TBT ETF, Inflation and Gold
Independent Investment Research

by John Dalt

01/09/09

Last Week I opened a swing trade against the 20-year treasuries (TBT). I had been watching it since Dec 18 when I first wrote about it. It has traded flat since then. This trade will gain as interest rates rise. My premise is that interest rates will have to rise as the government begins to borrow more and more. The government has two options; borrow or print money. The danger is that the FED can print money; buy the treasuries which forces down interest rates. Eventually even this must fail, as the government would be the only buyer of their own bonds if other buyers demand higher interest rates. We are not there yet, last week the auctions were oversubscribed. A chink is showing in the armor, Germany only sold one-tenth of their bonds last week due to lack of buyers. This demonstrates the Greenback is still the world’s currency of choice. I also thought that much of the demand in December was seasonal with funds needing window dressing on end-of-year statements. A trade against the dollar may be better as the dollar will fall if the FED prints too much to support purchases of treasuries. We will have to watch this trade closely; it could blow up before the inevitable occurs. The other event that could cause havoc with this trade is a general market selloff. This would trigger skittish investors to run to the safety of treasuries, in turn depressing interest rates. I am reminded of a statement by Warren Buffet, “The market can stay irrational longer than you can stay solvent”.

While I am bullish gold, I think one of these plays will front run the price of gold as inflation will show in the interest rates and dropping dollar first. We have a GDX position open in the long-term portfolio, but I have held the buy price under the market as I think there is a correction in Gold coming. 

Did you see that Hustler and Girls Gone Wild are applying for a bailout?  I cannot wait to see the congressional hearings! What kind of restructuring will Charlie Rangel and Chuck Schumer ask for? Speaking of bailouts, a friend sent this quote from Thomas Jefferson in 1802: 

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.

I sure wish we would listen to him.  Our country is in a tough place, made worse by 24 hour news, and major news organizations that are lazy and don’t dig to the real story.  Did you see the story of the guy that was stuck in the Vail ski lift?   

He may have felt like some of us as we try to trade this market.  There is a simile here somewhere.  Strap ‘em on!

WARNING:    The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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