Just a quick note:
I wanted to wish our national soccer team the best of luck tomorrow in the sweet 16 "knockout phase" of the World Cup. I thought this video was flat out awesome.
Landon Donovan's goal on Wednesday was one of the top 5 thrills I have ever experienced as a sports fan.
When I see the people of this nation come together like we all have watching the World Cup it gives me hope that we can work our way out of our financial crisis.
At the end of the day I will always love this country with all of my heart. I have no doubt my fellow patriots all feel the same way.
Enjoy!
Saturday, June 26, 2010
Friday, June 25, 2010
Thursday, June 24, 2010
Michael Pento on America's Ticking Debt Time Bomb
Must watch video here from Micheal Pento who is senior market strategist of Delta Global Advisors(click on the screen if it turns black):
My Take:
Pento totally nails IMO. If we want to save our countries economy we immediately need to slash spending.
The math is very clear here folks. We are on a path that is unsustainable and we cannot spend our way out of this problem. You don't solve debt issues by issuing more debt. This is insanity in it's purest form. You don't give a heroine addict more heroine if you are trying to get him to stop!
All you need to do is look at Greece if you want to see what America will look like in the next few years if we continue down this road. By the way: Yields on Greek bonds hit all time highs today. This triggered a nice selloff in Europe. We also got this out of Portugal today:
"The funding of Portuguese banks from the European Central Bank more than doubled last month, as financial institutions struggled to access international capital markets.
Portuguese banks borrowed €35.8bn from the ECB in May compared with €17.7bn in April, according to the Bank of Portugal.
The country was also forced to pay extremely high yields to sell five-year bonds as investors demanded big premiums amid the continuing worries over high debt levels in the eurozone.
It was forced to pay average yields of 4.657 per cent, almost 1 percentage point more than the 3.701 per cent paid at an auction at the end of May.
Steven Major, global head of fixed income research at HSBC, said: “These yields are approaching that magic number of 5 per cent that is likely to be charged by the European stability fund.
“If the yields keep going up at this rate, then they will be paying much more than 5 per cent next month, which is arguably unsustainable.”
My Take Continued:
Steven Major's quote obove pretty much sums it up. I think we are going to start hearing the word "unsustainable" on pretty regular basis moving forward.
After looking at today's trading in the bond pits, you have to wonder if the bond market is starting to hop on the unsustainable train as well. Treasuries on the long end of the curve sold off today despite the sharp move down in the equity markets:
Take a look at today's upward move on TBT which is an etf that shorts the long end of curve:
Time will tell whether or not this is the beginning of a trend or just an anomaly. Either way it caught my attention. The bond market usually acts well in deep red days as investors flock to the "safety" of bonds.
Ummmm...Perhaps they aren't looking so safe anymore?
The Bottom Line
If we do not move towards some sort of austerity program the economy is pretty much toast. As Pento warns in the video above, the only other way to get out of this is for the Fed to print.
This would be twice as bad as any "austerity" triggered depression because this country would face a serious inflation crisis.
History has shown us what happens to countries when hyperinflation hits. Governments fall and people starve because as the currency becomes worthless. This then leads to political and social chaos.
Geithner and Bernanke need to make an immediate 180 degree turn on how they are approaching our current depression.
The current can kicking policy via bailouts is not working, and it will be short lived because the math no longer works.
Time is running out folks. Prepare yourself.
Disclosure: No new positions at the time of publication. Owner of etf TBT in shorter term trading account.
My Take:
Pento totally nails IMO. If we want to save our countries economy we immediately need to slash spending.
The math is very clear here folks. We are on a path that is unsustainable and we cannot spend our way out of this problem. You don't solve debt issues by issuing more debt. This is insanity in it's purest form. You don't give a heroine addict more heroine if you are trying to get him to stop!
All you need to do is look at Greece if you want to see what America will look like in the next few years if we continue down this road. By the way: Yields on Greek bonds hit all time highs today. This triggered a nice selloff in Europe. We also got this out of Portugal today:
"The funding of Portuguese banks from the European Central Bank more than doubled last month, as financial institutions struggled to access international capital markets.
