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Betting Against the US Treasury |
Bill Bonner, leading off today's
reckoning from Baltimore, Maryland...
Why have we come back to the USA? For 15 years, the children followed
us. Now, we will follow them.
One of the surprises of advanced parenthood is how involved we still are
in the lives of our children. We thought they would leave home and that
would be the end of it. The nest would be empty. Instead, it has merely
changed...from a house to a hotel. They come. They go. They need some
advice. (But they don't want suggestions.) They need help with this.
They could use a hand with that. They have something to pick
up...something to drop off. They wonder what happened to their leather
coats. They ask Dad to look over a contract. They want to tell Mom about
something personal.
Not that we're complaining. Au contraire, we're delighted. We're just
surprised. Then again, we are easily surprised. We are surprised that a
sickly economy seems so healthy to so many people. And we are doubly
surprised that the world's most indebted nation pays less than 4%
interest to borrow money for ten years.
Of course, surprises, by their very nature, are fleeting. And we would
imagine that the surprisingly low rates of interest the US Treasury pays
to borrow money will come to an end...sometime during the next decade.
For those readers who neglected to tune in on Monday, we announced our
new Trade of the Decade: Sell Treasury bonds, buy Japanese stocks.
Since we announced our trade we've gotten a number of responses. Not
much argument with selling Treasury bonds. Although Richard Koo
disagrees. He thinks the Treasury market will hold up, as it did in
Japan. But our guess is that Treasuries are living on borrowed time (not
to mention borrowed money) in BOTH the US and Japan.
Most of the response came in regard to our long side recommendation: buy
Japanese stocks. Few approved. So we were feeling lonely and
isolated...just the way we like to feel...until we got this from Byron
Wein. One of his surprising predictions for 2010:
Japan stands out as the best performing major industrialized market in
the world as its currency weakens and its exports improve. Investors
focus on the attractive valuations of dozens of medium sized companies
in a market selling at one quarter of its 1989 high. The Nikkei 225
rises above 12,000.
Eric Fry, playing second fiddle from Laguna Beach, California,
responds to Bill's Trade of the Decade...
In Monday's edition of The Daily Reckoning, Bill Bonner offered
his new "Trade of the Decade." In all probability, this trade will not
deliver a result as dazzling as his last "Trade of the Decade."
Back in 2000, Bill urged the Daily Reckoning faithful to "sell
stocks; buy gold." As fate would have it, stocks produced a LOSS during
the ensuing ten years, while the gold price quadrupled. Good call!
Bill has gazed into his crystal ball once again, and he is offering a
brand new Trade of the Decade: Sell US Treasury bonds; buy Japanese
stocks. Your California editor heartily endorses Part I of this trade
(while professing agnosticism on Part II).
Treasuries are indeed a "sell."
In fact, Treasuries have been a "sell" for several months already. In
the year just passed, long-dated Treasury securities produced their
biggest annual loss since 1978. During the month of December, alone,
yields skyrocketed along the entire yield curve, as price tumbled.
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Just maybe, bond investors are growing a bit
nervous about America's mushrooming deficits. "President Barack Obama is
borrowing unprecedented amounts for spending programs," Bloomberg News
reports. "US marketable debt increased to a record $7.17 trillion in
November from $5.80 trillion at the end of last year."
This disturbing trend leads economists Brian Wesbury and Robert Stein to
conclude that "Government" will be the first major bubble of the new
decade.
"Some claim a bubble has already formed in the global stock market, with
prices up 60%-plus since the bottom in early March," the duo observes.
"Others claim commodities will be the next bubble... Still others say US
Treasury securities are already in a huge bubble, with interest rates way
too low. But maybe the worst bubble has nothing to do with the private
sector at all. The public sector, particularly the federal government, has
benefited enormously from absurdly low interest rates.
"Think about it," Wesbury and Stein continue, "the federal deficit was
$1.4 trillion in the fiscal year that ended in September, or 10% of GDP,
the largest peacetime deficit on record. But net interest - the cost of
servicing the national debt - was only 1.3% of GDP, the lowest in about 40
years. For comparison, net interest was absorbing about 3% of GDP in the
1980s and 1990s."
Unfortunately, the skeptical economists observe, the government is relying
on low-cost, short-term financing, which creates the delusion that "a
massive increase in government spending [is] an easy burden to carry...
