Bond Vigilantes, A Coming Bubble, Likely Currency Winner, Big Data Hits and More!

by Addison Wiggin & Ian Mathias

  • Big bond buzz kill… how a routine Treasury auction killed yesterday’s stock rally
  • Dan Amoss on the ballooning government balance sheet… and the market bubble it will create
  • Global economy on the brink… vote of no confidence in Britain, Japanese exports crash
  • Bill Jenkins on “the likely winners of this worldwide crisis” and how to invest accordingly
  • Plus, more data disasters… employment, GDP fall to Depression-era lows


  “You mean to tell me that the success of my program and my re-election hinges on the Federal Reserve and a bunch of f*%&ing bond traders?"

That famous outburst belongs to Bill Clinton, when the bond market asserted a veto on his spending plans in the ’90s. We suspect similar slips are being uttered behind closed doors all over the world today… probably with just as much cursing.

  The U.S. Treasury auctioned off $34 billion in 5-year notes yesterday — barely. Demand for government debt was so low the Treasury had to adjust the bond yields midauction, from 1.8% to 1.85%. Five basis points might not seem like a big deal, but it certainly turned heads at the Big Board:

Even more notable, this bond fallout happened on the same day the Federal Reserve announced its first series of Treasury bond purchases. Bernanke and company snatched up $7.5 billion of its $300 billion U.S. Treasury purchase program… and investors didn’t seem to care. So much for the trader idiom “Don’t fight the Fed.”

  “The U.S. is hawking a record $98 billion in new debt this week to finance its old and new spending,” reports Dan Denning.

“If you’re scoring at home, that’s a lot of new supply coming onto the market. Just as in any other market, an increase in supply leads to lower prices. With bonds, lower prices mean higher yields. That’s bad news for the U.S. government because higher yields mean higher borrowing costs, and the U.S. government has world-class borrowing plans.

“Yesterday’s action in the bond market suggests that investors are not going to play along. If the Fed wants to keep yields down, it may have to buy a lot more U.S. bonds than it expected. There may be a lot more sellers than it expected. And a lot fewer buyers.”

“Treasury bonds and paper money are both government liabilities,” adds Dan Amoss, “and both are expanding at troubling rates. Both are claims on real wealth (not wealth itself), so as they inflate in size and get distributed into the economy through the traditional channels of government and banking, they will increase the prices of the scarcest goods and services — especially goods produced by industries that have been starved of investment. Expect the investing environment to return to a state resembling that of the Carter administration (1977-1981).

“The ultimate cost of the Fed’s policy announcement will be a weaker dollar. But against what? Maybe not other global currencies… because they’re all getting debased at varying speeds. The dollar, and all other paper currencies, will continue to lose value against gold, oil and other natural resources.

“As the Fed rigs the market for longer-term Treasury securities, my eye’s on how big institutional investors plan to hedge their portfolios against the risk of a rising CPI.

“What they can’t do is sell Treasury bond futures — the Fed is guaranteeing that long rates won’t rise to compensate for a rising CPI. Many investors will take another hard look at gold and commodity futures.

“The media say that commodity futures were in a ‘bubble’ last year. The oil futures market might have been overheated in July, but we’ve yet to see the real bubble.”

Dan’s track record alone is enough reason to heed his warning. The average — say again, average — Strategic Short Report closed position gained 203% so far this year. And through the power of options, Dan has his readers ready for the next leg down in financials and the “real bubble” coming in commodities. You could have his advice too… click here to find out how.

  "Americans will need liquidity to finance all their measures,” said Czech PM and head of the EU Mirek Topolanek yesterday, “and they will balance this with the sale of their bonds, but this will undermine the liquidity of the global financial market.

“All of these steps, these combinations and permanency, is the road to hell. We need to read the history books and the lessons of history and the biggest success of the [EU] is the refusal to go this way."

Heh, OK… this guy is a bit of a quack, we admit. His comments yesterday were essentially his last political breath. The Czech PM was recently voted out of his position and is scheduled to resign today… so take that for what it’s worth. But consider him, plus warnings from the Russian and Chinese governments over the last few weeks, and the emerging trend is undeniable. Then there’s this:

  “You’re carrying on, willfully, worsening our situation, wantonly spending what little we have left,” European Parliament member Daniel Hannan sneered at British PM Gordon Brown yesterday. “Your are the devalued prime minister of a devalued government…

“Perhaps you would have more legitimacy in the counsels of the world if the United Kingdom were not going into this recession in the worst condition of any G-20 country.

“You have run out of our money.”

Sounds like the coming G-20 meeting might be more than the usual handshakes and posing for pictures. We’ll keep an eye on it for you.

  Even worse for PM Brown, a U.K. bond auction failed yesterday for the first time since 2002. Brown ordered the Exchequer to sell $2.5 billion in 40-year paper, but not enough buyers showed up to do the dirty work… a collective vote of no confidence for Brown and his super-sized spending programs. A ghost of things to come in I.O.U.S.A.?

Brown had planned to sell over $200 billion in debt this year and at least another $200 billion in 2010. But will anyone buy ’em?

