Shorting US Treasuries... Any thoughts?

Sell Treasuries...Again
By Addison Wiggin

"Shorting US Treasuries is a slam-dunk trade if ever there was one," our friend Paul Van Eeden wrote not long ago. I agree.

Treasury yields have been going down along the entire yield curve since 1983. This trend reached a crescendo during the crisis of 2008, when 10-year Treasury yields plunged to 2% and 90-day T-bills paid negative yields.

For a few moments in the heat of the credit crisis, some investors were so scared of losing money in any other asset; they took a guaranteed loss just to keep their money "safe." Better to lose 0.1% on a short- term bond, the theory went, than risk losing 50% on GE, Citigroup, GM or Bank of America.

The US government recognized this insatiable thirst for the "security" of American bonds. And it abused this opportunity to the fullest extent - setting record budget deficits in 2008, 2009, 2010 and likely beyond. Mainstream economists like Paul Krugman, James Galbraith and Dean Baker applaud these deficits as a necessary remedy for economic malaise. They maintain that when consumers can no longer consume and corporations are locked out of the credit markets, the government is the only actor in the economy that can save us all from financial Armageddon.

Further, they argue that inflation is the devil we know whereas deflation is the devil we don't want to know. They argue the government is not spending enough money right now, and that those who encourage fiscal restraint and austerity during an economic downturn are only asking for more trouble, more pain.

Further, they say, it is the government's responsibility to coax inflation back into the system, which would in turn spur growth in GDP. Then when the economy gets "back on track," we can deal with the deficits and begin addressing the national debt.

Trouble is, since the 1980s, we've never, but for a few short years in the late 1990s, gotten to the second half of that Keynesian equation. As one reader insightfully observed:

"Keynesian economics really does (or did) have a legitimate function in a capitalist economy wracked by business cycles. Any honest, solvent government can use Keynesian strategies to good ends when a cycle tanks.

"The problem, which you guys so rightly observe is that our government is far from solvent; it uses what are called 'Keynesian' strategies to mask what Marx would have called 'internal contradictions' - and it's not being honest with itself or its citizens, either. What we see now is not Keynesian - it's simply consequences of overreach by an empire in decline. It's not Keynesian at all, just chronic overspending."

Following what we feel is a deeply flawed economic strategy, the Obama administration issued over $2 trillion in government bonds - a record, by a long shot.

Mostly with the help of Asian governments, the Treasury managed to sell them all. But many thanks go to the Federal Reserve itself. Through its program of quantitative easing, the Fed bought billions upon billions of Treasury paper to suppress American mortgage rates and ease the pain of the housing bust.

This, to put it bluntly, cannot last. The Fed ended quantitative easing on March 30. Mortgage rates have already reached an eight-month high since then.

But the real threat to the plan to keep rates low may come from outside the Fed's purview. On January 25, 2010, the Obama administration announced a $6.4 billion arms deal with Taiwan. Two weeks later, the Treasury auctioned $16 billion in 30-year Treasury bonds. The Chinese failed to show up in customary fashion. Yields ticked up from 4.68% to 4.72% by the end of the auction.

The fear that the Chinese would simply slow their consumption of US debt was all that was needed to drive up rates in the US.

The worst inflations in history took place when savers and investors lost confidence in the integrity of the currency, while governments handed out purchasing power to entities that did not earn this purchasing power through past production.

By promising to suppress dollar-based interest rates well into the future, the Fed is giving investors little reason for faith in the dollar. Except for the inherent weakness of the euro, the dollar would already have "exited stage left."

The American government cannot continue financing bailouts and future growth with borrowed money. The national debt stands at 90% of annual GDP, the highest since World War II. In the face of looming entitlement disasters like Medicare and Social Security, our debts might grow even larger... but our creditors will assuredly not grow any kinder.

"We are very concerned about the lack of stability in the US dollar," Chinese Premier Wen Jaibao said last month. He oversees the biggest cache of US government debt in the world - roughly $889 billion in US Treasuries. As China's worries grow - along with the rest of the world's - creditors will demand higher rates of return. Bond yields will go up, prices will go down.

