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The Case Against Treasury Bonds
If you want to delve into the case against the future of US Treasury bonds in all its glory, take a look at the November/December issue of Foreign Affairs, the establishment bimonthly journal read by academics, intelligence agencies, and politicians alike, which I am sure you all have sitting on your nightstands. In a well researched and thought out article penned by Roger C. Altman and Richard N. Haass, the road to ruin ahead of us is clearly laid out.
The US has no history of excessive debt, except during WWII, when it briefly exceeded 100% of GDP. That abruptly changed in 2001, when George W. Bush took office, despite his loss of the popular vote. In short order, the new president implemented massive tax cuts, provided expanded Medicare benefits for seniors, and launched two wars, causing budgets deficits to explode at the fastest rate in history. To accomplish this, strict “pay as you go” rules enforced by the previous Clinton administration were scrapped. The net net was to double the national debt to $10.5 trillion in a mere eight years.
Another $2.5 trillion in Keynesian reflationary deficit spending by president Obama since then has taken matters from bad to worse. The Congressional Budget Office is now forecasting that, with the current spending trajectory and the new tax compromise, total debt will reach $23 trillion by 2020, or some 160% of today’s GDP, 1.6 times the WWII peak.
By then, the Treasury will have to pay a staggering $5 trillion a year just to roll over maturing debt. What’s more, these figures greatly understate the severity of the problem. They do not include another $9 trillion in debts guaranteed by the federal government, such as bonds issued by home mortgage providers, Fannie Mae and Freddie Mac. State and local governments owe another $3 trillion. Double interest rates, a certainty if the current commodity price inflation continues, and our debt service burden doubles as well.
It is unlikely that the warring parties in Congress will kiss and make up anytime soon. The capital markets will emerge as the sole source of any fiscal discipline, with the return of the “bond vigilantes.” They have already made their predatory presence known in the profligate nations of Europe, and they are expected to arrive here imminently.
Such forces have not been at play in Washington since the early 1980’s, when bond yields reached 13%, and homeowners paid 18% for mortgages. Since foreign investors hold 50% of our debt, policy responses will not be dictated by the US, but by the Mandarins in Beijing and Tokyo. They could enforce a cut back in defense spending from the current annual $700 billion. They might even demand a retreat from our $150 billion a year commitments in Iraq and Afghanistan.
Personally, I think the US will never recover from the debt explosions engineered by Bush and by “deficits don’t count” vice president Chaney. The outcome has been permanently lowered standards of living for middle class Americans and reduced influence on the global stage. But I’m not going to get mad, I’m going to get even. I am going to make a killing profiting from the coming collapse of the US Treasury market through buying the leveraged short Treasury bond ETF, the (TBT). Sure the 40% gain since august has been nice, but it is only the appetizer. My recently joined “Macro Millionaires” have been able to book a quick 20% profit. The main course has yet to come. I am sticking to my long term forecast for this fund of $200, and that is despite a hefty and rising cost of carry of nearly 1% a month.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Bond vig's, blah, blah, blah, blah..........
Im so fucking tired of reading this drivel.
The capital markets are in the hands of the US Govt and its agents.
Had I ignored thse lame fucking stoies and put my cash in the market I would have doubled my money by now.
Im fucking pissed off I even read this shit. It Fleckenstein 2.0!
Bingo! You are more right than you know.
Couldn't get past the rabid partisanshiip of MHFT placing all the blame on Bush when he fucking well knows a POTUS can't raise or spend one fucking dime in taxes or anything else.
There's plenty of blame to go 'round beginning with that unelected zionist democrat Robert Rubin if one must get heavy on partisanship.
Good Lord. Can't you offer something a little more intellectually challenging than .."it'a all Bush's fault"? For crying out loud that's getting old. How about this....we only have one party rule,and they all love to spend.
the bernank can stay irrational longer than the ocean can stay liquid! praise be the bernank! may he ease a thousand years!
mhft tells it like it is.
Looks like you need to see the dentist for a dose of radiation, when you come in from The Road
Another lamb to the slaughter. People betting against the treasuries are going to be skinned long before their predictions turn out to be right (which they will eventually).
The US has no history of excessive debt, except during WWII
[?!]
Economic analysis a nanometer deep
Total debt derivatives and unfunded liabilities to GDP eclipse anything seen during WWII, the Revolutionary War or the Mississippi or South Seas Tulip bubbles that assumed the national debts of England and France for a time
(Can we imagine AAPL or XOM assuming unpayable state or sovereign debts?)
Nah
Having said that, here is the bullish case for Treasury Bonds when the Debt Default Deflation Deleveraging and sovereign state asset sales resume all the way down:
http://stockcharts.com/freecharts/gallery.html?s=%24USB Targeting 178 from 119
Well, if we cant.discipline ourselves maybe we need china and japan to do it for us. Oh st vincent save us from the evil ones!
the deficits don't matter argument did not originate with cheney.
the wall street journal pushed this meme in the 1980's during the reagan administration. during that time in the trading bullpen we had many an argument on both sides of the issue. actually, one guy (leftist) took the position that deficits don't matter. they rest us hammered him.
But Cheney did once remark, "Regan proved that deficits don't matter."
and he was wrong. obviously, deficits do matter.
Yes indeed. Now, can we all just move forward.
Treasury bond yields will never rise higher than the price the Federal Reserve is willing to pay. They will buy up as much debt as necessary to keep yields down.
Shilly McShill
And the sun shall rise in the east!
Come on, long term, everyone here knows this.Tell me about their action in the near future given Europe and the Fed.
(-37) times 38 takes more than 3 characters...
I'm not going to defend Dubya or "Chaney" [sic], but is there no consideration that the sovereign financial troubles are, in large part, owed to
1) Previously enacted legislation and
2) Congress
rather than just one past Presidential administration?
With the opening "It's Bush's fault" implication, I thought this might have been written in 2008. However, I do agree. Treasuries suck.
+1000
Still another finger pointing at "your guys". I expected better.
Chaney? That gives me confidence in your scholarly analysis.
Would that would be Lon Cheney, Man of a Thousand Faeces?
Lon
(Please fix captchas to allow - signs as needed)