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SOVEREIGN MAN

One of the most obvious opportunities I can see right now

August 5, 2011
Vilnius, Lithuania

Fridays are normally the days I like to engage in a light-hearted Q&A, answering subscriber questions on a variety of topics ranging from libertarian philosophy to exotic international travel to investment insights.

Given the meltdown that we witnessed yesterday, however, I wanted to take a moment to cut through the BS and point out some simple truths for you.

First, it’s interesting that the US government was largely silent on yesterday’s market carnage. The Treasury had no official comment, and the White House had no official comment.

Nobody wanted to touch it… let alone admit that the embarrassing debt saga coupled with the dismal performance of the government’s economic growth initiatives has caused a widespread loss of confidence. That would certainly have been a party-pooper on Obama’s 50th.

Only one official, the deputy director of the White House National Economic Council, stepped forward to say that the administration believes its new jobs growth plan will calm the markets: “There are things we know work and we know will have a positive impact, and these are the things we’re going to push for and fight for.”

This is scary for a number of reasons. How do you ‘know’ that something works, when nothing you’ve done has worked so far? How do you ‘know’ that something will have a positive impact, when just about everything that you’ve tried has been destructive?

And yet, they’re going to keeping pushing and fishing for more of the same– more spending, more debt, more money creation, all aimed at senseless, wasteful ‘job creation’ programs.

Three years and trillions of dollars into the full-on crisis, there are few tangible results to celebrate. The only jobs the government can create are within its own bureaucracy– more TSA agents to molest our grandmothers, more enforcers to shut down kids’ lemonade stands.

But in terms of adding real value to the economy, they haven’t a clue… and it appears that the financial markets got a good, stiff, sobering wake-up call to this reality yesterday.

Nearly everything tanked. Stocks worldwide plummeted, and the Dow Jones dropped over 500 points, closing near its low for the day. Gold, on the other hand, showed marked resilience, shedding just a fraction of a percent.

This is another indication of gold’s long-term growth trend– even when markets are plummeting, institutions are pulling their funds out of stocks and putting them into gold. To savvy investors, this inanimate hunk of metal is worth far more than a politician’s empty promises.

Bonds are the ultimate proxy of those empty promises… and given the sheer volume of misguided investment capital that went into the bond market yesterday, there’s an obvious opportunity in shorting the 30-year Treasury bond which closed yesterday at a yield of 3.68%.

Think about it– would you loan your hard earned cash at a fixed rate of just 3.68% for 30-years straight to the largest debtor in the history of the world?

That would be sheer insanity… yet there are plenty of fools who are doing it.

To put things in perspective, there have been only 95 times since 1977 when the 30-year yield was this low… and the average yield during this time period was 7.76%, more than double the current rate!

This is an absolute gift to speculators who can see that US politicians have solved absolutely nothing with their recent debt deal; the federal balance sheet will continue to deteriorate, and allowing for short-term fluctuations, betting on rising 30-year yields at this point will be a veritable gold mine.

I’ll have more on this in another letter. For now, I will bid you a happy and safe weekend as I am off to enjoy the Lithuanian countryside.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • http://www.facebook.com/jay.twila Jay Twila

    Ethically and morally speaking, I wouldn’t buy U.S. Treasuries at any price. But assuming the U.S. government operated closer to my own personal code of conduct, I would lend it money at 20.00% interest for a short period of time. Even then I think it would be risky. Oh wait, I suppose that’s the point. Rates are artificially way too low.

  • Marek

    “betting on rising 30-year yields at this point will be a veritable gold mine” – this would mean that you have to short 30y treasury bonds. Any hint how you want to do that?

    • JJ

      You can buy sell futures, buy put options or buy inverse 30yr bond funds.  Or course there others such as shorting ETF etc etc.

      My personal favourite: TMV (Triple leverage inverse fund).  Heck if the options on TMV had a good spread and liquidity I’d do those as well.

    • http://www.facebook.com/procinctu.info Vigilo Procinctu

      Rydex Inverse Government Bond Strategy (RYJUX) ??

      Proshares Ultra Short 20 Yr Treasury (TBT) ??

