I Nearly Spit Out My Coffee When I Saw This…
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?
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…
Category: Bonds
