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Since the stock market bottom in March 2009, the S&P 500 Index has almost doubled. That’s a gain of apprx. 100% in three years. Yet investors have been dumping stock mutual funds like they’re the plague over this same period. It is impossible to know where the millions of investors that have redeemed from stock funds over the last several years put all of their money, but it is clear that a lot of it went into bond mutual funds.

Over the past several years, we have seen a stampede into bond funds, and especially US Treasury bonds funds. Investors around the world are seeking the perceived safety of US bonds. Many probably don't realize that bonds can be just as volatile as stocks, and sometimes more so. When interest rates do move higher, bond investors will experience losses - how severe we don't know.

The Fed says it's committed to keeping short-term rates interest rates low through late 2014. Yet with the yield on the benchmark 10-year Treasury Note now below 2%, it is hard to see rates moving much lower. If you are overweight in bonds, now may be a good time to take some profits and lighten up. We have a professionally managed bond program which can invest either long or short, in addition to the convertible bond program offered by Wellesley Investment Advisors.

At the end of today's letter, I'll show you a brand new presidential election poll from Rasmussen that is very surprising, at least to me. Rasmussen did a poll with a three-man race - Obama, Romney and Ron Paul as an Independent - and guess who wins by a comfortable margin? You may be as surprised as I was.

Introduction

The non-partisan Congressional Budget Office (“CBO”) released a very troubling new report in the last week of July. The new report is entitled “Federal Debt and the Risk of a Fiscal Crisis” and warns that we will face financial calamity if we do not get our massive budget deficits under control.

The CBO report points out that the national debt, which was 36% of the gross domestic product three years ago, is now projected to be 62% of GDP at the end of fiscal year 2010 on September 30. And it continues to ratchet up every year thereafter, even in the CBO’s “baseline” (more conservative) projections.

The CBO specifically warns that our out-of-control deficits could lead to the ultimate debt crisis when buyers of Treasury securities lose faith in the government’s promise not to default on these most trusted financial instruments. No kidding!

I have been writing about the perils of increasing our national debt year after year since back in the 1980s when I criticized President Ronald Reagan for doing so, and every president since him. The concern was that in 20-30 years, the ultimate debt crisis would come. Guess what: it’s now been 20-30 years, and even the CBO now warns that the day of reckoning is on the horizon.

This week, I’ll summarize the latest CBO report. After reading about it, you need to think seriously about how you will protect your assets when the day comes where US Treasury securities are no longer trusted – think sharply higher interest rates! This will be a continuing theme in the weeks and months ahead.

But before we jump into the latest troubling CBO report, let’s take a quick look at the latest economic reports, most of which have not been favorable. It has been several weeks since I wrote about the economy specifically, so let’s get caught up.