Treasuries Having Harder Time Finding A Good Home

It was inevitable.  You can't spray the world with an endless supply of something and not expect an adverse price effect.  The U.S. has been living on borrowed time, but now our bonds are looking square in the eye of the "Grim Reefer".  Country after country has either drastically curtailed buying our debt, stopped buying our debt altogether, or is looking for ways to offload it on someone else.

It's utterly amazing that nothing has happened... yet!  Now, the over-supply is creating a saturation in the market place, whose consequences have yet to be felt.  Another week, another financial problem.  That's what happens in a BEAR market:  whatever CAN go wrong, WILL go wrong!

For more than a year, analysts have been warning that record-sized debt sales by the U.S Treasury were utterly inconsistent with a 10-year yield below 4%.  This past week, the yield on 10-year notes jumped from 3.65% to as high as 3.92% on Thursday.  On Friday, it was 3.87%.

Tame "reported" inflation, rising unemployment, the housing market slump, the Federal Reserve’s policy of a virtually zero Fed Funds rate and its purchase of up to $1.7 trillion in bonds have all helped keep Treasury yields near historic lows.

But, this week the mood sharply deteriorated as yields for $118 billion of newly-issued U.S. debt were much higher than forecast, sparking overall selling of Treasuries.  Sentiment also deteriorated in the U.K. bond market after the government’s proposed budget failed to resolve doubts over future spending and debt reduction.

It hasn’t helped that the U.S. announced a big overhaul of its healthcare system this month, adding to worries about the scale of U.S. spending.  Thank you Obamacare! (sarcasm intentional!)

Also un-nerving U.S. investors this week was a report by the Congressional Budget Office that falling payroll taxes, resulting from high unemployment, means that Social Security will pay out more in benefits than it receives for this fiscal year.

“A sustained rise in yields is upon us and bond funds will start to incur losses,” says Jim Caron, Global Head Of Interest Rate Strategy at Morgan Stanley.  He expects 10-year yields to reach 4.5% in the second quarter, as investors pull their money from bond funds.  March looms as the first month for negative returns for investors in Treasuries this year.   Year-to-date, Treasuries have returned a scant 0.7% and threaten to slip into negative territory.

The 10-year note’s yield rose 15 basis points, or 0.15% , to 3.85%, according to BGCantor Market Data. The price of the 3.625% note due in February 2020 fell  $12.19 per $1,000 face amount.

The increase in the yield was the biggest since an advance of 0.27% for the week that ended Dec. 25.  The yield touched 3.92%  on March 25, the highest level since June 11.  The two-year note’s yield rose 0.05% to 1.04% and reached 1.12%  this week, the highest level since Jan. 4.

Unfortunately, the unsatiable appetite to fund America's bloated budget can only get worse.  The world has had it with our fiscal irresponsibility and the era of low interest rates will become harder to sustain. 

Marko's Take

For new readers, please visit us on YouTube at http://www.youtube.com/markostaketv.  Our newest episode on the legality of the Personal Income Tax will be posted in the next two days.

Investing In Soverign Debt: Much Riskier Than You Think

A couple of weeks ago, I covered the topic of default as it pertained to California, Marko's Take: California's Crisis Deepens... Part 2.  I did not, at that time, examine the history and likelihood of default of the debt of other countries.  The information is STUNNING.

The idea for this piece originally occured as the result of a report by David Faber on CNBC yesterday. What was most interesting about his report was how often soverign defaults occur.  For example, in data presented going all the way back to 1800, there have been 4 separate periods in which "the percentage of countries either in default or restructuring their debt" has risen to as high as 40%!

Despite the world's current economic woes, that figure stands at a "mere" 20% today. But, that number is rising, especially in light of problems reported regarding Dubai, which I believe are far more significant than they originally appeared.

Moody's, a very highly recognized credit rating agency, has published a study as to various statistics regarding sovereign defaults, which primarily covers the period from 1983-2006.  It also provides some limited information going back to 1949.  The study covers 103 countries from the 1949 starting date. The information revealed is STARTLING.