Portuguese banks borrowed €35.8bn from the ECB in May compared with €17.7bn in April, according to the Bank of Portugal.
The country was also forced to pay extremely high yields to sell five-year bonds as investors demanded big premiums amid the continuing worries over high debt levels in the eurozone.
It was forced to pay average yields of 4.657 per cent, almost 1 percentage point more than the 3.701 per cent paid at an auction at the end of May.
Steven Major, global head of fixed income research at HSBC, said: “These yields are approaching that magic number of 5 per cent that is likely to be charged by the European stability fund.
“If the yields keep going up at this rate, then they will be paying much more than 5 per cent next month, which is arguably unsustainable.”
My Take Continued:
Steven Major's quote obove pretty much sums it up. I think we are going to start hearing the word "unsustainable" on pretty regular basis moving forward.
After looking at today's trading in the bond pits, you have to wonder if the bond market is starting to hop on the unsustainable train as well. Treasuries on the long end of the curve sold off today despite the sharp move down in the equity markets:
Take a look at today's upward move on TBT which is an etf that shorts the long end of curve:
Time will tell whether or not this is the beginning of a trend or just an anomaly. Either way it caught my attention. The bond market usually acts well in deep red days as investors flock to the "safety" of bonds.
Ummmm...Perhaps they aren't looking so safe anymore?
The Bottom Line
If we do not move towards some sort of austerity program the economy is pretty much toast. As Pento warns in the video above, the only other way to get out of this is for the Fed to print.
This would be twice as bad as any "austerity" triggered depression because this country would face a serious inflation crisis.
History has shown us what happens to countries when hyperinflation hits. Governments fall and people starve because as the currency becomes worthless. This then leads to political and social chaos.
Geithner and Bernanke need to make an immediate 180 degree turn on how they are approaching our current depression.
The current can kicking policy via bailouts is not working, and it will be short lived because the math no longer works.
Time is running out folks. Prepare yourself.
Disclosure: No new positions at the time of publication. Owner of etf TBT in shorter term trading account.
Wednesday, June 23, 2010
Housing Collapse Intensifies
This one's going to leave a mark:
From Haver Analytics:
"· New home sales fell by nearly one-third last month versus April with the end to the Federal government's $8,000 home-buyer tax credit. New home sales at 300,000 followed a downwardly revised 446,000 during April. It was a record low for the series which dates back to 1963. The latest level was well short of Consensus expectations for 420,000 sales."
My Take:
Ouch! A whopping 33% miss versus consensus and yet the stock market hardly blinks....Amazing!
The bulls definitely have their blinders on at this point if they are ignoring numbers like this. Two years ago this would have triggered a 500 point sell off in the market.
Today, Wall St believes that the housing nightmare is backstopped by the Fed so they just assume that bad housing news is "priced in". HA! Good luck with that idea. What they fail to recognize is that the government cannot afford to continuing to backstop this garbage forever.
We are selling bonds at the rate of $100 billion every other week in order to finance this insanity. How on earth is this sustainable long term?...Answer: IT'S NOT.
Perhaps the bond market is waking up to this reality? Santelli gave today's 5 year bond auction a "D". The bid to cover was 2.58 which is pretty piss poor on a 5 year bond.
I also caught this today. Can't pay your mortgage? Don't worry the state will pay it for you!:
"Michigan’s plan to spend $154.5 million in federal funds to help those hardest hit by the economy has gained federal approval and will be available starting July 12.
The funds – targeted at helping borrowers facing pay cuts or job losses keep their homes – are expected to aid more than 17,000 Michigan households.
Until then, Michigan State Housing Development Authority officials will educate banks and credit unions about the process of evaluating borrowers for the program. Borrowers must apply with their lenders to take advantage of the lifeline, which will be awarded on a first-come, first-serve basis.
State officials say they’ll tell borrowers within 48 hours if they qualify for one of the program’s three options:
• Mortgage payment assistance for homeowners now receiving unemployment compensation. The state would provide half of the monthly mortgage payment up to $750 a month for a maximum of 12 months.
