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Is This the Beginning of the End of the Treasury Bubble?

Chuck Butler (March 10, 2009)

Issue #408: Tuesday, March 10, 2009

Also In Today’s Letter…

Chuck Butler Image

By Chuck Butler “Sometimes I’m right, and I can be wrong, my own beliefs are in a song…” I just heard that great old song on the radio, and thought, that’s a great credo to live by. Oh, well… That’s just me I guess… Let’s get to work!

The currencies, led by the euro, made a valiant effort during the trading day in the U.S. yesterday to mount a rally. And we did enjoy a small rally. They have gained even more ground in the overnight markets, with the euro trading with a 1.27 handle.

So what pushed the currencies higher yesterday? Ahhh…grasshopper, of course I’ll get to that. But let me first set the table with the background story.

First, you must recall, me saying on more than one occasion that I believed U.S. Treasuries are the next bubble to pop. Well there’s something happening in the markets right now that could cause this bubble to finally pop.

Right now, we have three separate auctions going on this week with a total of US$92 Billion of Treasuries on the selling blocks.

We start with an astronomical US$63 Billion of three-year notes, followed the next day by US$18 Billion of 10-year notes, and finally US$11 Billion of 30-year bonds.

What a Choice: Weaker Dollar or Higher Rates

Now, let’s circle back to the financing of our deficit. Recall that many times I’ve explained that foreigners pay for all our governments’ debts by buying up our Treasuries and other paper.

When those foreign purchases aren’t enough to finance the deficit, the U.S. government only has two choices…

1. They can raise interest rates aggressively to attract foreign investment, and by doing so bring the economy to its knees.

2. Or they can allow / force a debasement of the dollar, to allow those purchases to be made at a “discount.” As you know, any foreign investment into Treasuries has to be made with dollars, so the foreigner needs to convert their currency for dollars before they buy. If those dollars are at a “discount” then the foreign investors gets the bargain.

What Happens If This Auction Does NOT Go Well?

So big deal right? This delicate balance has existed in the U.S. markets for quite some time.

Ahh, but this is where it gets interesting… The fears late yesterday and in the overnight markets are that these auctions carry notes and bonds with yields that just aren’t high enough to attract foreign investors to the auction (or at least, not attract enough foreigners to the auction).

It’s Been a Great Run…But Is This Bull Market Finally Coming to an End?

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If the auction doesn’t go well, that means we have a financing problem. And with our economy in the shape it’s in, there’s no ability to aggressively raise interest rates to attract foreign investors.

So, the only choice is to allow the dollar to weaken (if that’s possible at this point)!

Now of course, I could be wrong. If by some miracle, foreign investors should flock to these auctions, then the Treasury bubble could continue to grow, and the U.S. dollar could continue to soar.

All I’m saying is that if they DO NOT, this could be the trigger to the Treasury Bubble that I’ve been watching for since early February.

“We May See Inflation Higher than 1970s” – Warren Buffett

How about mixing in some Warren Buffett to my story – about how that on the other side of this deflationary asset price scenario that’s going on right now – is soaring inflation?

Well…Warren, welcome to my wagon! Let’s listen in to Mr. Buffett…

Old Warren just said our economy, “has fallen off a cliff” and that efforts to stimulate the economy may lead to inflation higher than the 1970s, according to Bloomberg.

Now, here’s where Warren and I make the split on this inflation idea. He’s not bullish on gold, and of course, you know I am. Now, talk about someone that could move the gold market! But so far, he’s mum on the shiny metal.

Pound sterling continues to get whacked about the head and shoulders and I completely understand why. The U.K.’s economic problems mirror those in the U.S. but only the U.K. doesn’t have the world’s reserve currency, which allows the U.S. to print as much as they want!

Sterling has long been on a list of currencies that will not perform well. In fact, my newsletter, Currency Capitalist has been shorting the pound since way back in September.

Come On China, “Buy Gold Already!”

Did you see the comments by the head of the Chinese National Energy Administration, Zhang Guobao? Mr. Guobao suggested that China buy more gold, oil and commodities with a portion of the country’s nearly US$2 Trillion in foreign exchange reserves.

There have been more than few calls for China to deploy their reserves in a different manner, and they all have mentioned buying more gold in some way. And each of them have fallen on deaf ears, or just plain ignored…

China Has Massive Forex Reserves at Their DisposalImage

So, we have Warren Buffett warning about future inflation, and a Chinese official recommending the Chinese government buy more gold, and the shiny metal falls in price on the day.

Hmmm…makes you think that gold is not on terra firma right now. And maybe we’re in for a period of weaker gold prices.

Of course, that just means another chance to buy at a lower price in my mind…

That’s it for today… You know, I had back surgery, a discectomy, 18 years ago. About two years after that surgery, I herniated the same disc. Not opting for any more surgery, I decided to deal with it. And every now and then it flares up on me. And wouldn’t you know it? It flared up right before I’m about to leave for vacation. Getting out of my car, it grabbed, and that shooting pain reminded me of all the fun I used to have every day! Not!

Anyway, it’ll be better in a couple of days… Well, it’s time. Talk to you again tomorrow from the road!

I hope your Tuesday is Terrific!
Chuck

EDITOR’S NOTE: Ready to add gold to your portfolio but have no idea how? Tune in to next month’s Currency Capitalist, and we’ll tell you how…before anyone else notices gold’s selling for a song right now.

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