This week’s issue of Barron’s has a great interview with Doug Kass, the legendary investor who famously predicted that stocks would bottom in March 2009 and that they would go nowhere in 2011.Among other things, Kass talks about what he’s short. But one short stands out. From Barrons:
Finally, my favourite short of the next decade is the U.S. bond market, for those that possess deep enough pockets, have the fortitude and the patience. I am long ProShares UltraShort 20+ Year Treasury [TBT], which is the inverse, double-short bond ETF. Over the past 2½ years, bonds have achieved a near 60% total return. A remarkable feature is the consistency of positive returns and the absence of many drawdown years of consequence. Nevertheless, they should be viewed as a return-free asset class that is very risky. The 10-year yields under 1.5%, less than half the yield during the recessions in 2001 and 2008. That means I am paying over 65 times earnings for a 10-year-bond, a rich price even by Amazon’s or LinkedIn’s standards.
This is a position he revealed during a big presentation at May’s Value Investing Conference in Omaha, Nebraska. According to Market Folly, Kass identified seven key factors that could be “disruptive to the bond market”: 1) “the flight to safety premium erodes;” 2) “a muddle through economy might gain speed in the years ahead as domestic growth moves toward potential;” 3) “Federal Reserve policy is likely on hold—natural price discovery in fixed income;” 4) “inflation on the ascent;” 5) “housing is embarking on a durable multi-year recovery;” 6) “stocks versus bonds—the approaching reallocation trade;” and 7) “U.S. fiscal imbalances are not being addressed.”
In a series of charts and data tables, he demonstrates how these factors create a huge opportunity for investors willing to go against the grain.