For example, in 1983 there were NO nations assigned a "junk" status.  But, by 2000, that number had reached 38%!  In 2006, the number remained high at 36%.

According to Moody's, one country has even defaulted TWICE.  Ukraine defaulted in both 1998 and 2000.

Historically, sovereign issuers, assigned a non-investment-grade rating, have a 25% likelihood of defaulting within 10 years of issuance.  As to corporate issuers, which ought to possess a MUCH higher probability of default, the corresponding  probabiltiy is barely higher at 32.6%.

Finally, once a country does default, the loss suffered by the holder is calculated by Moody's to be about HALF of the original value.

So, if you're thinking about investing in sovereign debt, all I can say is "caveat emptor" or, buyer beware!

I hope you found this essay useful and informative. If you have any comments, pro or con. or have additional information of relevance, I'd love to become aware of it in the comments section immediately below this piece.

I will again be covering Gold tomorrow, given that the sharp correction has caused many people to declare the so-called bubble has burst.

Marko's Take

"Recovering From Affluenza"

"Affluenza" is a clever combination of the words influenza and affluence.  The term is derogatory and used by critics of over-consumerism. In fact, the term was popularized by a man named Oliver James, who wrote an entire book called "Affluenza".

Let's face it, a lot of us have, at one point or another, been subject to this condition.  However, by sheer necessity, very few people can afford to now.

So, what I'd like to cover today are some "cures" that I've recently become aware of.

If you haven't already heard of this website, I highly recommend http://www.lowermybills.com/.  The site is fantastic, especially when it comes to auto and homeowner's insurance.  I'll give an example:  I recently plugged in my auto insurance coverage details into GEICO's website.  I also got one through "lower my bills".  The latter was less than HALF!  The site is also incredibly easy to use and you receive voluminous quotes.

As to grocery shopping, in my experience nothing beats the 99cent stores http://www.99only.com/.  They have expanded at an incredible rate.  The website, to which I have provided a link, searches for store locations.  They're SO good, that during a recent trip to Ralph's, nearly all of the employees told me, off-the-record, that they shop at the 99cent stores!

Another phenonemal cure is the AT&T "U-Verse" program www.att.com/u-verse.  It has an extremely attractive bundling of broadband, local and long distance phone service and a large cable TV package for about $99 per month!

Have you tried actually SPEAKING to any of your service providers?  I have.  I, also, threatend to leave unless they lowered my rates.  In each and every case, it worked!  Honestly, you may have no idea how good of a deal you can get unless you threaten them with switching to someone else.  If you're not the type to be confrontational, then have a friend do it.

Finally, I want to reiterate that there is indeed a program for mortgage relief, even for the unemployed.  I wrote about a friend's experience with Wells Fargo's program a few days ago.  Apparently, it's quite new and being offered by other banks as well.  I don't think it warrants a huge explanation right here, but you won't be aware of it if you don't call your bank and ask whether such a program exists with them.  This is so new, that it's possible your bank may not be offering it at the moment.  The article I read that drew this to my attention was dated December 4th and was published in the "Sacramento Bee".

At this point, I think we can all have some real fun.  I've put out some of my suggestions, so why don't you suggest yours?  Therefore, all of us can benefit from each other!  By the way, I do know of some other savings methods, but for the sake of brevity I'll stop here.

I would LOVE to hear any of your other money-saving ideas.

Marko's Take

California's Crisis Deepens... Part 2

When the words bankruptcy and default come up in the context of California's financial crisis, they have the tendency to unnecessarily scare the heck out of many people. As we pointed out in Part 1 last Monday, the situation IS dire, in fact, VERY dire, but let's discuss what all this rhetoric really means.

First of all, a default differs materially from a bankruptcy.  A default is the failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement.  Bankruptcy, on the other hand, is defined as the condition of a legal entity that does not have the financial ability to pay their incurred debts as they come due.  In the case of California, the use of "IOUs" has precluded, for the time being, a default.

Therefore, a series of defaults must occur BEFORE a bankruptcy.  So, an entity can be in default WITHOUT being bankrupt, but it cannot be bankrupt without first being in default.

