Enzio's Clock

Background

1. What is "store of value"?

People tend to equate it with the lack of inflation: if there is deflation, then the value of things rises, and if there is inflation, the value of things falls.

This is deceptive in its simplicity. How about a currency or a house losing its value BECAUSE prices have fallen? Have this discussion with some U.S. home owners undergoing re-possessions by banks on their homes - homes whose prices and thus values  have fallen drastically. Adieu, "store of value = inflation" disciples.

That "adieu" is what yesterday's bond rout in the U.S., subsequently spilling into Europe, was all about. Sales of U.S. Federal debt are rising so strongly that its price is falling  - so up go the yields. Indeed, those higher yields on Federal debt also drove up yields on mortgage debts; according to today's Bloomberg ("Government bond yields hit six month highs" by A Worrachate and J Carrigan), "Mortgage bond yields are now higher than before the Fed announced March 18 it would expand purchases off those securities to drive down interest rates on new loans....Yields on...Fannie Mae's current coupon 30-year fixed rate mortgage bonds climbed to 4.69%...the highest since Dec.5, and up from 3.94% on May 20..." This means that these mortgage yields have climbed by 19% in just over a week! 

Now look ahead. This year alone, according to the same Bloomberg article,  the US Treasury will sell $3.25 trillion worth of Treasuries in the fiscal year ending this 30th September. Does anyone know the size of America's GDP? It is $14.2 trillion. This means that by the end of this September, the Treasury will have sold the equivalent of nearly a quarter of America's GDP in the form of additional debt.

So what the right hand giveth (more Treasury debt), the left hand taketh (more purchases of Treasury debt on the part of the Fed). Ever seen people bailing water?

Of course, then, people are getting nervous about how long the debt merry go round can continue, all the more so with America's Economic Time® worsening: that excess supply of goods will rise in line with increased unemployment.... so of course mortgage defaults have to rise. So how can banks prosper if mortgage defaults rise off the back of more unemployed and thus lower home values?

Adieu, conventional store of value disciples: it is precisely the LOSS of pricing power that is leading America down the slippery path of worthless government debt. Welcome to the predictable fate of super power currencies...

2. How to Save/Make Money Off This Idea

1. Always consult your financial adviser first.
2. Buy the ETF that shorts U.S. 20-year Treasury bonds, TBT:US.  It has risen by 54% since we recommended it on 22nd December 2008.
3. Look at shorting U.S. financials via SKF:US.  Our timing has been terrible: it has fallen by 56% since we recommended it on 23rd March 2008, so you better had speak with some technical experts before losing money on this. But then climb in when your timers tell you to.
4. Short the U.S. stock market, inter alia via SDS:US.   It has risen by 7.5% since our initial recommendation on 15th November 2007.