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.

Is There Nowhere To Hide?

I seriously asked myself this question today as I looked for an investment "safe haven". When Bond king Bill Gross tells you to avoid treasuries and questions the USA's AAA credit rating you need to ask yourself: Is any investment safe anymore?


My Take:

I don't think Bill could have been more blunt: STAY AWAY FROM TREASURIES. Folks, this isn't an equity strategist that's just saying this as he tries to get you into equities.

This is the King of Bonds telling you not to buy bonds!!!!!

I am in one of Bill Gross's bond funds and I think he is one of the smartest guys on Wall St. Be very afraid if this guy is willing to goo out on a limb and say such a thing.

His view appears to be shared by the world's central bankers according to Reuters(Thank You Karl Denninger):

"[11:41 US GOVTS: Real Money Using Coupon Passes To Exit; FM Blast] Boston, May 21.

There apparently is a new wrinkle to the intermediation trade between buying from Treasury to sell to the Fed with real money, including central banks, now in on the act. Indeed, several Street sources relay central banks were aggressive offers into this morning's coupon pass, with one letting go of a large block of old 5-years. Other offers too are coming in from embedded Asian real money longs -- in the higher coupons -- also looking to sell size without unduly upsetting the market, and especially considering the illiquidity in off- the-run bids from the Street.

Whether influenced or not by the much higher tenders coming in on the Fed Passes ($45 bln tendered for $7.4 bln bought in today's pass for a 16.2% hit rate), fast money has been tattooing the bid and especially so in the belly with the 10-year most leaned on. Note as well, earlier this week the Bank of England (BoE) gilt pass too saw a need to offer paper at or below the market's bid side in order to get sales off.

Obviously, this is not a very supportive situation for the treasury market, if previous sponsors are heading for the exits in a fairly sizeable manner. With this, and $101 bln in supply next week (and another $70 bln in 3s, 10s and 30s to be announced the week after)look for more downside action. Q-E III anyone?

Kenneth.Logan@Thomsonreuters.com/db/mc"

Quick Take:

As you can see, the foreign buyers of our debt are bailing on treasuries and selling out to the Treasury at above market prices. How in the hell does Ben think he can sell Treasuries going forward at a time when the FCB's of the world appear to be selling and running for the hills?

1932 all over again?

I have discussed 1932 in previous posts. Lets me put this bond collapse chart up again:

My Take:

Panics occur when no investment seems safe. As you can see above, bonds initially peaked after the roaring stock market began in the early 1920's. When stocks began to crash, bonds soared as investors flew into the safety of bonds.

This worked great until 1932 when both bonds and stocks collapsed. Why did this happen? Because there was no confidence that anything was solvent. The government tried to spend its way out of The Great Depression just we are doing today. Bonds all of the sudden didn't look so safe anymore as a result so investor's got the hell out.

Stocks had no earnings in 1932 so there was no confidence in this investment either. We are looking at the same situation today. S&P earnings are down 90%. We have seen buyers for stocks for now, but this rally seems very long in the tooth after today's selloff.

Folks, the parallels of 1932 versus today are almost identical.

So where did the money go in 1932 when nothing appeared safe? RIGHT UNDER THE MATTRESS! I am beginning to think that the same thing might happen again today. Nothing to me looks very safe! In fact, I think I will go out and buy an extra thick Sealy so I have a little more room for some greenbacks.

Bottom Line:

According to the Reuters article we have another $101 billion in bond sales next week followed by another $70 billion the following week.

Where is the money going to come from to fund these treasury purchases? The Fed may find themselves sitting in the bond market and buying treasuries via QE all by their lonesome!

Folks, I may be a bear/Gloom and doomer, but I am usually hesitant to press the panic button. I gotta say it: The end is near.

The situation here is extremely dire. I don't see any plausible exit strategy for the Fed that doesn't result in an economic collapse/depression.

My advice?

Have a couple months of living expenses available in hard cash at home. Buy some gold and silver coins and find a safe place to stash them.