Oy, and another country in peril: Japanese exports crashed 49% from February 2008 to last month, the Japanese government reported yesterday. That’s the largest year-over-year plunge in the country’s history and the fifth consecutive month of decline. Thus, Japan’s trade surplus has fallen 91%, to just $840 million. Poor Japan… these guys really can’t catch a break.

  “The likely winners in this worldwide economic crisis,” opines our currency man Bill Jenkins, “will be countries like Canada and Australia. They have an edge because of their commodity-related economies and currencies. Oftentimes, you’ll hear them called the ComDolls (commodity dollars) for short.

“Of the two, I like Australia better. Canada is inextricably tied to its neighbor to the south (namely, us), and that’s more than just a little problematic. Australia, on the other hand, is not tied to the United States and has many other real positives going for it.

“As China attempts to lift itself up by its own bootstraps, Australia comes into the picture. It has been widely understood that Australia is a little China. Not in culture, custom or language, but in economics. A significant part of Australia’s commodities flows into China, and the more the Chinese move ahead, the better it is for Australia.

“Also, let’s consider that Australia’s central bank is still holding its interest rates at 3.25%. In a fairly stable country, with a fairly stable currency, that is one heck of an attractive rate. Why, it is downright appealing!

“Indeed, Australia may now become the benefiting member of the next carry trade. After all, if can you borrow money at 0.25% and invest it at 3.25%, you stand to make a decent haul. And as risk appetite re-enters the market, you can bet your bottom dollar that Australia will likely be a real beneficiary.


“All things considered, a long position in the Australian dollar doesn’t seem like too bad of a bet.”

So how should you invest in the Aussie? We suggest you consult Bill,here.

  The dollar suffered a wild ride yesterday, courtesy of Treasury Secretary Tim Geithner. Speaking at a conference in New York, Geithner was asked to comment on the recent dollar diss delivered by China’s central banker Zhou Xiaochuan. Geithner made some token remarks… that Zhou was a “sensible man” and that “anything he says deserves consideration.”

Wire services misquoted him and quickly spread the word that Geithner was considering Zhou’s proposal to ditch the dollar as the world’s reserve currency. That sent the dollar index into a tailspin, falling almost a full point in a matter of minutes.

Geithner later clarified his comments and the dollar index rebounded (to about 84, where it rests as we write). But there’s probably a moral to this story: Currency traders of the world have their fingers on the trigger… and the dollar in the cross hairs.

  Gold snapped its recent losing streak yesterday, thanks to both Geithner’s faux pas and the bond turmoil. The spot price found a low around $918 and has since popped back up to just below $940 an ounce.

In the data patch today… sorry, more bad news:

The Commerce Dept. revised U.S. fourth-quarter GDP again today, this time down to a 6.3% annualized contraction. That 0.1% adjustment makes for the worst quarter since 1982 and the third largest contraction in the last 50 years.

The Street currently expects a 5.1% annualized contraction in the current quarter. Should that come true (we don’t see why it won’t), that would spell the worst six-month streak for the U.S. economy since 1947.

And the Labor Dept. shared its latest batch of lousy data too… a record 5.5 million Americans are filing jobless claims. 652,000 people filed their first unemployment claim last week, up 78% from the same time last year.

  “It’s not xenophobia — jerks,” writes a reader in response to a Richard LeFrak and Gary Shilling’s recent editorial.  If you missed it, the gist was that immigrants could arrest the housing crash… if the government would consider granting resident status to foreigners who buy an American home.

“Gee,” continues the reader, “did you even think whose jobs those immigrants would take? Hmmmmm?


“We want to put Americans FIRST before we allow more in. We have a high unemployment. I want those jobs to go to Americans FIRST, rather than to foreigners.


“Oh, but you forgot about that, didn’t you?


“You are shills for the WSJ? All they advocate is more and more cheap labor for the benefit of wealthy business owners. That is so unkind of you and thoughtless toward the American worker… if it was your job that was going to replaced by a cheaper worker, you’d think twice.


“I guess caring about our countrymen means xenophobic.”

The 5: We’re sympathetic… really, it’s not often “fair” who gets to work and who doesn’t. But what ever happened to “Give me your tired, your poor, your huddled masses yearning to breathe free”? Are those ideals suspended when they’re inconvenient?

And yes, you caught us. The 5’s real mission is to sell subscriptions to The Wall Street Journal.

  “It’s a bit of a stretch,” writes a reader, this one responding to our comments on China yesterday, “to think of China as a world power with an unbroken record of success from 500-1500. Your more recent history from 1500, however, made a good point, that it is difficult for China historically to maintain economic prosperity, and I appreciated the mention of the Taiping Rebellion — next to World War II, the deadliest war of all time.


“There were many ups and downs to Chinese power between 500-1500, which I won’t go into in detail, but all had the same two root causes. One was internal decay caused by the problems of administering what has always been both the largest population in the world and also has always had more than its share of separatist sentiment. The other was ‘nomad troubles,’ and I think they have several modern-day counterparts. There were plenty of other states, such as the Tibetans and Vietnamese, to add to those woes. The bottom line is that all the same problems are present in China today.


“Enjoy your newsletter.”

It’s our pleasure. Thanks for reading,

Ian Mathias

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