Below is an email sent to a popular - and usually bearish - blogger in response to his comment that he was not sure why long term US Treasury fund TLT paid such a high dividend in a bond market filled with 1% or lower yields.
The post is anonymized because while said blogger did respond to my query to reprint, he did not give yey or nay as I think he is so busy reading emails he just skimmed. His blog is orders of magnitude more densely populated than little Biiwii with its relatively small, but hard core audience.
I post because this once again gets to the absolute nut of why bears have been continually frustrated over the 'continuum' as they await a final Armageddon.
Hi [XYZ Blogger],
I enjoyed your video yesterday (well, all except the Weiner part), but have to say I was almost stunned when you mentioned you did not know why TLT pays near 4%.
It is a long (Treasury) bond fund and the long bond is the absolute final arbiter in the inflation/deflation debate that moves forward through years and years of bear frustration.
Ever wonder why 'they' always seem to save the day, bail the bulls out when we know that this mess should crash and go to the hell it came from? It's because people run to the long bond, drive down interest rates (and inflation fears) and then the whole circus starts anew.
I am sure some of the stuff I have posted on your blog has dealt with this. The Wizard welcomes all the little speculators back into his warm, loving arms as they buy long term treasuries like good little do-bees. In other words, they get good and bearish while speculators like me buy their fear - in the precious metals first - in anticipation of the new inflation cycle that always catches the bears off sides eventually.
TLT pays near 4% because with each new inflation long bond holders get killed. QE2 the latest inflation attempt, and I agree there is probably not going to be official QE3 but rather, it will proxy through the banks via artificially low short term treasury rates as they become enriched on the spread and feed the economy.
There will ultimately be deflation, but it will be the final deflation, after all confidence is lost and possibly after a hyper inflationary event. My crystal ball broke before I could get the answer on that one :-). But as long as what I call the continuum (very long term trend in the long bond) remains intact, so too does the trend of inflate-deflate-inflate. It's all about confidence in the Wizard and man, it remains intact at least in an implied manner because somebody buying the long bond. Doesn't matter who, as long as [appearances are kept up].
Disclosure: I have been variably short everything from precious metals (while holding core longs) to commodities to junk bonds to NDX, SPY & RUT during this topping process. I am not a bull apologist or anything of the sort. Just trying to explain why bears always seem to snatch defeat from the jaws of victory - at least thus far.
Since this email could be construed as critical of your orientation, I will await your okay before posting on my blog. I think it would be helpful to people, since it is speaks to the most important aspect of the macro game where remaining on the right side is concerned.
