The Current Financial Crisis And US Treasury Bonds
The Dynamic Wealth Report
July 16, 2008
The US Government In Default?
by Brian T Mikes, Managing Editor
“Any man who is a bear on the future of this country will go broke.” –
J.P. Morgan
How can you read that line and not feel all warm and fuzzy. In one
succinct sentence he was able to wrap national pride with positive views
on the economy. J.P. Morgan was an amazing businessman and financier. In
additional to accumulating vast amounts of wealth, he singlehandedly
saved the stock market and the country from ruin.
He provided great strength and leadership. He also held an unwavering
view on the future prosperity of American business.
Today however, some investors don’t see America’s future quite as rosy.
What am I talking about?
I’m talking about the doom and gloom that’s flowing in the markets. I’m
talking about the newspaper headlines that rehash the same problems over
and over. I’m talking about fear running the markets.
I’m talking about investors who think the US Economy is going to
collapse. Give me a moment and I’ll tell you more.
----------Advertisement----------
Use This 'Piggy-Back' Technique Now to Turn Every $2,000 into $91,771 in
Just Seven Weeks...
Dynamic Wealth Report editor Brian Mikes recently
launched a new investment strategy that follows what the 'heavy hitters'
of Wall Street are doing in the market. He then uses options to
magnify the gains.
So far, the results have been nothing short of amazing.
In fact, we've seen trades that could turn every $5,000 into $42,850 in
as little as 18 days.
Click here
for the full report...
-----------------------------------
First, I need to say this. I’m not saying we aren’t in the midst of a
crisis. I’m not naive enough to think everything’s wonderful. We have
issues. Big issues. And they need to be fixed. But we also need to think
these issues through when it comes to the economy, government
intervention, and future regulation.
We need to use common sense.
Let me give you a simple example of common sense run amuck.
Anyone who follows the bond market knows that US Government issued
Treasury Bonds are actively traded. Over the last few weeks and months
we’ve seen bond values fluctuate. Sometimes those fluctuations have been
dramatic. This is known as volatility and it exists in every market to
one degree or another.
What I don’t expect is for the US Government to default on their bonds.
That’s right I said it. . . . The “D” word. Default.
US Treasuries are backed by the full faith and credit of the US
Government. Remember, this government has taxing authority over the
largest economy in the world. These government bonds have been rated
triple A since rating agencies have been around.
Think about that. The US Government bonds have been rated triple A
through the 1920s and the depression in the 30’s. They survived two
World Wars and the Korean and Vietnam wars. Through the economic boom
of the 1960s and stagflation and oil shocks of the 70’s they never lost
their AAA rating. The US Government even survived the Savings & Loan Crisis,
the dot com bubble, and now the housing crisis. Never have they been
rated lower than triple A.
Might that change?
Some traders are betting that it will.
What’s going on? The price of credit default swaps for US treasuries is
off the charts. My bet is that few people actually know what a credit
default swap is. It’s not exactly something you or I would trade in our
retirement accounts.
In simple terms, credit default swaps are like buying insurance on bond
investments.
Investors that hold millions and millions of dollars of bonds buy
insurance against default. This is “Belt and Suspenders” insurance. You’d only buy it if you thought there was a chance of default. As an
institution you can buy insurance on just about any government bonds out
there. The credit default swap market can be very active.
Just a few days ago, according to the Wall Street Journal, you could
insure $16 million in US Government bonds for about $35,000 per year.
What’s scary isn’t immediately obvious. It’s the price of the insurance.
Just as a point of reference, when Bear Stearns collapsed, the price of
this insurance jumped to $29,000 – at the time a record.
One other observation. You can buy the same type of credit default swap
“insurance” on bonds issued by Germany. But it would cost you half as
much . . . that’s right half. Based on GDP, Germany is the
fifth largest economy behind the US, China, Japan, and India.
Fannie Mae and Freddie Mac have been fanning the flames of fear this
week.
Investors are getting nervous. As more investors buy insurance the rates
continue to climb. This is frightening. Do these huge institutional
investors who buy credit default swaps know something we don’t? Might
the US Government default on its debt? Might our economy be on the verge
of collapse?
What does it mean?
It means investors buying credit default swaps think the US Economy
might be in for some cataclysmic event. I think they’re crazy.
This news tells me fear is running rampant on Wall Street. We might have
a bit more bad news. The markets might continue to fall for a while. But, I believe to my core in J.P. Morgan’s statement. Don’t bet against
the US – it will only cost you money.
Since we opened today’s article with a quote I feel it’s only fitting to
close with one as well. This quote is from the Sage of Omaha, Warren
Buffett, on how he makes his money.
“We simply attempt to be fearful when others are greedy and to be greedy
only when others are fearful.”
• Oil ($134 per barrel)
Oil prices fell almost $10 over the last two days. Oil dropped more than
$6 yesterday and we’re down $4 today. Renewed concerns of a slowing US
economy and falling demand pushed prices lower. I’m expecting oil to be
driven by news more than anything over the next few weeks.
Print
Page
Bookmark Us
Home | Whitelist Us |
Terms of Use |
Privacy Policy |
Contact Us | Security |
Site Map