Warren Buffet says there's a T-Bill bubble...

[Kurt_and_Hunter]

If he means treasury bond prices are unsustainably high, sure... no doubt about it. Buying bonds that yield almost 0% is not a great investment.

But not every over-priced asset is a bubble. People are bidding up bonds out of fear to preserve capital, not in hopes of stupendous price appreciation. Since the yield on long-term treasuries will not go below zero there is only so much room for price appreciation and expectation of price appreciation is at the heart of any self-respecting bubble. (With bonds the higher the price the lower the interest yield)

Once the yield gets to zero the bond is just a much less convenient form of US currency. And a ten dollar bill will never be worth eleven dollars.

Since the goal is capital preservation rather than price appreciation I don't see any need for the "B" word. (Some Jews escaping Germany paid way over-market amounts of currency for diamonds they could sew ito their clothing to escape with. But it wasn't a diamond bubble.)

(Granted, you can leverage T-bills just like anything else and get into trouble. With enough leverage any bet can become a high-risk/high-return proposition.)

Buffet's observation about the 2008 Treasury 'bubble' does, however, add to something about the B-I-G bubble we have experienced. For the last 12 years a gigantic price hump has been running through all sorts of things in the direction of perceived asset-safety, running downhill from pets.com to cash:

1997- Crazy speculative stocks> blue-chip stocks & real estate> consumable commodities: food, oil. etc.> US treasuries & Gold> Cash -2009

=======================

NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc (BRKa.N) (BRKb.N) sits on $25.54 billion (17.8 billion pounds) of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.

In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.

But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors.

"The investment world has gone from underpricing risk to overpricing it," Buffett wrote. "Cash is earning close to nothing and will surely find its purchasing power eroded over time."

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

http://uk.reuters.com/article/wtMostRead/idUKTRE51R1Q720090228

[Skink]

1. He must of shedded his T-s

Not that he wanted to. He goes where it is safe and is probably not gonna say where it is safe, if he can even find it.

[crimsonblue]

16. His entire business model is safe

He invested in companies that keep the country running, and he developed powerful market shares in those areas. He has a widely diverse group of companies that he is recession resistant. Plus, Berkshire Hathaway insurance biz that makes them mad money, even in this recession (BH owns Geico). Incidentally, insurance is a good business right now (excluding the retards at AIG). People are less likely to file claims, and underpayment actually goes down (the financial liability of not having insurance is especially overwhelming right now). Plus, BH runs a government bond insurance company (municipal bonds are among the safest). Buffet rarely takes wild risks, and his word usually commands a value on investments for his company.

[Olney Blue]

2. Should we avoid T-bills then?

[elocs]

3. If T-bills are no good, what else can there possibly be? n/t

[Telly Savalas]

6. Baseball cards on eBay

[elocs]

7. Well, son of a bleach. What did my mom ever do with all my old baseball cards?

And my comics! I kid you not--back in my comic collecting heyday in the early 60s I had the first comic book with Spiderman. Of course by then I bought comics to actually read and not to immediately stash in a plastic bag.

[Kurt_and_Hunter]

5. They are over-priced for sure.

Treasuries are priced for disaster. If the world economy ever improves at all they will be less valuable.

If you buy a treasury yielding 3% and inflation starts up your bond will decay in value.

But so many of these treasury purchases are hedges against disaster and deflation that there is some capital preservation utility in the purchases even if they are unlikely to appreciate.

In terms of whether people want to be holding them... probably not. If the economy picks up they'll go down in price. If the economy collapses in deflation then cash will appreciate in value almost as much as the bond.

So I'm sure Buffet is right in saying nobody should be holding them for long. Hopefully the world governments will keep printing money until we see some glimmer of inflation so holding super low-yield treasuries is kind of the ultimate violation of the market maxim: "Don't fight the Fed."

But treasuries are safe. Their trading price will decrease (if things improve at all) but they will all pay off their face value in genuine US dollars someday. (Whatever a dollar is worth at that point.)

I would assume the big risk would be in holding aggressive leveraged bond mutual funds more than the bonds themselves.

[Olney Blue]

11. I'm economically challenged. Could you explain your last sentence?

Thanks! :dunce:

[Kurt_and_Hunter]

12. There are some bond mutual funds that use leverage to be more aggressive

They used to be called something like "aggressive bond funds" but that was back when "aggressive" was considered desirable. I don't know what they call them today.

They try to pay higher yields by taking chances with mechanisms that magnify price moves. So there might be an 'agressive' US Treasury bond mutual fund designed to make 15% a year or lose 15% even though the underlying bonds are quite conservative.

But a vanilla treasury fund wouldn't have such big up-down moves.



Some say state bonds are a good place to be on the theory that they pay good yields and that the US will probably never let a state go under. (Unlike municipal bonds... cities do default sometimes.)

No idea if that's good advice, but it sounds plausible.

[FrenchieCat]

4. Do you have a link for that?

[ozu]

8. here's one where it's noted

I heard them talking about it in CNBC today.

http://uk.reuters.com/article/wtMostRead/idUKTRE51R1Q720090228

""When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.""

[Kurt_and_Hunter]

10. thanks for that. I added it to OP

[AllentownJake]

9. Tulips

I'm investing in Tulips because hell, history might repeat itself.

Nothing is safe. Since Reagan and his predecessors deregulated it has been one bubble after another since the 80s.

[PurityOfEssence]

15. Damn you!

Beat me to it...

[Frank Booth]

13. Seems like he's using the term "bubble" to mean that an irrationally high number of people

are holding t-bills, and they're paying an irrationally high amount to hold what is barely better than cash at this point (and might be worse, if you consider liquidity).

It seems like he's right, if the t-bills don't beat inflation and there's an alternative investment that will (though, I guess then you could also say there's a "cash bubble"). Problem is, what's that alternative investment? Short selling until the market hits bottom?

[Jennicut]

14. I don't think there is anywhere safe to put your cash these days

Maybe just keep a tiny bit in the stock market and hope it eventually goes back up. :shrug: