With public held debt already at a spiking 4.1 times gross US savings and an even more eye-popping 23 times net private, state and local savings, one should expect even more upward pressure on US Treasury interest rates as our spend-happy government is forced to expand its take of the public credit market. FULL ARTICLE
Source link: http://blog.mises.org/9630/obama-says-short-us-treasuries/
Obama Says Short US Treasuries
Previous post: The Fundamentals: with a wink and a nudge
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I came to the same conclusion several weeks ago. It is notoriously hard for individual investors to short sell US Treasuries, but there are a couple of synthetic ETFs that I’ve found useful: PST and TBT, which attempt to return twice the inverse price move of the 7-10 year UST and the 20+ year UST, respectively.
Corporate bonds also shouldn’t be ignored in an inflationary environment. That is, it is worth looking into shorting them. Prices can diverage fairly significantly from par, but will converge as the bond nears maturity, limiting the downside potential for a short (a nice feature when equity shorts have an infinite downside). In a rising rate environment, bond shorts combined with long positions in gold or a short-UST fund/ETF, may be a good place to ride out the storm.
This article is just about perfect! Now, if all the journalists would just read it, and digest it.
Finally, someone has posted a good inflation investment, unlike all those in the past that have pushed gold. But be careful, at some point you have to cover your short. Set limits and stick with them!
What happens if they ban shorts on U.S. debt?
I agree with most of the article except for this -”Federal Reserve discouraging savings by stubbornly holding interest rates near zero.” In reality, the fed just simply follows the rates the marketplace sets. Let me repeat, the Fed does not set rates, the market does. The fed always lags.
Money and Ethics
Wednesday, March 18, 2009
AIG And Congress And The Federal Reserve!
AIG got the money from where? Congress!
Who in Congress voted to give money to these special interests? Chuck Grassley and the rest of the imbeciles in Congress.
Congress got the money from where? The Treasury Department!
Where did the Treasury Department get the money? The Federal Reserve!
Where did the Federal Reserve get the money? It used its authority to counterfeit to just print it out of thin air!
Who gave the Federal Reserve the authority to counterfeit the dollar? The Congress!
Why did the Congress give the authority to counterfeit the dollar to the Federal Reserve? Because the corrupt politicians in power in the first decade of the 1900′s were in close collusion with the big banks and it was a way for both to benefit?
Was this Constitutional? No!
What is the effect of having an unconstitutional institution in control of the money supply?
First of all, the dollar is being destroyed. It is only worth 3 cents compared to its value of $1 in 1913.
And secondly, the Federal Reserve system launched an even more ominous constitutional breach which is nothing less than an unConstitutional coup that does whatever it wants. Congress has lost all ability to pull on the reins of the beast!
What can be done? Get rid of the Federal Reserve.
The reporter asked “What will replace the Fed if it is abolished?” The answer is: a constitutional government that will have enough strength to combat the economic terrorists who are trying to provide sustenance for the unConstitutional coup.
How will the Federal Reserve be abolished? By the revolution for the cause of liberty that is stirring all around the world.
I actually moved half of my 401k into a mutual fund that shorts long bonds (RRPIX) right after the parabolic spike in their price last December. I may dump it, however, once the Fed starts monetizing and wait for inflationary pressures to start taking hold.
“But there’s more. It just so happens that those pay-as-you-go government trust funds, the ones with some $50 trillion in unfunded liabilities, have been a big help in funding the government’s borrowing needs for years. Why is that important? Because it means the government did not have to tap the credit markets, the public, for the full amount of its funding needs….”
This is mistaken on several counts. First of all, the trust fund balances are effectively merely records of the cumulative amounts of useless excess payroll taxes already paid, seasoned with the assignment of phony interest earnings. They are neither assets nor liabilities, and are of no economic significance, now or in the future. All that matters is the future balance of payroll taxes and mandated payouts.