Just like homeowners who relied too much on short-term adjustable rate
mortgages, the federal government's average debt maturity remains less
than 4.5 years, which means net interest costs will soar over the next
several years as the government rolls over its debt at higher interest
rates."
Maybe the US Treasury pulls off this financial miracle without a hitch.
But we would take the other side of that bet. The Treasury auctioned off
$118 billion of Treasury notes during the last week of 2009 - a record
quantity. We predict this record will fall in 2010...several times. As
these monstrous auctions sweep through the bond market like rogue waves,
interest rates are sure to rise.
To repeat: Treasuries are a "sell."
--- Outstanding Investments Gold Investing Report ---
From Hulbert's #1 Ranked Advisory Letter Over a Five-Year Period...
Even if Gold hits $2,000 by the end of 2010 here's a hidden way
you can get in for less than one cent per ounce
Over the next two years, you'll witness the greatest surge in gold prices
in market history - at least 119% above where gold sits today, as I write
this.
But even better, I've just discovered a way for you to sneak into the
soaring gold market for next to nothing, with what I call "penny-per-
ounce" gold.
That is, doing this is a "backdoor" way to own as much of a position in
gold as you like... for the equivalent of paying a single cent per ounce.
Get All The Details Right Here.
Back to Bill in Baltimore...
We did our part. If the US economy remains in a slump, it's not our fault.
If Detroit can't make a profit, it's not because of us. We went out and
bought a truck. We contributed to the economy. We added demand.
The Ford F-150 is a nice truck. Comfortable. Smooth. Quiet. It's probably
a difficult export item. It's too big for most foreign markets, where
people are more concerned with fuel economy and have smaller parking
places.
GM reports that its sales to China are rising sharply, but it's hard to
imagine much demand for the F-150 in China. Smaller, lighter, more
economical and cheaper trucks are available.
But your editor is in the USA now. He has a right to use all the gas he
wants - at half the price of gas in Europe. It's in the constitution
somewhere. Besides, it's been so cold around here he figures the
atmosphere must need a little more CO2; the greenhouse effect isn't as
effective as people seem to think. But here in Baltimore it is warm
compared to many other areas. The Des Moines paper says it is "30 degrees
below normal." Seoul, South Korea, just got the most snow it has had in 70
years.
Enough of that... The Daily Reckoning is about money. And we're
on the case...
If you read the papers you're likely to think that the recession is
over...we're in full recovery mode...with rising sales, rising production,
and rising prices. This year is going to be a good one for stocks...and
the US economy is coming back stronger than expected.
Is it true?
Well, it's sort of true. The recession is over...the depression continues.
As we keep saying, if you're going to make a royal mess of things, you
need taxpayer support. And with the unwitting and unwilling support of
millions of American taxpayers, the federal authorities are busily making
a bad situation worse.
Don't believe us? No worries. Since everyone is so sure that the economy
is hunky dory, the burden of proof is on us to show that it is not.
First, we point out that the evidence is mixed. Here's David Rosenberg, on
the 'new normal:'
"...what was previously unthinkable suddenly becomes the 'new normal'.
From March 1983 (when the Reagan-led economic expansion took hold) through
to September 2008 (when Lehman collapsed) we never once had a month where
US vehicle sales came in as low as 11 million units at an annual rate.
That is a span of 25 years.
"In yesterday's WSJ, page B1, there is a huge article titled
'Late Surge in Car Sales Raises Hopes for 2009.' This 'surge' seems to
have taken sales up to 11 million units in December (data out later
today), which would be up from 10.9 million in November. So here we are
today, and it is apparently good news that we had virtually no growth in
sales towards the end of the year even with dramatic incentives according
to the article, GM gave its dealers $7,000 for some of its models and that
we had 11 million units when the 'old normal' was 16 million units (not to
mention that 12 million is the cutoff for replacement demand - autos are
still being taken off the highways and driveways of America)."
"Personal Bankruptcy Filings Rising Fast," says The Wall Street
Journal. That's the way depressions work. It takes time for people to
run out of money and out of options. Then, they give up...admit
defeat...and get on with their lives.
That's true for the housing market too. People hold on. They wait. They
hope prices will go up. And finally, they give up. That's when prices
really go down. That hasn't happened yet. The depression is still young!
David Rosenberg again:
"One would think that of all the sectors that should be benefiting from
all the government largesse it would be housing - but at 355k in November,
new home sales were down 11% MoM and the fifth lowest level in 3 decades.
