 | | The Daily Reckoning | Tuesday, April 12, 2011 |
- Man the barricades, batten down the hatches...the Feds are a comin',
- Got dollars inside the US? Are you a "risk taker of epic proportions?"
- Plus, Bill Bonner on the Fed's first hurdle...and what's to come...
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|  | | | The Problem With T-Bonds | | Why the World’s Largest Bond Fund is Now Shorting Treasuries | |  | | Eric Fry |
Reporting from Laguna Beach, California...
As we go to the cyber presses this morning, the global equity markets are wobbling a bit. The Dow Jones Industrial Average is down 130 points - its biggest drop in three weeks. Commodities, likewise, are adding to yesterday's losses. The CRB Index of commodity prices is down more than 3% during the last 24 hours, led by a steep 7% drop in the price of crude oil. The bond market, on the other hand, is enjoying the fleeting popularity of "flight to safety" buying.
This array of counter-trend market moves might be signaling the beginning of new trends - i.e. commodity prices down, bond prices up - but we doubt it. For as long as Ben Bernanke's money machine keeps churning out the dollar bills that the Fed uses to buy Treasury securities, owning commodities and avoiding bonds seems like the appropriate course of action.
Bill Gross, founder of Pimco, the $1.2 trillion investment management firm that used to buy bonds, has stated very publicly that he considers US Treasury securities to be high risk, low reward investments.
"If I were sitting before Congress," Gross recently remarked, "and giving testimony on our current debt crisis, I would pithily say something like this: 'I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden. Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies - inflation, currency devaluation and low to negative real interest rates.'"
Gross is not merely selling Treasuries, he is selling them short. His flagship, $235 billion Pimco Total Return Fund (PTTAX), now holds a net short position in "government-related" debt securities, while also sitting atop an enormous $73 billion pile of cash.
As such, Zero Hedge's Tyler Durden points out, "The world's largest 'bond' fund now has cash, at a stunning $73 billion, or 31% of all assets, as its largest asset class on both a relative and absolute basis. We repeat: cash is more than PIMCO's holdings of Treasurys and Mortgage securities ($66 billion) combined...US debt is no longer the safe haven it once was. Which begs the question: when will the Total Return Fund break out a 'gold' asset holdings line item."
Whether or not Gross begins adding precious metals to the Total Return Fund, he is clearly erecting defenses against Ben Bernanke's "War on the Dollar." Yes, it is a war, even though the Fed never officially declared it. And history demonstrates that undeclared wars can inflict casualties just as well as the officially declared kind.
In fact, wars on money always begin as "covert ops" and usually proceed as "classified" campaigns, far removed from public scrutiny. As long as these wars inflict limited damage, as measured by published inflation rates, the money-holders rarely complain. But if/as/when inflation starts inflicting painful wounds, the money-holders scream. By that point, often, the money-holders have already lost the battle.
Ben Bernanke does not mean any harm, of course. He doesn't really want to prosecute a war against the dollar. That thought has probably never occurred to him. But so what? That's exactly what he's doing...and the free-spending members of Congress are his conscripts. Together, they wage war against the dollar with their trillion-dollar deficits and money-printing schemes.
So far this year, the US Treasury has raised $293 billion in net cash by selling Treasury securities. And so far this year, the Federal Reserve has purchased a net $330 billion of Treasury notes and bonds. We'll do the math for you: the Fed has provided 100% of the net new cash the Treasury has "raised" this year, along with another $37 billion of what we'll call "old cash."
This blatant Ponzi scheme seems to be working so far...and we predict it will continue working...until it doesn't. Anticipating that day, Bill Gross, the "Bond King," is selling bonds and asking himself, "Who will buy Treasuries when the Fed doesn't?"
"If the USA were a corporation," Gross concludes, "then it would probably have a negative net worth of $35-$40 trillion once our 'assets' were properly accounted for, as pointed out by Mary Meeker and endorsed by luminaries such as Paul Volcker and Michael Bloomberg in a recent piece titled 'USA Inc.' However approximate and subjective that number is, no lender would lend to such a corporation. Because if that company had a printing press much like the US with an official 'reserve currency' seal of approval affixed to every dollar bill, that lender/saver would have to know that the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation - surely unthinkable, 2) surreptitiously via accelerating and unexpectedly higher inflation - likely but not significant in its impact, 3) deceptively via a declining dollar- currently taking place right in front of our noses, and 4) stealthily via policy rates and Treasury yields far below historical levels - paying savers less on their money and hoping they won't complain."