If you are in treasuries you may want to hedge your position by shorting treasuries. You can do this by buying ticker TBT. You can also short bonds by buying PUTS on TLT.

Place some cash into some CD's and money market funds(under FDIC limits) and pray that the government has the money to make you whole if we go "kaboom".

Scale into some short positions on the S&P via ETF: (SDS) or buy long dated PUTS on the SPY.

My Trading Account:

I promised to disclose my positions in the comments section today so here we go. Keep in mind 90% of my portfolio is in cash and bonds(for now). Also, I am not a professional trader nor do I have any desire to be one because I probably would have no hair left.

Let me also preface this by saying that I am not advising anyone to use this as trading advice!

Anyways here ya go:

I currently am short Treasuries via TBT, short the the S&P via SPY and SDS, short tech via the QQQQ's, long gold via GLD. I am also currently short commercial real estate via SRS. I also hold a pretty big position in BEARX.

In terms of performance: Flat on the SPY and SDS bets, down big(40%) on the QQQQ's(very small position). Up big on TBT(+25%) and GLD(+50). Crushed on SRS(in at $85 OUCH!). Never saw the bailout coming. Down on FAZ. Got in at only $10 so not too worried about it. Up 30% in BEARX(bought in 2005).

In terms of the weightings in my account: S&P short bets: 25%. BEARX: 25%. TBT: 10% SRS: 10% GLD:10% QQQQ's: 3% FAZ: 5% Balance is in cash.

The Fed's Fiasco

Alrighty Folks,

Lets get right to it and head straight to the credit markets. I have been talking a lot about treasuries and the Fed's ridiculous quantitative easing policy in recent weeks. This QE plan was doomed from the start, but I realized it would take some time before the Fed blew itself up as it attempted to finance itself by buying its own debt.

My thesis all along around the Fed's massive spending has been pretty simple:

There would eventually come a point in which the bond market would pull a Jerry McGuire and yell "Show me the Money Benny" to the BB and the Fed as they spend themselves into oblivion.

The bond market would send this message by ignoring the QE policy by the Fed and continue to take yields higher. Basically if this was Texas Hold'Em poker, the Fed went "all in" when they announed their QE policy a month or so ago. The bond market is about to call the Fed's bet bet because they don't believe the Fed has the ability to pay back what they are spending unless they flat out print.

If the Fed loses(which we all know they will), they will be forced to massively cut spending because they can't afford a printing scenario where hyperinflation gets put on the table.

Today, I started to see some signs that this "come to Jesus call" on the Fed's "all in" bet may be closer then we all realize. I say this after seeing what the 10 year did after the Fed's announcement of a large treasury purchase :

As you can see by the chart above, the Fed was somewhat successful in getting the 10 year to back off a bit today(although yields are still above the Fed's target of 3%). However, what I thought was interesting was how the 10 year closed. Yields began moving sharply UP at the close as stocks began to sharply sell off in the last half hour of trading

We should have seen the exact opposite occur folks. Treasury yields should have dropped into the close as stocks sold off because investor's usually move from stocks into the safety of bonds when the market moves down.

The QE announcement from the Fed should have exacerbated this move into bonds at the end of the day as the market went red. The fact that the exact opposite(stocks down/yields up) occurred is something to take note of. So basically both stocks and bonds sold off. Panics occur when no investment appears safe. This is what happened in 1932. I am not insinuating that we will see a panic sell off, however, this bears watching closely tomorrow.

You gotta wonder: Has the bond market finally had enough of this asinine spending?

There comes a point in time where all of this spending by the Fed begins to look absolutely ridiculous. I figured that the credit markets would allow the Fed to run massive deficits up to a point when this whole economic nightmare started. The bond market has a vested interest in avoiding an economic collapse. Remember, bonds and stocks both get killed in depression's.

So as a result, Chicago gave the Fed some slack and allowed them to ramp up spending hoping that perhaps the Fed could avoid an economic collapse by expanding its balance sheet. I think the bond market knew this wasn't going to work but said to themselves: "Why not give the Fed a shot? Maybe they can pull it off ?".

