The Death of Treasury Bonds

Gold is an all-purpose, evergreen haven. Got a personal problem? Have a drink. Relax. Talk to your priest or your bartender. Got a financial problem? Buy gold.

And here’s Bill Gross of PIMCO, commenting on one of the things gold is a haven from. A Yahoo! Finance headline cautions, “No Way Out of Debt Trap, Gross Says: US Living Standards Doomed to Fall.”

“Debt, debt and more mounting debt,” the Yahoo! story begins. “In the US, states across the country face a collective $125 billion shortfall for fiscal 2012, while Congress is facing a budget gap nearly 10 times that size.

“PIMCO founder Bill Gross – one of the world’s largest mutual funds managers, who focuses mostly on bonds – has previously said that if the United States were a corporation, no one in their right mind would lend us money. For the last decade, we’ve been ‘relying on the kindness of strangers’ to help cover our debts…

“After years of reckless spending,” Yahoo! Finance continues, “America’s debt level is nearing a breaking point and can no longer rely on foreign capital as a last resort. ‘When a country reaches a certain debt level, confidence in that country’s ability to repay that debt becomes jeopardized,’ says Gross, ‘There is really no way out of this trap and this conundrum at this point.’

“From an investment perspective,” the Yahoo! story concludes, “Gross’ advice is to stay clear of ‘bonds in dollar denominated terms’ and to be ‘wary of higher interest rates going forward.'”

According to the market scuttlebutt circulating this morning, Gross is putting his (clients’) money precisely where his mouth is.

“Based on still to be publicly reported data by Pimco’s flagship Total Return Fund, the world’s largest bond fund, in the month of January, has taken its [Treasury] bond holdings to zero,” writes Tyler Durden at Zerohedge.

“The offset, not surprisingly, is cash. After sporting $28.6 billion in ‘government related’ securities, [Pimco’s Total Return Fund] dropped this category to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion (based on total holdings of $236.9 billion as of February 28).

“This is the most cash the flagship fund has ever held,” Durden continues, “and the lowest amount in Treasury holdings since January 2009… PIMCO’s Treasury holdings peaked in June 2010 at $147.4 billion and have declined consistently ever since… Gross has explained that he thinks the end of quantitative easing would punch a huge hold in the market for US debt.”

Meanwhile, the debt trap hole gets deeper and deeper. “The federal government posted its largest monthly deficit in history in February, a $223 billion shortfall,” The Washington Times reports. “That one-month figure, which came in a preliminary report from the Congressional Budget Office, dwarfs even the most robust cuts being talked about on the Hill, and underscores just how much work lawmakers have to do to get the government’s finances in balance again.

“The Senate plans to vote Tuesday on competing proposals to cut spending,” continues the Times, “but Democrats have rejected GOP-backed cuts of more than $50 billion, and Republicans have ruled out Democrats’ cuts of less than $10 billion, meaning neither plan will draw the 60 votes needed to overcome a filibuster and pass.

“The two sides are facing a March 18 deadline, which is when the current stopgap funding bill expires. Without a new spending agreement by then, the government would shut down.”

Let’s see. A shut down? Yes, seems like a good idea. Close the doors. Turn out the lights. Send the zombies home.

But wait…the FBI and Homeland Security would shut down too. And the IRS.

Well, great… What an opportunity! Want to cheat on your taxes, murder someone, rob a bank, or blow up a federal building? Get ready… The coast will be clear.

But why bother? The feds are going to cause enough mayhem on their own. The feds spent $223 billion more than they took in last month. Multiply by 12. Hey wait. We don’t even need a calculator. That’s more than $2 trillion. Come to think of it, a shut down may be the only way to save us.

Yes, $2 trillion annual budget deficits can’t be far away. Because tax revenues are depressed by the Great Correction in the private sector, while the feds try to goose up the economy with hot money.

As usual the road to Hell is the best-paved highway on the map.

Hot money has already toppled two governments and put one more, Libya, in grave jeopardy. In addition to record-breaking gold prices, it has put up food prices to all-time highs. And it has investors speculating on $200 oil.

Check this out, from Bloomberg:

March 7 (Bloomberg) – Options traders are betting more than ever that crude oil is heading to $200 a barrel as some websites call for a “Day of Rage” in Saudi Arabia and anti-government protests spread in the Middle East and North Africa.

Saudi Arabia produced 9.71 million barrels a day in 2009, one-third of OPEC output and almost six times as much as Libya, according to BP Plc’s Statistical Review of World Energy. Websites have called for a nationwide “Day of Rage” on March 11 and March 20…

“The price of oil is going to go up, whether you like it to or don’t,” said Juerg Kiener, chief investment officer at Swiss Asia Capital Ltd. in Singapore. “If Saudi Arabia fails, then I say you have a fire in the house.”

Higher oil…higher food – ouch! – middle and lower classes are pinched badly.

Food stamps are setting records too. They’re now being sent to more than 44 million people. And another 15 million qualify – one out of every 5 Americans.

But living on food stamps is not exactly like eating at the Prime Rib. The average allowance is only $130 per month per person. Not enough to buy a good bottle of wine at Smith & Wollensky’s…or a bad bottle at La Tour d’Argent.

Markets and Money readers are urged to raise chickens. And plant gardens. For those who want to be fed by at government expense will soon want bread.

Bill Bonner
For Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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