The Fed’s Big Bluff

[powayseller]

jg, what is the treasury money market fund? Don’t you risk losing principal as the yield rises? Isn’t it safer to buy short-term treasury bills that you can hold to maturity?
Why the Precious Metals Fund vs. GLD ETF?
I want to find out where I can get Canadian, euro, and swiss franc government bonds. Any ideas?

[powayseller]

Diego Mamani, if you used the pre-Clinton era of CPI measurement, before they changed the definition of inputs to make inflation look lower than it really is, inflation has been at 7.5% over a year now. Chart. CPI, like the median, is another poorly understood number, because the media doesn’t adequately educate us.

Even with today’s measure, CPI shows inflation has been rising for 2 years. The economy is slowing, so inflation should be falling, not rising. Inflation will keep rising, because rents will keep going up as housing falls, and oil prices will probably reach $100 by the end of the year. This is mild stagflation, because inflation is only 7.5%, not 17%.

[powayseller]

jg – this is a gem! Some questions: Why is Japan the major buyer of Treasuries, double of China? I thought we import mostly from China.

We need to note that the oil producing nations buy their Treasuries via other countries/dealers, so their actual purchase is not known and does not show up in the Treasury or Flow of Funds reports. You can bet they are ending up with 50% more dollars vs. 2 years ago, since oil is 50% higher vs 2004. What are they doing with all those dollars?

Why are Mexico and Canada doubling, and the United Kingdom tripling, their monthly Treasury purchases vs. last year?

A few countries lowered their Treasury purchases, but only by 5 or 10%. Most countries increased or kept constant their Treasury purchases through the period shown, May 2006.

Why are there such wild swings in the monthly inflow/outflow of Treasury bonds/notes? The other chart (last link you gave) shows a constant monthly purchase.

The second link shows $17.7 bil tendered, $9.9 bil accepted. Does that mean only half the Treasuries were sold?

[Anonymous]

PowaySeller, the managers of money market funds keep the average maturity low, so there’s little risk of falling principal from interest rates.

Gold mining stocks are fine, and precious metals mining stocks are largely gold mining companies. I’m with Vanguard, and they don’t offer a mutual fund targeting gold mining companies, just a mutual fund targeting precious metals mining companies. GLD tracks gold buillion; I want leveraged exposure, hence, my parking my money in precious metals mining stocks. Just plot year end gold prices over ’87-’05 vs. VGPMX; when gold goes up, VGPMX goes up a multiple (and same on the downside!).

Foreign currency securities have too many moving parts — operating risk, legal risk, and exchange rate risk — for me, so I don’t have anything that I can pass you.

[Anonymous]

I’m not sure why U.K. et al stepped up their buying of U.S. Treasuries. I assume that the dollar must be relatively attractive to Brits.

I assume the well paid Japanese are big savers, hence, their big chunk of U.S. Treasuries.

“Tendered” is a measure of interest; buyers submit (tender) sealed bids, saying they will buy $XX amount of the $9.9B offered U.S. Treasuries at YY% yield. The Treasury then sorts the bids from lowest (U.S. Treasury preference) to highest yield (investor preference), and distributes the securities at the yield that “clears” $9.9B in total. So, the Wed. results show decreased interest, resulting in the U.S. Treasury having to pay a higher yield to sell all $9.9B in bonds.

Yes, there’s variability in the monthly purchases. But, the trend is clearly down, overall.

[powayseller]

jg – what kind of paper do money markets hold? I’ve always been given vague answers, like short term corporate AAA paper, etc. They could be holding 50% of Fannie Mae’s AAA paper, which is really worthy of a D grade. For this reason of vague disclosure, I don’t see money markets as a safe vehicle. Why would I get a money market at 5.5% when I can go FDIC insured or government backed Treasury for that same rate?

Thanks for the info on gold mining stocks. Now I see why Bill Fleckenstein is bullish on Newmont Mining. I get all my commodity signals from Zeal Intelligence, since I don’t have the time or interest to do this research myself. I have a subscription to Zeal.

[technovelist]

You’re right that many (most?) money market funds don’t tell you much about what they invest in. But there are some that stick to short-term Treasurys, such as American Century’s “Capital Preservation Fund”. I believe their minimum is $2500. As for why one would prefer that to an FDIC insured account: FDIC may take a long time to pay off, especially in a general banking panic. Treasury funds should not have that problem, as the Treasury could just sell debt to the Federal Reserve if they can’t find any other buyers. Of course, that would be very inflationary, but you can’t avoid that risk with any dollar-denominated debt investment.

[bob007]

i don’t buy worst case scenarios.

in the short run

inflation will be above normal

growth will be below normal

equity markets will be sluggish

real estate will talk in some overheated marketsc like San Diego. Some low flying markets will be hit harder due to general economic slowdown.

[barnaby33]

In all of these discussions of the dollar and our fiscal proflegacy I find something missing, something major. We keep talking about our dollar losing its value to the Euro or the Yen. Does anyone out there think these currencies are particularly good places to invest? Its a relative thing in my mind. We are doing some very bad things with our currency, but none of the major European govts can get their act together with respect to debts either. France and Germany make a point each year of violating the Maastricht treaty (restricting debt growth to 3% of GDP.) Japan has an aging population and its tax base is horribly contorted.

I would just like to say that relatively speaking we may not be doing that badly. Ultimately with fiat currency, relativity is all that matters.

Josh

[powayseller]

I think the swiss franc is the best place to invest, then canadian dollar, then euro. Once gold prices drop a bit, gold is good too. Since we don’t know which will do best diversification is prudent. I am going to investigate buying government bonds of those currencies. I need to make calls to e-trade or large banks. My credit union doesn’t deal with international currencies.

If the dollar keeps falling we will see inflation, as prices of imports rise. But with the renminbi pegged to the dollar, it won’t affect prices of Chinese goods. Roubini makes a good case for China revaluing the renminbi before the Sept. deadline for the senator’s proposal for 27.5% tariffs for chinese imports. I think China has too many uncertainties in its banking sector, so I am unsure about buying yen.

Why did Bank of Italy buy british pounds instead of euros? Shouldn’t that tell us something?

[SDLaw06]

There is entirely too much info on this website, I can never keep up with all the posts.

[Author]

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