Should You Short Treasuries Now?

10/03/2011 3:00 pm EST

Focus: BONDS

Dennis Gartman

Editor and Publisher, The Gartman Letter, L.C.

Though many are calling for a top in the Treasury market, Dennis Gartman explains in this exclusive interview with why you should wait until the US takes meaningful steps to reduce unemployment.

Is it too late to buy Treasury bonds? Everybody seems to be ready to short them.

To be quite honest, I’m actually long the Treasury bond market at this point, because everybody I know is trying to be short of it, and it keeps making new highs and yields keep making new lows. It’s going to continue to do that until it stops.

And more importantly, what people forget is, the value and the change that you get when you’re down to these low levels of interest rates—the value of an .01%, the price change of one basis point—is now so much larger than when you’re at 10% interest rates and certainly when you are at 15% rates. The price movement is dramatically larger here than in the old days.

So now you get a three-basis-point move in the ten-year note, and that becomes almost three-quarters of a point in price. Ten years ago, a three-basis-point move in yields didn’t move you one tick.

Last I checked, the zero [coupon bond], if you just went out and bought the 30-year zeros, you’d be up 30% this year.

Yeah, it’s been a bull market, and everybody you know has tried to be short of the long end of the bond market, and they’ve been wrong.

The Fed is easing. The Fed has been easing, and the Fed is going to hold overnight fed funds at zero.

In that environment, institutions are going to continue to own whether they like it or not. They have no choice. They’re going to continue to come in and own the bond market.

That’s wonderful.

Don’t be short of it. Everybody you know is trying to be short of it. I remember people trying to pick the top in the Japanese yen bond. They tried to pick that top for 15 years.

So these central bankers throughout the world could be right for a long, long time and we could keep rates…

They have the ability to be right for a long time. They can make themselves right for a long period of time. The only central bank that has been wrong recently has been the Swiss National Bank, and boy were they wrong.

To try to defend the Franc. To try to devalue the Franc.

Exactly. And that’s a whole different game.

This is an unemployment issue. Then again, there are so many endemic problems that are going to keep unemployment rates very high in the Western world, it’s unlikely you’ll see these central banks start to hike rates.

I think it’s important to target. They won’t use that term, but to target the employment rate.

Several of the regional Federal Reserve Bank presidents, who have voting power on a rotational basis, have said that until the unemployment rate is below 8%, their propensity to vote for tightening is nil. I don’t think you get any kind of move to tightening monetary policy until we get the unemployment rate below 8%, and maybe even below that. Which, that’s not such a bad thing.

The problem is out there for the United States—and it will be a problem forever—is that in the modern world with greater transportation, there are people willing to work at $1.50 and $1.75 and $2.00 and then $2.50. So the downward pressure upon wage rates is going to obtain in the industrialized world for a long period of time.

We have brought China, Malaysia, Indonesia, and India into the manufacturing world, and sadly, that’s not going to go away. So I hate to say this, but the high-school graduate who thinks he’s going to be able to make a middle income as his father or grandfather were capable of doing, that’s gone and that’s not coming back. As Bruce Springsteen said, those jobs are gone and never coming back.

That’s a shame.

It’s true. That’s just the harsh reality. What we’re good at the United States is creating new products. We are great at technology. We’re great at intelligence. We’re not that good any longer with manufacturing.

I don’t have a problem with that. In fact, as a consumer, I’d rather have it manufactured someplace cheaper so that I can buy it at a less expensive price.

As would I. Do you see a new boom some day in the future in investing and capital formation, innovation, the good old fashioned American generation machine actually getting back into gear?

Sure, there will be. There’s not a question there.

When we have a government that is less intrusive, and when we have tax rates that are more advantageous, when we create even lower capital-gains rates and send them to zero. When we just have a less intrusive government, and one that is more pro-free market, we will have the most expansive economic advance you can imagine.

On what? I haven’t the faintest idea. I haven’t the faintest idea. But in 1865, did anybody know that Ford was going to come up with the Ford? Did we know that there was going to be an airplane?

In 1968, did we know there would be an iPod? Did we know there would be personal computers? No, we did not. No one knows what’s going to happen in somebody’s garage when a new product comes. Nobody knows what’s going to happen with technology.

All I know is that in the course of history, technology and new products always come, but they come in the countries and in the areas where government allows it to occur. And government allows things to occur by staying out of the way.

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