Tuesday, January 6, 2009

TRADING ALERT - Treasury Footprints in the Sand

From time to time I will post a TRADING ALERT. Those words will mean that a money making opportunity is rapidly approaching or has arrived. Unlike most financial pages, my goal is always to post ALERTS before they happen or at least while there is plenty of movement left in front of us.

Treasury rates have started to tell us something very important. Let's summarize what we know, first:

1) Treasuries have been pinned at all time low yields for months. The 3 Month T went negative yield for sustained periods of time. Low yields mean that an enomous amount of wealth is willing to accept little return ON capital in order to ensure return OF capital. A 0% yield means they just want to get their capital back after a storm passes. Negative yields mean they are willing to pay or sacrifice some capital just to get the remainder into a storm shelter.

2) These low yields are historically extraordinary. The previous all time low yield occured when Hitler rolled over Poland. We've blown that record away. This is no small feat, a lot of money is moving.

3) A large number of bids on those Treasury instruments did not get filled. Two bids went unfilled for every successfully purchased instrument.

4) We have record government spending bringing a record number of Treasury instruments to auction to fund that spending.

5) The US dollar is rapidly strengthening relative to other major currencies.

Let's analyze what this means, number by number:

1) Big picture - wealth protection is the rage, risk is being shunned.

2) ...like never before.

3) Pent up Treasury demand is waiting. Bidders know more auctions are coming. They've decided not to pay an excessively negative yield and accept the risk of waiting a short time for more supply to arrive.

4) The supply truck has arrived. It is dumping a record number of Treasury instruments on the market place, right now. Note the 3 Month Treasury Yield (^IRX) on my ticker is now above it's long grind at 0% and occasionally negative yields.

5) A strengthening dollar exchange rate implies that the increase in T yields is not because the dollar is being shunned. A more traditional rise in Treasury rates might occur when the dollar is being shunned and Treasury supply is more stable, that means people can pay a lower price to hold dollars, or conversely, the US Treasury must pay a higher yield to attract dollars--that is NOT what is happening here.

The Opportunity: This analysis adds up to a new flow of capital away from risk, occurring right now. That is, out of the venture economy and into hiding. This equates to a large amount of downward pressure on paper assets which are a relatively liquid source of funds. Stocks are in a topping process and about to start another significant leg lower. In fact, any asset with lots of liquidity left buoying high prices is vulnerable to this liquidity drain. I've recently pointed to gold and other PMs as a shorting opportunity, this analysis is supportive of those positions.

The Play: I think we are within a few % of the counter rally high, and I project about a 20% decline during the next leg down. Begin to short liquid assets like stocks and precious metals. Illiquid asset prices like real estate will suffer just as much, as liquidity is absorbed into the protection of Treasuries, but prices will not move as quickly.

Icing on the Cake: Most will misinterpret rising treasury yields as inflationary, and take the opposite positions. They will supply your profits.

See my OPEN MARKET FORECASTS, listed below, for expected price levels.


  1. Thank for the insight. Any particular short you like on the stock side? I know you are not a big fan of inverse etfs, but what about some of them for the more novice players?

  2. I am not sure if I am allowed to post here, but here's one of my two cent wackier ideas:

    In regards to today's release of Dec's FOMC agenda. One of their last "tools" seems to be a concerted propoganda effort to push the spectre of inflation expectations in a deflationary environment. This is akin to them "threatening" to devalue the dollar ruthlessly, that dollar holders trip over themselves to spend it on something, anything before it might devalue. However, monetizing the debt is a double-edged sword to our Asian friends and the Fed know they would kill the golden goose. More importantly, in our case, the problem to the small investor here may be that this doubly magnifies the risk of less nimble market participants, because the dollars coming out of safety would go right into the teeth of big players who will, no doubt, slam down the hatch when enough of the herd has come out of the gate to feed on the green. Here are the dots connected:

    Ben's Playbook
    By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

    Minutes of the Federal Open Market Committee December 15-16, 2008
    Members also discussed how best to communicate the focus of the Federal Reserve's policy going forward. Members agreed that the statement should indicate that all available tools would be employed to promote the resumption of sustainable economic growth and to preserve price stability.
    Participants emphasized the importance of explicitly conditioning communication regarding future policy on the evolution of the economic outlook. The added clarity in that regard might help forestall the development of expectations that inflation would decline below desired levels and support aggregate demand.

  3. I agree that this rally should be short lived because when I look at a dow chart, we have not even come close to the 9654 mark of the day before the unprecedented post election collapse.

    A lot of talk about a big rally and a convenient bottom in Nov. But still the dow has barely even consolidated let alone break through the most obvious recent high of 9654.

  4. Concerning short term Treasuries, would it make sense, if rates were negative, to just park funds in (C of I)Certificare of Indebtedness at no interest? Limo

  5. thanks for the warning, I just wanted to confirm that according to the outlook above, TBT will be going down. Thanks for your blog and insight.

  6. Would it make sense to leave funds in (C of I) Certificate of Indebtedness, if rates turned negative? Thank you

  7. "Would it make sense to leave funds in (C of I) Certificate of Indebtedness, if rates turned negative? Thank you"

    Yes, I think so. Let's face it, a fraction of a percent isn't going to make or break most people, and C of I has already out performed the 3M Bill.

    The key is to have your money ALREADY through the Treasury door if/when Citi (or similar) fails. That is when $6T in big non-FDIC insured accounts and a few trillion in skeptics have to pay to get in.

    Even these large Treasury auctions can only accommodate around $60B a week. A real panic could produce stunning negative yields if a "too big to fail" fails.

    The bottom line is this:

    This is what a modern bank run looks like. Once most people figure it out, it will be too late to get in line.

