72% -- heck if you are willing to lock in for 30 years you can get 3.15% today. Those rates are down from 3.78% just last month on the 10-year and 4.26% on the 30-year.

Just sit back and think about how long that is. Ten years ago, the country was obsessing about Monica Lewinsky. Thirty years ago, the Shah was sitting on the throne of Iran.
 
Yes, it is true that you are certain to get your nominal investment back when the bond expires, and there is no default risk. But will those nominal dollars be worth anything near what they are worth today? It is true that the current problem is deflation, not inflation. It is, however, exceedingly unlikely that deflation will last more than a year or two, let alone 10 or 30 years.

The Federal Reserve is actively trying to create inflation as we speak to offset and put a halt to the deflation. They do so by, in effect, turning on the printing presses. There is little doubt in my mind that they will eventually succeed. Given the inherent lags in monetary policy, and the incomplete data that the Fed must work with, the odds of them "succeeding too well" and setting off a round of very high inflation are exceedingly high.
 
The Federal government is going to run record deficits both this year, and most likely next, not only in nominal terms, but as a percent of GDP. With an economy this weak, that is actually a good thing. If it didn't, the economy would fall into a depression, not merely a very long and nasty recession.

In other words, the supply of T-notes is going up...BIG TIME. Still, with their own economy weakening, will the Chinese and the Japanese continue to buy our bonds at anything like the pace they have been in recent years? Will the petro states of the Persian Gulf continue to buy with oil prices in the $40's? How can they? So if demand is not coming from them, where will it come from?
 
I would avoid T-notes and bonds. Corporate and municipal debt looks like a much better bet at these levels. Also, there are many companies that are likely to not only maintain, but grow their dividends over the next few years that offer yields higher than are available on treasuries.

Consider some of the big drug companies as alternative sources of income investments. For example Pfizer Inc. (PFE - Analyst Report, 7.7% yield), Merck & Co. (MRK - Analyst Report, 5.7%) and Bristol Myers-Squibb (BMY - Analyst Report, 5.8%). 

Energy oriented MLP's are another area to consider, for example we like Enterprise Products Partners (EPD - Analyst Report, 10.5%) and Natural Resource Partners (NRP - Analyst Report, 14.9%).

Read the full analyst report on PFE

Read the full analyst report on MRK

Read the full analyst report on BMY

Read the full analyst report on EPD

Read the full analyst report on NRP