Friday, May 22, 2009

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.

20 comments:

Anonymous said...

Hi. Thanks for sharing your thoughts. Are you expecting a hyperinflationary depression as some economists like John Williams of ShadowStats are predicting? Or a deflationary depression according to Weiss and Mish?

Jeff said...

Anon

I am on the fence. I have always been in the deflation camp. If the government doesn't stop spending and running up massive debts then the hyper inflation scenario is on the table.

My guess is the bond market will force spending to stop
The government would then ring fence the losses and deflation would be more likely.

The jury is still. Out the spending needs to stop or we will see hyperinflation

Scary times.

ryan said...

Love your blog.

Too bad good writing tends to develop in bad times.

Jeff said...

Ryan

Thanks a lot.

I look forward to writing about the recovery down the road.

Gloom and doom is no fun but my number one promise that I made to myself when I started this blog was to be completely honest and call them as I see them.

I may be wrong at times but what I write will always be honest.

Most of the MSM have lost their way in this regard.

I can promise you that it will never happen here.

J

Anonymous said...

Jeff,
dont you think that debasement of USD via QE and deficits could be only achieved by destroying real economy as all effort to debase USD will be meet with rising interest rates, which will further destroy rest of real economy (via defaults and higher debt repayments)?

I count in my scenario, that at some point the printing press will have to be stopped, if US doesnt want to become another Zimbwave.

jeff said...

Anon

Bingo!

You got it! You basically just desribed by whole thesis.

I have written about everything you just described.

Rates rise, spending stops, and the bailouts end which then collapses the economy.

If the spending doesn't stop then its Weimar Germany, Argentina, Zimbabwe(pick your choice) all over again.

Its always nice to hear from people thet "get it"!

Most unfortunately most people have no clue where this is all headed.

Thanks for sharing your thoughts.

jeff said...

Some Housekeeping:

Taking some R&R and heading away for a few days.

I might have something up tomorrow if I get back.

J

teddy bear said...

especially for all of you from Mish's blog

http://www.youtube.com/watch?v=2fq2ga4HkGY

Zimbabwe or Japan? :D

CT-Hilltopper said...

Hi Jeff,

I'm in the midst of a rare three day weekend myself, which I'm using to have fun with my kids before their world unravels. We did some fun stuff today, we'll do some more fun stuff tomorrow, on Monday we'll go to the parade...I never get to spend a lot of time with my kids. I'm always at work. Always traveling. This weekend and next weekend, we're doing stuff together.

How will it all play out?

Deflation of assets (cars, homes, boats). The things that the boomers counted on to help them to retire (some of them), their paid off homes, aren't going to help worth a damn. There's going to be a lot of pain out there. A lot.

Inflation of prices for oil and gas products, food, etc. Plus the purchasing power of the dollar will be devalued. If you have dollars, you'll get good deals on things you won't need (houses, cars), but you won't be able to afford to eat or heat your home.

That's what I'm thinking anyway. I hope that makes sense.

Anyway, I've got stuff squirreled away. My kids and I will be okay for a quite a while. Now I'm trying to find a way to spend more time with them. They are the number one priority right now.

I can't put into words how upset I am at the people who screwed this country up for my kids, so they won't be able to enjoy many of the things that I was able to enjoy. I am angry that I am preparing for my country to crater while 90% of the morons on the street are blissfully unaware that any of this is even taking place.

Oh well. I am off to grill some steaks and relax. I hope that you and yours have a good weekend.

Or at least try to.

snood said...

I don't think inflation will be able to take hold until the government is able to get lots of money into the hands of consumers. Gas, food, etc can only go so high before consumer demand falls.

Companies have eliminated cost of living increases like those of the 70s/80s and for the most part wages have risen less than inflation for quite a while.

Pumping money into banks may cause inflation in those things that banks like to buy, probably other banks.

Jeff said...

Snood

Its a tough call.

If the dollar continues to spiral downward demand won't matter.

