Wednesday, February 16, 2011

Treasuries In Real Trouble?

The US federal government's creditworthiness is in peril and deteriorating. There are credibly rising inflation fears. So what is keeping Treasury yields so low? The safe haven effect. But that leg of the stool might be getting knocked out too? IMHO, Treasuries are in trouble.

A wise associate of mine told me during the last financial crisis, "don't worry about this crisis, during this crisis we'll sow the seeds of the next one. That is the one to worry about and prepare for." Of course, the trick to being prepared (and to making a little money) is to figure out how we sowed the seeds and thus what the next crisis will be. I don't think it is any great mystery. In my view the next crisis is the sovereign crisis, more specifically, a US sovereign debt crisis brought about by the prevailing approach of spending gobs of money (and locking in much bigger government, call it the Rahm Emmanuel UnWasted Crisis Effect) to cure what was essentially a monetray panic. We've institutionalized a response that is no longer needed and that we can't afford (we couldn't afford the pre-crisis level, but at least we had breathing room - we've since removed any breathing room). Thus, US debt will get a hefty mark down in the coming years. There is no political solution to this problem, bondholders will have to grab the reins. I think it is coming, soon, so I've been upping the "short Treasuries" piece of my portfolio. The paradigm shift is here.

UPDATE: And when the people in charge are talking like this...you might oughta have a short bet going...

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