Buy U.S. Treasury Bills
By Paul Lamont
June 28, 2011
According to Fortune (citing IMF data), Germany’s banks are now more leveraged than Lehman Brothers at the time of its collapse (Lehman: 31 to 1). Similarly, their leverage is financed by “cheap, short-term loans that are vulnerable to a market shock.” These loans (as we explained last December) are from money market funds here in the U.S. (Investors should buy 1 year T-Bills instead.)
According to Fitch, “Forty-four percent of money market mutual fund assets in the U.S. are invested in the short-term debt of European banks.” Last February, we shared a Bloomberg table which showed European bank exposure to Portugal, Ireland, Greece and Spain. The worst of these is obviously Greece. Greek loans have been continuously falling in value and some currently trade at roughly 40 cents on the dollar.
“Even
though some like Greece are small economies, the intertwining of finance would
then spread the woes throughout the Eurozone and, indeed, the world.”
– A. Gary Shilling. The Age of Deleveraging. 2011.
And while the European politicians may continue to buy time for Greece with additional bridge loans, default risk (as shown by the Greek 5Y CDS) has continued to rise despite previous bailouts.
Source: Bloomberg
“It is 100% certain
that Greece will default. The only question is what euphemism will be dreamt up
to cloak the fact that it’s a default. And the race is on to find a way
of saying Greece hasn’t really defaulted, even though it’s not
making good on its interest payments…Good luck with that. “– Niall
Ferguson, Harvard Professor and author of The Ascent of Money: A
Financial History of the World.
“It’s
all about bailouts or stimulus… that doesn’t solve the
problem.” - Robert
J. Shiller
For U.S. investors, this is not going to end well. Their funds will be lost (or held up in a money market fund wind down/bailout) as European banks fail. And as Reuters is reporting, “Up to one in six European banks is set to fail an EU-wide financial health check...”
The ‘Ultimate’ Dollar Bear
Turns Bullish
Last month,
we mentioned that Jim Grant had changed his U.S. Dollar outlook. This month, “The Ultimate Dollar Bear” Jim Rogers on Bloomberg
Television's “Surveillance Midday” (a must watch video) reveals that he is long the
U.S. dollar. How bearish has Jim been on the U.S. dollar? In 2007, he sold his
house in New York, moved to Singapore and has been teaching his daughters
Mandarin (i.e. pretty bearish). But now he is
buying U.S. dollars. He explained his reason to Bloomberg; “Because
everybody is bearish, including me. I read that something like 97% of people
are bearish on the dollar. I am one of those ninety-seven. So I bought
dollars.”
While Grant and Rogers are advising U.S. dollars, the Wall Street Journal reports: “financial advisors increasingly are telling their clients” to move “cash and shorter-term assets into foreign currencies and bonds.” This is an easy sell for Wall Street as “clients have become more receptive recently as they digest the risks of owning only dollars and the impact that could have on living standards over time.”
So on one side of the trade, Jim Rogers is buying U.S. dollars. As a reminder, Jim Rogers’ Quantum fund (with the assistance of his partner George Soros) earned 4200% over 10 years. And on the other side of the trade (doing the complete opposite of Jim i.e. getting rid of their dollars), you have Wall Street’s customers. Historically, these customers look at past performance, rush to give Wall Street their funds and are almost always left holding losses. How will this all turn out?
We may have a hint as the Canadian dollar is already down 4% in the last two months. (See Japanese homemaker-traders from 2007 and the subsequent performance of the Yen if you can’t wait for the conclusion of this particular episode.)
Meanwhile, AFLAC has just reported a $610M loss on European bank investments. Their reasoning for their investment was the same as Wall Street’s customers as they admitted to “a search for yield.” As we stated last October, “Seek value, Do not chase yield.”
“We always have risk.
The world is full of banana peels - that goes without saying. The difference
today, across a range of markets is that you are not getting compensated for
the risks that we face and the Fed itself is helping to create these risks
through the manipulation and suppression of interest rates.” - Jim Grant
The Tiger After the Crash
What will it take for us to
get truly excited? Here is how Julian Robertson, Wizard of Wall Street,
found Wall Street after the Crash of 1987:
“Throughout his travels
and his research, he had a hard time finding anybody who wasn’t
exceedingly bearish - investors, it seemed, believed that the sky had truly
fallen. He found few, if any, investors who were fully invested during this
time. It seemed that many of the professionals that he spoke with were simply
sitting on the sidelines waiting to see how the market was going to react and
waiting for some semblance of normalcy before getting back into the
game.” Julian Robertson: A Tiger in the Land of Bulls and Bears.
Daniel A. Strachman. 2004.
The pessimism that pervaded
on Wall Street after the Crash of 1987 provided value investors like Robertson
with bargains. A flash of that pessimism appeared in 2009. But it did not
remain and investors (encouraged by the Fed) have returned investments to their
speculative valuations.
“Holding cash is
uncomfortable, but not as uncomfortable as doing something stupid.” -
Warren Buffett
Full Disclosure: Paul J. Lamont holds U.S. Treasury Bills
and a bearish S&P500 option position.
At Lamont Trading Advisors, we provide wealth preservation strategies for our clients. For more information, feel free to contact us. Our monthly Investment Analysis Report requires a subscription fee of $40 a month. Current subscribers are allowed to freely distribute this report with proper attribution.
***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions. This newsletter should not be construed as personal investment advice. It is for informational purposes only.
Copyright ©2011 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama. Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm visit www.LTAdvisors.net, or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net, or call (256) 850-4161.