Imagine yourself sitting in a movie theater.
The final twenty minutes of the movie are suddenly interrupted with an announcement “For all of you interested, there will be unlimited amounts of free popcorn in the lobby for the next twenty minutes.”
Tough decision? Do you watch the ending of the movie and forgo the climatic scenes for the free popcorn?
The idea of receiving something for free, as well as evoking the emotion of greed, affects people differently.
Some will give into their greed, and load up on the free popcorn. Others, however, will think seriously about it and then decide to stay in their seats. Next, imagine if in the final twenty minutes of the movie, it was once again interrupted.
However, this time the announcement was “For all of you interested, there’s a fire in the theater.”
Do you watch the ending of the movie, or advance to the nearest exit?
Most would probably agree that nobody would remain in their seat. The emotion of fear usually strikes everyone the same way.
When fear turns to panic, the outcome is easily determined.
As I wrote in the beginning of 2011, that treasuries would be the play for the year, so it will be once again in 2012.
Treasury bonds have returned almost 10% for the year, outpacing all other bond and stock indexes.
As others are now doing, it seems fairly easy to warn that future lower yields are almost impossible, if not improbable. A ten-year treasury yield below 2% would have received extremely high Vegas odds just one year ago.
However, here we are, currently at 1.87%. What are the odds that a year from now the yield on the ten-year is below 1%?
Impossible, you say? Ravings of a madman or a lunatic?
Under normal circumstances, I would agree. Unfortunately, these are not normal circumstances.
Greed will continue to succumb to fear, and fear will ultimately turn to panic. Whether it’s European collapse, Chinese implosion, Mideast war, or crazy U.S. elections, 2012 will once again see dollars flow into treasuries, confounding the experts, all save one.
Wishing all of you a happy, healthy, and prosperous New Year!