Oil and many other assets are priced in US dollars. If the greenback continues to slide anything thats priced in USD will rise.

I think the world is beginning to lose confidence in our credit rating and thus our currency.

Going long any asset priced in USD as a hedge is a good move at this point.

I am very concerned with the amount of treasury issuance over the next few 2 weeks($170 billion).

The dollar should continue to slide as long as we QE and dig deeper deficits.

I totally agree that deflation is a powerful force here. However, currency devaluation overpowers deflation in anything US dollar based.

At some point in this cycle massice inflation will be a massive problem.

I don't think any of us really know the timing of it however.

this is why I am getting diversified.

GL

J

Jeff said...

CT

+1

I hear you!

I am on the exact same page that you are. I hope you enjoyed your steaks.

Spending time with family is one of the most important things that we all need to do right now.

I went to a nice cookout today with some good friends. Had a blast drinking some wine.

I plan on grabbing a nice steak tonight in the city. I think we all need to enjoy life right now because it will become increasingly more difficult down the road.

I was talking to a financial advisor that I have some money with on Friday about this mess. He was always been a bull and he fought me when I totally changed my portfolio around last year. Wow What a difference a year makes.

He now has his clients in 70% cash has put a bunch of them into BEARX now. The guy manages a nice chunk of change.

We discussed the bond market. He was shocked at my aggressive short in bonds. I explained why and he really didn't fight me like he used to. We both agreed that we hate owning metals but we both agreed that its a must hold in a market where the dollar is collapsing.

It was a great convo and I have a lot of respect for him.

He told me my I was one of the best performers among his clients last year due to my move to cash and shorts..lol

Enjoy the holiday!

Jeff said...

Teddy

LOL Love it. Classic.

I don't know how you find this stuff!!

Keep it coming!

CT-Hilltopper said...

Here's a link for you, and it's a perfect link that goes right along with your original post.

It shows exactly how screwed we are.

usdebtclock.org

I really don't have much of a comment on this. Just, "We are Screwn."

Back to my kids.

See ya later, Jeff.

Jeff said...

CT

OMG

How depressing. Its doing to take decades to dig out of this mess.

Enjoy the holiday!

CT-Hilltopper said...

And now the End Game...

http://jessescrossroadscafe.blogspot.com/2009/05/obama-we-are-out-of-money.html

I decided to check the internet for news before calling it a night. I wish I had just left well enough alone.

Technically, The US has been insolvent since Bill Clinton left office, he was the last President with a surplus. But none of the others have ever said it out loud.

Its the end game Jeff. It still might take a while to play out. I'm a little stunned that I'm sitting here watching it happen, to tell you the truth. I'm so happy my father isn't alive to see this. It would break his heart to see what's happened to his country. I don't think he'd be surprised though. He never cared that much for politicians or bankers, just flat out didn't trust them.

God, what a mess.

ubutranscendent said...

Jeff,

Please bear in mind that the article about the potential for food riots in China is not new - it was first published in the English-language press in early January 2009.

Here's a link:

http://www.channelnewsasia.com/stories/afp_world_business/view/400747/1/.html

The situation with T-bills and bonds has the Treasury and Fed between a rock and a hard place. In chess, the position would be called Zugzwang - all moves lead to some loss.

When we look back in a year, it may be that a tipping point will be identified in May-June '09.

Ubu.

ubutranscendent said...

Hmmm...

The link was truncated.

Let's try again:

http://www.channelnewsasia.com/stories/afp_world_business/view/400747/1/.html

Ubu

ubutranscendent said...

No dice. A quirk in the blog commenting software, evidently.

I'll break it into two lines that you will have to paste together.

One more time:

http://www.channelnewsasia.com/stories/
afp_world_business/view/400747/1/.html

Ubu

Jeff said...

ubu

Thanks for the link.

the last one worked by the way.

Yup this is going to be a serious game of chess between China and the USA over Treasury sales.

Both countries face enourmous challenges.

Lets see what happens!