Tag Archives: treasuries

Taleb: Everyone Should Short US Treasuries

Posted on by Nirav
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One of my favorite investors, Nassim Nicholas Taleb, founder of Empirica investment management funds and author of Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, was recently quoted on Bloomberg advising every single human being to short the US Treasury bonds. While this news is about a week old, I thought I’d still comment on it given the fact that it’s a pretty strong statement and that I recently exited a similar paired-trade.

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific. Nouriel Roubini, the New York University professor who predicted the credit crisis, also said at the conference that the U.S. dollar will weaken against Asian and “commodity” currencies such as the Brazilian real over the next two or three years.

The Fed and U.S. agencies have lent, spent or guaranteed $9.66 trillion to lift the economy from the worst recession since the Great Depression, according to data compiled by Bloomberg. Bernanke, who in December 2008 slashed the central bank’s target rate for overnight loans between banks to virtually zero, flooded the economy with more than $1 trillion in the largest monetary expansion in U.S. history.

President Barack Obama has increased the U.S. marketable debt to a record $7.27 trillion as he tries to sustain the recovery from last year’s recession. The Obama administration projects the U.S. budget deficit will rise to a record $1.6 trillion in the 2011 fiscal year.

“The problem we have in the United States, the level of debt is still very high and being converted to government debt”, Taleb said in an interview with Bloomberg Television. “We are worse-off today than we were last year. In the United States and in Europe, you have fewer people employed and a larger amount of debt”.

Moody’s Investors Service Inc. said on Feb. 2 that the U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce budget deficits projected for the next decade.”.

Do I believe him? Absolutely. So why did I exit my highly profitable trade? Several reasons. During times of global economic uncertainity, there has always been a flight to quality. We saw this during the financial meltdown in 2008, where US Treasury prices soared and yields tanked. Right now, there is uncertainity in Europe regarding the debt of Greece, Portugal, Ireland, and Spain. People are worried this might have lasting consequences on the Euro as a viable currency. These fears are probably overblown, but until everything settles down and we have more clarity, there will be a flight to quality, which means that people will sell the Euro and flock to US Treasuries.

At least thats my hypothesis and I sold all my positions (except Berkshire Hathaway), shorted the Euro and also the S&P500. The one thing I didn’t do is go long the US Treasuries, since inherently I feel Nassim Nicolas Taleb is correct. At some point, I’ll most likely re-enter my short US Treasury trade, but in the meanwhile I happy to see how the European Union handles the issues of excessive debt.

Buying Our National Debt

Posted on by Nirav
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I got this email from Randy Johnson, author of the best book I’ve ever read on the topic of real estate mortages. If you own a home or are thinking of ever buying a home, you need to get How to Save Thousands of Dollars on Your Home Mortgage. It’ll probably be the best $12 you’ve ever spent. Buy it. Even if you have an MBA in finance from a top tier school. 😉

Up until about 30 years ago the American people always funded most of our own national debt. We went into World War II with a national debt of less than $100 billion, maybe $500 billion dollars adjusted for inflation. We came out of the war with about $300 billion, a piddling amount by today’s number as today the National Debt stands at about $11 trillion.

When we embarked on WWII, how did we finance the expenditures necessary to build all those battleships, airplanes, and tanks and pay for the soldiers and sailors to man them? We sure as heck didn’t sell Government Bonds to the Germans and the Japanese. Europe that wasn’t under Nazi control was worse off than we were. We financed the war ourselves.

Ordinary Americans put the money they saved into Savings Bonds, and that is what financed the war effort. But, to be truthful, we were on a wartime economy and, as I here put on my old-timer hat, it was a lot different world than young people are willing to acknowledge today. Can you imagine your teen- ager’s reaction to having the whole family being rationed four gallons of gas per week?

