Who’s Really Holding US Treasury Bonds?

The Chumps’ Revenge? The German’s Retreat?

Another month gone by. Still no sign of recovery. Where are the fools when you need their money?

Yesterday, we were singing the praises of the chumps and patsies. Thank God for the dumb money, was the chorus.

People willing to spend what they don’t have on what they don’t need — that’s what made the old economy of ’71-‘07 spin around so fast. And now where are these chumps? They seem to have run for cover where they didn’t want to go. They don’t seem to want to buy stocks. Now, they’re buying US Treasury bonds!

But what’s this?

“Gold Rises $40 As Markets Fall Sharply — Safe Haven “Tipping Point”?

Bloomberg (on Wednesday):

Gold fell and tested support at $1,530/oz but then bounced very sharply and rose by nearly $40 from $1,532/oz to $1,570/oz. US stocks and commodities remained under heavy pressure and the benchmark S&P 500 ended down 1.43%.

Gold consolidated on yesterday’s gain in Asia and during European trading it is challenging resistance at $1,570/oz.

Gold is set to incur its 4th month of losses which has not been seen in nearly 13 years. Interestingly while gold in dollar term is off 6% in May, the sharp fall in the euro means that gold has again risen in euro terms and is up 0.3% in euro terms in the month.

Gold may have turned a corner. It was going down with stocks and other commodities. But on Wednesday, stocks fell hard…while gold bounced. Then, yesterday, gold held steady…while stocks fell again.

What’s going on? Ultimately, gold is money. It is the only money you can trust. And when you begin to have doubts about the other currencies — those made from wood and controlled by wooden heads — your enthusiasm for real money increases.

Which makes us wonder who is holding so many dollar-based US Treasury bonds? It must be the chumps. Yields fell to their lowest point ever on Wednesday. That means that a lot of people are buying them. Which is remarkable for a couple of reasons.

First, US credit quality has declined substantially over the last 5 years. Deficits have pushed up the national debt from 60% of GDP to over 100%. Both S&P and Egon Jones downgraded US debt as a result. Unlike Europe, which tries to squeeze the reckless spending out of the system, the feds are still at it…and unrepentant. They now fritter and consume about $1.30 per dollar received in tax revenues.

Second, in times of stress, the custodians of the dollar at the Fed have shown themselves ready, willing and able to throw the greenback out of the lifeboat. If it’s a choice between saving the dollar…or saving their jobs, or their campaign contributors…or their power…we know what they will do.

Third, unlike Japan, the US still runs a substantial trade deficit. The last month tallied was March, in which imports beat exports by more than $50 billion, or about $600 billion, annualized. The Japanese and others used to use a lot of that money to buy US debt and support US deficit spending. Now, they need it for their own purposes…or to buy gold. This leaves the US with neither a net flow of funds coming in from overseas…nor high domestic savings. It has no means of sustaining a long spell of deficit spending.

Fourth, last year, nearly two out of every three dollars in deficits were funded by printing press money — or a near equivalent — from the Fed.

All of those reasons should give bond buyers pause. But they can’t seem to find the pause button. They buy US bonds without hesitating. And who knows? Maybe they’re right. It has been five years since the crack up in subprime. There is still no relief in sight. No recovery. Instead, bond yields themselves signal a deep economic sleep setting in. Like a Japanese Rip Van Winkle, the US economy could slumber for 5…10…20 years. And the yield on the 10-year note could fall some more…maybe to as low as 1%. Then, the bond buyers will look like geniuses, not chumps.

People who mortgaged their homes to lock-in a 4% rate will regret not having waited for 3%.

People who bought stocks because they didn’t want to miss the big recovery boom, will regret ever leaving cash…as their stocks fall 20% to 50%.

And people who bought houses at a 30% discount from 2007 will cringe every time they look at the real estate section of the local paper. Those same houses will be down 40%…and 50%.

Yes, it will be the Revenge of the Chumps…the poor shmucks who bought US Treasury debt in the spring and summer of ’12. They’ll be right. We’ll be wrong…

…for a while.


Bill Bonner
for The Daily Reckoning

The Daily Reckoning