Review & Outlook

Our take on the investing, financial, & economic themes of the day

Time to Clean the Fishtank

22 September, 2011 by Ben O'Brien in Commentary

As I write the Dow Jones Industrial Average is down 475 points, or about 4.3%. At the same time the stock market is tumbling, the bond market is soaring. Here it is a bit confusing for the layman, because bond yields and bond prices move in the opposite direction, and it is the practice in the trade to express the state of the bond market in terms of yields, not prices. In any event, the yield of a 30-year Treasury bond is 2.86%. The yield of a 10-year Treasury note is 1.73%. If these yields seem low, they are lower than they seem. That’s because they don’t even take inflation into account. If these yields were adjusted for inflation which is somewhere around 3%, they would be negative.

The real excess right now is going on in the bond market, not the stock market. That is to say, investors are selling stocks that are historically cheap to buy bonds that have never been more expensive – – yields have never been this low.

Most times the markets are about investing for the long term. This is not one of them. So what do I do during these periods of market insanity? Clean the fish tank. It’s is sparkling clean. If you do not have a fish tank to clean, you should do the equivalent and just step away from the news (I almost said ticker tape) and the false sense of calamity and urgency. Focus on the long term and you will avoid costly mistakes.

Mark O’Brien