There is precedent for individual states to be in default.  According to an article by William B. English titled "Understanding The Costs of Sovereign Default: American State Debts In the 1840's", 9 states went into default between 1841 and 1843.  One of which was Florida, which was, at that time, considered to be a territory,

Of these defaulting states, 5 had already repudiated their debt in all or part by the end of the decade. The other 4 used a variety of factors to ultimately fix THEIR problems.

According to Mr. English, these debts are seen as "sovereign" debts, or debts of the COUNTRY.  The Constitution currently precludes enforcement of these debt through lawsuits.  Therefore, a State bankruptcy, for the time being, is IMPOSSIBLE.

California, despite its recent hardships, still has the 9th largest economy IN THE WORLD, if viewed on a stand-alone basis.  Therefore, it is WAY too critical to the world to let the Golden State default, let alone go bankrupt.

The only conclusion one could reasonably draw, is that the frequent use of the words default and bankruptcy in the context of California is nothing more than an irresponsible scare tactic.  Its likely intent is to bully the Federal Government into providing bailout funds sooner rather than later. Although, to be fair, California MAY be bordering on default status, since it IS issuing IOUs as discussed at length in Part 1 last week.

None of this is intended to suggest that a State default cannot happen, especially if California's worsening financial condition continues to deteriorate.  State defaults have precedent, while State bankruptcies DO NOT.

Finally, I do appreciate feedback and comments, pro or con.   I will continue to provide regular updates on California as they become material.  In the meantime, I will cover Gold, Silver and other timely and relevant topics.

Marko's Take

California's Crisis Deepens... Part 1

California's financial situation is so complex it could fill up a book.  So, I'll begin with the way things stand NOW and, in Parts 2 and 3, I'll tackle other aspects, such as the ramifications to the state.


There has  been no shortage of talk regarding the worsening financial condition of the Golden State.  Increasingly, people are speculating that California will default on its debts.  Recently, Governor Arnold Schwarzenegger has stepped up the rhetoric by repeatedly warning of a default.  He has even contacted former Treasury Secretary Hank Paulson to ask for assistance in arranging an emergency Federal loan of $7 billion.  This was reported in the LA Times last week when a copy of the email correspondence was obtained.


John Chiang, the State Controller, publishes official records at his website (http://www.sco.ca.org/.). According to the most recent report, Chiang notes that the year-to-date deficit is already up to $794 million and he provides breakdowns of which sources of revenue are up and down. Since California's fiscal year starts July 1, a deficit that large so soon is quite troubling.  He notes some positive items, though.  For example, sales taxes were UP last month and even UP year-over-year.  He also acknowledges the positive impact of "Cash For Clunkers", but that program was temporary. What Chiang does NOT acknowledge in the latest report, is that only one month earlier, he warned the Governor and other lawmakers quite starkly of the emergency conditions that were prevailing.

California recently enacted a significant increase in withholding taxes and, it is believed, that state finance officials intend to issue "IOUs" to anyone receiving a  tax refund.  This would be at least the fourth time "IOUs" have been used.  The problem  is that an "IOU" is a form of currency which, in California's case,  carries a yield of 3.75%. Given the state's problems, they may ultimately prove to be worth FAR LESS than face value.  At the moment, a small trading market has evolved, but apparently, a few banks are still honoring them. So for now, no sizable discounts that I know of exist. However, there are numerous reports of opportunistic buyers bidding as little as 85% of face value on places like Craigslist.

There is historical precedent to what the true market worth of "IOUs" might become, albeit from the 1840's.  The states of Indiana and Michigan and the city of Chicago all issued some form of scrip, or "IOUs", only to have them ultimately drop to 40% of their original value.

If you listen to independent sources, the budget situation is far, far worse than Chiang implies. Very recently, The LA Times reported that a study by a man named Marc Taylor, who is described as a "non-partisan Legislative Analyst", estimated that over the next 18 months, ANOTHER $21 billion in budget deficits would be realized. The reality is that no one really knows how bad the deficit will actually become because of all of the constantly moving pieces. It is even conceivable that the deficit could go LOWER.