• Rescue funds for homeowners who have fallen behind on their mortgage payments because of a temporary layoff or medical emergency and have overcome this obstacle. The state will provide up to $5,000 to families in this situation.
• Federal matching funds for principal reductions for homeowners who can no longer afford their mortgage payments as a result of reduced income. This will allow up to a $10,000 principal reduction from the state that will be matched by the lender"
Continued Take:
Has the world gone mad????? How on earth is this going to be productive? Will these borrowers all of the sudden be able to afford their house 12 months from now? Talk about a total waste of money.
We have already seen a 50-70% re-default rate on modified mortgages. Why on earth do they think this is going to solve the problem?
The government needs to be face the music: Millions of people bought houses they could not afford using lending products that are no longer available.
Pissing away billions trying to keep them in these homes is nothing but a total waste of money that we don't have! The USA's checkbook is running out of checks and the balance in our account reads - trillions.
We must start letting the housing market revert to the mean. The Fed's needs to let these borrowers default, and the banks must then recognize these losses on their balance sheet. If millions of banks and borrowers go bankrupt as a result then so be it.
This is how free markets work. If you make a financial bet and lose then you should be held responsible for it.
The government also needs recognize that the risk of such housing programs from a moral hazard standpoint is extremely dangerous.
Borrowers are rapidly coming to the conclusion that perhaps the best thing to do is to stop paying on their mortgage because the government looks more and more like they will be there to bail them out.
The Bottom Line
The popping of the housing bubble is happening more violently then I had ever could have predicted. The fact that we hit an all time low in new home sales during the springtime where everyone is supposed to be buying is flat out frightening.
I understand that the housing tax credit may have skewed this number a tad but let's put this into perspective. In 2007(after the housing bubble had peaked) we still sold 769,000 new units according to Haver. Today's number was more than 50% lower.
The medium home price also dropped to $200,900 which is the lowest number since 2003. Think about this one for a second: Prices are collapsing at a time where we are seeing the lowest mortgage rates in history!
What this tells you folks is that America has lost interest in owning a home. The psychological damage has been done. As prices continue to fall, potential home buyers stay on the sidelines because they are petrified that they might lose money on their home.
Homes are now looked at as a place to live versus an investment. Once this mindset sets in its very difficult to change it. What we are seeing now is a classic example of how deflation sets in on a specific asset. The more prices drop the more people stay on the sidelines which then triggers more price drops.
It's called a negative feedback loop(otherwise known as a deflationary death spiral). This is how bubbles pop and we are seeing it now in housing.
One more question to ponder: Can you imagine what the home sales numbers will look like when rates start moving higher and/or when the weather starts to get cold? Yikes!
I am rambling here so I think I will call it a day.
I will leave you with this one piece of advice: Stay on the sidelines if you are looking to buy a house because this housing unwind hasn't even gotten into full gear yet.
Until next time.
Disclosure: No new positions at the time of publication.
From Haver Analytics:
"· New home sales fell by nearly one-third last month versus April with the end to the Federal government's $8,000 home-buyer tax credit. New home sales at 300,000 followed a downwardly revised 446,000 during April. It was a record low for the series which dates back to 1963. The latest level was well short of Consensus expectations for 420,000 sales."
My Take:
Ouch! A whopping 33% miss versus consensus and yet the stock market hardly blinks....Amazing!
The bulls definitely have their blinders on at this point if they are ignoring numbers like this. Two years ago this would have triggered a 500 point sell off in the market.
Today, Wall St believes that the housing nightmare is backstopped by the Fed so they just assume that bad housing news is "priced in". HA! Good luck with that idea. What they fail to recognize is that the government cannot afford to continuing to backstop this garbage forever.
We are selling bonds at the rate of $100 billion every other week in order to finance this insanity. How on earth is this sustainable long term?...Answer: IT'S NOT.
Perhaps the bond market is waking up to this reality? Santelli gave today's 5 year bond auction a "D". The bid to cover was 2.58 which is pretty piss poor on a 5 year bond.
