February 06, 2008

With no safe place left to store wealth, some are now saying we have a US Treasury Bill Bubble. Man, these are bizarre times indeed.


You have t-bill yields falling to near record lows again as investors rush to the "safety" of US government debt (that alone is kinda funny, considering we're bankrupt), with investors apparently thinking deflation and depression are coming and are happy to earn essentially a negative interest rate on their cash.

Then at the same time you have investors bidding up gold to multi-decade highs, apparently fearing that the dollar is being debased and inflation is about to rage out of control. With a sprinkling of flight-to-safety store-of-wealth as well.

SO WHAT THE HELL IS GOING ON OUT THERE?

Well, one thing is that people are scared and trying to find a place to keep their wealth. And the second big thing is investors placing bets, very different bets, on the Inflation/Deflation thing.

If t-bills are in a bubble that could suddenly unwind, and gold is an asset that can be suddenly sold off to raise cash, and both are paying essentially no interest, that does lead us back to one thing, one sentence, one time-tested piece of advice:

Cash is King.

That said, I am using some cash now to buy very selected and targeted non-REIC buy-and-hold stocks that I see as unwisely and temporarily beaten down. CEOs and insiders were net buyers of stocks last month for the first time since 1995, and short levels are the highest since 1931, if that gives you some guidance as contrarians.

But keep these three words in your mind as it all continues to fall apart:


Cash is King.

Bubble Trouble: Could the Treasury Market Be Due for a Rapid Price Deflation?

Investors' raging demand for safe assets over the past six months may have created a bubble in the Treasury market -- and some onlookers expect to hear a bursting sound any minute now.

Insider Buys Exceed Sales, Signaling Market Bottom


The last seven times insiders bought more than they sold, between 1988 and 1995, the Standard & Poor's 500 Index rallied an average 21 percent in the following 12 months

While executives step up buying, short sellers are betting against U.S. companies like never before. The amount of short selling -- when traders sell borrowed shares expecting to buy them back after prices fall -- grew to 3.7 percent of the total shares on the NYSE last month, the highest since at least 1931.

33 comments:

Anonymous said...

DBA

Commodities are cash too

Anonymous said...

Nasty gold selloff coming

http://www.kitco.com/temp/demo/kitcoradio/wmf_over.gif

bleak said...

IMHO, treasuries appear to be pricing in deflation (liquidity trap argument). Better to have a positive return in an environment of falling prices...

If gubmint defaults on Treasuries, money is the least of your concerns.

Economist said...

Food will be king. Stock up on non-perishables now. I would budget $10,000 to be spent on non-perishables for a start. A depression is like a natural disaster. Food will be like gold in a depression. Liquidate your assets and start buying up food in bulk quantities. I would buy enough to last me two years. You cannot lose if you do this. Even if you do not lose your job or the dollar does not sink, you haven't lost anything by doing this. You can always eat your supplies. When inflation becomes deadly, the smart thing to do is to convert your money into hard assets so that it doesn't lose value. Food is a top priority, everything else is secondary. The next step up after your food needs are taken care of, is to buy a plot of land you can farm. This can be useful for bartering and for times when your food stock runs out. This is a hedge against losing your job as well. At least if you lose your job, you won't go hungry and you have something to keep yourself occupied with. If you still have plenty of cash after this, then buy real estate. Property is cheap and you will make a huge profit once the depression is over and housing picks up again. I would go for the worst house in the best location. Something that can be fixed up. I would also buy energy stocks - you can never go wrong buying energy stocks such as oil. Also maybe investing in scrap metal as recycling will be big business during a recession.

I would keep away from gold unless I was super-rich and could afford to speculate. Speculating in gold is for gamblers and really rich gamblers at that.

westwest888 said...

I don't buy the "net buyers" argument because of how I think we got there. It's not that CEO's and directors are actually buying MORE. It's that they're selling less. It's pure investor psychology; they're too proud to sell at lower than 52 week high. A lot of the guys in telecom in 1998 should have been glad to sell their options at 30% off of an unsustainable high. But instead, they rode it right down to delisted-off-the-exchange.

ross said...

Gold is just another form of cash. The oldest and most accepted (worldwide) form I would say. The people buying gold are saying "cash is king" in the good old fashioned way.

London STUD said...

I've enjoyed and learned a lot from this blog. So here is a give back:
http://www.rgemonitor.com/blog/roubini/

If you know about Roubini, you are good to go. If not I suggest you register at his site and read some of the comments. Between this site, Roubini, The Big Picture and Calculated Risk, I think I'm ready come what may.

Brian said...

Keith-

For an interesting play, one might consider shorting high-yield (junk) bonds. I think that there are a couple of ETFs that make this easy.

There should be a raging bull market it corporate defaults! :-p

Brian

Mark said...

