Tuesday, July 5, 2011

Austrian Economist Robert Wenzel Predicts T-Bill rates to Jump at Least 100 times in One Year; Is This Likely?

The well-known economist-blogger Robert Wenzel is out today with a post that predicts that T-bill rates will hit at least 7% within one year. Currently, on a day when gold is up 2% in price, the 6-month T-bill rate is 0.07%.

This is the cut and paste from the relevant blog post:

Investors won't want to own short-term Treasury securities paying less than 7
percent to 10 percent (The 6 month yield is currently only one-tenth of a
percent) . At some point after that things will move very rapidly and the United
States government will be paying interest rates comparable to those paid by
banana republics.

This rate has dropped today even though gold and oil are both up
about 2% today.

And it's not just ultra-short rates that have dropped
today in the face of what appears to be buying pressure in multiple commodities.
The 5-year bond is down to 1.69% from 1.77%.

Think of what a 0.07% annual rate means for a 6-month bill. It means that if you lend the government $1000 for 6 months, you are owed the grand total of 3 cents plus a ha'penny (3.5 cents).

A 1.7% or so 5-year note rate means that the lender gives away the thousand, not
to see it again for 5 years, and in return accepts $1.70 a year from the gov't as a sign of its good
faith that it appreciates the thou.

You need to understand that it is
not retail money that is rushing into the money markets to snap up these
securities the way it rushed into condos 6 years ago or tech stocks 12 years
ago. This is smart, sophisticated institutional and banking money that does not
much like stocks or real estate at these prices. It wants better deals on these
and other assets. This is not money that expects to realize a loss on its 5-year
notes within one year that far exceeds the total interest owed. This is
money that not only is very well-connected but has a significant say about what
the Federal deficit is going to be. When this money talks, Presidents, Treasury
Secretaries and Congressmen listen. This is also money that is part of the
"game". My guess is that this money does not want the chaos that the Wenzel scenario would
envision. I suspect that this money would prefer a Japan scenario for the US
than a Greek one.

Who of us can be sure in advance, of course? It is
always wise to recognize that "it's always something". But I'm taking the
"under" on interest rates vs. the above view.

I propose a friendly wager on the Wenzel prediction. I say he's wrong. This will be a negative wager. Loser has to eat crow.

Copyright Long Lake LLC 2011

Monday, July 4, 2011

Is Silver a Short-Term Buy Again?

I want to focus on longer-term matters here most of the time, but it's also important to stay on top of trading calls I have made on the record. Thus I want to provide an update on silver, as I posted "Silver Is Probably Overpriced" on June 2. At that time, the ETF known as SLV was at $36. I thought that was a brave call, given that silver had recently plummeted and looked oversold to many.