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Time to Short Treasuries Yet?

Every Ponzi Fails In Time

Written by Brian Hicks
Posted November 18, 2010

Back in February Nassim Taleb suggested that, "every single human being" should short U.S. Treasuries.

He's right, of course. Treasuries are a bubble of epic proportions.

And when that bubble pops, a lot of money will be made on the short side. For retail investors, that means using ETFs like TBT, which short t-bonds with leverage.

But getting the timing right on this trade has proven tricky. Bond prices just keep going up, pushing yields to absurdly low levels.

Investors who bought TBT back in February, when Mr. Taleb made his "every single human" statement, are down about 20% on their trade.

The yield on 10-year Treasury has fallen to a paltry 2.8%. In April, the same bond was yielding 4%. In 2000, before the tech bubble burst, the 10-year was paying a substantial 6.7% annual dividend.

Take a gander at this 5-year yield chart:


With inflation expectations rising — and the dollar falling — why on earth would anyone loan America cash at 2.8%? They wouldn't, of course.

The only thing driving demand for treasuries is the Fed. And chinks are starting to show in their armor, for the first time, well... ever, really. (More on the Fed's eroding credibility here.)

How long can the Ponzi last?

I don't imagine that Chairman Bernanke cared much for the world's reaction to QE2. In case you need a refresher on the case against QE, this should do the trick:

And every investor should read this commentary by Bill Gross.

Here are some of the juicier tidbits, though I do recommend reading the entire piece:

Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme.

The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next.

Pay attention to that last one, as Gross is clearly hinting at something important when he describes QE2 as possibly being Bernanke's "last move."

When Mr. Gross speaks, investors listen. And for good reason. Bill Gross is the kind of guy who can move markets with an off-hand comment. So the fact that he is blatantly calling the U.S. economy a Ponzi scheme does not bode well.

Gross has even dubbed the system a "Sammy Scheme," with our own Uncle Sam reprising the role of Charles Ponzi.

QE2: Fed curtain call?

QE2 should succeed in temporarily pushing yields down further, but it's not guaranteed by any means.

Bond holders may well see this as the perfect opportunity to sell their bonds to the Fed at a healthy premium. For managers looking to unload large quantities of assets, it's a potential windfall.

Anyone who has owned U.S. bonds already has a big paper-gain. Why wouldn't they take some profits?

Over the next eight months, they know Bernanke will be "on the bid" almost every day, gobbling up $900b worth of treasuries.

But after QE2 ends, all bets are off. This could be the last good chance for money managers and central bankers to dump their treasuries.

Don't get me wrong; QE3, 4, 5, 6, are certainly possible. If Bernanke and the doves get their way, the printing won't end any time soon. And even the might of the Fed may not stem the tide for too long.

But if inflation starts to look worrying, or the political situation changes, the printing presses could come to a screeching halt. If that happens, bond shorts stand to make a killing...


It's time to test the waters. Last week, I opened a small position in TBT, a double-short treasury ETF.

I'm just dipping my toes in at this point, and will watch closely for changes to the situation.

Why go short with the Fed buying? It certainly violates the investing maxim Don't Fight the Fed...

I'm aware of the risks, and am starting the position because I suspect that when the snowball starts rolling, the move will get quick and violent.

As a bonus, funds like TBT act as natural hedges to gold, as shown in the chart below (gold in blue, TBT in red).

So those with large precious metals positions may get some downside protection in their portfolio by shorting treasuries.


In a world where attractive investments are in short supply, shorting treasuries is looking better every day.

Adam Sharp
Analyst, Wealth Daily 

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