I also caught this today. Can't pay your mortgage? Don't worry the state will pay it for you!:
"Michigan’s plan to spend $154.5 million in federal funds to help those hardest hit by the economy has gained federal approval and will be available starting July 12.
The funds – targeted at helping borrowers facing pay cuts or job losses keep their homes – are expected to aid more than 17,000 Michigan households.
Until then, Michigan State Housing Development Authority officials will educate banks and credit unions about the process of evaluating borrowers for the program. Borrowers must apply with their lenders to take advantage of the lifeline, which will be awarded on a first-come, first-serve basis.
State officials say they’ll tell borrowers within 48 hours if they qualify for one of the program’s three options:
• Mortgage payment assistance for homeowners now receiving unemployment compensation. The state would provide half of the monthly mortgage payment up to $750 a month for a maximum of 12 months.
• Rescue funds for homeowners who have fallen behind on their mortgage payments because of a temporary layoff or medical emergency and have overcome this obstacle. The state will provide up to $5,000 to families in this situation.
• Federal matching funds for principal reductions for homeowners who can no longer afford their mortgage payments as a result of reduced income. This will allow up to a $10,000 principal reduction from the state that will be matched by the lender"
Continued Take:
Has the world gone mad????? How on earth is this going to be productive? Will these borrowers all of the sudden be able to afford their house 12 months from now? Talk about a total waste of money.
We have already seen a 50-70% re-default rate on modified mortgages. Why on earth do they think this is going to solve the problem?
The government needs to be face the music: Millions of people bought houses they could not afford using lending products that are no longer available.
Pissing away billions trying to keep them in these homes is nothing but a total waste of money that we don't have! The USA's checkbook is running out of checks and the balance in our account reads - trillions.
We must start letting the housing market revert to the mean. The Fed's needs to let these borrowers default, and the banks must then recognize these losses on their balance sheet. If millions of banks and borrowers go bankrupt as a result then so be it.
This is how free markets work. If you make a financial bet and lose then you should be held responsible for it.
The government also needs recognize that the risk of such housing programs from a moral hazard standpoint is extremely dangerous.
Borrowers are rapidly coming to the conclusion that perhaps the best thing to do is to stop paying on their mortgage because the government looks more and more like they will be there to bail them out.
The Bottom Line
The popping of the housing bubble is happening more violently then I had ever could have predicted. The fact that we hit an all time low in new home sales during the springtime where everyone is supposed to be buying is flat out frightening.
I understand that the housing tax credit may have skewed this number a tad but let's put this into perspective. In 2007(after the housing bubble had peaked) we still sold 769,000 new units according to Haver. Today's number was more than 50% lower.
The medium home price also dropped to $200,900 which is the lowest number since 2003. Think about this one for a second: Prices are collapsing at a time where we are seeing the lowest mortgage rates in history!
What this tells you folks is that America has lost interest in owning a home. The psychological damage has been done. As prices continue to fall, potential home buyers stay on the sidelines because they are petrified that they might lose money on their home.
Homes are now looked at as a place to live versus an investment. Once this mindset sets in its very difficult to change it. What we are seeing now is a classic example of how deflation sets in on a specific asset. The more prices drop the more people stay on the sidelines which then triggers more price drops.
It's called a negative feedback loop(otherwise known as a deflationary death spiral). This is how bubbles pop and we are seeing it now in housing.
One more question to ponder: Can you imagine what the home sales numbers will look like when rates start moving higher and/or when the weather starts to get cold? Yikes!
I am rambling here so I think I will call it a day.
I will leave you with this one piece of advice: Stay on the sidelines if you are looking to buy a house because this housing unwind hasn't even gotten into full gear yet.
Until next time.
Disclosure: No new positions at the time of publication.
Tuesday, June 22, 2010
Bond Bubble?
I found an interesting article on bonds today that was done by CNBC. The network actually interviewed some bond traders for a change which was very refreshing.
