Follow The Bottom Violation
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Feb
7
The Treasury Bubble Blows On
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
– Alan Greenspan
Before he sold his soul and renounced capitalism, Alan Greenspan was one of my heroes, and the above quote exemplifies why. I’m still in shock; the man spent his entire life championing free markets, only to throw it all away near the end. I don’t see how he sleeps at night, knowing history will see him as a sycophantic coward and a political lackey. But that’s a discussion for another day, because right now, guess what I want to talk about? That’s right. Treasuries.
First, Goldman Sach’s chief interest rate strategist in London, Francesco Garzarelli, believes we are not in a Treasury bubble. Do you know how he reached that conclusion? He did it by “mapping one-year ahead macro expectations to long-dated government yields through [Goldman's] Sudoku framework.”
Work with me here. Goldman is predicting bond prices and yields by employing a popular number-puzzle found in daily newspapers? Am I missing something? Look, being short Treasuries is a no-lose trade; no matter what happens, rates are going higher.
By the way, I’ve heard any number of analysts suggest that the current Treasury bubble is “different” from other bubbles, because it is driven by fear rather than greed. Now that’s just nonsense. There are plenty of traders out there who will be happy to go on the record that Treasury prices are going higher — mainly because they believe the Fed really is going to continue [trying] to hammer the long end of the yield curve. So, they’re still buying bonds. And I promise you their motives have absolutely nothing to do with safety and fear; they’re buying Treasuries for capital appreciation. And guess what? That’s greed.
It’s a bubble. Of the old-fashioned persuasion. Period.
That’s right, this little bond craze isn’t as tame as some people would have you believe, and when it ends, it’s going to end quickly and painfully for anyone who is stupid enough to hold longer-dated maturities. Can you hear the printing presses churning and grinding? Can you? That’s the sound of pure, unadulterated inflation. And it’s coming soon.
So, I’m going to ask the same question I ask every day: who in the hell is going to keep lending the United States money? The Chinese? The Japanese? The Saudis? Do we really think they’re that stupid? The U.S. is about to print somewhere between $2 and $3 trillion dollars — depending from whom you’re getting information. As Rick Santelli, on CNBC, so eloquently put it this morning, “The dollar really doesn’t stand a chance.”
How do you make something more valuable? You decrease the available quantity, or you increase demand. The U.S. government is clearly not decreasing the number of dollars available. So for all you people out there who think the dollar is going higher, what, exactly, do you think is going to spur demand? Further, what force in the universe is going to create that demand at a rate that outpaces the $2 to $3 trillion that are going to hit the economy in coming months? Please do tell me. I am your eager student, and I await your answer with bated breath.
So, in case you missed it in the passage above, there are already many trillions of dollars in U.S. Treasuries floating around the world. Who is going to buy the manifold trillions of dollars more the United States intends to auction this year? I think the brilliant minds at Treasury have fallen victim to the if-you-build-it-they-will-come affliction. Somebody needs to send them an email and let them know that Kevin Costner is a weenie, and none of his movies should be the basis for projected demand at Treasury auctions. Ever.
Rick Santelli, by the way, is the coolest person on CNBC. They should fire everyone else and just let him talk all day. And they should especially fire his bald, Keynesian nemesis. Whatever-his-name-is-that-I-can’t-remember-right-now.
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Disclosures: Paco is long TBT, UCO, and gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.
You can buy his novel Discipline wherever books are sold.
13 Comments so far
Partners
Nicely done Paco!
Bloodbath is the term that enters my mind. Right now my husband and I are having an argument about investing in long term treasuries, at least it isn't my money – it is his father's estate so not mine.
Greenspan did exactly what he was groomed to do. It took him three Presidents to finally find the dupe (who became rich) to repeal Glass-Steagall.
Bernake is doing exactly what he was groomed to do. Ben isn't as lucky as Alan, Alan had Y2K, dotcom, “homeland” security, a war and then housing. I'm just not seeing what new temporary, or fake, bubble can be pulled out of the hat to rescue Ben.