Secondly, the trust funds have not and cannot have ‘helped in funding the government’s borrowing needs for years’. The actual excess payroll taxes themselves COULD have done so, but, in reality, each $1 of excess payroll taxes encouraged Congress to spend an additional $1.72.
Regards, Don
Apolitical Political Commentary!
Wednesday, March 18, 2009
Gold Prices And The Prospect Of A Federal Reserve Audit!
If you were unethical and in trouble what would you do?
If you knew there was a possibility that you were going to be audited and if you have already irretreivably stolen and spent trillions what would you do with the assets that remain?
What if the unConstitutional coup that is your overlord cannot sustain its camouflage if the gold price continued to attract investors who are trying to flee to some market asset that is real and at the same time the assets in your possession are the remnants of gold that are still unstolen?
Sell the gold on the world market to cause the gold price to fall while the other pawns of the unConstitutional coup use fear and compulsion to try to convince investors to buy U.S. Treasury bonds. This is the strategy of the Federal Reserve and its forked-tongued whispering advisor, the Treasury Department.
What about the gold, these assets that are supposed to be in the possession of the Federal Reserve? If the audit actually happens the scam is exposed anyway so totally depleting it has no restraining influence. All that can be done at this point is to hope that the unConstitutional coup can propagandize the public, and pull hard on the puppet strings of all its marionettes in the Congress to prevent the audit, and use the confusion in the market caused by dumping gold to buy time so the international monetary system devised by these economic terrorists can be imposed on a propagandized and unsuspecting world population.
Fed to buy $300 Billion in long term treasury debt
http://finance.yahoo.com/news/Fed-to-buy-up-to-300B-apf-14679757.html
so its already happening…
Paul,
The Fed does influence interest rates. All you have to do is look at the current t-bill rates as of 2:15pm today when the FMOC announced their decission. Fed is going to spend another 1.1 trillion to buy everything and all those rates are dropping.
Speak of the Devil! I missed the FOMC statement earlier. They are indeed now monetizing in the 2 year and 10 year sectors. I’ll keep an eye on the technicals now. After their initial spike, long bonds are trading right at their $130-ish resistance level. If they break through to the $131-$132 level then I’m dumping RRPIX for the time being. Luckily, the other half of my 401k is in gold mining stocks, closely related to the Gold Bugs index — and that gained more than RRPIX lost today. I guess diversifying bets against the dollar helps keep gains steady and relatively stable.
Shorting treasuries is a terrible idea right now. Seems that the Fed has an almost religious fixation with keeping long term rates below 4% and I’d expect them to continiue monetizing at that level.
Diversified shorts against the US dollar (or buying gold) would seem like a better approach at this point in time.
To Donald Lloyd
My point re the trust funds is that they represent Federal spending that would have to have be funded directly from the credit markets if not for social security and payroll taxes. As babyboomers move toward retirement – we are in first year now – that source of funding will be in decline, UNLESS taxes are raised or benefits reduced. To me this is very significant as it means more stress on credit markets. If I’m missing something, please explain.
To all readers / Note on timing,
I want to stress that shorting T bonds here has short term risks owing to short term effect of Fed purchases on rates (as well as noted possible deflation scares). Once the Fed starts its monetization process in earnest, and we can access its impact, we will have a better idea on an “all in” entry point. I wrote an essay on this issue and related “inflection point” matters, which can be found on Financial Sense http://financialsense.com/fsu/editorials/2009/0309b.html
Mashuri,
Who is your 401k through??? I am with Fidelity and cannot invest in gold funds. Just stock mutual funds, money market funds, and t-bonds.
I’ve actually been considering dumping my 401k and starting an IRA to give me more control.
