What’s The Black Swan Saying Now?

Besides the volatility in the stock market due to the PIIGS’ (Portugal, Italy, Ireland, Greece, and Spain) teetering economies, we have a denial by Treasury Secretary, Tim Geithner, that the US will never lose it’s credit rating. Really? world-economySince currently we have deficits of 30% of our annual GDP, it’s interesting he should say that. Congress has raised the debt ceiling and they are having to raise it again. That’s $1.5 Trillion spent in one year!

Do you realize how much $1 Trillion is? I was astounded to hear this analogy. If you stacked $1,000 bills to equal $1 Billion, it’s about 800 FEET high (think the height of the Washington Monument). If we were to stack $1,000 bills to equal $1 Trillion, it would be 64 MILES high. Quite a difference and hard to wrap your head around.

Bill Gross from PIMCO says 80% of the US debt is being monetized by the US Government. That’s like issuing paper money with our left hand and buying it with our right, instead of selling it to foreigners like we used to. His partner Mohammed Al-Erian said he’d rather buy German bonds than US bonds. Others are reminding us in the 1970’s bonds were called “Certificates of Confiscation” due to the fixed interest rate and rising inflation. Could we be headed there again in a few years down the road?

More trouble is foreseen in the bonds markets as Nassim Taleb, author of The Black Swan, advises that “Every human being should short Treasuries.” Really? Every human being?

Other top portfolio managers have called shorting (betting they will decline) Treasuries “the Trade of the Decade”, and even, Julian Robertson, former hedge fund manager of the Tiger Fund has said curve steepeners, futures that bet on the difference between rising higher long-term interest rates vs. lower short-term rates, are his favorite trade and one he put in all his children’s Christmas stockings last year.

There seems to be an overwhelming theme here: be cautious with long-term bonds! Interest rates are near the lowest in 28 years, the government is printing money like crazy, and someday the effects will be felt. In the meantime, lighten up on bond mutual funds over time and review your asset allocation models to be sure long-term bonds are not overweighted. Stay very short term and start monitoring the double short inverse treasury ETF for possible accumulation on weakness longer-term. The symbol is TBT.

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