Sunday, June 26, 2011

You Owe $534,000

Did you write your check yet?


I find it hard to believe, but it's true. I owe $534,000, and so does my wife. So do you...and so does your spouse. What do all of us owe for? It's our individual share of the US national debt, and believe it or not, our balance due is getting bigger!


It was kept out of the news for years, but as the bickering in Washington has turned it's focus towards fiscal responsibility, more and more articles are popping up in the news about out country's budget problems and how much it would cost each of us for our share to fix things.


Below are excerpts from an article I came across written by Jeff Clark that does a good job of summing things up:

"You owe $534,000. That's your share of the national debt – your cost of fulfilling the government's promises. Please send in a check right away. We have bills to pay.

On Tuesday (June 7th), the headline on front page of USA Today screamed "U.S. owes $62 trillion." It's a number so big, so gargantuan, it defies description. I've never seen 62 trillion of anything – be it dollars, marbles, or grains of sand on a beach.

So when analysts, economists, or newsletter editors talk about the enormity of the national debt and warn of the eventual consequences, they're often declared kooks, extremists, or "Chicken Littles."

But now it's right there on the front page of one of America's most widely read newspapers. The size of the problem is becoming mainstream, and it begs the question… "How the heck are we going to pay for this?"

The simple answer is… we're not.

Some promises are going to be broken. There's no other way around it. And many people are going to be let down.

And as with any massive economic disruption, there are investment implications. The easiest and most obvious: U.S. Treasury bonds are headed lower.

We've covered this topic plenty of times. The basic premise is one of supply and demand. The U.S. needs to issue ever-increasing amounts of new debt to fund its insatiable spending habits. So the supply of new bonds is increasing at a rapid pace.

Meanwhile, the investment demand for Treasury securities is drying up. Foreign governments aren't lining up to buy U.S. bonds like they used to. Individual savers are reluctant to accept 3% interest per year on 10-year notes when real inflation is running at twice that rate. Indeed, the only certain buyer for new Treasury issues is the Treasury itself – which buys its own bonds through the quantitative easing (QE) programs.

That buying will dry up when QE2 comes to an end.

In an environment of increasing supply and shrinking demand, there is only one direction for bond prices to go… down. It's obvious. It's logical. Yet, so far this year, it has been wrong. Interest rates have been falling steadily since January, and bond prices have been rising.

That's how markets work sometimes. They don't always reward the obvious and logical trades right away. Think about the internet bubble in 1999 and 2000. Companies with no sales and no earnings were trading at multibillion-dollar valuations. It was nuts and everybody with a brain knew it. But the market didn't care. It didn't matter how crazy things got. Internet stocks were a one-way upside bet and going against that momentum was financial suicide.

That is… until the "realization" stage set in.

The crash in internet stocks happened virtually overnight. It was as if the market snapped its fingers and investors collectively awoke from their trance.

I suspect the Treasury bond market is set up for a similar sort of awakening. And the snap of the fingers that may get things going is Tuesday's headline inUSA Today.

If you still own Treasury bonds, it's time to sell. The markets have given you a gift. Bond prices aren't quite back up to the levels they were at when I first urged you to get out, but they're at the best prices we've seen this year.

Take advantage of it.

Jeff Clarck"