      I would like to know the answer to this question as well……

  • Bob

    The main problem with trying to short treasuries is that rates SHOULD HAVE
    increased a long time ago. The problem is the FED and other CBs continue
    to distort the market. Who know how many more billions or trillions they will
    monetize in order to keep rates artificially low…

    • $4329150

      i just realized i made the same comment as you, albeit more cynically– see above

  • david

    Question? I am looking to convert us dollars into australian dollars. Any advice on when to do it and why? Any tips would be great. When would be the most effective time to buy the aussie dollar? What is the exchange rate (usd vs. aud) that would be most benificial to me? Thanks, david     

    • Elai

      Looking at a 10 year trend, the line is pointing downwards except for the 2008 spike.   I would just convert them when your at a local maximum for the last few months.

      http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1312588569967&chddm=2752333&q=CURRENCY:USDAUD&ntsp=0

    • Diogenese_

       Why are you looking to convert to the Aussie instead of a GoldMoney account? I’ll hazard a guess that Australia looks better than the US because it seems reasonable to think that the Aussie natural resource companies will eventually be seen as a safe haven. Beyond ‘right now before a dollar collapse’, when to convert and at what rate is impossible to answer, in particular because the Aussie is traded actively for complex reasons by professional Forex traders.

        In my opinion, the only money to majorily convert to in Australia for a none Forex pro would be Perth Mint Gold and Certificates. I think fiat currencies will continue to be used as the unit of account for most types of financial transactions for a few years at least. And for that reason having a none capital controls limited overseas bank account makes great sense. But why save large amounts of money in a form that is controlled by politicians given the events of the past few years? When you need money, you can transfer it from your GoldMoney account in Gold form to your Aussie bank account in Aussie form.

  • Diogenese_

      I think one of two things are pretty much certain to happen over the next year:
    a. the US government dominates the entire world big brother style and forces everyone to ‘loan’ it money at the point of a gun.
    b. US Treasuries will decrease in value.

    It may be a scary ride at first though, as the Fed and US gov will do anything imaginable to hold off a Treasury collapse. I wouldn’t be surprised if the Fed was secretly buying more bonds now. Ultimately though their bag of tricks can’t last forever, any more than money can grow on trees.

    It’s worth noting that the SEC temporarily outlawed the short selling of dozens of financial stocks after the 2008 crises.

    Maybe this will be the new haven straw on the camels back of the US bond-dollar system:

    COMMON EURO ZONE BONDS TO COME?

    As for the euro zone, heavy selling this week of Spanish and Italian bonds is raising pressure on European leaders to massively expand the bloc’s emergency financial rescue fund.
    http://news.yahoo.com/analysis-world-economy-wobbles-markets-push-policymakers-143936389.html

    • Charleydan

      I agree highly as it did it in the last great depression, also. The risk is knowing that this dollar currency will be like a thorn in the consumers side as they start paying more and more for every day living items.

      The question I ask is. will the interest rate be high enough to justify the inflation? Unless one just becomes a money changer, going no where.

  • E. von Wegen

    Better watch it…  Aside from short-term corrections, bond
    prices are going to move HIGHER (and yields LOWER) – due to the deflationary
    impact of the unfolding Crash of the Millennium.  Placing medium to long-term bets on rising
    30-year yields is, at this point, a sure way to bid your cash farewell. 

    Buying gold at the current level is
    the next best bet to lose money since it’s currently setting up for a steep
    decline, sometime in the near or not-too-distant future.

    E. von Wegen

     

  • bondGuest

    While I like the overall message of action and production that Simon brings on a daily basis, I have to take him to task for this post.  I trade bonds for a living (productive, I know), and have written in to a number of the “End of America” group to take them to task as they have tried to short the bond as the yield has gone from 4.40, to 4.10, back to 4.30, and now very swiftly down to 3.8.  It was a losing trade back at 4.40 and I think it will continue to be a losing trade even at 3.80 (yes, 3.68 was overdone, but only on a short term basis). Bob touched on a key reason for this. Look at a chart of 30y yields since 1980: not exactly a trend I often want to bet against. More basically, the US is on the verge of recession: for all the talk of inflation and dollar devaluation, neither of which I disagree too much with, the concern of investors during the coming period is going to be DEFLATION. The bond may be one of the only investments that performs over the next several months. Read Hussman, read Druckenmiller’s interview in the WSJ, do your homework like with any investment. Know that when you short the bond you’re paying 4+% a year in coupons, so you need the price to move down by more than that amount to show a profit (very possible, but still a hurdle). Well, like anyone I could be wrong on this, but if we get back to 4% I am most likely going to be a buyer.

