Thursday, July 1, 2010

The World is Ending... Time to Buy?

Dead Cats Bouncing details what the two year Treasury bond is indicating:

There are growing concerns that the U.S. risks a Japanese post-bubble scenario of endless economic stagnation, as reflected in tumbling implied inflation expectations in the TIPS market. The yield on 2-yr Treasury Notes yesterday dropped to its lowest level ever and as short-term Treasury yields typically track the nominal GDP growth (they effectively present a risk-free alternative to having 'geared' nominal GDP exposure via equities and corporate debt) current levels suggest that the market is expecting that an extended period of recessionary conditions and very low inflation. Treasury yields seem to be pricing in the double-dip recession that many economic bears have been calling.

Call me crazy, but ALL this negativity (justified in most cases) makes me think we are due for a short term pop in risk assets. As Meb Faber detailed on his World Beta blog a month back:

On the monthly time frame, I examined asset class performance after a really bad month.

The take-aways from this study were:

  • It does not pay to buy an asset class after a really bad month for the following 1 month.
  • 12 Months later the return is not much different than average.
  • 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month.

A simple strategy would be:

After an asset class has a terrible month, wait a month then take a 2 month position. i.e. after this (probably) terrible month, buy July 1 for a two month hold. Those with a little longer time frame could move out to a 5 month hold.

Just dipping in my toe only (not willing to risk much capital for a pure behavorial trade / bet). Wish me luck...

Source: Federal Reserve


  1. We've yet to peak in pessimism. Last time around, companies were falling left and right, now it's just bankrupt nations. It'll be time to buy when we have some kind of failure somewhere.

  2. just a toe... when that happens, i'll dip in to my ankle

  3. Great call, man, keep it up