Saturday, August 22, 2009

Even Warren Buffett Is Now Saying Bonds Could Crack!

by Mike Larson 08-21-09

I’ve made no secret about my view on U.S. bonds and the U.S. dollar …

I’ve minced no words, and cut no corners …

Instead, I have given you specific, consistent guidance on those fronts: Namely stay the heck away from long-term Treasuries and hedge yourself against the government’s unofficial policy of trashing the greenback.

It started last year in my December 5 Money and Markets column, when I issued the most strident warning I’ve EVER released on bond prices. I labeled long-term Treasuries “the biggest bubble of all” and warned you that …

“No government, or central bank, is bigger than the bond and currency markets. Foreign bondholders aren’t going to sit idly by while any government … even the government of the U.S. … openly decides to trash its currency by printing it with reckless abandon. And they aren’t going to sit by while the government manipulates prices higher.

“They’re going to say ‘Sold to you!’ and take their money elsewhere.”

Then on March 27, I compared the finances of the U.K. and the U.S., noting that we’re both in the same boat. I pointed out that policymakers were “transforming a Wall Street debt crisis into a potential debt crisis in Washington.” And I said that …

“Foreign investors have already started unloading ‘agency’ debt — bonds sold by Fannie Mae and Freddie Mac. In addition, China has warned that it’s getting nervous about its massive U.S. Treasury holdings.

“So is it too much to imagine that U.S. bonds will soon have their day of reckoning? I sure don’t think so.”

Now’s the time to hedge yourself against the government’s unofficial policy of trashing the greenback.
Finally, a few weeks ago, on August 7, I said that the never-ending wave of debt washing over the market would have dire long-term consequences. My warning:

“In the case of the U.S. government, our ever-increasing debt load means one of two things is going to have to happen. Either …

1. Economic growth is going to surge, sending tax revenue through the roof and allowing us to pay off all these bills, notes, and bonds.

OR …

2. Taxes are going to have to rise sharply to make good on our debts.”

Now, in a devastating broadside from the editorial page of The New York Times, the greatest American investor of all time is warning of the very same things. Warren Buffett, in a piece entitled “The Greenback Effect,” wrote on Wednesday [emphasis mine]:

“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible … Still, their threat may be as ominous as that posed by the financial crisis itself.”

And …

“Our immediate problem is to get our country back on its feet and flourishing — ‘whatever it takes’ still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

“Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.”

Buffett’s warnings speak volumes about the seriousness of this problem.
That’s not all …

Buffett also noted that our government is spending $1.85 for every $1 it takes in from taxes … that ever-increasing purchases of Treasuries by foreign investors are “no sure thing” … and that our deficit is on track to hit 13 percent of GDP, more than double the previous non-wartime record of 6 percent.

Sound familiar?

It should. Because that’s exactly what we at Weiss Research have been warning you about for several months! But the fact that Buffett is weighing in speaks volumes about the seriousness of this problem.

Officials at PIMCO, the world’s largest bond fund manager, are also warning about the consequences of our government’s actions.