What's more, China and many other foreign creditors have historically bought Treasuries in order to suppress the value of their currencies. Now that so many emerging markets have "emerged," currency suppression isn't providing the boost that it used to. If inflation becomes a problem in emerging markets, currency suppression will cease to become an objective. This would also remove a major source of demand for Treasuries.

When will it happen? How bad will it get? We don't know. But our money says it'll happen in the next 10 years. Holders of US debt will wish they were holding something - anything - else. Anything but the promise of a fixed stream of steadily debased US dollars. Investors will wish they sold US bonds short when they had the chance.

So how do you short US bonds without going to the trouble of borrowing them? Fortunately, there's an exchange-traded fund (ETF) that lets you do just that.

The ProShares Short 20+ Year Treasury ETF (NYSE:TBF) returns the daily inverse of TLT, the Barclays 20+ Year US Treasury Index. The focus is on long-dated bonds - the securities that Treasury will have the most trouble floating if global confidence in US debt wanes.

In the last half of March, Treasury had a series of lousy auctions. TBF responded just as you'd want it to - rising 2% in just a couple of weeks. This is just the beginning.

All of that probably makes intuitive sense to you. After all, we're betting against an investment class that's gone nowhere but up over the last generation. So don't be surprised if this asset goes nowhere but down during this generation.

Addison Wiggin
for The Daily Reckoning Australia

Peter Schiff Stock Picks from 1/23/2009

http://money.cnn.com/2009/01/20/magazines/fortune/okeefe_schiff_sidebar.fortune/index.htm

5 Peter Schiff Stock Picks from 2009. Lets see where they are today....

These picks were made on 1/23/2009

Ascendas-REIT (SIN : A17U)

* Price on Jan 12: $0.95
* 52-week range: $0.75-$2.00
* Dividend yield: 11.4%
* Market cap: $1,382 million

Price Today: $1.950

Duet Group (ASX: DUE)

* Price on Jan 12: $1.35
* 52-week range: $1.07-$3.29
* Dividend yield: 14.0%
* Market cap: $852 million

Price Today: $1.78

Singapore Petroleum (SIN : S99)

* Price on Jan 12: $1.58
* 52-week range: $1.25-$6.01
* Dividend yield: 25.5%
* Market cap: $816 million

Price Today: $4.30

Skyworth Digital (HKG: 0751)

* Price on Jan 12: $0.06
* 52-week range: $0.04-$0.13
* Dividend yield: 11.8%
* Market cap: $137 million

Price Today: $7.29 (HOLY CRAP)

Vitasoy International (HKG: 0345)

* Price on Jan 12: $0.41
* 52-week range: $0.34-$0.51
* Dividend yield: 3.6%
* Market cap: $420 million

Price Today: $5.29 (Really?!?!?!)

Everyone wins with free trade

http://www.realclearpolitics.com/articles/2010/04/28/everyone_prospers_with_free_trade_105341.html

Privatization of the Social Security System in Chile

http://www.youtube.com/user/catoinstitutevideo#p/u/34/jVmCdS57xqw

From bankrupt to 9% annual return

More Greece News

http://www.reuters.com/article/idUSLDE63S17H20100429?type=marketsNews

The Fed is going to be keeping those rates low for a long time

http://latimesblogs.latimes.com/money_co/2010/04/federal-reserve-fomc-interest-rates-extended-period-bernanke.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MoneyCompany+%28Money+%26+Company%29

Greece is leading the way, but Spain is catching up real fast....

http://www.businessweek.com/news/2010-04-28/euro-touches-one-year-low-as-s-p-cuts-spain-s-debt-rating.html

Downgrades are for everyone!!!

