The Great U.S. Ponzi Scheme: Sell U.S. Treasury Bonds

This is the era of Ponzi schemes. And while on one side we are punishing people like Madoff and Stanford, here we have the greatest and biggest schemer of all, US Federal Reserve Bank. Yesterday, the FOMC came out with a new policy to buy up to $300 Billion of US Treasurys. I hope every reader understands that how this is the biggest and dumbest Ponzi scheme of all. The government is authorized to have a printing press that prints US dollars, then can amass as much debt as it wants and puts it back by printing more US dollars. This is exactly the scheme that the US government and federal reserve have devised to rob other countries from the fruits of their labor. While companies and people in other countries are working hard and saving for a rainy day, companies in the US are outsourcing their jobs, slashing their payrolls (just to stay competitive) and people are spending as much as they can.

Instead of embarking on a path of future prosperity that involves working and producing, the US is embarking on a path of consuming. Authorities are devising new ways to sustain it and federal reserve's latest move goes exactly in that direction. So it's high time to downgrade US Treasury debt. I'm warning investors to stay as far away from US Treasurys right now as they can. This market will blow up with double trouble. Not only will Treasury yields decline, but the US dollar itself will be devalued further. I hate to see that, but that's the outcome of these policies.

What that implies is that US banks will be holding more devalued debt in the future. So while on its face value, this Fed move might seem very good. it's highly counterproductive. It will destabilize banks' balance sheets even further, especially those banks which operate on a global basis including Citi (C) and JP Morgan (JPM). But these bank stocks are now looking too expensive given the Fed's statement yesterday. So I'd be a seller of US banks now at these levels.

Longer term horizon is uncertain and will depend on the actual steps taken by authorities. But nonetheless, these banks look fairly valued or over valued given the evolving scenario. The problem is that foreign investors will or should be spooked by these developments. That will undermine the ability of these banks to go outside and raise more money if the need arises. And need will arise because now the next snowball is forming in the credit card defaults. That market is not as big as the housing market but considering that both the US Treasury and Federal Reserve themselves are highly leveraged right now, I see very little room if any for them to provide any big future support to these banks. So BAC and JPM are a sell right now until valuation is again corrected or some significant policy changes appear.

Stock position: None.

Comments

[Ranchr:]

Well last summer when I went to London it was roughly $2 to the £1 and it's been over $1.80 for a couple years. It's now at $1.39 we haven't fallen of your currency exchange cliff yet...

Mar 19 07:43 AM

[lucky lenny:]

- huh? u say "Not only will Treasury yields decline..." well if treas yields decline, the value of the bond goes up. So really, you're advocating buying T-bills now.


On Mar 19 07:43 AM Ranchr wrote:

> Well last summer when I went to London it was roughly $2 to the £1
> and it's been over $1.80 for a couple years. It's now at $1.39 we
> haven't fallen of your currency exchange cliff yet...

Mar 19 07:48 AM

[Ganesh Sastri:]

The FED buying debt issued by Treasuries is an accounting gimmick. The FED & the Treasury should be treated as one entity for consolidation purposes. One entity cannot borrow and lend to itself. It is truly PRINTING OF DOLLAR BILLS and showering them from HELICOPTER.
There is a real danger that notwithstanding the recent strength of the US dollar, it can fall from a cliff.
Imagine Gold at $ 4000. By the end of this decade you need not imagine.

Mar 19 08:24 AM

[Gem Hudson:]

Is it towing the party line or is the party line towing you along or else? You can pay down the debt. China say or your can pay up later but China say. You are not going to hyper-inflate. Hara Guru Obama want to buy more of a deficit death so that we can spend our way out of a deficit death.

Hara Guru Obama needs a new cue card because proserity is making more of the money that what his program will cost you and because one would have to work out the business until they know what would work for them and working out the business is them working out the business until each of their products are a marketable production.

Mar 19 08:28 AM

[Andy Abraham:]

IF you had sold yesterday... depending on leverage you would have lost alot of money.... Trade with a plan...not an opinion...Opinions can lose you money...It all depends on your time frame...more so.. know where the trade works... and when it does not...

Mar 19 12:31 PM

[Econ 101:]

Yes the politicians are almost all crooks and liars. Grandstanding to take away your liberty. While they screem about AIG bonuses the real theift is happening right in front of our eyes. The congress is paying off their contributers via AIG and the other bailouts. One of these AIG bonus babies should come out and explain how our tax dollars are being sent to europe to bailout them.

Constant crisis is just a political ploy to pass more laws to strip away your liberty. The AIG "bonus crisis" is just that

"Those who woulld trade essential liberty for a little transiant security deserve neither." Franklin

Mar 19 01:31 PM

[nova:]

"Those who woulld trade essential liberty for a little transiant security deserve neither." Franklin

Yes, times have changed. Both Republicans and Democrats are failures to America and its people. We are in dicline.

In America, the strugle to
* Preserve our high standards of living and privilegies
* Find and punish "guilty" parties
* Make appropriate and workable change
is just started.

One more comment: just because a house was the first leaving a starting gate does not mean it will be the first at a finish line or even finish the race. The same is true for US$: it started great but it is just the first inning...

It appears to me we are "running" in a wrong direction.

Mar 19 03:35 PM

[econjunkie:]

Treasury yields and bond prices are inversely related. If bonds are downgraded and sold off, that will reduce the price and increase the yield of the bonds, and if it was international money that was initially involved, one would expect an escape from the U.S. dollar to push it down.

I would sooner argue that the relative value of the U.S. dollar is positively correlated with gov't bond prices, and therefore negatively with bond yields, though I haven't regressed the dollar on these variables. You are suggesting the opposite sign.

Mar 19 05:51 PM

[Gold Digger:]

Sorry for a typo in my original post. I meant that treasury yields are all set to rise and prices will go down. Also if the fed is buying US treasury bonds at these yields especially the ones with longer maturities, I can't think of any practical scenario in which it will ultimately make money. basically it's a guaranteed loss on Fed's balance sheet except in one scenario, where US economy outperforms rest of the world by at least a multiple of 2-3. Meaning if rest of world grows at say 4% and US grows at 10-12%. Which is a highly unlikely scenario.


On Mar 19 05:51 PM econjunkie wrote:

> Treasury yields and bond prices are inversely related. If bonds are
> downgraded and sold off, that will reduce the price and increase
> the yield of the bonds, and if it was international money that was
> initially involved, one would expect an escape from the U.S. dollar
> to push it down.
>
> I would sooner argue that the relative value of the U.S. dollar is
> positively correlated with gov't bond prices, and therefore negatively
> with bond yields, though I haven't regressed the dollar on these
> variables. You are suggesting the opposite sign.

Mar 19 08:28 PM