Michael,
“My point re the trust funds is that they represent Federal spending that would have to have be funded directly from the credit markets if not for social security and payroll taxes. As babyboomers move toward retirement – we are in first year now – that source of funding will be in decline, UNLESS taxes are raised or benefits reduced. To me this is very significant as it means more stress on credit markets. If I’m missing something, please explain. ”
What you might be missing is that all of the problems are entirely encapsulated in the future SS shortfalls. The trust fund is neither an ameliorization nor an additional problem source, no matter what its nominal balance. The future additional burden on the credit market will be identical whether the borrowing directly makes up the shortfall with Congressional approval if the trust fund is exhausted or if the borrowing is used to ‘redeem’ remaining trust fund ‘bonds’.
Regards, Don
Willabus,
It depends on what deal your employer has with Fidelity. My 401k only allows me to invest mutual funds — but ANY mutual fund that Fidelity brokerage has access to. No stocks, ETF’s, futures, etc. It’s sort of a semi-self-directed 401k I guess. If you can cnvert yours into a fully self-directed IRA, by all means, DO IT! YMMV, of course…
Behind all of those treasury bills, notes and bonds stands the almighty US dollar with its promise to pay…uh…nothing. Of course the dollar is legal tender for all debts public and private, but of what value is that to those who have no debts? It does seems reasonable to me that at some point, a sufficient number of people are going to look askance at the dollar’s value, and by extension all of those other treasury obligations. Of course there have always been people decrying the essential worthlessness of the dollar since it became fiat money, but until China’s premier recently expressed concern for the safety of China’s investments in US treasury obligations (http://www.washingtonpost.com/wp-dyn/content/article/2009/03/13/AR2009031300006.html), I doubt if anyone holding a trillion-dollars worth of such obligations has ever expressed such a potentially self-fulfilling doubt. Could his words prove to be the first small hole in the dike? Were they the muffled sound of a coming avalanche?
The market sees deflation ?? People expect deflation ?? That would mean people on fixed incomes will see their standard of living RISE. That would mean that all those bench warmers in the NBA will see their salaries decrease from the current average of $5.6 million per to what ? $25,000 ? Play 4 days of golf, win and here’s a check for a million dollars. When sanity returns to professional sports, then I’ll start to positon myself for deflation.
Thank You All for you Comments
Seems the Fed is going to monetize. I think this is step one in picking the bottom, and I will be watching closely how far the Fed can take rates down.
I agree with some previous comments that a short Treasury long long strategy is the way to go. Long term you win both sides. Short term hedged. Who now the inflection point, right?
Rates tanked today but Gold exploded too.
Do the same rules apply for mortgage backed securities as for treasuries? Does the fed simply create this money as well?
Wow Michael. It looks like you can read the future some hours before !
Good call.
I’m wondering something. The 10 years bond dropped almost 50 points from 3 to 2.5%. By artificially dropping the rates, aren’t they making them less attractive to debt buyers, specially the foreigners ?
If so, I guess the Fed will need to buy more and more bonds in the future accelerating the process.
glad to see someone else likes steve saville. i think his archived articles (viewable at safehaven.com) are some of the best applied austrian economics around.
Love Steve Saville. I subscribe to his newsetter and IMO its a great value. He BTW thinks its too early to short US T’s, perhaps about 1 year away. I think we agree on drivers, but not timing. He may be right
Not sure I made great call yet Procule. I shorted at recent spike low and have been waiting to add to that short position after the the Fed began to monetize. Well we are here, and what I will be watching is if Gold breaks out to new highs and if TIP spreads widen. If so, it would suggest that more and more investors are worried about imapct of this money printing on USD (ie inflation premium). In end, I think the combo of that plus foreignors backing away from AT LEAST new T issuance (on dollar fears as well as decining exports) does T’s in. BTW, gold surged and T’s out performed TIPs on this news
And I agree low rates are not going to make anyone happy for long. Premier of China just made a speech last week urging the US honor its obligations. He cant be happy today
Well, in holding to my exit strategy I chose to dump all my RRPIX holdings for now. 15% gain in 3 months ain’t too bad. Michael, I have been reading your and Saville’s articles for the past few months and they have been very helpful for me. Once inflationary pressures start to show themselves in the bond market, I’ll look to jump back in but, in the meantime, one can make some easy money in the futures market with a strategy (like daily or Globex pivots) that takes advantage of all this volatility.