Kudos to CNBC for mixing things up! Let's hope this trend continues because I don't think I can handle much more of the usual bulltards they roll out every 10 minutes pumping equities.
Let's listen to the video(make sure you listen to the second half) first and then I will have some quotes and some comments around the bond bubble that I think is forming below:
My Take:
Ahhh....Isn't it nice to hear a credit analyst dicuss the economy versus an analyst from the Wizards of Wall St? The crew in Chicago is so much more intelligent.
The most interesting part of this piece was his take on how it appears the USA is on it's own when it comes to sticking with the "throwing money out of helicopters" economic policy.
Japan and England have already announced severe austerity measures. Germany and the PIIGS are also in agreement. China has a surplus so they don't have this problem but they have been critical of the Fed's spending.
What I don't understand is why our politicians are so scared to join them. What are they so afraid of? Were there riots in the street's of England and Japan after their severe austerity measures were announced? No. Some anger perhaps but I think the people of both nations understand that this needs to be done for the good of their respective countries.
The reality here is it's the only policy that will work. You can't keep throwing $1 trillion dollars at a bad economy thinking that you will get $1.5 trillion back.
I think the USA would be willing to accept austerity if it was the right thing to do for the long term sustainability of this nation.
Just look at the Tea Party: They are essentially running on an austerity platform and the voters have responded by rapidly making them a major player in many of the recent elections across the country.
Lets face it: The taxpayers were already molested by Wall St via the TARP legislation and the the people in this country did NOTHING in response. If that won't make them turn off American Idol and riot in the streets then nothing will.
I say bring on austerity because it will give our children a future!
Bond Bubble?
I am starting to believe that the massive move into bonds might be overdone. We saw another highly successful bond auction today.
The bond traders in the article above have nailed it. Let me share a few quotes with you from above:
"The trend toward long-dated bonds is not surprising to those who think the market for Treasury's has been overheated and led by investors who are ignoring inflationary signals.
The trend is "another indication of how bubblicious this market has become," says Michael Pento, chief strategist at Delta Global Advisors in Parsippany, N.J. Pento points out that by 2015 the US will be spending 30 to 50 percent of all revenue on debt service payments, a factor that will drive up interest rates and push people away from bonds.
"If you have 50 percent of all revenue going to interest payments, what do you have left?" he says. "You have exploding deficits, you have skyrocketing interest rates, people selling your currency—you have economic catastrophe."
"The amount of debt we're going to be seeing over the next decade is worrisome, the Fed's balance sheet is worrisome. Those are off into the future now," says Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. "At some point something's gotta give and rates are going to turn sky high. It's just a matter of when."
"With long-term US bonds you're really playing with fire," says Mike Larson, analyst at Weiss Research. "We're still borrowing and overspending and we don't really have a concrete plan to get that down."
"Nevertheless, Ferry says he's seen enough to know that trouble is ahead.
"Everyone wanted a piece of the inflationary theme when the Fed went to quantitative easing. They got killed. So now they're seeing the other side," he says. "That's indicative in our mind of a last-ditch, crazy fifth wave. This is what happens at the end of cycles. We're in that final stage."
The Bottom Line
I could not agree more with the bond traders that are quoted here.
If the USA decides to be a renegade and go it alone with deficit spening then I think bonds are going to sell off hard and yields will soar asa result.
Remember, risk is relative and if the USA continues it's Ponzi spending at a time where everyone else is tightening their fiscal belts then our bonds will have to be repriced for risk. The effect of this repricing of risk will be ugly for treasuries.
IMO a bond collapse seems inevitable after reading Pento's quote where he claimed that 30-50% of our GDP will go towards servicing our debt by 2015 if we don't cut our spending.
In fact, bonds should sell off no matter what we do from here.
If we keep spending rates will rise because our risk of default will rise relative to other countries who are in the process of cutting spending.
If we stop spending(by choice or force) rates will rise because we will be suffering from severe austerity at a time where we must continue to service our massive debt load.
So are bonds a bubble? My answer is yes. The scary thing for me as an investor is I don't know where to put my money:
Equities? Hahahahaha....P/E's are insane. Someday I will be back but not now.