Finally, I want to re-iterate that  Fitch, a respected rating agency, has given California a BBB rating, shared only with Louisiana.  A rating of BBB is barely above junk bond status. Only one month ago, California tried to sell $4.5 billion worth of bonds to help finance its deficit.  The issue size had to be scaled back by nearly 10% despite a hike in yields.

I hope this gives you a small glimpse into just how tragic the state's financial situation has become.  Next Monday, in Part 2 of this series,  I  intend to cover the likelihood of  California's potential descent into bankruptcy. As for tomorrow, my topic will be "Taxes On Taxes".  Meanwhile, I hope you keep coming back and review some of the other topics we've covered.  Your feedback, pro or con, is always welcome.

Marko's Take

The Interest Rate Conundrum

If the economy were truly in recovery, as we have been  told time and time again, market interest rates ought to be MUCH higher.  For example, according to the U.S. Treasury's own website, as of last Friday, 1 month TBills yielded a scant .04%, 3 month TBills .02% and if you entrust the government with your dough for a year, you'll see a "fat" .26%.  If you're willing to tie up your money for 10 years, the yield jumps to a "juicy" 4.03%!

So, one has to wonder why ANYONE would accept so little on Treasuries. My guess is that either people are afraid of yet more bank failures, or the Federal Reserve has become a large clandestine buyer. (As bond prices rise yields go down, therefore significant purchases of bonds would tend to drive yields lower). We know the largest buyer through last year was China but they have stopped buying, and are instead  accumulating  hard assets like Gold. If the Fed indeed is buying Treasuries, it might go a long  way to explain why all attempts to audit the Fed have been blocked despite the support of an overwhelming majority of the House.


To be fair, the United States still carries the highest credit rating, AAA, but so did issuers of mortgage derivatives, who ultimately led the meltdown of 2008. So this rating may not last or be accurate.

The market is telling us that there IS risk to government debt. The financial instrument employed to provide insurance is also known as a Credit Default Swap.  According to Rob Kirby, who writes the fabulous newletter, Kirby Analytics (http://www.kirbyanalytics.com/),  the "cost" of insuring $10MM  of 10 year Treasuries is $25,000.   He further states that this in itself is a fraud, since if the insurance were made good, the proceeds would be in dollars.  Now I ask you, what would a dollar be worth if the U.S. did indeed default?

Normally, one would expect even short term rates to exceed the rate of inflation, which the Bureau of Labor and Statistics claims to be running at about 0% annually, but has turned up markedly from mid-year. By comparison, John Williams, who has a site called Shadow Stats (http://www.shadowstats.com/), puts that figure at 3%.  As you may recall from a prior essay, Mr. Williams computes  key government statistics in the same way as they were calculated prior to a revision in algorithms instituted by the Clinton administration.  His measures reveal a much higher level of inflation: 3% and rising.  With the dollar having fallen so far this year, we KNOW that our imports  are costing on the order of 10% more.

California's rating was recently cut by Fitch  to BBB, a rating which is barely above junk status. Fitch is a respected credit rating agency.  California has begun to issue "IOUs", whose value is at best, uncertain. The "IOUs" may ultimately turn out  to be "worth"  a  fraction of their face value.

Problems like this are cropping up world-wide. For example, Fitch cut its ratings on Ukraine to B-, a very low quality junk bond rating. And, according to a recent Bloomberg news story, both Japan and Switzerland have fallen off the list of the top ten safest sovereign debtors.  Safest countries include Denmark, Finland, Australia, New Zealand and the United States.  The inclusion of the United States surprises me, especially given its enormous unfunded liabilities like Social Security and Medicare.  In addition, the already enormous budget deficits are projected to rise as far as the eye can see.  But then, who am I to argue with the market?

I hope you enjoy these essays and visit often. I appreciate comments, pro or con, and we cover a variety of topics that are simply too convoluted for just about anyone to understand. But, I'll do my best to clarify these issues. Our growing library includes pieces on Gold, Silver, Taxes, and much more.

Marko's Take






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