The Daily Reckoning on Bonds
(Mish Note: the DR is grossly distoring the Facts - Pimco hardly calls Treasuries a short. At any rate here's another treasury bear that's likely to get slaughtered)
- We would not argue with Mr. Gross. Au contraire, the
Daily Reckoning's New York bureau considers the U.S. bond
market to be the best short sale west of the Atlantic.
Treasury bonds, in particular, are vulnerable to America's
acute reliance upon foreign creditors. Consider the
following observation from William Poole, President of the
Federal Reserve Bank of St. Louis: "Foreign-owned U.S.
assets increased by an average of $155 billion per year
during the 1980s. Since 2000, foreign ownership of U.S.
assets increased at an average rate of $833 billion per
year - more than a fivefold increase in the rate of foreign
buying. In 2000, over $1 trillion of U.S. assets were
purchased by foreign entities. And, by the end of 2002,
foreigners owned more than $9 trillion of U.S. assets;
including more than $300 billion in cash, far more cash
than is held by all U.S. citizens combined.
- "To give you an idea of how important foreign-ownership
of U.S. assets is to our economy, consider the recent sales
of U.S. government debt. In the last six quarters, the U.S.
government issued $345 billion in debt. Net foreign
holdings of U.S. debt increased by $304 billion during the
same period. Foreigners must buy all of our new debt
because our economy produces almost no net saving.
- "The willingness of foreigners to continue to invest in
U.S. assets depends, mainly, on currency management... The
dollar is the world's reserve currency because of its
perceived soundness. Rising rates of inflation in the U.S.
economy will jeopardize the dollar standard, make
foreigners increasing reluctant to hold U.S. dollar assets
and make it increasingly difficult to sell U.S. bonds at
affordable rates of interest."
- Responding to Poole's comments, Porter Stansberry writes,
"I'm reminded of what Alan Greenspan himself said this
month in Germany when asked about the growing U.S. foreign
debts: 'In the end, the restraint on the size of tolerable
U.S. imbalances in the global arena will likely be the
reluctance of foreign country residents to accumulate
additional debt and equity claims against U.S. residents.'
- "Commenting on the rise of prices across the board in
commodities," Stansberry continues, "Fed Governor Ben
Bernanke maintains that commodity price rises are not a
harbinger of future inflation, but instead a proof of
'strengthening economic activity.' He also mentioned that,
while shopping for cheap dry land in Florida, he had a
wonderful lunch with Santa Claus." (More from Mr.
Stansberry, below... ).
- To conclude: Bonds might rally more, but they don't
deserve to. |