FDIC? CD's and money market funds are an option. At a minimum I believe that you should own both bonds and FDIC investment vehicles(underneath the guaranteed limits of course).
Short treasuries? This is a nice hedge against your bond holdings. You can do this in a variety of ways. You can own the etf TBT which shorts longer term treasuries. This is not a good long term hold because of the slippage that is seen in the ultra short etf's. You can also buy PUT's on symbol TLT. The risk here of course is they expire so I would go out as far as you can when you buy them.
Bond funds? I really like this idea because they can manage risk for you. My largest bond holding is PIMCO's PTTRX. Bill Gross is the best bond guy in the world in my opinion. He consistently beats 95% of his competitors year after year.
We are certainly in unprecedented times. Could this be a time where we see a deflationary collapse with higher bond yields at the same time as a result of overwhelming deficits? Every collapse has its own characteristics so perhaps this is how ours will be different.
Let's not forget about inflation here either. There is still the risk that the Fed could print in a desperate attempt to get us out of this mess. A dollar devaluation is also a serious risk to the inflation equation and it's something that I think we will see at some point.
Either way one thing is clear: We are on the cusp of hitting some sort of economic reset.
What it looks like remains to be seen. However, diversification is a must as an investor as we all prepare for it.
Disclosure: No new holdings at the time of publication. Own PTTRX in longer term accounts. Owner of TBT in short term accounts.
Kudos to CNBC for mixing things up! Let's hope this trend continues because I don't think I can handle much more of the usual bulltards they roll out every 10 minutes pumping equities.
Let's listen to the video(make sure you listen to the second half) first and then I will have some quotes and some comments around the bond bubble that I think is forming below:
My Take:
Ahhh....Isn't it nice to hear a credit analyst dicuss the economy versus an analyst from the Wizards of Wall St? The crew in Chicago is so much more intelligent.
The most interesting part of this piece was his take on how it appears the USA is on it's own when it comes to sticking with the "throwing money out of helicopters" economic policy.
Japan and England have already announced severe austerity measures. Germany and the PIIGS are also in agreement. China has a surplus so they don't have this problem but they have been critical of the Fed's spending.
What I don't understand is why our politicians are so scared to join them. What are they so afraid of? Were there riots in the street's of England and Japan after their severe austerity measures were announced? No. Some anger perhaps but I think the people of both nations understand that this needs to be done for the good of their respective countries.
The reality here is it's the only policy that will work. You can't keep throwing $1 trillion dollars at a bad economy thinking that you will get $1.5 trillion back.
I think the USA would be willing to accept austerity if it was the right thing to do for the long term sustainability of this nation.
Just look at the Tea Party: They are essentially running on an austerity platform and the voters have responded by rapidly making them a major player in many of the recent elections across the country.
Lets face it: The taxpayers were already molested by Wall St via the TARP legislation and the the people in this country did NOTHING in response. If that won't make them turn off American Idol and riot in the streets then nothing will.
I say bring on austerity because it will give our children a future!
Bond Bubble?
I am starting to believe that the massive move into bonds might be overdone. We saw another highly successful bond auction today.
The bond traders in the article above have nailed it. Let me share a few quotes with you from above:
"The trend toward long-dated bonds is not surprising to those who think the market for Treasury's has been overheated and led by investors who are ignoring inflationary signals.
The trend is "another indication of how bubblicious this market has become," says Michael Pento, chief strategist at Delta Global Advisors in Parsippany, N.J. Pento points out that by 2015 the US will be spending 30 to 50 percent of all revenue on debt service payments, a factor that will drive up interest rates and push people away from bonds.
"If you have 50 percent of all revenue going to interest payments, what do you have left?" he says. "You have exploding deficits, you have skyrocketing interest rates, people selling your currency—you have economic catastrophe."
"The amount of debt we're going to be seeing over the next decade is worrisome, the Fed's balance sheet is worrisome. Those are off into the future now," says Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. "At some point something's gotta give and rates are going to turn sky high. It's just a matter of when."
