I Get A Pat On the Back From Warren Buffett

Back in February 2010 ago, I wrote an article titled, The Municipal Bond Crisis is About to Begin. The main points presented in that piece were all based on simple common sense. The were:

1) Most state governments are broke or in the process of going broke

2) Tax receipts are falling (so less money for state coffers)

3) Muni bonds would collapse as governments chose to default rather than honor their payments

I should have added one other point:

4) Politicians are TERRIBLE allocators of capital

None of this was rocket science. The entire political system in the US is essentially based on candidates, most if not all of whom fall under #4 above, promising to spend tax payer money in ways that the tax payers will like. “Vote for me,” they say, “and I’ll spend your money on awesome ideas!”

The awesome ideas, more often than not, are municipal projects. Some of them are needed (new sewers, new roads, etc), others are often just a giant waste of money (hotels, stadiums, etc). However, almost all of them seem to run over budget.

In fact, as a recent piece by Matt Taibbi in RollingStone pointed out, many politicians turned to Wall Street to help them engineer some of their municipal projects, a mistake that in the case of Jefferson County Alabama resulted in the cost of a sewer project increasing from $250 million to over $1.28 BILLION.

Gee, who would have thought that combining politicians with Wall Street would be a HORRENDOUS idea?

Again, none of this is rocket science. And yet my article generated quite a bit of attention including numerous interview requests from TV and print media outlets. Go figure, you point out that 2+2 doesn’t equal 5 and somehow you’re controversial.

Regardless, the “muni bond market is screwed” view has been getting a lot more attention in the mainstream media lately. Here are a few quotes from others concerning this issue:

Once a few municipalities default, there is a risk of a widespread cascade in defaults because the opprobrium will be lessened, all the more so if the defaults are spurred along by a taxpayer revolt – democracy at work.

Rick Bookstaber,

Policy Advisor, SEC

There will be a terrible problem, and then the question becomes will the federal government help

Warren Buffett

UBER-rich Investor

The sad thing about all of this is that it will be ordinary investors, many of whom got into muni bonds because they’re retired or nearing retirement and needed additional income, who will be getting screwed when the muni bond market comes unhinged.

Indeed, bonds in general have become the asset of choice for investors. Already, they’ve piled more than $90 billion into bond funds this year.  This comes on the back of a record $396 billion in bond fund inflows in 2009.

And they’re very likely going to be massacred.

Remember, the last bear market in bonds ended in 1982. We’ve had nearly 30 years of low defaults, general appreciation, and lower interest rates. Because of this, there is an entire generation of professional traders/ analysts/ fund managers as well as individual investors who have NEVER invested during a bear market in bonds.

These folks have made their entire professional careers investing with the basic understanding that debt is cheap, defaults are rare, and bonds overall move higher.

Can you imagine what kind of impact a bond market collapse (and higher interest rates) would have on these folks? Their trading programs and algorithms were created decades AFTER the last bear market in bonds ended. They are totally unprepared for this.

And if they’re unprepared, their clients (individual investors, retirees, baby boomers) are even MORE unprepared. Having been screwed twice with stocks in the last ten years, these folks have fled to bonds, including municipal bonds, only to get screwed yet again when the debt crisis comes to the US's shores.

If you’re one of them, there’s still time to prepare. Review every bond in your portfolio. If it’s a muni-bond, review in great detail the fiscal condition of the local government that issued it.

You can also sign up for a trial subscription to my Private Wealth Advisory newsletter. I’ve been warning my subscribers for months about the various issues that are unfolding in the markets today. On that note, in the last few weeks we’ve pocketed gains of 14%, 16%, even 19% when the market collapsed.

We’re now sitting back, letting the market rally (and accruing some gains from the long positions I’ve suggested) while getting ready for the “next leg down.”

If these kinds of gains and insights sound like your “cup of tea,” you can sign up for Private Wealth Advisory today and try it out for 30 days while still qualifying for a full 100% refund.

If at any point during those 30 days you decide Private Wealth Advisory is not for you, simply drop me a line and I'll issue a full refund no questions asked.

The reports you download and ideas you learn during that 30 days are yours to keep, regardless of whether you choose to stay with me.

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Good Investing!

Graham Summers

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Are We About to Repeat Autumn 2008?

It’s time for an update on the US debt situation.

As I’ve noted in previous articles, long-term US Treasuries have generally been in a bull market for the last 30 years, more than doubling since the early ‘80s. Now, there are two reasons to invest in bonds: appreciation and income. As the below chart shows, long-term US debt has shown some serious appreciation over the last 30 years.

As you would expect, the “income” side of this equation has moved in the exact opposite direction, with long-term Treasuries yielding less and less over time.

