Treasuries are unlikely to return a real yield of 4.6% over the next 30 years, because the US government’s finances are such a wreck that very high inflation is likely by then. Given the current market environment and greater fool theory, they are a buy, which is why I’m long.

I also own gold for the long run and intend to keep buying it, though I am not averse to shorting it in the short run, just as I am not averse to trading T-bonds.

Are Japanese government bonds and German government bonds horribly overvalued too? I do not think Treasuries are “horribly” overvalued; I would think a ~ 3.7% nominal yield is a very high real interest rate in this environment where the return on other assets are very low.

I have the general sentiment that Bernanke just ran out cards to play. It is probably that he would print again (but unlike most market participants, I do not think it is a 100% chance that he will raise the pot in this game of chicken), but I don’t know if he’ll test the bond market again. Perhaps, he realizes printing money has dangerous effects in a globalized economy especially if you rely on foreign funding for a large fraction of deficit financing. Bernanke would have more freedom to print if the US was more autarkic. At least Bernanke’s created the perception that he would print more. Perhaps that perception would backfire as it fuels reflation trades in commodities that increase prices for consumers who are already suffering from wage deflation and unemployment.

What about gold? Although I am a deflationist, I do agree with Adam of Gold versus Paper and Mish that it would do well. I do not buy the hyperinflationist’s argument that gold will hit $5,000, but it will still do well. I regard gold as an illiquid form of money that has a built in put option that increases in value due to when currencies are perceived to be in crisis. Also, since gold outlasts everything (except proton decay), I suppose it would benefit in an environment where people have negative long-term intratemporal discount rates (as this happens in older populations). It would do well when the short term interest rate is at zero, and when the return on equities will be very low.

30-year Treasuries would be junk as buy and hold instruments even if there had been no bailouts at all. The US is broke primarily because of entitlements and secondarily because we have 130 military bases abroad and two bloody occupations in Asia.