CEO's and insiders are notoriously poor stock timers, I wouldn't follow them. We are in a "bear" market and stocks could go much lower from here.
"Bottom-fishing" has always had a poor risk/reward ratio.

As for the t-bills, they are low because institutions (banks, pension funds, insurance co's, etc) are scrambling to get out of "electronic money" which can be printed with the click of Bernanke's mouse. The yield on short-term treasuries may actually go negative! It did during the great depression.

sour dough said...

Deflation? Yeah right. W just announced the federal budget and it has $400B deficits (probably $1T when TSHTF) in out years.

Add that deficit to the 3% private deficit consumers are running, and the deficits of local and state governments and it's easy to see the only way out is an inflation that will blow off the debts. Bernanke is on record favoring this approach, and his buddies at the banks are getting their ducks lined up for "the final solution".

We may eventually experience deflationary hard times, but IMO it will be 5-7 years from now. For what we'll encounter in the immediate future, gold and junk silver are much better investments than canned beans.

Marky Mark said...

That said, I am using some cash now to buy very selected and targeted non-REIC buy-and-hold stocks that I see as unwisely and temporarily beaten down. CEOs and insiders were net buyers of stocks last month for the first time since 1995, and short levels are the highest since 1931, if that gives you some guidance as contrarians.

You want to name names? At least Cramer names companies.

Marky Mark

Anonymous said...

I just tried to get an auto loan and the best and only deal I could get was 11.29% from a bank. I have no late payments for the past 10 years and have paid off numberous auto loans. The auto industry is going to get slaughtered if this continues.

Anonymous said...

"Food will be king. Stock up on non-perishables now. I would budget $10,000 to be spent on non-perishables for a start. A depression is like a natural disaster. Food will be like gold in a depression."

MBM - Must Be Mormon!

Anonymous said...

I just tried to get an auto loan and the best and only deal I could get was 11.29% from a bank.
Then get it from the dealer, they will gladly offer you 2-3%. If you buy an american car you can get even 0%.

Anonymous said...

You forget, the Govt. ain't bankrupt cuz they can tax your ass to get the money to pay off China.

Jack said...

RE: auto loans -- Audi offered me 2.8% last week on a 2006 A4.

RE: 'gold is cash' -- if gold is cash, then why do you have to sell it before you can use it at a store?

Anonymous said...

"NEW YORK (AP) -- Stocks turned mixed Wednesday as many investors, still uneasy about the economy, cashed in their earlier gains after a Federal Reserve official suggested that rising inflation could prevent the central bank from making further interest rate cuts."

Holy fuc*ing flying Sh.t! Fed caring about inflation means we're in deep...

Ruprecht said...

A CEO may be buying stock in the company for any of these reasons and more;
1) the company is sound and long term feels it is good value
2) Being so used to seeing the stock go up, feels that the stock is now cheap
3) Seeing the stock price go down affects the ego and the CEO is making a statement
4) A CEO lives in his own insulated world and the creeping realities have no affect on his perception of the world.


btw, if I was an employee at Apple, Amazon, or Google, and had stock options, I would have cashed them out 2 months ago.

Ruprecht (holding mostly cash, waiting for stock yields to got to 12%)

New Depression of 2008 said...

"Holy fuc*ing flying Sh.t! Fed caring about inflation means we're in deep...

February 06, 2008 7:24 PM"

You're RIGHT. Are you ready for 10%short-term interest rates?

Happy Days are here again....

Vote for McShitstain. More of the same failed Bushco policies... but you get a WAR HERO in the bargain..

DIE U PIGS said...

Standing Offer:

Home Equity with 1st Trust Deed:
4 cents per dollar.

Car Equity:
2 cents on the dollar with pink slip, subject to appraisal and inspection.

Trophy Wife Equity:
Nothing (uselss,no market for these whatsoever) or percentage on total sex tricks/sessions turned paid daily. No medical care provided. Minimum IQ = Room temperature - No RealWhores accepted or qualify.

Rolex, Breitling, Cartier, etc,:
Pending inspection up to 8 cents on the wholesale dollar or by the intrinsic metal weight, whichever is lower.

Boats, Harley, Hummer, etc:
paid on a per-ton basis tied to scrap steel values. No intrinsic value. I recc. a theft or arson on these for maximum insured return.

Keep working Joe/Jane Six-Pack. I'm coming to steal your most valued toys for pennies on the dollar. I will move you out of your home and into the gutter if I can, along with the kids. I will take the family pets to the shelter for you when you leave. Your alternative is to GO HUNGRY or GET SICK AND DIE..

You are F*cked Now, Big Boys and Girls.

Enjoy the granite and pergo. Ramen noodles, 8pkgs to the dollar...

DIE U PIGS

Anonymous said...

