Monday, April 27, 2009

On Treasury Bonds and Trade Wars

Well, a lot has happened since my quick treasury bond market update, treasury bond market update and my prediction that the fed will buy all treasury bonds in existence if necessary. Quite frankly, I don't know where to begin but let's get started.

Let's start with a chart. Here is a six month chart of TLT, the 20 year treasury bond ETF:

Notice the large rise late last year, the sharp drop in the beginning of 2009 and then the long sideways chop since then. That sideways chop may be ending as TLT has just broken its 200 day moving average (the yellow line). In a (somewhat) free market, one may even be inclined to short such a technical setup. The amount of manipulation taking place forces us to take a different approach, however. So?'s opinion on treasury bonds is that you would be crazy to take either side of this trade.

The US Federal Government is now running a yearly deficit of $2+ trillion. This quarter alone, the Treasury expects to borrow $361 billion of debt. Because real market demand could not dream of soaking up this level of supply, the Fed has stepped in and agreed to buy the treasury debt with newly minted dollars - in effect monetizing the debt. This is in addition to the money the Fed has allocated to buying up agency debt sold by Fannie Mae and Freddie Mac as well as its financial commitments to a plethora of alphabet soup programs.

It might sound complicated but it is really quite simple. Any government can effectively spend more than it makes by simply paying for its costs with newly created money. What prevents most governments from attempting this on anything near a large scale is the risk of a currency crisis which leads to a devaluation of their currency and debt followed by massive inflation. The US Government has been allowed to get this far already chiefly because (1) the US economy is crucially important for world trade and (2) the US dollar is the world's reserve currency.

The other world powers have already begun to reject the current US financial doctrine. Witness China, which is now at the forefront on pushing for an alternative to the US dollar by looking to utilize IMF Special Drawing Rights. China has also announced that it has been heavily buying gold over the last few years. This has all the signs of the beginning of a trade war between the US and China.

I believe that the trends outlined above will be the storyline for 2009 and the next few years. We will revisit these topics in greater depth as events unfold. For now, I will leave you with this. There is precisely zero chance that this game ends well. I challenge my readers to outline one possible scenario where this leads to economic prosperity. I have not even heard a single Treasury or Fed official make a plausible argument for what they are doing. China, on the other hand, is taking long term, rational steps towards cementing its fate as the world's number one economy of the future.


Tyrone said...

I wish somebody could explain it to me, too. I can only see it ending badly.

Dustin said...

That is the elephant in the room. Almost anyone outside of the talking heads on TV will say that this is going to end very badly. So why are we still going down this path? I initially think that I am not seeing something but then I go back to the K.I.S.S. principle. There is nothing else to see. We are printing money to pay the bills where before we have borrowed. The question is when does the inflation hit us?

The only hope I have is Ron Paul's bill HR 1207 the Federal Reserve Transparency Act of 2009. This bill opens up the books to the GAO. The GAO has always been able to audit the FED but not action A, B, C, D, and E which is the detrimental stuff. If our fearless leaders in congress can see what the FED is doing and how they create inflation then we stand a chance of curtailing the pain and maybe saving the currency.

maybe... in the meantime I will be preparing for the worst.

SoYouThinkYouCanInvest said...

The inflation/deflation debate is interesting but I think it misses out on the most important aspect of this crisis. The misallocation of capital will cause growth to be stunted for many years. I can easily see a decade or more of zero growth going forward.

Besides, we will probably get nice doses of inflation and deflation from these policy actions. Both are detrimental to the economy as business owners cannot plan for the future without a stable currency.

I see the best case scenario as a Japan like malaise for a decade or more. The worst case scenario is too frightening to go into detail.

I like Ron Paul and (I voted for him in the Republican primaries) and I like libertarians in general but they have completely failed. The big government central planners have won and are doing as they please. I held out some hope before Obama took over but his policies are more of the same and do not represent change in the least. Things will eventually change alright, but not in the way our government officials would like.

Brooks said...

So if you were invested in TLT, what are some alternatives to move to?

SoYouThinkYouCanInvest said...


I am hesitant to give specific investment advice because what is right for you individually depends on how much money you have, when the money is needed, what it is needed for and your risk tolerance.

