Mon, Jun 20, 2011 - 6:24pm
Gambling on Short-Term Financing
Portugal's government recently suffered a debt default. The country required a bailout by the European Central Bank (ECB) because it had too much short-term debt coming due and not enough lenders were willing to extend these loans at affordable rates. Lots of economists criticized Portugal's borrowing strategy because much of its debts were short-term.
Apparently, these folks haven't bothered looking at the U.S. Treasury's debt maturity curve. We have. The numbers are so shocking, we expect most of our subscribers simply won't believe us. You can read all of the numbers for yourself, if you'd like. Bureau of the Public Debt includes all the numbers in its Financial Audit (which you can read on its website.
Feel free to read all 35 pages... Or focus on just this piece of data. It's all you really need to know: 61% of all the marketable Treasury debt held by the public will mature within four years. Thus, over the next four years, the U.S. Treasury must either repay or refinance more than $1 trillion in existing debt each year – not to mention additional deficit spending of at least $1.5 trillion. For us to avoid a default, the U.S. Treasury may have to borrow or refinance as much as $10 trillion in the next four years.
That would double the amount of U.S. Treasury bonds currently trading in the world's markets.
Think about that for a minute. Then, consider the decades-low yields in the Treasury market today, which would surely rise to accommodate this enormous increase in supply.
Now, try to arrive at any sort of scenario that ends well for today's U.S. Treasury bond market investors. We can't... We don't know exactly what the end game will look like or exactly when the bond market will crash. But we know it is coming. We know it can't be avoided. And we know many investors will suffer catastrophic losses.
Given these risks, the Federal Reserve cannot allow the Treasury's borrowing costs to increase. It cannot allow the dollar to strengthen. It cannot allow the stock market to fall, or business activity to slow...
That's why we are 100% certain the Fed's promise to stop printing money and buying Treasury bonds on June 30 is a lie.
Even though we know Bernanke will have to turn back on the printing presses sooner or later, we have no doubt the market will react strongly to the presses' temporary stop. Expect big moves – falling commodities, a rising dollar, and even falling stock prices.
We have been warning our readers since the spring of 2010 that the stock market was no longer broadly attractive. Since then, valuations have only gotten more extreme. A big correction is overdue. We will likely get that correction this summer. We've been very patient, waiting for the better entry point for stocks that will come as a result. And again this month, we will keep most of our "powder" dry. In fact, we're even going to close out several long-held positions. It's time to raise cash and be ready to take advantage in the aftermath of a new, mini-crisis this summer and fall.
But first, we have one new recommendation this month. It may surprise you...
Edited by: ¤ on Nov 8, 2014 - 5:07am