Friday, May 29, 2009


Peter Schiff and Marc Faber on the Glenn Beck show this week. Beck's show receives over three million viewers every night, and as people continue to hear the truth about what is happening, more people begin to understand how they are being silently robbed by holding American currency. We can see a reflection of this as gold marches upward toward $1,000 once again.

We see another reflection of this as the dollar crashed through 80 last night.

Thursday, May 28, 2009

The Bond Story: Part Two

Our government this year has projected to run a $2 trillion budget deficit. I estimate that this number will be closer to $2.5 to $3 trillion when the finals numbers come in. There are two reasons for this:

1. Income (tax revenue) is rapidly falling right now as the economy deteriorates.
2. Expenses (spending programs, bail outs, etc) are growing by the week.

Imagine you take in $30,000 per year. Due to poor management of your finances, you end up spending $40,000. This leaves you with a $10,000 deficit that you put on the credit card.

This is what our government does by selling treasury bonds. Do you see that running clock on the top left of the page? That is the total amount of money we owe on our credit card, with interest.

It is projected that a best case scenario would be for foreign countries to purchase about $500 billion in treasury bonds this year. Estimating that the total annual deficit will be $2.5 trillion, that leaves $2 trillion in debt that needs to be purchased by investors in America.

I would estimate that pension funds, financial institutions, etc, in an absolute best case scenario will purchase an additional $500 to $1 trillion in bonds. So that leaves us with:

$2.5 trillion - $500 billion - $1 trillion = $1 trillion

$1 trillion in bonds that need to be purchased (best case scenario). Now if it were a person, a company, a state, or another country they would have to declare bankruptcy. They would essentially default on their debt.

However, we have a magic tool that is called a printing press. Our Federal Reserve is going to print the remaining $1 trillion and buy the remaining treasury bonds.

Problem solved right?

There is one catch. When an investor gives the government $100,000 to borrow for ten years, they are concerned what the value of that $100,000 will be when they get their money back after those ten years. If the dollar loses 20% of its value over that period, in ten years their $100,000 will be worth $80,000 in purchasing power: what they can buy at the store with the money.

Additional supply of new currency (from the printing press) will lower the value of our currency. Think of it like 200 new homes in your neighborhood going into foreclosure (supply) and the banks all trying to sell them at the same time.

This puts the bond market in a tough spot. The Fed wants to buy bonds in order to keep interest rates low, however, the more bonds they buy with printed money the less attractive bonds become to investors because of the currency risk.

Basically, we are on a collision course with disaster. The United States will never actually "default" on its debt because it can print an unlimited amount of money. The money paid back to our creditors will eventually lose most of its value, so it will pay its debt through inflation.

Foreign countries such as China are already taking steps to diversify out of American bonds and the US currency because they understand this is happening. Their leaders have expressed increasing disgust in our administration's reckless spending.

We are moving toward the point where foreign countries will become net sellers of the treasury bonds they currently hold. This additional supply will combine with Obama's endless annual multi-trillion deficits. There will be only one buyer left to purchase the debt: the Federal Reserve.

This could happen slowly over time, or an event could trigger foreign selling one night overseas while we sleep.

Wednesday, May 27, 2009


Money manager and financial advisor Dr. Marc Faber, takes some time this week to speak with Bernie Lo on Asia Confidential. Faber was one of the few advisors to understand and warn of America's current credit market crisis.

The Bond Story: Part One

The recent action in the treasury bond market is the most important story in the financial world today. Before I begin talking specifically about what is happening, why its happening, and what that means for the markets, lets start with a simple discussion on what treasury bonds are.......

When the government needs money that it doesn't have, it sells treasury bonds. Think of it like going to the bank to get an interest only mortgage for your home.

For example, lets say the government wants to borrow $100,000. They can issue a 30 year treasury bond at (X) interest rate. If it is 4%, they will pay the investor $4,000 per year for 30 years. If it is 6%, they will pay the investor $6,000 per year for 30 years. At the end of the 30 years, the investor then receives his initial $100,000 back.

Treasury bonds can be issued for 1 month, 3 month, 6 month, 1 year, 2 year, 5 year, 10 year, or 30 year terms. An investor usually receives a higher interest rate the longer they are willing to let the government borrow their money. For example, a 10 year treasury bond, if you bought it today, would pay you 3.5% interest. A 30 year bond would pay you 4.5%.

Bonds are valued by their demand in the free market. If there is a low demand for bonds, interest rates will go higher to entice buyers into the market. If rates go up, that means the bond is losing value. Here's why:

Lets say you bought $100,000 worth of 10 year treasury bonds at 5%. This means that every year the government pays you $5,000.

What if the rates on 10 year treasury bonds rose to 10%? That means it would only take $50,000 worth of 10 year treasury bonds to receive the same $5,000 every year.

So if you want to sell your bonds, you will only receive $50,000 in the market. The rates doubled, so the bonds lost half their value.

The following chart shows a long term look at 10 year treasury bond interest rates:
This past fall we saw a spectacular grand finale to a 30 year bull market in treasury bonds. Many people believe the yields will stay low forever. I think they will be surprised at where we go from here.

Sunday, May 24, 2009

A Look Back From 2089

I often wonder what the history books will contain when they look back years from now at the collapse of the United States empire.

Who will take the blame? They completely misdiagnosed the cause of the first Great Depression. For example, our current Federal Reserve chairman spent his life studying the Great Depression and has concluded that there was one overall mistake made during the 1930's: not enough liquidity/money was injected into the economy.

He is now in a position today to prove to the rest of the world that his thesis is correct. Unfortunately for the rest of the world, his tests will bring a new nightmare, far worse than the original.

But will historians tell the correct story this time? I'm not the only one who imagines how it will be told years from now.

Ben Stein, one of the great minds of our era, wrote a fantastic article this weekend in the New York Post. It is titled, "Decline and Fall: A view from 2089."