However, once they saw QE was going to fail(an inevitable conclusion IMO), I expected to see bond traders shove it right up Ben's ass by taking yields through the roof.

US Dollar collapse

The Fed's QE policy continue to to heavily pressure the dollar. Our currency continues to collapse as the Fed continues to spend money that it doesn't have:

My Take:

The 82 level was considered to be a critical support level for the dollar. As you can see above, we sliced right through it like butter today.

This is not good folks. Inflation is going to be a serious problem moving forward if our dollar continues to slide because many commodities are priced in US dollars. Metals and commodities should continue to work well here as the Fed spends itself in bankruptcy. This spending weakens the dollar which then increases our cost of living. Inflation is now a HUGE risk as a result of our collapsing currency.

This will only further fuel the deflation seen in large assets like housing. One might think housing prices would go up in an inflationary environment. Nope! Higher costs to live mean that the consumer has less money to spend on big ticket assets like a home because the consumer only has so much disposable income. Expect devastating deflation in housing if our currency continues to collapse. YOU CAN HAVE INFLATION AND DEFLATION AT THE SAME TIME. We are witnessing it right now.

Bottom Line:

The uptick in yields as the market sold off was an ominous sign today folks. If the Fed begins to lose control of the yields in the bond market the game is OVER. They will be forced to pullback spending in such a scenario. This means the bailouts will stop and the debt bubble collapses.

I am long hard assets(gold) and short the S&P right now. I may pick up a commodity ETF later this week. I am currently researching a few.

BTW

I have had a few requests from readers asking about where they should buy their gold. Here are a few places that I recommend: http://www.bulliondirect.com/. A second idea is apmex.com. The spreads are fair at each place and the deliveries are quick from what I have heard from some friends. Hope this helps.

I think the trades above will work as long as the Fed continues its QE policy. The Fed is slowly digging themselves into a hole that they will never be able to climb out of. This will only further pressure the dollar which will be the death blow for our consumer that is currently drowning in mountains of debt.

How are corporate earnings going to rise when people need to spend most of their money on the bare necessities? How many Apple I-Pods can the consumer buy as they pay off their maxed out credit cards and bloated mortgage payments?

The Fed has a serious decision to make. Here are the two choices the way I see it:

1) They could continue to spend like drunken sailors and watch the consumer sink as massive inflation inhales all of their rapidly declining wages. Soaring inflation also increases the risk of a total economic collapse. Social chaos and the destruction of our government are very possible if inflation runs wild. Millions of Americans would become traumatized as the cost of living would rose to unaffordable levels. Families would be forced out their homes, and bread lines like we saw in the 1930's would become a common occurrence.

Our consumer driven economy would then completely implode because any money made at work would be used to survive.

2) They can stop the spending, let the debt bubble burst, and allow a resetting of our economy back down to affordable levels for the average American. This would be devastating to the economy short term as bailed out banks and companies would fail on an epic scale. However, letting this reset occur allows us to get that much closer to the recovery. I have no doubt that we will recover folks. we are the most resilient nation in the world IMO.

My vote of course is for option #2. Both are painful but at least #2 allows us to get back to affordable living. Its time to mark an end of the Supersizing of America. Its time to get rid of the McMansion's, send the Hummer to the junkyard, and get back to the basics where we all live within our means.

I don't feel like being a debt slave for the rest of my life as a result of being forced by the government to pay for someone else's speculative mistakes. The spending is never going to stop until we rise up and say ENOUGH ALREADY!

The Fed, Wall St, Fannie and Freddie, and greedy investor's are all just a bunch of obsessed speculators. They all take turns wasting our taxpayer dollars. Most recently its been the Fed's turn to speculate and blow up bubbles. Treasuries anyone?

Reckless Speculation must die before this greed takes our country from us.

Its time to make the tough decisions everyone. What's is gonna be?