Gross is fortifying his defenses and manning the ramparts for a long, bloody campaign. A war on money is never pretty, as guest columnist, Jeff Berwick, explains below...
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| | The Daily Reckoning Presents | | The War on Money | |  | | Jeff Berwick |
If you keep your money or savings in US dollars inside of the United States, you are a risk taker of epic proportions. Have you not been paying attention to what is going on?
To begin with, the US Government now employs cash-sniffing dogs at most international airports. If you are carrying more than $10,000 in cash and don't declare it to the Government when coming in or out of the US, your cash will be seized. Thanks to these cash-sniffing canines, US customs officials seized $3.2 million at Boston's Logan Airport last year.
Some government apologists might say, "If you aren't doing anything wrong, why would you mind being x-rayed, sniffed, patted down, detained and questioned?"
Besides the obvious absurdity of that question, the main reason this is of concern is because in every case in history when a government has inflated its currency into worthlessness they always institute capital controls. Just ask anyone from Argentina or Italy. And it won't take much to change the rules from having to "declare" $10,000 to "not being allowed" to take $10,000 out of the country.
Not to mention that if you do declare you are taking $10,000 out of the country, who knows what kind of database you will end up on. You are obviously highly suspicious if you have more than a few hundred bucks! Only Wall Street bankers and others associated with the government are supposed to have more than a couple dollars! The most ludicrous example of the War on Money came across the newswire today, "Feds Seek $7 million in Privately Made Liberty Dollars."
The news story is only about 10 paragraphs long yet it has dozens of logical absurdities. Even in the Headline is one.
According to the headline, part of the reason they want to seize these dollars is because they are "privately made"? Yes, we wouldn't want to compete with the private Federal Reserve banking cartel!
And I know the Constitution is passé in the US, nowadays, but how in the world can this man be in trouble for making silver coins? The constitution states:
No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts.
He is in trouble because he is making currency out of gold or silver yet, the Federal Reserve, another private organization, is not doing anything wrong by making paper currency NOT backed by gold and silver coin?
Apparently, the thing they "got him on" was the following:
Federal prosecutors successfully argued that von NotHaus was, in fact, trying to pass off the silver coins as US currency. Coming in denominations of 5, 10, 20, and 50, the Liberty Dollars also featured a dollar sign, the word "dollar" and the motto "Trust in God," similar to the "In God We Trust" that appears on US coins.
Ignoring the fact that the dollar sign was originally used for Spanish and Mexican pesos and was stolen by the US to use for its dollars and the fact that the word dollar actually comes from the word thaler which was a silver coin minted in Bohemia, according to the Feds, he was trying to pass off coins, made of silver, worth more than $35/ounce, as quarters, which are now made from 92% copper and 8% nickel, and worth $0.06 in metal value.
Boy, that's quite the racket! Passing off highly valuable silver to people who were expecting to receive near-worthless copper and nickel tokens! It's a good thing they stopped him before it was too late!
Anne Tompkins, the US Attorney who was put on this important case, stated:
"Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism."
Anne, if attempting to undermine the currency of the US is a form of terrorism, why has Ben Bernanke not been tracked down and sent off to the Guantanamo concentration camp?
This "news" story finished by quoting an unbiased source: a group named the Southern Poverty Law Center, a group that tracks political extremism which has apparently been tracking Bernard von NotHaus, the proprietor of the silver coin making terror enterprise. According to the story, long before the government began its investigation into von NotHaus, the group was raising concerns about the popularity of Liberty Dollars among fringe groups on the far right.
"He's playing on a core idea of the radical right, that evil bankers in the Federal Reserve are ripping you off by controlling the money supply," said Mark Potok, spokesman for the group. "He very much exists in the world of the anti-government patriot movement, whatever he may say. That's who his customers are."
The US has started another war. The war on money. Anyone with any amount of cash more that will buy them a couple NFL tickets and beers for the game is suspect. And if you are one of those deluded people who thinks the Federal Reserve is evil and is ripping you off and you buy gold or silver to protect yourself, you are a domestic terrorist.
It's going to be a fun few years ahead in the US.
