U.S. Treasury bonds Still Rising

Everyone on the cable channels here in America is trying to guess what will go up in 2009. So far, no one has had the courage to say, "Nothing!"

This is one of the great pillars of the modern financial world, the belief that something somewhere must always be going up. If that were the case, then you're only real challenge would be allocating your assets correctly. Pick the right asset class the one going upand let the market do the rest.

This normally works. But beginning in 2003, all asset classes simultaneously went up, thanks to Alan Greenspan's interest rate knife work. Now, they're all going down, thanks to deleverageing. So which asset is going to find the bottom first?

You can be pretty sure it's not U.S. Treasury bonds. They are still rising. A talking head on CNBC this morning said the capital value of the 30-year U.S. Treasury bond is up 55% year-to-date, nearly five times its historic average. That seems unlikely to continue.

But it should make you nervous that so many people are so comfortable predicting a collapse in the Treasury bond bubble. We think it will happen too. But not when it's so obvious.

So how should you invest? One popular thesis among by American-based colleagues is to focus on world-dominating, best-of-brand franchises. These are the ones that will survive. But it is not so easy applying this strategy to Australia. We're not sure who's going to survive 2009.

An interview with Deloitte Touche Tohmatsu partner Eric Lilford in the Herald Sun is not encouraging. Lilford reckons that a third of Australia's 800 listed mining exploration companies may not survive next year. A combination of lower commodity prices, the credit crunch, and the general consolidation you find at the end of the cycle will doom them.

So who will survive? Lilford says the companies most at risk or single commodity producers, explorers, or project developers. It's the blessing and curse of the Aussie market that there are hundreds of companies in those three categories. It's a blessing in a bull market, a curse now.

Still, another popular thesis is that the first half of 2009 will see a big bear market really in blue chips and inflation hedge type assets, which could include gold, oil, and deeply over sold commodities (especially uranium). So there is some good news for Aussie resource investors, despite Lilford's grim forecast.

We'll have more forecasts for 2009 for you later this week, in a special report we've prepared for all DR readers.

That's it for today. Your editor is woefully under-dressed for the cold weather here in Colorado. You grow up in a place and then leave it for years. Somehow, all the unpleasant memories get fuzzy and you only remember the warm fuzzy ones. Then a cold blast of dry air hits your face and you remember the good with the bad. But it's certainly good to be home with family. Here's wish you and yours a Merry Christmas and Happy Holidays.

Dan Denning
for The Daily Reckoning Australia

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