G&G Associates Tax & Financial Consulting
Dear G&G Reader,
I read this article and thought it would be more evidence to why you should be buying Gold & Silver AND getting your money out of the bank.
by Eric Roseman
On Tuesday, the Treasury suffered its worst five-year auction in history. Yet that news barely made a headline.
It’s not the first time Treasury has struggled to sell its paper...and they're certainly not alone. The Germans – among several other Euro-zone credits – have struggled to auction their debt since last October with four failed or reduced bond auctions (even the Chinese endured a failed bond auction this July).
That’s almost mind-boggling...especially since I’d consider the Germans the best government credit in the world, possibly along with the Swiss and Norwegians.
The United States, like several other European governments, is struggling to sell a truckload of Treasury’s this year. Investors are advised that this slow bleed can easily magnify into a full-blown crisis over the next few years if the global economy fails to recover.
But government debt has enjoyed a great run for the last thirty years...
The 28-Year Bull Market
From 1981-82 until December 2008 Treasury bonds enjoyed a secular bull market as interest rates collapsed from a Volcker Fed peak of 20% in 1981 to 2.25% in December of last year. Zero-coupon bonds – long-term bonds on steroids – have earned big double-digit gains over the last 28 years as rates tumbled, handily outpacing most global stock markets.
But the big bond bull market is over.
Faced with an unprecedented funding gap thanks to the worst credit collapse since the 1930s and plunging tax revenues, the United States is now issuing more debt than ever to finance its expenditures. About $2 trillion dollars is estimated to be auctioned this fiscal year.
And what it can’t finance, Treasury simply monetizes vis-à-vis the Federal Reserve, as we all already know, through the process of “quantitative easing.” Several other central banks are doing the same thing this year, including the Swiss National Bank and The Bank of England.
Thirty Years of Steady Profits Coming to an End?
Yet nobody has a debt the size of America’s.
Deficits are clearly out of control with no political resolve to reduce spending. At some point, a major lenders’ strike looms as foreigners balk at financing this paper. If that happensed, the United States could be forced to impose a deficit-financing tax or a VAT consumption tax to finance its explosive debt and the interest required to service outstanding Treasury bonds.
The Chinese are stuck with about 40% of this paper, the Japanese about 25% and the British about 10%. Rightfully concerned, the biggest holders of U.S. Treasury debt outside of Japan and England have increased their rhetoric latelylately, as they grow nervous about their declining dollars. The Chinese and the Russians are the most vocal, fed-up with dollar depreciation.
Last week, Treasury was successful in selling its tranche of seven-year Treasury bonds. But for the second time in a week, Treasury attracted poor demand for the sale of five-year and two-year notes. That raises the cost for Treasury as it relies on the Fed to absorb unwanted notes.
If you need to park short-term funds then avoid longer dated notes. In fact, I’d be shorting or betting against 20-year and 30-year Treasury bonds. Stick to the short end of the yield-curve or bonds maturing no later than in 2011-2012. That’s what PIMCO is doing now.
Failed bond auctions in the West since October mark the beginning of a bear market in government bonds.
Assuming we don’t slip into a deeper recession or worse, the bond market is the worst place to park long-term funds ahead of the next inflation crisis down the road, a U.S. dollar and EUR blow-up and, eventually, higher interest rates to support ever-growing government borrowing.
Tax & Financial Consultant, RFC
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LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. Also, please note that due to our commercial relationship with Publc Gold, G&G Associates may receive compensation from a membership purchased at www.publicgold.com/gngpreciousmetals.