Regards,
Jeff Berwick,
for The Daily Reckoning
Joel's Note: A self-made multimillionaire, Jeff Berwick has appeared numerous times on CNN, CNBC, is a contributing editor at many of the world's largest financial and precious metals related websites including Kitco, Gold-Eagle, Safehaven.com, Market Oracle and is a speaker at many of the world's most important investment conferences including the San Francisco & New York Hard Assets Show, the PDAC held in Toronto and all the Cambridge House conferences in Vancouver, Calgary and Saskatoon.
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| | | | Bill Bonner | | Borrow or Balance: The Feds’ Only Two Choices | |  | | Bill Bonner |
Reckoning from Buenos Aires, Argentina...
The feds got over the first hurdle. They cut a deal to keep the government in business a while longer.
But that's not the end of the story. It's just the beginning.
The New York Times has the story:
Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling - a step that will become necessary in as little as five weeks - President Obama and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and averted a government shutdown.
Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.
In a letter last week, Treasury Secretary Timothy F. Geithner told Congressional leaders the government would hit the limit no later than May 16. He outlined "extraordinary measures" - essentially moving money among federal accounts - that could buy time until July 8.
Once the limit is reached, the Treasury Department would not be able to borrow as it does routinely to finance federal operations and roll over existing debt; ultimately it would be unable to pay off maturing debt, putting the United States government - the global standard-setter for creditworthiness - into default.
The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming, more than three years after the onset of the last recession. Here's the story. The feds spend more than they "earn" in taxes - almost 100% more. That gives them only two choices...balance the federal budget, by raising taxes and/or making spending cuts...
Or...borrowing money.
Borrowing is a lot easier than taxing or cutting. So, that's what they'll do. Forget the grandstanding...forget the agit-prop theatre...
..they either borrow...or they balance the budget.
And they're not going to balance the budget. Because too many voters expect to get more from government than they have paid for. That was the unstated promise of modern, social welfare governments:
Let us control your lives. We will give you more in benefits than you pay for. How can you give people more than they pay for? Only by taking the money from someone else. But governments have learned that taxing the rich heavily actually reduces the GDP and the amount of money that can be given to voters. So, they turned to taxing the next generation.
After all, they don't vote.
And more thoughts...
Buenos Aires is beautiful. We have been blessed with good weather.
The city is booming, too. Strong agricultural prices have done what they always do in Argentina - they've set off a boom.
"Property prices are up about 30% over the last 3 years," says our BA- based colleague, Rob Marstrand. "But this is such a funny place. I love living here, because you see everything. If not in the present, certainly in the past...or the future. Booms, busts, corruption, inflation - everything.
"Only about 6% of properties are sold with mortgages. So this is a real boom - where people are paying cash. But, where does this cash come from? Much of it comes from the bull market in farm products. Argentina is one of the world's top producers of cereals, for example. But there is probably a lot of money coming from the government too. The inflation rate is about 25%.
"Now, you'd think that a country with a 25% inflation rate would have a currency that is falling through the floorboards. But no. The authorities have been supporting the peso; it actually went up 4% against the dollar. Put the dollar's drop and Argentine inflation together, and you get a loss of dollar purchasing power of 30%.
"People want to protect themselves. And here, they do it by buying real estate.
"Americans might want to think about it too."
Prices are down 30% nationwide in the US. In Florida, Nevada, and most of California, they're half off. Even if they might go down a bit more, there are some very good deals available now. A friend of ours is able to buy apartment buildings for little more than 5 times rent income. If upkeep and taxes take half of that, that still gives him a 10% return. But it could be much better. Suppose he takes out a 30-year, fixed rate mortgage. Now, suppose inflation goes up. Every percentage point that consumer prices rise is another percentage point of yield for a fully- mortgaged investor.
Rob also is in charge of our Family Office investments.
"I don't see any way that they can unwind all this debt and spending without causing even more problems," he says. Investors might get some protection from real estate or stocks. But the best protection is gold.
"But we're still in a correction," Rob continued. "It wouldn't be surprising to see gold fall when this round of QE ends. Take away the money-printing and gold could sell off along with everything else. But people are now catching on. When the economy worsens, they expect the feds to add more stimulus...or lower rates...or more QE. So, they know that over the long run, the effect will probably be to undermine the dollar. I wouldn't be at all surprised to see gold down 15% in the next sell-off.
"But when the feds step in with more spending, gold will be the clear winner. We already own a lot of gold. I feel like I want to buy more of it..."
Regards,
Bill Bonner,
for The Daily Reckoning |
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