During a severe credit driven depression (a la Kondratiaff winter), people will move whatever assets are the most liquid. Reading several commentatora and analysts on this, assets in order order of liquidity are:

1. gold
2. Federal reserve notes or Euro notes (currency with wide distribution).
3. Treasuries.
4. All the other crap ranging from bank deposits down to SIV, CDO, and wierd ass derivative products at the bottom.

Hence, the rally in bonds dispite low yields.

Budvar said...

"'gold is cash' -- if gold is cash, then why do you have to sell it before you can use it at a store?"


Rupees, Roubles and Renminbis are also cash, but try spend them down the store

goron said...

"A CEO may be buying stock in the company for any of these reasons and more"

many CEO's I know are gamblers and, besides, look at the CountryWide buyback?

or, those CEO's might be think it's the last time they can make a buck cause the ship is about to sink!

i.e. it's time to "sucker rally!"

Anonymous said...

For those who feel Gold is in a bubble, you still have much to learn. You will be left out or shaken out. Keep your assets in cash and stocks and see where that gets you. Keith is making a big mistake.

BondsofSteel said...

Treasuries could be selling so cheap because traders believe the funds rate will drop lower through the duration of the bond.

With the helicopter fed lowering rates at the slightest market panic, who could blame them?

The risk premium was all but absent the last few years... BBB- corps selling almost the same as treasuries. Not any longer. This correction is good for the markets.

What puzzles me is why the yeild curve is still so flat. Do people still belive the Fed has inflation under control? If not... and you're concerned about saftey instead of yeild... why not buy 2y or 5y instead of 10y/30y?

Anonymous said...

Gold was frothy at around $500 a couple years ago, then Iran liquidated all of it's dollars before the freeze. This was the bubble driving force that pushed it towards $1000.

What will happen when everyone in Iran wants a $600 dollar welfare check like Americans are getting?

Economist said...

Ramen is expensive. I rarely buy ramen, only as a treat. It only does you for one meal and afterwards you are instantly hungry again. This is not poverty food, and it's not even good for you - think chemical additives.

What is wrong with Americans that they think ramen is poor man's food?

I cook my own noodles from raw pasta and make my own sauce from scratch. That way I save loads of money - 2 meals can be made from the price of a packet of ramen by buying cheaper raw ingredients. It's more healthy and more filling too.

This discussion about ramen shows that Americans have a long way to go before they realize the meaning of true poverty and thrift and living within one's means.

WINGS said...

Elvis is King!

Cash is Queen...

Or was that Freddy Mercury?

Anonymous said...

It is my understanding that treasuries cannot be held outside of brokerage accts. ie. they are no longer issued as certificates which you can put in a safety deposit box. This means that you are exposed to the risk that your broker will go under - which is a very real risk since the SIPC insurance fund is covers a trivial part of the exposure - it looks to me that if we get a systemic collapse, you could even get screwed owning treasuries.
Can anyone refute this?

Anonymous said...

The Great Depression was clearly deflation. However FDR confiscated the Gold and paid the sheeple $20.00 an ounce and then revaulued it at $35.00 an ounce...Hmmm

Anonymous said...

Retirement funds in foreign stocks and etfs.

All discretionary funds in savings getting between 2% and 5%.

Name of the game for funds needed for the short-term is capital preservation. With the potential of huge capital mkt implosion this year, i'm not risking anything.

Got my popcorn and waiting for the opening credits to pass so I can see the movie!

Anonymous said...

Anonymous said...
It is my understanding that treasuries cannot be held outside of brokerage accts. ie. they are no longer issued as certificates which you can put in a safety deposit box. This means that you are exposed to the risk that your broker will go under - which is a very real risk since the SIPC insurance fund is covers a trivial part of the exposure - it looks to me that if we get a systemic collapse, you could even get screwed owning treasuries.
Can anyone refute this?

February 07, 2008 6:28 AM

----------------

See www.treasurydirect.gov, at least if you like negative real interest rates. I'll take gold and dividend-paying blue chips.

Anonymous said...

Anonymous said...
The Great Depression was clearly deflation. However FDR confiscated the Gold and paid the sheeple $20.00 an ounce and then revaulued it at $35.00 an ounce...Hmmm

February 07, 2008 6:49 AM

-------------------

Of course many lost 100% if they had money in a bank that went under, so getting $20 for $35 of value is not that bad by comparison. It also beats what happened to the Dow (down by 90%). Not saying the gold confiscation was good (or Constitutional), just that the gold holders actually lost less than many others.

Also, this time around we are clearly headed down a different path. Ever heard of the Weimar Republic? That's a more likely worst case scenario than a repeat of the 1930's. More realistically, we'll have a flashback to the 70s, probably with some extra "stag" as well as "flation."