Even the Losers

 | Jun 05, 2012 | 10:30 AM EDT  | Comments
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Stock quotes in this article:

TBT

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nflx

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gmcr

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msft

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jnj

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aapl

The biggest position in my portfolio is the ProShares UltraShort 20+ Year Treasury (TBT), which seeks to provide twice the return as a short position in the long Treasury index. I established a small 1% position in this ETF in first quarter 2011 after the recommendations of the National Commission on Fiscal Responsibility and Reform were not acted upon, and I have been slowly averaging down since.

It has been a painful experience so far, as 10-year Treasury yields have continued to fall and now stand at around 1.5%. By averaging down and by selling out-of-the-money puts throughout, however, my breakeven point is just under 2% on the 10-year Treasury yield, and the position now represents approximately 7% of my personal portfolio.

It is a position with which I am entirely comfortable, as I have a very long-term view on this holding. In addition, being early and temporarily wrong is nothing I have not experienced many times before. Most recently, I was about six to nine months early on shorting Netflix (NFLX) and Green Mountain Coffee Roasters (GMCR), but eventually, both positions turned out to be extremely profitable.

My TBT holding will turn out to be one of my most profitable positions, as yields have nowhere to go but up over the long term, even if Europe blows up resulting in one more new low Europe blows up and there is one last flight to safety.

Below are more reasons why this investment will ultimately make money:

  • Real interest rates are already negative, as yields are below the 2%-plus core inflation right now. Obviously, this is unsustainable.
  • Bernanke's Fed buying up more than half of the new debt issued by the Treasury is another condition that cannot continue over the long term.
  • Unlike Japan, with 95% of its huge debt being internally funded, we rely on foreign sources traditionally for about 50% of our debt funding.
  • The government is adding about $1 trillion in debt per year to our tab, which is now close to the critical 90% level that economists conclude starts to impact a country's economic growth.
  • This debt does not include the liabilities for entitlement programs such as Social Security and Medicare, which account for another $40 trillion to $75 trillion of our domestic debit ledger, depending on the study you choose to believe.

The time for putting our fiscal house in order draws nigh. We will have no choice other than to inflate our way out of our huge debt balance (a.k.a. print money), which will obviously cause yields to rise substantially and will make my position very lucrative.

For those seeking yield, a better option is to invest in blue chips with fortress balance sheets and growing cash flow and dividend yields such as Microsoft (MSFT), Johnson & Johnson (JNJ) and now Apple (AAPL).

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