Manufacturing is gone, housing is gone, commercial real estate gone, house flippers dying, mortgage brokers (at least non-government) gone, credit gone, service is shrinking and we continue to import visa employees to help drive down our wages.
There are very few rabbits that could be pulled out of their hat that could cover up this decade long disaster of an economy. I'm sure Ben will try.
“Further, what force in the universe is going to create that demand at a rate that outpaces the $2 to $3 trillion that are going to hit the economy in coming months? Please do tell me.”
Paco, your wording is very unfortunate. The above statement could reasonably be construed as you predicting that consumer price increases are going to jump in the coming months because of the reckless printing of the Fed. No body–you, me, or Peter Schiff–can predict WHEN prices will rise due to the money printing; indeed, we can't even predict that it will be CONSUMER prices that will rise. The currency inflation could hit consumer prices, stocks, commodities (which might flow through to the consumer) or real estate (again!). I agree with your premise that money printing can only cause mischief, but there is no way we can predict when or where such mischief will surface.
We can predict it with much more accuracy than you're implying. Certainly the massive printing of currency and easing of credit we've seen bodes horribly for the long term outlook. It's not such a reach to apply it to the short- or intermediate term as well.
[...] THE TREASURY BUBBLE BLOWS ON – by Paco Ahlgren – … Who is going to buy the manifold trillions of dollars more the United States intends to auction this year? I think the brilliant minds at Treasury have fallen victim to the if-you-build-it-they-will-come affliction. Somebody needs to send them an email and let them know that Kevin Costner is a weenie, and none of his movies should be the basis for projected demand at Treasury auctions. Ever … – The Bottom Violation [...]
“Paco, your wording is very unfortunate. The above statement could reasonably be construed as you predicting that consumer price increases are going to jump in the coming months because of the reckless printing of the Fed. No body–you, me, or Peter Schiff–can predict WHEN prices will rise due to the money printing; indeed, we can't even predict that it will be CONSUMER prices that will rise. The currency inflation could hit consumer prices, stocks, commodities (which might flow through to the consumer) or real estate (again!). I agree with your premise that money printing can only cause mischief, but there is no way we can predict when or where such mischief will surface”
Is it not obvious already that commodities and US equities are being artificially inflated by this already? Seriously, the market is up 80% in a year and commodities have nearly tripled in some cases!
The pure, Ayn Rand nutso capitalism you espouse teaches that society must let poor or neglected children die of hunger and disease to further her superman ideal. This is not the ideal society. It's evil, and you're really an ignorant bastard
1. I'm not espousing Randian Objectivism, although I do like the libertarian aspects of her philosophy. Still, at its root, its dogmatic and tautological.
2. I am a bastard. You got me there.
3. I don't remember reading anything by Rand, or any Objectivists, in which there exists a call to “let poor or neglected children die of hunger and disease.” I think you better cite the source of that outrageous claim.
4. You won't cite it. Because you can't. And I doubt you've read Ayn Rand anyway.
So remind me again: who's ignorant?
USER 487104: Your naivety is scary. You espouse a Christian form of socialism which ignores human nature. Already, the Western nations are careening toward self destruction as a result of massive social spending. The more society promises, the more demand it creates for its services. Human behavior is adaptive.Incentives increase production. Eliminate disincentives and watch how quickly the parasites change their behavior. It is one thing to act charitably toward the truly needy and dispossessed, but quite another to steal the labor of others for the benefit of the capable. Almost half of Americans pay no income tax. At some point, the half that do won't.
[...] is a fun little chart for your perusal. It shows bond yields at all time lows — relative to all yields going back to 1928. And you can’t stay at zero forever. At some point, [...]
Hello to all
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by definition inflation is the velocity of paper chasing to few goods, the velocity, if unemployment grows and grows, velocity will slow and slow,,,what we have to watch for is jobs increasing rapidly as will inflation,, right now hiding inflation in unemployment and off shore selling,, i am sure china will protect itself by protecting this govt,,,
read goldwaters, with no apologies, and jenkins money worlds greatest hoax
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