Now, 30 years is a heck of a long-time for something to rally. And yet, for two decades, long-term Treasuries always hit a higher significant low when they corrected. This was a clear sign of an uptrend and told investors that there was likely more appreciation to come.

Things began to change in the early ‘00s. For starters we had a lower significant low in 2004. Then we had a double bounce at 105. However, before a bear market could develop, the Financial Crisis erupted  and Treasuries generally rose higher on a  flight to safety.

Indeed, you can clearly see than since late 2007, long-term US Treasuries have been in an elevated trading range relative to where they traded in the first half of the decade.

Long-time readers know that from a fundamental standpoint, I am no fan of US debt. However, you have to respect what the markets are telling you via the chart. And since 2007, the markets have been telling us that US debt has strong support at 115 and strong resistance at 122/3: all told we’ve bounced off these levels eight and seven times in the last three years, respectively.

However, when the Euro crisis really took hold of the markets in early April 2010, Treasuries exploded higher breaking through 122/3. The only time this has happened in the last three years was in 2008 when investors piled into Treasuries as a safe haven during the Crash. So this move in of itself, tells us that the markets went fully back in Crisis mode in April-May 2010.

The issue now is determining whether this was a temporary situation or if we’re staying in “red alert” mode. One way to gauge this would be track the action in long-term US Treasuries. If they broke back below 122/3 into their old trading range, then it would appear that the April-May crisis may have been a temporary issue.

However, if long-term Treasuries BOUNCE at 122/3 it would be a major warning that the markets were anticipating greater trouble in the near future. Remember, 122/3 served as overhead resistance for three years straight. For long-term Treasuries to bounce off this level (meaning that former resistance was now acting as support) we’d know that investors were showing a much greater aversion to risk (similar to late 2008).

The futures market shows what looks like the beginning of a bounce, but as I write this it’s simply too early to tell. But for those trying to gauge whether the recent market rout was just a once month deal or the start of something much bigger, keep your eyes on long-term Treasuries. A bounce off 122/3 would strongly suggest that we’re in for rough times indeed. Again, the last time long-term Treasuries broke above this level and stayed there was July 2008. What followed wasn’t pretty.

Good Investing!

Graham Summers

PS. For those of you who are active investors looking for regular trades to profit from all of this, I suggest signing up for my exclusive bi-weekly Private Wealth Advisory newsletter. In it I detail what's going on in the markets and provide you with specific investment ideas to profit from what's to come.

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Remember, It’s Still a Four Letter Word

I’m talking about debt.

Some 50 years ago, the notion of owing debt in the US carried with it some degree of shame and embarrassment. It was a point of pride to live within one’s means. And anyone who racked up large debts was seen as unsavory or unprincipled.

A lot’s changed since then.

Today, debt is everywhere on a personal, state, and federal (country) level. Consumers are broke, state and municipal governments are collapsing, and even the Federal Government is running Deficits and a Debt to GDP ratio that is comparable to Greece.

In fact, owing money has gotten so ingrained in our collective psyche that we’ve begun dressing it up verbally to mask how broke we are. On a personal level we use the word “credit,” a word typically associated with a quality that is earned, to discuss how much money we owe. On Wall Street, garbage debt that would never be repaid was marketed as “securities,” a word associated with protection and stability.

Heck, US debt is even seen as a “SAFE haven.” Think about that for a moment… lending money to someone is now seen as a SAFE thing to do (as opposed to simply sitting on your cash).

This is how warped the world gets when you let currency-devaluing lunatics like Alan Greenspan and Ben Bernanke run the monetary policy. I don’t give a hoot for clever economic models or language.  When a world becomes so messed up that it is deemed more prudent to LEND money to someone (a broke country no less) than to simply have your cash in hand, then we have SERIOUS problem.

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I implicate Greenspan and Bernanke for this because they both crafted monetary policies in which savers (those who sat on their cash) were punished for doing this. Humans are animals and can be conditioned to think anything, including the idea that it is unwise to actually keep one’s money in one’s own hands.

So here we are, the world is awash in debt. Entire currencies are collapsing, and the US currency (and debt) has become the winner by default (both metaphorically and literally).

Indeed, thus far in the Financial Crisis, US Treasuries have acted as a kind of “Implode-O-Meter,” jumping and sliding based on how “safe” the financial markets appear to be at any given time (see the below chart).

As you can see, US Treasuries exploded higher in 2008 as the S&P 500 took a nosedive. This relationship has continued to this day, though Treasuries have refused to break below the elevated levels they entered at the end of 2007: an obvious sign that the slow-motion implosion continues through 2009-2010, despite stocks bouncing some 60+% from their March 2009 lows.

However, this will not last forever.