Consumerism came in a distant second place to building war materiel. And there was rationing. We only got limited access to gasoline, tires, and metals, all of which had a higher military priority than civilian use. See http://en.wikipedia.org/wiki/Rationing

Even food was rationed. Remember the old economic trade-off “guns versus butter.” It was real. Butter was rationed which mean that the civilian population turned to margarine, and not the “I can’t believe it’s not butter” type. This was a white globule of hydrogenated vegetable fat. It came in a bag with a little yellow button that you broke and then kneaded into the mixture to make it look like butter. The problem was that it still tasted a lot like hydrogenated vegetable oil. Each family got a little bit of beef and a little bacon every week. And we saved bacon fat and it was used in the manufacture of explosives.

It was time for Rosie the Riveter as the overwhelming majority of American men and women supported the war effort. We all looked at the sacrifices we made as small in comparison to the millions of soldiers, sailors and marines who were risking their lives to win the war on the battlefield.

What did kids do? For openers we saved paper and took to what we would refer to today as recycling centers. We cut out both ends of “tin cans,” stomped them flat and saved them to turn into collection centers to be made into steel to help the war effort.

But we all helped financially too. We had little coupon books and when we saved a nickel or a dime, we bought stamps that went into books. I forget the numbers but it seems to me that if you saved $37.50, you took it to the bank or Post Office and traded it for a War Bond with a value of $50 some years hence. The $12.50 was interest.

As to marketing of the War Bonds, I have a dim recollection of Bing Crosby singing a song Buy Bonds. We didn’t need much encouragement. We all wanted to win the war.

All of which brings me to 2009. I don’t see much difference between 1942 and 2009. We are in the middle of a crisis that to my mind is every bit as dangerous to American families as was World War II. No, except for Iraq and Afghanistan, no one is shooting at our troops, but economic events are very serious, perhaps even more so than in 1942. Back then we had the most important economy in the world, and while we are still the leader in GDP, citizens of other countries are much more effective in their ability to compete successfully for Americans’ jobs.

Ever since 1946 we have had a society based upon consumption. We used to save and then buy. But for the last 45 years or so our consumption has been financed by the extension of great gobs of credit. We used to balance the Federal budget and much of the debt stayed at home, but recently the debt was ultimately bought by someone in China or Japan or Europe. I think China holds over $1 trillion of our bonds.

Frankly, I do not believe that it is healthy to depend upon the largess of others to finance that debt any more than families who depend on someone else to finance their excess consumption. Quite bluntly, the counter-parties may not want to continue to do so. The sooner we wean ourselves from the teat of foreign largess, the better off this country will be.

We need to adopt a mentality that is based upon a higher national savings rate, which has indeed spiked in the last few months. But my feeling is that it may be more a knee-jerk, fear-based reaction to the crisis that rather than a newly found sense of financial responsibility.

What better way to restore America’s fiscal health and the American family’s financial well being than to have American citizens finance the necessary increase in the national debt. We can’t do it a nickel and dime at a time, inflation being what it is, but we can sure have teenagers save a few dollars every week, and when they get $37.50 then go buy a $50 Series EE Savings Bond. Who would you rather have a buy that bond, your kid or some Chinese government official?

You see what I mean. I want to get along with China and I hope that they continue to be our trading partner, but I would rather have us keep our debt between the American Government and the American citizens.

What would happen if we all adopted a policy of buying T-bills? What if our Government tried MARKETING the concept? Heck, we can sell almost anything fattening to our citizens. Why don’t we try marketing something that is good for them, and the rest of us too. I think that if Madison Avenue got involved in this project, they could instill a lot of Patriotic Pride into buying T-Bonds.

As to buying the Bonds or Bills themselves, you can buy them through your stockbroker or it can actually be done online at http://www.savingsbond s.gov/indiv/myaccount/myaccount_treasurydirect.htm

Seriously, as a measure of your Patriotic commitment, why not go online right now, open an account, and buy some T-bills. I did it and I can tell you it really feels good, better than a trip to the mall.