I Nearly Spit Out My
Coffee When I Saw This...
The Dynamic Wealth Report
February 10, 2010
by Justin Bennett, Editor
Every morning I sit back in my office chair and enjoy a nice hot cup of
coffee while my computer starts. I usually get a couple swigs down
before my trading software is up and running.
I like to run through the financial press each morning. I just glance
through the headlines, just reading the articles that peek my interest.
Most of the articles are truly mundane. I sometimes wonder why I read
them at all.
But once in a while I find something really amazing…
This morning I came across an interesting little tidbit of information. In fact, I nearly spit out my coffee when I saw it. I’ve studied this
subject before. But what I read was shocking.
Before I tell you what I saw, let me give you a quick recap…
Unless you just moved here from Mars, you know how close the U.S. came
to financial implosion. Even though recent GDP numbers show the economy
is growing again, jobs are still a scarce resource.
How did we get in such a pickle?
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Well, it all started with artificially low interest rates and years of
easy credit. This is what created the housing bubble. Home prices shot
into the stratosphere. Prices simply could not keep going straight up
forever. Even though Wall Street thought they could. (And bet big they
would.)
It was only a matter of time before the party ended.
Collapsing home values sent over-leveraged financial institutions down
in flames. Bear Stearns, Lehman Brothers, and AIG (amongst others)
brought the entire financial system to its knees. Risky bets in the
mortgage market were blowing up in their collective faces.
How the situation was handled is still open to debate amongst
economists…
Many people have different opinions based on their political ideals. But
let’s leave politics out of this and focus on the facts.
The Federal Reserve injected trillions of dollars into the faltering
financial system. They did what they thought was needed to avert
disaster. Maybe it was right, maybe it was wrong. But that’s what
happened.
They lent, spent, or guaranteed over $7 trillion. They borrowed from the
U.S. taxpayers and foreign governments. They printed massive amounts of
money in order to stop the deflation of the economy.
Let’s be clear, the situation was (and still is) extraordinarily
complex.
But here’s what really took me by surprise…
The number I saw made me do a double take. It was so outrageous I had to
go straight to the source to verify it. The number I was looking at was
U.S. short-term public debt. This is in the form of T-bills. T-bills are
treasuries with terms of one year or less.
As of January 31, 2010, the amount of public debt that must be repaid or
refinanced within the next year is an astounding $1.68 trilllion. Yes,
trillion with a "T". That figure is straight from
the U.S. Treasury website.
But wait, that’s not all…
Did you know total public debt is north of $54 trillion? It gets even
better… that number doesn’t include future liabilities like Social
Security, prescription drug liability, and Medicare which brings the
total to $107 trillion... (Does anybody really believe this can be funded,
much less repaid?)
The ability of the U.S. government to continue rolling over its short-term debt is a cause for concern.
But here’s the real problem. The new debt being created is not going
towards growing the GDP. It’s going towards propping up the economy. To
me, it means the economy is now structurally impaired. It will remain
that way until government stops deficit spending.
I can hear you asking, “So what’s your point?”
The point is this… the U.S. is not out of the financial crisis. We’re
right on the middle of it. Rest assured there’s going to be more
financial pain coming our way.
How can you protect your portfolio and actually make money if the worst
case scenario arises? Take a look at UltraShort 20+ Year Treasury
ProShares (TBT). TBT is a leveraged inverse ETF tracking the treasury
market. At some point, if foreign governments lose their appetite for
American debt, TBT will see phenomenal gains.
But be careful, TBT is volatile. Only buy at defined support levels and
control your downside risk through stop losses.
The waters may seem relatively calm at the moment. But somewhere out in
the ocean, a tsunami is brewing…
• Silver (Under $16 an ounce)
Strength in the dollar is causing a volatile pullback in the precious
metals markets. But we’re looking at the pullback in silver as a buying
opportunity. Silver will likely continue to pullback as the uptrend in
the dollar continues. But rest assured, at some point the dollar rally
will reverse, and precious metals will scream higher.
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