OVERDONE

The US Treasury recently unloaded a bunch of 10-year debt with a yield of 1.9%, selling into demand for these anemic 10-year puppies that was the third highest on record. The official inflation rate--assuming anyone out there still believes that--is now actually higher that the 1.9% yield investors are scrambling to get.

This is the old boiling-the-frog method of a slow capital death. It's the just-give-me-back-my-money-and-forget-about-any-returns mantra of the times. Maybe it's time to consider taking the other side of that trade and ramping up for unexpected higher interest rates down the road? Sooner or later overdone gets undone.

What Do I Know?

What I do know is equity risk premiums are near 40 year highs, meaning the premium equity holders require to hold stocks over bonds; many of these stocks are paying decent dividends well above what so-called safer Treasury bonds pay; predictions, as they usually are, for 2012 run the gamut; developed markets including the US are supposed to underwhelm; last year the so-called no-brainer was shorting or avoiding US Treasury bonds. They were expected to go down not up in value, sending yields much higher. Gold enjoying a 10-year run had become every man’s safe haven of choice with a gaggle of radio talk show hosts hawking the yellow stuff.

Though we only have intuitive evidence, second term presidents are usually not as effective. An Obama re-election, if it occurs, will be a concession not a mandate. Plenty of people are fed up with the Obama administration and they are hardly religious, right wing or racist nuts despite what the media portrays. With that said we like big pharmaceuticals and healthcare; we like energy and defense given the turmoil worldwide

The famous, fictional Gordon Gecko pointed out that greed is good and it is. And so, too, is gridlock. The problem is always the same as in whose ox is getting gored. Oprah Winfrey at her height was earning 30 times the annual salary of the highest paid American corporate executive. The top 10 Hollywood celebrities earn a big multiple of what those corporate executives earn and we won’t even mention the highest paid sports figures. See anyone picketing them?  Money can be made off of gridlock and it should be. It’s called a semi-free market. Bernanke with his QE babble has essentially tried to put a put option below the market.

Manufacturing is on a rebound in the US owing in part to China’s high cost of labor and energy. Customer demand is another reason centering on rapid delivery times and quick design changes. Energy prices could be the 2012 market’s Treasury Bonds, going down instead of up. But we give that about a 10% chance and remain long oil and natural gas. Austerity suddenly became the catch word of 2011, especially in the EU. Austerity usually implies another strong word, discipline, but the two could become the proverbial irresistible force versus the immovable object, the worst nightmare for politicians and bureaucrats. It’s mostly just a fiscal form of whistling past the graveyard. Behavior changes never come easy. They almost always require a catastrophic event.

A friend retired after being in medicine for 25 years. He decided he wanted to do something different, like selling since he viewed himself a people person. One day after numerous applications, a few interviews and much waiting he found himself sitting in a huge high riser across the desk from a corporate executive dressed in the obligatory blue suit, white shirt and red tie. Several plaques and an Ivy League MBA degree framed the wall behind the executive.

They sat in silence for a long time while the suit perused my friend’s resume.

“I don’t see anything here, “the suit said, finally breaking the silence, “that says you can sell. What makes you think you can sell our product?”

My friend said he paused for a long second because turnaround is fair play before he responded: “Because for the last 25 years I’ve been selling the hardest product on the planet.”

There was another longer, more awkward silence as the executive pondered my friend’s reply. It was almost as if, my friend recalled, you could see the wheels of his MBA grey matter spinning.

“And what might that be?”

“Trying to get people to change their behavior,” my friend shot back.

The safe bet here is, short of a real collapse; go against behavior changes of any serious magnitude. And that’s what I know.