"With long-term US bonds you're really playing with fire," says Mike Larson, analyst at Weiss Research. "We're still borrowing and overspending and we don't really have a concrete plan to get that down."
"Nevertheless, Ferry says he's seen enough to know that trouble is ahead.
"Everyone wanted a piece of the inflationary theme when the Fed went to quantitative easing. They got killed. So now they're seeing the other side," he says. "That's indicative in our mind of a last-ditch, crazy fifth wave. This is what happens at the end of cycles. We're in that final stage."
The Bottom Line
I could not agree more with the bond traders that are quoted here.
If the USA decides to be a renegade and go it alone with deficit spening then I think bonds are going to sell off hard and yields will soar asa result.
Remember, risk is relative and if the USA continues it's Ponzi spending at a time where everyone else is tightening their fiscal belts then our bonds will have to be repriced for risk. The effect of this repricing of risk will be ugly for treasuries.
IMO a bond collapse seems inevitable after reading Pento's quote where he claimed that 30-50% of our GDP will go towards servicing our debt by 2015 if we don't cut our spending.
In fact, bonds should sell off no matter what we do from here.
If we keep spending rates will rise because our risk of default will rise relative to other countries who are in the process of cutting spending.
If we stop spending(by choice or force) rates will rise because we will be suffering from severe austerity at a time where we must continue to service our massive debt load.
So are bonds a bubble? My answer is yes. The scary thing for me as an investor is I don't know where to put my money:
Equities? Hahahahaha....P/E's are insane. Someday I will be back but not now.
FDIC? CD's and money market funds are an option. At a minimum I believe that you should own both bonds and FDIC investment vehicles(underneath the guaranteed limits of course).
Short treasuries? This is a nice hedge against your bond holdings. You can do this in a variety of ways. You can own the etf TBT which shorts longer term treasuries. This is not a good long term hold because of the slippage that is seen in the ultra short etf's. You can also buy PUT's on symbol TLT. The risk here of course is they expire so I would go out as far as you can when you buy them.
Bond funds? I really like this idea because they can manage risk for you. My largest bond holding is PIMCO's PTTRX. Bill Gross is the best bond guy in the world in my opinion. He consistently beats 95% of his competitors year after year.
We are certainly in unprecedented times. Could this be a time where we see a deflationary collapse with higher bond yields at the same time as a result of overwhelming deficits? Every collapse has its own characteristics so perhaps this is how ours will be different.
Let's not forget about inflation here either. There is still the risk that the Fed could print in a desperate attempt to get us out of this mess. A dollar devaluation is also a serious risk to the inflation equation and it's something that I think we will see at some point.
Either way one thing is clear: We are on the cusp of hitting some sort of economic reset.
What it looks like remains to be seen. However, diversification is a must as an investor as we all prepare for it.
Disclosure: No new holdings at the time of publication. Own PTTRX in longer term accounts. Owner of TBT in short term accounts.
Monday, June 21, 2010
Niall Ferguson: US Fiscal Crisis Will Likely Occur Within 2 Years
Interesting day today. I wanted to start with a video from the highly accomplished Niall Ferguson This is a must watch so please take the time to watch it in its entirety:
My Take:
This was a great video on the reality of what we are facing as a nation. The best take home point from this is where Niall brilliantly discusses the bond market and our rapidly increasing debt loads.
The perception of the bulls is that low rates and easy money will eventually get us out of this mess. What Niall counters with here is a mathematical reality check in regards to the shear magnitude of the amount of debt we are issuing and the cost to service it.
The USA's ability to service our Treasury debt is mathematically impossible if we continue to sell $120 billion in treasuries every other week.
As Niall describes, when the debt loads become so large it only takes a small increase in rates to create a fiscal crisis because you become overwhelmed by the huge amount of debt issuances that you need to service.
For example: Increasing interest rates by 2% on bonds with the overwhelming amount of debt we have today might be the equivelant of taking rates to 8-10% in the early 1980's when it comes to the percentage of GDP it will cost us to service the debt(pay interest on the debt).
