The Treasury Spiral Continues

Hello All

Just a quick note on this holiday weekend. The treasury sell off continued today as the bond market increasingly worries about the USA's debt levels. Take a look at the TNX today:

My Take:

As you can see, bonds continue to sell off at an alarming rate. Gold was up again today for the 13th time in the last 16 trading days. Its appears that gold is developing into the most likely flight to safety out of treasuries. We shouldn't be surprised. Gold has held its value for thousands of years. It would make sense to see huge inflows into the metals as the USA begins to drown in its own debt.

A couple of reads:

This story from Reuters added some fuel to the bond fire sale today:

"LONDON (Reuters) - The dollar fell to a 2009 low on Friday as fears intensified that the United States could lose its triple-A rating, while renewed caution about the world economy and banks prompted Asian and European stocks to slip.

The dollar's latest decline started when ratings agency Standard & Poor's cut its ratings outlook on Britain to negative from stable, stoking fears other AAA-rated countries which are running huge debt levels could share a similar fate.

Moody's Investor Service said on Thursday it was comfortable with its triple-A sovereign rating on the United States but that it was not guaranteed forever.

"The main issues are related to yesterday's movement on fears that the U.S. might lose its triple-A rating," said Roberto Mialich, FX strategist at Unicredit in Milan.
"This exacerbated the dollar's losses over the last few days ... (and) for the time being it's hard to imagine a sharp reversal of the dollar's trend."

This article around civil unrest due to economic struggles in China added further fuel:

"BEIJING (AFP) – China's state media has issued an unusually candid warning of the risk of mass riots this year, in what observers said Wednesday reflected increasing jitters about the global economic crisis.

Outlook magazine, an authoritative weekly published by the Xinhua news agency, said in this week's edition that the economy might become so bad in the coming months that China's social fabric could start unravelling.

"Due to deepening economic difficulties and social security problems since the second half of 2008, enterprise closedowns, layoffs and labour disputes have significantly increased, triggering a rise in mass incidents," it said.

"Economic pressures affect the sentiment of various social strata, and disadvantaged groups in particular are seeing their livelihood threatened. Their pent-up discontent could easily burst out... and spark mass conflicts."According to one ominous statistic cited in the magazine, close to 10 million migrant workers out of a total of 120 to 130 million have lost their jobs as crises overseas have hit the nation's export-dependent economy."

My Take:

Frightening stuff folks. I feel sick to my stomach. How can China continue to buy treasuries when their people are starving as a result of their collapsing export economy? Easy answer: They can't. China will be forced to start using their reserves at home in an effort to calm the sheeple. Governments fail when their citizens rise up as a result of starvation.

There are also some unconfirmed reports on Drudge that China may balk at buying more treasuries. Drudge hasn't put it up yet so stay tuned.

Could China use civil unrest as an excuse to get out of buying our worthless debt? Just thinking out loud here folks. I find the timing of the civil unrest story to be an interesting coincidence.

Bottom Line:

I am terrified by whats happening in the bond market. It appears from various reports that the threat of the UK losing its AAA rating has hurt the US more than the UK. Both countries are viewed in the same way economically. However, our debt to GDP levels are worse over here as we continue to bailout America.

I made some drastic changes in my long term investment portfolio today. I bought a bunch of silver and gold(GLD and SLV). Metals should be a part of your investment portfolio at this point as a hedge against inflation IMO. I also bought some TBT as a hedge against the treasuries that I own.

How fucked up is the world when you need to hedge yourself in fixed income!

Enjoy your Memorial Day festivities this weekend. I plan on having several cocktails over the weekend in an attempt to forget about the oncoming economic freight train that's about to rip apart our bond market and the economy.