The primary purpose of the Fed’s “bold” move to start quantitative easing was not just to stimulate the economy with lower bond rates. Rather, it was a deal made with China and possibly others to prevent them from dumping their Treasuries and to participate in purchasing the additional 2.5 trillion in new debt that needs to be sold. Here’s my theory:
China does not want the US bond market to collapse since they own so much US debt and would have a hard time unloading it all in a crash. However, they are aware of the bubble in Treasuries and need to have some guarantee that the bonds they buy now at bubble prices won’t lose half of their value in 6 months (or whatever). The Fed has given them this guarantee through quantitative easing, making itself the buyer of last resort at bubble bond prices. The $300 billion the Fed has dedicated for this purpose will be spent as a last resort when China tells them the prices are dropping too quickly for their tastes (they may have already said this).
As noted in the article, a bigger reason China does not want to continue buying is that they have less US dollars coming in due to their drop in exports to the US, therefore they have less US dollars with which to purchase new Treasuries. The way they will get more dollars to buy the Treasuries is that the Fed will purchase $750 billion of China’s agency debt (Fannie & Freddie), which China wants desperately to be rid of. I think the deal that was made was that the Fed would buy their agency debt if China pinky swore to spend the dollars from these purchases on Treasuries.
This means that the effect of the Fed’s move will not be just $300 billion injected into Treasuries, but $1+ trillion injected into Treasuries, with a net cost to China of $0 (it’s essentially a type of swap, agency debt for Treasuries). This will go a long way towards satisfying the necessary $2.5 trillion, and the appearance of China buying strongly into Treasuries will bring others into the market. This whole charade also gives the appearance that the Fed’s quantitative easing is only $300 billion, not the much more significant and inflationary value of $1+ trillion that it will be in reality.
China’s finance minister (or whoever it was) made a statement last week saying for the first time, publicly and definitively, that China would consider reducing or stopping its purchases of US Treasuries. This could have been a provocation to the Fed to make the deal they ended up making. More likely the deal had already been made, and this was just a marvelous piece of propaganda to feed people’s doubt about China’s continued purchases. This way the Fed’s move would have more impact, and China could then come back later and say, “Never mind, we’ve decided to continue buyiing US Treasuries. Everything’s AOK!” Even if they don’t say this publicly, their accelerated purchases will give observers this impression.
If and when China does decide to dump its Treasuries, there won’t be a press conference beforehand. They will just start selling as much as fast as they can in the middle of the night (for us), and this will be D-day for the dollar.
I know I’m going out on a limb here a bit and I can’t say I fully understand the bond markets and currency dynamics, but this scenario makes more sense to me then the Fed arbitrarily (and unanimously!) deciding to make this “bold” and reckless move for its stimulus effect.
Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down.
http://tinyurl.com/da295v
mB
There is no need for China to find these $ 415 bln at all, as they will be ensured by the so-called “multiplier effect”. Based on the latter, the initial injection /& 170 bln/ enters into the economic circular flow, sets off the multiplier process in motion and triggers a second /3 times bigger than the initial $ 170 bln/ stimulus reinforcement. Thus, the total stimulus package is a total of 1st before-the-multiplier injection /170/ and second after-the-multiplier injection /3 times 170/. As the first injection trigger the multiplier, the second is provided by the economy circular flow itself through increased consumption, business expenditures or both. It is a snowball effect.
Not just Treasuries, short everything. At least that’s how I felt upon reading an article about Robert Prechter of Elliott-Wave fame, written by Carl Watner and available at his Voluntaryist web site. Here’s the link. http://www.voluntaryist.com/forthcoming/thereisatide.php
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