With that being said, in general, long term government bonds have very little potential upside and significant potential downside. At the least, moving to short term bonds, money markets or plain old cash is much safer. If you want to hedge your inflation risk you can put a small portion of your assets into commodities such as precious metals, agriculture and energy. The ETFs and ETNs mentioned here are worth looking into:

Dustin said...

I hear talk about Treasury Inflation-Protected Securities (TIPS) from the talking heads on TV. They say if you are worried about inflation invest in those.

I read in Peter Schiff's book that TIP's are tied to the inflation rate that the government reports and that this number is misleading. The government does not report Food and Energy prices in their number. Have you looked into this?

SoYouThinkYouCanInvest said...

You are correct Dustin. TIPS are indexed to the government's CPI index. Beyond my issues with using the CPI as a measure of inflation (as you mention) the entire idea of TIPS to me is simply absurd. Government creates inflation with expansionary monetary policies. Why in the world would I ask for inflation protection from the very source of inflation? It is akin to hiring your friendly neighborhood arsonist as your fire fighter.

So buy some government bonds if you wish but hedge your inflation risk by buying commodities. This way you can even hedge yourself against the cost of food and energy.

Dustin said...

Off topic but if you are interested in Ron Paul's politics look at his Political Action Committee. It is the "Campaign for Liberty." HR 1207 to audit the FED is picking up steam and as of today has 134 Co-sponsors which is impressive.

hyipinvestor said...

Liberty Reserve Investing - Make Money Online - The Best High Yield Investment Programs
Make Liberty Reserve Money on HYIPs(High Yield Investments Program)
HYIP is an abbreviation of "High Yield Investment Program". The principle of working with HYIPs is

very simple.
You sign up on the project’s website, open an account in an international Electronic Payment System

(EPS) like Liberty Reserve, Perfect Money, and invest money in this project .
What is Liberty Resereve?You can find answer on
Although high yield investing sounds like a lucrative way to trade, it involves greater risk. Due to

the growing number of investment frauds associated with high yield investment programs (HYIP), many

investors should shy away from these ventures.The Best Low Risk - High Return Investment.
There are ways to find a legitimate high yield investments and avoid being victimized by HIYP

scams.Do you want to become millionaire in one day
I Made Several Millions Profit with Liberty reserve and perfectmoney money in paying hyips
Today,Many people feel like they don't have enough money in their lives. These days having only one

stream of income isn't enough. People are always looking for more. Life is getting expensive. People

want to be able to go out and do what they want, take vacations, have fun, and in general enjoy

life. The problem is that they usually don't have enough money or time to enjoy these things. This

is where E-Currency Investment comes in.Becoming a HYIP Investment expert is not easy, but it can be

very profitable, you can be able to gain daily interest as high as you will never find in any other

investment opportunity!
Is it worth dealing with HYIPs?
Any business is a risk. There’s nothing guaranteed and certain in business inherently. As an

example – economic crises, major banks and companies bankruptcies, permanent oil, gold, real estate

price fluctuations.
From this point of view, a high-yield deposit differs from a low-yield one only in that in the first

instance the investor knows that he’s running a risk and, therefore, secures himself to the utmost,

and in the latter case the loss in income or of money is like a bolt from the blue.
Hence, investing in HYIPs is often the only way to earn serious money having a modest initial

See more information at HYIP Investments on Hyips Monitor sites.
If you've been having a hard time keeping up with your bills, you feel like you want more money, or

you feel you need to grab a hold of your life, then I recommend checking out E-Currency Investment.
First,You need to have one liberty reserve account or perfectmoney account.
Second, you need fund your liberty reserve account. You can find the best exchange company on
Third, Choose a paying hyips from HYIPs Monitors sites and make your deposit with your Liberty

Reserve Money. we recommed the two great monitors for Serious Investors
Last, Waiting for your payment. Most of hyips send payment automatic and directly into your liberty

reserve account. Reinvest Again , You will become Millionaire.

Find More Serious Paying HYIPs,Just check my site

My email: .If you have any questions,you can mail to me.
The Liberty Reserve MLM Game

emmalineyodis said...

Investment is basically based on speculation. As one speculates profit, he or she invests money in the project. The investment in the Iraqi dinar also works on the same formula.