US FOOD PRICES

http://inflation.us/foodinflationspiralingoutofcontrol.html

Interesting read regarding where our food prices are headed

Brazil Raising Interest Rates

http://www.businessweek.com/news/2010-04-27/brazil-rates-set-to-surge-2-25-points-in-trading-update1-.html

Jordan you might find this interesting

Couple Posts on the Greece Debt (Euro Debt really)

http://www.marketwatch.com/story/sp-cuts-greece-ratings-to-junk-status-2010-04-27

http://www.marketwatch.com/story/gold-prices-ease-back-with-eyes-on-dollar-greece-2010-04-27

http://www.kitco.com/ind/katz/apr262010.html

http://www.kitco.com/reports/KitcoNews20100427_pm.html

http://www.reuters.com/article/idUSTRE6360JO20100428

http://online.wsj.com/article/BT-CO-20100427-724085.html?mod=rss_Currencies



That should get everyone started

Why central Planning and Socialism are not sustainable without brute force.

--Whether Greece's debt crisis ought to have any real affect on the share prices of Aussie banks and resource companies is debatable. What's not debateable is that stock markets all over the planet are selling off on the down-grading of sovereign debt in Greek and Portugal. The S&P was down 2.3% in the U.S, London down 2.6%, Germany's Dax down 2.73%, and in Lisbon the market sold off by 5.36%.

--All of that was a bit predictable, given how far markets have come since last March without, we'd argue, much improvement in the debt picture that caused the whole GFC in the first place. What is persistently strange about these sell offs in European and emerging markets is how it causes a rally in the U.S. dollar and U.S. Treasury bonds, given how lousy America's fiscal position is.

--But the bond market has ruled with the big thumbs down on Greek debt. In the last two weeks, the yield on 2-year Greek debt has more than doubled from 6.1% to 15.35%. This means the market is not confident Greece can meet its obligations and roll over new debt by May 19th. And the market is essentially rejecting the bailout/back stop offer engineered by the EU and the IMF.

--The soaring bond yields are just another way of saying that investors now expect a restructuring of Greek debt which includes a default. Bond investors are not going to be made whole. But something will have to be better than nothing.

--The fact that Greek trouble has spread to Portugal and many of the other fiscally-challenged European states shows what really needs restructuring-expectations on the level of social welfare the nation state can be expected to deliver without bankrupting an economy. But this is a larger issue than politicians have the stomach (and the intellect) to deal with.

--So a great whirlpool of uncertainty now begins to swirl over who is going to pay for what, or whether it can be paid for at all. That is not good for investors in the short-term. But there IS one way in which it's useful. It's preview.

--That is, the Greek problem is also a Euro problem. And the Euro problem is a paper money backed by nothing problem coupled with high levels of debt. You can see that the only resolution to a sovereign debt crisis is default of inflation. Because it does not control its own interest rates or money printing (monetary policy) the Greek government is at the mercy of the European Central Bank. And being genetically descended from Germany's Bundesbank, the ECB is not willing to print Euros in order to save Greece. Default remains.

--The Federal Reserve, of course, CAN print as much as it would like. And this is why we firmly believe the resolution of America's own sovereign debt problem will be inflation. That's the investment scenario we're preparing for...a world awash in increasingly worthless paper claims on the full faith and credit of the United States government. But in the interim, the dollar is getting the 2008-like "flight to safety and liquidity" bid.

--You may not believe this, but in the midst of the accelerating Greek crisis, it's not even the country that keeps us up at night. That distinction would have to go to China. Mind you we're not sharing the same bed with China. It's a big country. It wouldn't fit on our queen sized mattress.

--But like it or not every Australian investors is in bed with China, or in a relationship if you prefer. And for the last ten years, that's been a very amicable relationship. And arguably, as big a story as the sovereign debt crisis is (because it impacts global capital flows, which highlights an Australian vulnerability to the rising cost of capital), what happens in China will have a longer-lasting effect on the Aussie share market and the Aussie economy.

-- Shanghai stocks fell 2.1%, according to Business week. "Concerns about government efforts to cool a housing price boom have hurt makers of building materials and construction-related machinery, said Liu Feng Feng, a strategist for Central China Securities in Shanghai."

--This is the subject of a new report we've put together that you can read tomorrow. China has become a giant construction site where loose credit policies have unleashed a building boom that's fuelled demand for Aussie resources. When China's credit bubble pops, the real estate money machine will grind to a halt. And then?

--It all depends on how much confidence you have in men to manipulate markets. It would be more than a little ironic if Beijing's central planners pop the bubble and unintentionally unleash a real estate collapse. But this is the trouble with thinking a small committee of decision makers can manage an economy of 1.3 billion people.