    • Andrei A.

      Who has the time to be concerned with what happens during the next months? Normal people just want to put their money in something that will be safe long-term (gold, silver etc.) and are not concerned with leveraged short-term speculations.

  • $4329150

    Shorting fiat debt backed by F-22’s into a weak currency brings to mind those who fought the Germans panzers on horseback.  No matter how good you make it look on paper, the tanks just plow right through.  Treasuries are the most manipulated instrument on the market.  Go with multinationals like AAPL and XOM that have more cash than the U.S. government.

  • Johnny Bronx

    Bonds, money, precious nmetals, collectibles, etc., are all forms of cash and all will go down in value over time due to inflation and taxation. Even if they keep up with inflation, taxation will knock it down.

    If you want to keep ahead of inflation and taxation, you have to have a business, or an interest in a business, that is growing fast enough to outpace both of them. If you don’t, then, no matter what you do, you’re losing buying power.

  • 2gard

    And now the credit rating. Lord help us. In Argentina when they got into trouble they locked down the banks, credit cards were useless nobody would take a check and they would only let you access the equivalent of about $300. A week. I hope you have cash and food. Try this place.
    http://www.theharvesthouse.myefoods.com soon the cold slap of reality will wake the dumbed downed masses. When that happens it will be to late . Get what you need now!!!

  • Diogenese_

    Peter Schiff paraphrased:
    ‘we are weeks away from a move to the Euro because the dollar rallied so little, unlike in 2008.’

     ‘S&P should now logically downgrade all debt denominated in US dollars- corporate,states,everything.’

    http://www.europac.net/media/video_blog

  • E. von Wegen

    Better watch it…  Aside from short-term corrections, bond
    prices are going to move HIGHER (and yields LOWER) – due to the deflationary
    impact of the unfolding Crash of the Millennium.  Placing medium to long-term bets on rising
    30-year yields is, at this point, a sure way to bid your cash farewell. 

    Buying gold at the current level is
    the next best bet to lose money since it’s currently setting up for a steep
    decline, sometime in the near or not-too-distant future.

    E.
    von Wegen

  • Diogenese_

    SB was apparently right, a lot sooner than I expected:

    Nomura Securities has pulled its
    recommendation to buy Treasuries after a volatile week in the
    financial markets, said George Goncalves, head of interest-rate
    strategy at Nomura Holdings Inc.

    http://www.bloomberg.com/news/2011-08-12/treasuries-no-longer-a-buy-after-gains-nomura-s-goncalves-says-tom-keene.html

    The U.S. Treasury bond market suffered its
    worst long bond auction in 2-1/2 years Thursday as foreign investors
    shunned it in the wake of a damaging budget battle and downgrade to the
    credit standing of the United States.

    Losses
    in the open market put long bonds on track for the worst drop since
    1994 after the sale, which was the first 30-year bond offering since
    Standard & Poor’s stripped the U.S. of its triple-A  credit rating on Friday.

    In the open market, the 30-year bond lost 5 points in price and were last yielding 3.78 percent, a huge jump from Wednesday’s close of 3.52 percent.
    http://www.cnbc.com/id/44102133

  • Diogenese_

    Short-selling banned in 4 European countries

    By ANGELA CHARLTON, GREG KELLER
    updated 8/11/2011 6:40:18 PM ET

    PARIS — France, Italy, Spain and Belgium are banning
    short-selling on select stocks amid efforts to calm market turmoil that
    has sent bank shares gyrating wildly and aggravated worries about
    Europe’s huge debts.
    http://www.jsmineset.com/

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Gold: the clearest sign yet

August 4, 2011 Vilnius, Lithuania Here's some food for thought that I'd like you to chew on for a bit....

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