It is now taking the builders a record 14 months to locate a buyer upon
completion of a unit. And the unsold inventory shot back up to 7.9 months'
supply from 7.2 in October. Sales of completed homes are still down 38%
from what were already depressed levels of a year ago."
"Living on nothing but food stamps," says a New York Times
headline. A record 39 million people are getting food stamps. For some of
them, that's all they have. They've used up their unemployment
compensations. They've spent all their savings. They've mooched off of
relatives and friends. Now all they've got is the kindness of strangers
who work for the US federal government.
And more reckoning:
Carmen Reinhardt and Ken Rogoff say that "higher debt may stunt economic
growth." Hey, this is getting interesting. Maybe we're not entirely alone
here at The Daily Reckoning.
This is the second point we were going to make. For the most part, there
is no recovery happening. And the part of the recovery that is actually
happening is a fraud.
You can't cure a problem of too much debt by borrowing more...even if the
borrower is the federal government. When the private sector was
over-borrowing, it was absorbing resources it couldn't really afford.
Plus, it was sending the wrong signal to producers, leading them to
believe they had real customers on the other end of the line. What they
had were people pretending to have more purchasing power than they really
had. And when the credit got turned off, these customers disappeared,
leaving the manufacturing sector with too much capacity and the retail
sector with too much floor space to sell it.
Now, the government is doing the same thing - taking up resources it
cannot really afford...and redirecting them to uses that it really can't
sustain. What's more, this use creates a phony GDP... production for which
there may or may not be any real demand. It looks like real GDP to the
economists...after all, people are making money and spending it. But is
anyone really any better off by building a piece of expensive machinery
that gets shipped to Afghanistan at enormous cost and is later abandoned
there? Or how about hiring another 1,000 bureaucrats to process health
care paperwork? Is the world a better place as a result?
In the private economy, people are always making mistakes. People buy
things they really don't need with money they really don't have. Then,
they pay the price.
In the public economy, people are always making mistakes too. But since
the person who makes the mistake is not the one who pays the price there
is little incentive to ever recognize the mistake or to stop it. Just the
opposite. In the public economy, people are rewarded for failure. The
worse a situation becomes...the more money gets thrown towards it. Just
look at Detroit!
Government mistakes become eternal...programs that can't be stopped
because too many jobs would be lost...useless community centers that can't
be closed...wars that go on forever...the bureau of this...the department
of that...
More and more parasites...fewer and fewer honest workers. But parasites do
not build honest prosperity. They just waste resources.
Driving home from work yesterday, we saw a billboard with a curious
message:
"Birth defects? Call John McClure. Lawyer. Get what you deserve."
Yes, even in the private sector - with generous help from the government
court system - the parasites are everywhere... And always with the same
message: get something from someone else...without working for it.
It all goes on...until it all goes broke.
Finally, Patrick Cox, Editor of The Breakthrough Technology
Alert, discusses one of the newest "gee whiz" technologies to catch
his fancy...
Here's a new addition to your tech lexicon: Nanotech lithography - a
technology that enables you to "print" electronics on virtually anything.
Xerox has developed a silver-based conductive ink that can be printed on
everything from plastics to textiles. The ink's melting temperature of 140
degrees Celsius is low enough to allow printing on plastics. Instead of
expensive fabrication facilities, specialized inkjet printers will be able
to print circuits that could be used as part of flexible signage, radio
frequency identifier tags and even novelty clothing.
Beyond logic circuits, energy storage devices will be printable as well.
Two years ago, chemists at the Rensselaer Polytechnic Institute in Troy,
N.Y., were able to place a thin film of cellulose over a surface of carbon
nanotubes. This breakthrough will enable paper and CNT-based batteries.
Stanford researchers have been able to take a paper substrate and coat it
with ink made of silver and carbon nanotubes to create working 'paper
batteries.'
Paper-based batteries charge and discharge quickly, making them suitable
for a wide variety of technologies. Together, these breakthroughs herald
an era of ultra-cheap, easily manufactured energy storage...
New nanotech-scale manufacturing and materials technologies in the
semiconductor industry are going to power a revolution in how we make
electronic devices, power our homes and collect and analyze information.
Right now, the vast majority of people have no idea how profound these
changes are going to be.
This is just one of several technologies that are on the verge of changing
the world as we know it. For my complete list,
look here.
Regards,
Patrick Cox,
for The Daily Reckoning
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