The Damning Case Against Treasury Bonds

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Summary

My late friend, Texan money manager, Mike Robertson, asked me just before he passed away a few weeks ago if there was one asset class that I truly despised.

I didn’t hesitate: bonds.

In fact, fixed income investments are about to regain the nickname they earned during the 1980s: “certificates of wealth confiscation”.

That leaves me within a hair's breadth of pulling the trigger on some new short positions in fixed income instruments. My hedge fund buddies are lining up various short plays here, like clay ducks in a shooting gallery.

With the 10-year Treasury bond yield at a microscopic 2.56%, and 3.20% for the 30 year, you have a classic "heads I win; tails, you lose" trade. Best case, you break even over the next decade. Worst case, you lose half or more of your capital.

The US has no prior history of excessive debt, except during WWII, when it briefly exceeded 100% of GDP. That abruptly changed in 2001, when George W. Bush took office. In short order, the new president implemented massive tax cuts, provided expanded Medicare benefits for seniors, and launched two wars, causing budgets deficits to explode at the fastest rate in history.

To accomplish this, strict "pay as you go" rules enforced by the previous Clinton administration were scrapped. The net-net was to double the national debt to $10.5 trillion in a mere eight years. Another $5 trillion in Keynesian reflationary deficit spending by president Obama and $4 trillion worth of Federal Reserve quantitative easing since then has taken matters from bad to worse.

This year, the national debt is rapidly approaching the $20 trillion level. The Congressional Budget Office is now forecasting that, with the current spending trajectory, total debt will reach $23 trillion by 2020, or some 127% of today's GDP, 1.25 times the WWII peak.

By then, the Treasury will have to pay a staggering $5 trillion a year just to roll over maturing debt. What's more, these figures greatly understate the severity of the problem. They do not include another $9 trillion in debts guaranteed by the federal government, such as bonds issued by home mortgage providers, Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC).

State and local governments owe another $3 trillion. Double interest rates, which they inevitably will, and our debt service burden doubles as well. It is therefore likely that the capital markets will emerge as the sole source of any fiscal discipline, with the return of the bond vigilantes.

They have already made their predatory presence known in the profligate nations of Europe, and they have come back with a vengeance in America since July. Yes, the 10-year Treasury bond ETF (NYSEARCA:TLT) really has fallen 26 points in only five months, a swan dive of some 18.30%. Do you think it was something Donald Trump said?

Now here is the bad news. Trump wants to increase the national debt by ANOTHER $10 trillion if he gets his way with congress. You can double that to $20 trillion if he gets us into another land war in the Middle East, which is a strong possibility.

Such forces have not been at play in Washington since the early 1980s, when bond yields reached 13%, and homeowners (including me) paid 18% for mortgages.

Since foreign investors hold half of our debt, policy responses will not be dictated by the US, but by the Mandarins in Beijing and Tokyo. They could enforce a cutback in defense spending from the current annual $700 billion.

Personally, I think the US will never recover from the debt explosions engineered by Bush and "deficits don't count" vice president Cheney. The outcome has permanently lowered standards of living for middle class Americans and reduced influence on the global stage.

But I'm not going to get mad, I'm going to get even. I am going to make a killing profiting from the coming collapse of the US Treasury market through buying the leveraged short Treasury bond ETF (NYSEARCA:TBT), which has skyrocketed 42% since the July low.

I am sticking to my long-term forecast for this ETF to rise from the current $41 to $100, then $150. And that is despite a hefty and rising cost of carry of nearly 0.5% a month.

tlt

tbt

Uncle Sam

Where's My Social Security?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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