As I explained in yesterday’s piece, the US is as bad if not worse than Greece from a fiscal standpoint. At some point, and I cannot tell you when, what is happening in Greece will happen in the US. It may take one year, two years, five years. But when it does, we will see the same currency implosion, the same soaring interest rates, and the same civil unrest. Those who are banking on an incredible US recovery will end up looking just like their bullish counterparts did in 1930: unbelievably wrong and misguided.

Until then we are entering a Debt Spiral: a time when investors are less and less willing to lend to the US for long amounts of time at the exact time that the US must roll over Trillions in old debt while issuing $150-200 billion in new debt per month. I do not know when the spiral will finally end and the US Dollar go in the toilet, but it WILL happen.

When it does, the world, as a whole will remember what it’s known for centuries but seems to have recently forgotten…

Debt is a four letter word.

Good Investing!

Graham Summers

PS. If you want insights on how to play all of this madness and the volatility in the markets, sign up for my exclusive Private Wealth Advisory, newsletter. In it I'll detail what's going on in the markets and provide you with specific investment ideas to profit from what's to come.

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Guess Who’s Even MORE Broke Than Greece?

Sentiment is a strange thing.

Greece’s debt issues have been staring everyone in the face for years. And yet it wasn’t until January 2010 that they suddenly became “relevant” to the investment world.

Then, even after Greece became a “household” word for the investment community, for nearly five months the whole world (with the exception of the evil speculators who were betting against Greek debt… and turned out in fact to be Greek banks themselves) gave Greece a series of “mulligans” on its debt issues.

And then, in the space of about three weeks, Greece debt suddenly becomes about as popular as Ebola. What exactly changed in those three weeks? Greece didn’t suddenly become MORE bankrupt. All that changed was investors’ attitudes towards the country and its debt situation.

It’s truly staggering to think about. For five months, the market stayed afloat because various unnamed Greek “officials” claimed that a bailout was coming. The fact that “rumors” of a bailout even propped the market up indicates that market participants are borderline rat-stupid  (how precisely does lending more money to a bankrupt country “solve” its debt problems?).

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It just registered another trigger last week..

It is now highly likely a new Crash will grip the markets in the next 2-3 months. We've got our "Crisis Insurance" trades lined up to profit from it.

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What’s even stranger is the fact that Greece’s fiscal situation isn’t all that worse than several other European countries. Ireland, Spain, and the UK all are running comparable deficits. Italy actually has a higher Debt-to-GDP ratio. And Germany and the UK are only a couple of years off from having Greek-type Debt-to-GDP ratios themselves. (see the chart below).

However, the oddest thing about this whole development is that the US’s fiscal condition is in fact AS BAD IF NOT WORSE than Greece’s.

The US is expected to run a $1.7 trillion deficit this year. Assuming that the GDP numbers are accurate (they’re not, but that’s an article for another time), the US economy is in the ballpark of $14 trillion. This means we’re running a deficit equal to 12.3% of GDP. That’s RIGHT next to Greece.

Then of course, you’ve got our Debt-to-GDP ratio. If you ignore unfunded liabilities like Social Security and Medicare, the US already has a Debt-to-GDP ratio of 98.1%. That’s only slightly off of Greece’s Debt-to-GDP of 112%.

Throw in Fannie and Freddie’s mortgage debts (Uncle Sam own $5 trillion of these now too), and we’re already well over a Debt to GDP of 112% (actually it’s 130% or so). And when you include Social Security and Medicare ($45 trillion) this puts total US Debt-to-GDP at 421% ($59 trillion of Debt on a GDP of $14 trillion).

Everyone knows this. Heck, even USA TODAY (not exactly the cutting edge in financial research) notes that in order to pay off our current liabilities, every US family would have to pay $31,000 a year… for 75 YEARS!!!

In plain terms, for the US to be criticizing Greece’s debt levels is beyond the “pot calling the kettle black.” It’s like a Black-hole calling a kettle black. At this point, we’re beyond broke. Even if the US taxed 100% of all personal income, we couldn’t pay our debt off for years (at least five)

So it’s small surprise that fewer and fewer investors are willing to lend to the US for any lengthy amount of time. We’re not even half way through the year and already we’ve had several long-term debt auctions that were fishy to say the least. I’ll detail precisely what I’m talking about in tomorrow’s essay. In the meantime, start preparing for the ‘Greece” situation to hit US shores. We’re no better off than Greece, we’re just larger, and have a “trigger-happy” money printer for a Fed Chairman.

How do you prepare?

I detail all of this in our Phoenix Investor Personal Protection Kit which you can download by clicking here. This contains basic preparatory practices for times of Crisis.

If you’re an active investor, you can also consider signing up for my Private Wealth Advisory, my bi-weekly newsletter focused on helping investors navigate the market with specific investment ideas including Buy and Sell points.

You can read more about Private Wealth Advisory by clicking here.

Until tomorrow…

Good Investing!

Graham Summers