The bond market will eventually call the Fed out by taking rates higher as they begin to realize that our GDP will simply not be large enough to service the debt.
Will the PIIGS and the rest of Europe get called out before us? Sure, but eventually we will end up in the same placeour situation is no better. We get a pass for now because we are still considered to be the safest haven left. Or as I like to say: The best of the worst!
This is all unsustainable and I think the reality is beginning to set in that we cannot continue to spend like this. Anyone that has a job and pays bills understands that you cannot spend more than you bring in every month over a long period of time without going bankrupt.
The problem we have here is the political will is not there to make painful decisions we need to make in order clean up our fiscal house. It's going to take a fiscal crisis similar to Greece in order to finally force the government to clean up their balance sheet..
The fact that Niall predicts this will likely happen within 2 years was a pretty alarming statement.
The Bottom Line
We saw a nasty reversal in the markets today. I think the market realized by the end of the day that the Yuan devaluation was a big nothingburger. The markets tried to pump the news and failed miserably.
Tomorrow's action should be interesting. We have the G-20 coming up here soon and Germany seems to be pumping fiscal restraint whereas we are still promoting throwing money out of helicopters. It will be interesting to see how this plays out.
Folks: The jig is about up. The Ponzi scheme is on its last legs. The borrowing path we have chosen is proving to be mathematically unsustainable. Greece went down via the same route. England and Japan are right behind them.
The question is now WHEN not IF.
When accomplished people like Niall Ferguson are confident enough in their thesis to put time lines on the collapse it's time to be afraid.
Disclosure: No new positions at the time of publication
My Take:
This was a great video on the reality of what we are facing as a nation. The best take home point from this is where Niall brilliantly discusses the bond market and our rapidly increasing debt loads.
The perception of the bulls is that low rates and easy money will eventually get us out of this mess. What Niall counters with here is a mathematical reality check in regards to the shear magnitude of the amount of debt we are issuing and the cost to service it.
The USA's ability to service our Treasury debt is mathematically impossible if we continue to sell $120 billion in treasuries every other week.
As Niall describes, when the debt loads become so large it only takes a small increase in rates to create a fiscal crisis because you become overwhelmed by the huge amount of debt issuances that you need to service.
For example: Increasing interest rates by 2% on bonds with the overwhelming amount of debt we have today might be the equivelant of taking rates to 8-10% in the early 1980's when it comes to the percentage of GDP it will cost us to service the debt(pay interest on the debt).
The bond market will eventually call the Fed out by taking rates higher as they begin to realize that our GDP will simply not be large enough to service the debt.
Will the PIIGS and the rest of Europe get called out before us? Sure, but eventually we will end up in the same placeour situation is no better. We get a pass for now because we are still considered to be the safest haven left. Or as I like to say: The best of the worst!
This is all unsustainable and I think the reality is beginning to set in that we cannot continue to spend like this. Anyone that has a job and pays bills understands that you cannot spend more than you bring in every month over a long period of time without going bankrupt.
The problem we have here is the political will is not there to make painful decisions we need to make in order clean up our fiscal house. It's going to take a fiscal crisis similar to Greece in order to finally force the government to clean up their balance sheet..
The fact that Niall predicts this will likely happen within 2 years was a pretty alarming statement.
The Bottom Line
We saw a nasty reversal in the markets today. I think the market realized by the end of the day that the Yuan devaluation was a big nothingburger. The markets tried to pump the news and failed miserably.
Tomorrow's action should be interesting. We have the G-20 coming up here soon and Germany seems to be pumping fiscal restraint whereas we are still promoting throwing money out of helicopters. It will be interesting to see how this plays out.
Folks: The jig is about up. The Ponzi scheme is on its last legs. The borrowing path we have chosen is proving to be mathematically unsustainable. Greece went down via the same route. England and Japan are right behind them.
The question is now WHEN not IF.
When accomplished people like Niall Ferguson are confident enough in their thesis to put time lines on the collapse it's time to be afraid.
Disclosure: No new positions at the time of publication
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