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Aussie
09-12-2008, 11:26 PM
This commentary bares careful thought and reading and shows that ultimately, in a world consumed by counter-party risk, what is a safe investment? I'd be interested to see what other Kiwi investors think about this and how we may be affected.

Cheers



You Lose!
12.10.08
by Bill Holter
Le Metropole Cafe

I hear a giant sucking sound, not the one Ross Perot heard all those years ago but the one coming out of the government bond market. The Treasury market is sucking up all kinds of capital as investors are pushing rates close to 0%. What we are watching is an enormous flight to quality by investors willing to lock in a rate so low that they are guaranteeing they will end up with a loss of purchasing power after inflation. The 10 yr bond is under 3% while the 30 year is barely above this level.

What a complete joke this is, who in their right mind would tie up money for 30 years at a rate of 3%? Add to this, they are lending the money to an entity that has mathematically over borrowed to the point of putting themselves on the doorstep of bankruptcy. With the amount of debt outstanding, the US government can in no way pay this debt back in current Dollars. The only option will be to devalue in order to make payment. The current situation is certainly dicey as the only way the system holds together is through the confidence of foreigners. Should this confidence even slightly falter from here, the entire Ponzi scheme will be up. The Fed will have no other choice than to purchase every bill, note, and bond the Treasury can crank out. No this is not a "flight to quality", it is a kamikaze suicide mission if I ever saw one! Investors can't get in fast enough today, tomorrow and believe me tomorrow is coming, they WON'T BE ABLE TO GET OUT, PERIOD! Who will they sell to? We all know the answer, the Fed. The Fed will be the buyer of last resort within the Treasury market. My how times have changed, when I went to school the Fed was the lender of last resort for the banks, the thought of the Fed being the only buyer for Treasuries was unimaginable.

Back in March when Bear Stearns fell, I wrote to everyone and put out a crash alert. Debate this or not, we HAVE crashed as stock markets globally have dropped anywhere from 30-80%, commodities are down 25-90%, and debt securities excluding [the bubble of all bubbles] Treasuries are down between 10-100%.

Now comes the moment of truth for the entire world. What comes next is the crash in sovereign debt, what I mean here is that countries will begin to default. Whether it be from non payment or not being able to access the credit markets makes no difference, a default is a default. The CDS spreads for the sovereign debt markets has begun to rise markedly in just the past several weeks, the US in particular. I believe that the "next crash" will be sovereign debt and their associated fiat currencies, this "crash" will be what separates MONEY from CURRENCY. "Currency" is a medium of exchange and "temporary" store of value, while "money" is first a store of value and second a medium of exchange. This distinction will shortly become apparent for anyone with a pulse as every currency on the planet will be affected.

As for the "Credit Default Swaps", or CDS market, I must chuckle out loud. Here is a market that bets on the likelihood of an entity going bust and defaulting. We have seen this market rev up and blow out spreads in company after company, and within days the government comes to the rescue with a bailout so the "default trigger" doesn't get pulled. However, recently the amount of bets on a U.S. default has increased and the default rates have begun to increase.

Now here is the part that I don't get and I don't think the market participants do either otherwise they wouldn't be playing. OK, so I bet on a US government default with $100,000 today. Things get worse from here and the Treasury has a couple of failed auctions and the Fed is the only buyer present and this action triggers a global panic. Either the Fed monetizes hundreds of $Trillions, or the auction actually fails and the US defaults on payments triggering the CDS payment.

Now here is the part I don't get, if you bet on a default and win, HOW DO YOU GET PAID??? No, really think about this for a moment. How do you get paid? I don't think you do get paid. If the other side of the trade still actually has the $10 million to pay you, what are the actual dollars worth anyway? ZERO!!! Do the math, the Fed prints Bazillions so the Treasury has a buyer, or the Treasury defaults and the Fed prints Bazillions, either way the Dollar will collapse and disappear as every other unbacked fiat currency has before it.

The CDS market is hilarious, in the end, either you lose or you lose, there can't be a winner when the game ends. Either the government doesn't default and you lose, or they do default and the other side of the trade goes bankrupt and since the government is bankrupt the Dollar goes without value anyway. So if you win and the other side of the trade is bankrupt, you don't get paid, if the other side of the trade isn't bankrupt you get paid in a currency that is worth nothing. Either way you end up with nothing and end up not getting paid.

Such a deal! So this is what the computer geeks that created this market came up with. A market where no matter what happens, YOU LOSE!

Aussie
10-12-2008, 01:38 PM
At that rate why not just buy gold, at least you have an asset that is highly liquid, tangible, portable and most importantly . . . has no counter-party risk. ie: it's money that exists OUTSIDE the insolvent banking system. Just a thought . . .


Point of no return: Interest on T-bills in U.S. hits zero as investors nervous
Madlen Read And Martin Crutsinger, The Associated Press
December 9, 2008 - 8:11 p.m.

NEW YORK - Investors are so nervous they're willing to accept the same return from U.S. government debt that they'd get from burying money in a coffee can - zero.

The U.S. Treasury Department said Tuesday it had sold US$30 billion in four-week bills at an interest rate of zero per cent, the first time that's happened since the government began issuing the notes in 2001.

And when investors traded their T-bills with each other, the yield sometimes went negative. That's how extreme the market anxiety is: Some are willing to give up a little of their money just to park it in a relatively safe place.

"No one wants to run the risk of any accidents," said Lou Crandall, chief economist at Wrightson ICAP, a research company that specializes in government finance.

At last week's government auction of the four-week bills, the interest rate was a slightly higher but still paltry 0.04 per cent. Three-month T-bills auctioned by the government on Monday paid poorly, too - 0.005 per cent.

While everyday people can keep their cash in an interest-earning CD or savings account at the bank, institutional investors with hundreds of millions of dollars on their hands often use government debt as part of their investment strategy.

In the Treasury market, the U.S. government, considered the most creditworthy of borrowers, issues IOUs of varying durations to raise money.

The zero per cent interest rate is no reason to panic. As recently as Monday, investors were plowing cash into stocks, and averages like the Dow industrials are off their lows.

And long-term government bonds, while near record lows, are still paying decent money considering the tumultuous climate. The yield on a 30-year bond on Tuesday was a little higher than three per cent.

There's good news in all this for taxpayers: Low interest rates on government debt mean the United States is financing its $700-billion bailout of the financial system very cheaply. The Treasury has sold mountains of debt to pay for it.

But the trend also underlines stubborn anxiety in the financial market that could keep the economy sluggish for years to come, and it translates into stagnant returns for people who have their money in places like money market funds.

"There's a price for safety," said Peter Crane, president of money market mutual fund information company Crane Data LLC. "Down slightly is the new up."

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b1209107A&utm_source=markets&utm_medium=rss

Aussie
10-12-2008, 07:54 PM
More trashy worthless paper . . .

http://online.wsj.com/article/SB122888021757894023.html