--The problem, as Friedrich Hayek pointed out, is one of knowledge. There is just too much to know for so few people. How is any one group of people supposed to know what the idea price of money is, or where credit should be allocated and to whom? Those decisions are best left to individuals with local knowledge acting in their own best interests with transparent pricing information that actually reflects what people want and what they're willing to pay.

--China can tax third homes on individuals and curb credit or it increase land supply to try to make home values appreciate more slowly. But its property market is fundamentally organised to maximise revenues for local government. It encourages speculation. And the bubble is already baked, full of Australian coking coal and iron ore and zinc and copper and coal.

--It's the bursting of China's centrally planned bubble that looms largest for Aussie investors. So even if you get a relief rally after some transparently false resolution to the Greek crisis, you may want to consider a much bigger picture and a longer-term investment game plan. Stay tuned for that.

--And here's a bonus thought for the day: what if the inevitable collapse of the social welfare state funding model leads people to change their primary loyalty from the State to something more local? For starters, it would mean, we reckon, that the centralising principle of the last 200 years of Western history (in commerce, politics, and living arrangements) may have reached its natural limits.

--The centralising principle would reach those limits for various reasons. One is the inherent fragility of complex systems and their increasing vulnerability to systemic collapse. Globalisation and the division of labour on a global level creates tremendous complexity AND vulnerability.

--Politically, the centralising principle, as emotionally successful as it has been in winning market share/votes (let us live at one another's expense) is being exposed as economically fraudulent (as well as morally wrong to coerce other people to your way of thinking through taxation). It's a nice idea, but it may be unaffordable without literally mortgaging the future or destroying our standard of living in the pursuit of a social welfare utopia.

--Just to refresh, Robb defines a primary loyalty as "A connection to a non-state group that is greater than loyalty to a state. These loyalties include those to clan, religion, tribe, neighbourhood gang, etc. These loyalties are reciprocated through the delivery of political goods (by the group that the state cannot or will not deliver)."

--In a prosperous liberal democratic state where people see justice as fair and view the burden of civilisation (taxes) as equitably shared, where corruption is not rife and opportunities exist for social and economic mobility, having your primary loyalty to an abstraction (the rule of law or the State) is no problem. It is the norm.

--But when the State expands the promises it makes and then fails to deliver on more basic ones, people begin to question their primary loyalty. This doesn't mean they revolt. No one really wants to do that. You only do that when you have no recourse economically and no better prospects.

--We reckon a retreat to a more local way of life is in the works. The rising cost of energy and capital will be one factor. And frankly, to use a Marxist term, people might feel less alienated from their labour and life if they felt more connected to their neighbours and their work. And that's more possible in a small, more sustainable resilient community than it is in an artificial mega-city of millions. But now we're just prattling on! Until tomorrow...

South Korea-opportunity or trouble?

I am looking heavily into the Latin American sector right now because of the high source of natural resources and the emergence of a middle class in such places as Brazil. This is a recent ETF that opened and a lot of investors think that it will be a good buy. South Korea is a little risky in my opinion, but has always had a strong consumer goods base. Check out this article if you are interested in Int'l ETFs.

http://blogs.forbes.com/streettalk/2010/04/15/south-korean-etfs-launch/

For interest in how to choose a good ETF I would follow the criteria established in this article.
http://www.investopedia.com/articles/exchangetradedfunds/08/ETF-choose-best.asp

Also, pay attention to the liquidation of an ETF. These are funds that you want to hold on to for a long time (technology, energy, alternative fuels) are all industries that will be around for a while. If the fund doesn't have legs, beware because you will have to pay taxes on your capital gains if it is liquidated.

Gold Stocks

http://www.caseyresearch.com/articles/3358/gold-stocks:-math-today,-magic-tomorrow/


While I prefer physical Gold, this article touches on owning mining company stocks. Interesting read on how stock prices of Gold companies have not increased (yet) as much as is realistic in relation to the price of Gold. Hard part is to decide which companies are actually worthy of investment.