  8. Thanks for the blog. Bookmarked.

    Happy New Year.

  9. "We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

    I disagree on two counts:

    1) That assumes the Federal Reserve actually wants inflation for inflation's sake. That is not the case in a monetary system where the government doesn't print its currency.

    If our government issued our money, as the Constitution requires, we might be able to inflate our way out of deflationary trouble.
    But then again, we would never get into deflationary trouble if we used Constitutional legal money.

    Our government does not issue our currency, a private banking cartel lead by the Bank of NY does that. So EVERYTHING they do must return a profit to their shareholders, or they can't do it. The reason we are deflating is a lack of profitable borrowers, so in our corrupted system:

    No new profit = no new currency

    2) Government "spending" when the government must new borrow all currency at interest, is not spending at all. It is a net expense.

    So as we see today with a huge pile of Treasury hitting the auction block as we speak, government "spending" in a debt based (bank profit based) monetary system, always drains more liquidity than it creates.

  10. I have a suggestion that will materially and positively impact our GDP numbers - and may just solve this entire 'economy' thing within one quarter.

    If we accept the axiom in physics, that the law of conservation of energy states that the total amount of energy in an isolated system remains constant. A consequence of this law is that energy cannot be created or destroyed. The only thing that can happen with energy in an isolated system is that it can change form.

    And, if we further apply the substitution principle in the above proof, that 'Jobs=Energy' as they relate to economy, and reflect themselves in the measurement of GDP, it therefore follows:

    That 'Jobs' in our economy are neither created or destroyed, they simply change form.

    For instance, over the past 25 years, the United States has arguably been a net exporter of jobs. These jobs were not lost, however; rather, they reflected themselves in the balance of trade, in the form of cheap plastic c**p imported from China.

    While one may be tempted to find flaws in my logic as it is applied to our present situation, as there is a net loss of jobs worldwide; this would be incorrect.

    As it pertains to the situation in the United States, our net job loss numbers in fact reflect a net positive export balance of 'Jobs' to 'Job Heaven'.

    Hence, in order to accurately account for this transfer, we simply must appropriately valuate this net export of energy to 'Job Heaven', and book the corresponding 'export' valuations during the quarters in which they occur to our Accounts Receivable ledger, book the entry as actualized gross profit, reflect said profit in our balance of trade; and finally, reflect these entries our new adjusted GDP numbers.

    The effect will be fourfold:

    First, our 'new and improved' GDP numbers will attract massive inflows of foreign investment, and restore the United States' standing as a safe-haven store of wealth.

    Second, The markets will be energized, and will be provided the stimulus for further domestic manufacturing of new jobs for export - and allow our importation of plastic c**p to continue unabated.

    Third, we will cultivate the standing as a sole market player in 'Job Heaven', build a new market base, and build goodwill with the present administration of 'Heaven Proper'.

    Finally, the United States will once again establish itself as both the world and 'universal' leader in the manufacturing of jobs.

    Note: While there are some unresolved logistics involved in the actual collection of trade payments from 'Job Heaven', I believe this is an issue that can be resolved quickly through the combined acumen of our Federal Attorneys, and our Military.

  11. Why is the government not concerned with repaying massive amounts of debt with deflated dollars?

    Also, would it make sense to have savings accounts denominated in another currency, such as the Swiss franc?

    Thank you very much for the blog.

  12. "Why is the government not concerned with repaying massive amounts of debt with deflated dollars?"

    Because they don't understand it.

    "Also, would it make sense to have savings accounts denominated in another currency, such as the Swiss franc?"

    I would not, because your cash payoff during inflation is the increased buying power of the cash you hold. We've already watched pure cash positions nearly double in buying power in 2008 (as measured by stocks, real estate, fuel, 50-80% sales, etc). That will happen again and again over the coming years.

    The key is protecting your cash.

    Banks are about to start popping, so traditional protections like accounts, CDs, MMFs, and even the FDIC are risky. Treasuries are the only place to be if you want to hold a large cash position, near-0% yield proves that wide spread (internet/virtual) bank runs are in progress.

    The mattress works fine too, but will you be able to find any cash to stuff, once Citi starts to tip? At that point, the Treasury club will sport a heavy cover charge, and ATM machines will be empty after the first 10 in line.

  13. I meant "deflation" in the cash payoff sentence, above.

  14. Thank you for setting up the blog, FDR. An excellent idea.

    You say that "most will misinterpret rising treasury yields as inflationary". Could you clarify this? Are you saying that treasury yields are rising because of the increase in supply of treasury instruments? If so, isn't it reasonable to argue that since the increase in supply of treasury instruments reflects record government spending that is inflationary? Or are you saying that increased government spending is deflationary because of the increased interest payments? Thanks.

  15. Hi,

    I am saying that slightly increasing yields are the expected result of an insatiable demand meeting some new supply.

    Let's say you sell a wildly popular item on eBay. Bids are sky high. So you produce more supply. When you bring the new supply to market, you know bids are going to drop, that is ok, because you are raking in more volume.

    The total volume of money seeking shelter is what is really price deflationary. The uptick in prices in the face of a strengthening dollar is simply confirmation that it is occurring right now.

  16. FDR do you still think that the DOW rally has some more steam left or it has topped out and on the way down towards 6500 in the next few weeks? What about the precious metals? Your esteemed views solicitied!!


  17. I think the next leg down is most likely underway as of my TRADING ALERT on the 6th. If there is any upside life left, I don't think there is much potential beyond the Dow 9,100 point of the alert.

    I'm very long term bearish on basically everything with lots of liquidity left sloshing around in prices, that goes for almost all stocks, real estate, precious metals, and anything else still trading at late-90's to 2007 price levels.

  18. waht about holding PM in the physical form?


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