Is it Time to Sell U.S. Treasuries?

I am getting awfully close to shorting U.S. government bonds. The debt crisis in Europe is heating up, and I foresee a domino effect globally. I still believe the U.S. crisis will hit last, but this doesn’t mean Treasuries have to rally the entire time. Sooner rather than later, there will be a tradeable long-term top in U.S. government bonds.

I don’t think people understand how grave the situation in America is (I will go over in greater detail in my newsletter, which you can sign up for on the right sidebar). All eyes are now on Greece as if they are the only country with a debt problem. What about Spain? What about Japan? What about the U.S.? We are all going down the same path and the riots you see in Greece simply reflect human nature. Trust me, we are no better than Greeks; when people lose their retirements in America, they will react the same way.

Yes it’s true that the U.S. is much bigger than Greece, but that just means our problems are bigger. Is Greece conducting never-ending wars around the world that cost over $1 trillion? We have massive obligations, including implicit guarantees, that aren’t included in the $14 trillion national debt number that gets bandied around. Our structural problems are way bigger than the average person realizes.

Contagion Effect?

The biggest fear our there is a contagion effect in markets. When the crisis in American hit in 2008, no country was left unscathed. This time around I think it will be much of the same when Greece defaults on its debt. That the European authorities continue to promote austerity and higher taxes on Greece shows they have no idea what the hell they are doing. It’s such a simple-minded solution: “Geez, we have a huge budget deficit, so if we raise taxes, we’ll raise revenue. Furthermore, if we cut spending, we’ll close the budget gap even more.” No one asks what the composition of the workforce is and what austerity will do to unemployment. No one asks if the real problem is the rising currency that is increasing the real value of debt in Greece. It’s so foolish to celebrate a theoretical 5% reduction in the deficit when the currency rises 20%. The only way out of this crisis for Greece is to get out of the Euro so they can decrease the real value of their debt by inflating away.

If you follow the markets day by day, you realize how schizophrenic people are. One day Greece is headed towards default and markets fall, the next day the Greece crisis is solved and markets rally. They can bail out Greece all they want- nothing will change. In the same vein, we can talk all day about how the U.S. can’t technically default on its debt. This is just rubbish. Gold can be trading at $10,000, the 30-year bond can be trading at 20%, and inflation can be running at 30%, but people will still be stubborn and say we have not “technically” default since we are still repaying our debt in dollars. Let them get lost in their own theoretical musings; I’m more concerned about investing correctly.

I think a long term top in Treasuries is very near. Once Treasuries are exposed as an investment just as risky as other Western government debt, all eyes will be locked in on gold. This is when gold will truly be untethered. I’ve already explained what the “fair value” of gold is. As usually happens in markets, gold will reach its fair value rather violently.

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  • Seal

    this is without any mention of tungsten laced gold bars out there

  • Jim Kingsland

     You might do better to wait and see what the Fed will do with respect to targeting inflation and whether it will attempt to cap certain treasury yields. We know that FRNs are used as a complete fiat ponzi scheme, but (and this is a big but) so far the banksters have managed to extend the lie quite nicely.  Shorting treasurys will have its day, but it’s not something you want to show up too early for.  As for Greece exiting the EU, it will end up with a weaker drachma and debt denominated in euros. it’s screwed either way.  Anyway, the real risk is not so much that Greece dies, but that contagion spreads to Spain, Italy, the UK etc and that underlying derivatives written by US banks blow up . we live in interesting times!

    • http://www.expectedreturnsblog.com Moses

      I am very dubious about the Fed’s ability to control or cap anything. I am not too worried about being a little early because I’m looking 5 years down the road at the disaster that is surely  headed our way. 

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    According to Zero Hedge, countries outside of the U.S. dumped 74 billion dollars in U.S. Treasuries, most of it over the weekend:

    “Over the weekend, we observed the perplexing sell off of $56 billion in US Treasurys courtesy of weekly disclosure in the Fed’s custodial account (source: H.4.1) and speculated if this may be due to an asset rotation, under duress or otherwise, out of bonds and into stocks, to prevent the collapse of the global ponzi (because when the BRICs tell the IMF to boost its bailout capacity you know it is global). We also proposed a far simpler theory: “the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity (although not with the element of surprise – China has made it abundantly clear it will sell its Treasury holdings, the only question is when), has finally arrived.” In hindsight the Occam’s Razor should have been applied. Little did we know 5 short days ago just how violent the reaction by China would be (both post and pre-facto) to the Senate decision to propose a law for all out trade warfare with China. Now we know – in the week ended October 12, a further $17.7 billion was “removed” from the Fed’s custodial Treasury account, meaning that someone, somewhere is very displeased with US paper, and, far more importantly, what it represents, and wants to make their displeasure heard loud and clear. (Source)

    Undoubtedly, the Chinese and other countries have recently discovered that Italy and Greece, with smaller debt to income ratios than the United States, are less riskier and carry a higher rate of return. This is because, unlike the US, the Rothschild/Rockefeller bond rating agencies have trashed their country’s debt ratings, forcing them to pay a much higher interest rate than U.S. Treasuries. Hey, if you take the risk, you might as well earn the reward! http://www.moneyteachers.org/Foreigners+Dump+Treasuries.htm

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