Big Moves for Gold and Silver Prices

http://www.kitco.com/ind/degraaf/apr232010.html


It always scares me when the whole world thinks something is going to happen, usually means it won't, especially when it is being said by the same people who say we are in recovery.

Collapse of The Dollar

One of the things that I am seriously considering doing right now is going short on the dollar against a sound curreny (the question is does one even exist?). For more information regarding the imminent Dollar Collapse see links below.

http://www.youtube.com/watch?v=EW0cBbNFalw&feature=related

http://www.youtube.com/watch?v=7EWjogDOdB8&feature=related

http://www.youtube.com/watch?v=SzmYI_4XCbM&feature=PlayList&p=97D691C1469FE5EB&playnext_from=PL&index=0&playnext=1


My question to all of you is what currency do you view as the most sound? I really would love to do this over the long term, but right now with the Greece bailout just announced I am leery of the Euro. I am leery of the Australian Dollar because of the Housing Bubble they have. I know Canada has a deficit (though nothing like ours). Maybe Singapore? Any suggestions?

Reason

I'm not much of a political activist, but this online newspaper offers a Libertarian view of economics and public policy. http://reason.com/ Usually instead of intense criticism of policy, the writers from this publication aim to offer suggestions, such as with the problem of overcrowding in California's state prisons, their suggestion is to allow private companies to run jails. This is already being done in other states for about a third of the cost of what the state of California pays per inmate on a daily basis.

Commodities and natural resources are the future. http://www.dailyreckoning.com.au/etfs-as-a-resource-investment/2010/04/21/ Investing in these today is a smart investment. I am especially looking to Brazil with their new found oil reserves off the coast of Rio de Janeiro. Latin American is starting to increase rapidly, especially with the emergence of a Middle Class in Brazil.

Goldman Sucks

http://www.washingtonexaminer.com/politics/Goldman-Sachs-wants-regulation_-not-laissez-faire-91639489.html

Why Goldman Sucks wants Regulation and to not allow free market principles to work.

Regulations always benefit the big guys, because they can pay the politicians. Corporatism at its finest.

Jim Rogers

Jim Rogers started a Hedge Fund with George Soros in 1980. Said Hedge Fund went up 4800% during the decade. He called commodities going up in 1999, and he is saying they are going to go up again.

Here are some clips to enjoy from him:

http://www.youtube.com/watch?v=rR7TiRuMWw8 Jim On Bloomberg 4/7/2010 regarding Commodities and Gold Prices

http://www.youtube.com/watch?v=ySFKTGMhvY8 "Studies show that you would have made 300% more owning the actual commodities rather than the stocks of the commodity producers."

http://www.youtube.com/watch?v=JH5MddRPPAg&feature=related "Geithner has been wrong for 15 years"

http://www.youtube.com/watch?v=eeSIJF1vOPU&feature=related Bright Future

The Daily Reckoning

Another investment/libertarian outlet that has very much impacted my thinking regarding the macro-economic problems that are facing our country was introduced to me by Vince Dilley, and is named The Daily Reckoning. I read the Daily Reckoning every day for great, unbiased, and realistic analysis. Though the column is written in Australia, they feature like-minded analysts from throughout the world.

http://www.dailyreckoning.com.au/ is their main website.

I have signed up for the daily newsletter, which I read daily.

Peter Schiff was F#$KING RIGHT

My economic thinking has been heavily influenced by Peter Schiff, who was introduced to me by my good friend Alan Munk (who is also a contributor to this blog). Being that some of you might not be familiar with his work. I am going to post a couple of my favorite Peter Schiff Videos.

http://www.youtube.com/user/SchiffReport : His youtube channel

http://www.youtube.com/watch?v=tZaHNeNgrcI Peter Schiff was right 02-09

http://www.youtube.com/watch?v=Z0YTY5TWtmU Peter Schiff was right CNBC edition

http://www.youtube.com/watch?v=2I0QN-FYkpw&feature=related Peter schiff was right 06-07 edition

http://www.youtube.com/watch?v=jZFmtvXPER8&feature=related Kudlow and Company with the idiots.



If you are smart, please check out europac.net (it is his investment firms website)