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February 19, 2008 – Comments (7)

The gross imbalance between long term debt and short term is getting close to endgame.

I am new to learning about how various aspects of the markets work, so, for example, if someone said treasuries bills were safe, I'd compare them to Canada Savings Bonds and agree.  But, horror of horrors, they aren't the same at all.  Canada Savings Bonds have far less risk built in by design.  You don't want them any more, you simply cash them.  Some have restrictions about only being able to cash once per year, and a penalty cost of losing interest for cashing early, but the down side is well defined.

So, I only learned how those 30 year treasuries work in the past month, and, omg, what a disaster.  The risk people have been taking buying treasuries...  They are priced to today's interest rates for 30 years.  People have been buying them for short term purposes to get the long term rate because the market has been liquid and there is always someone to buy them.  And when the buyers dry up???

That's when you can't get out without taking a huge hit, a hit that reprices the risk for funding 30 year debt.

The more I look, the more it seem the entire lending game has gone to short term intentions for long term obligations and it means that many people are going to be stuck with long term debt at highly depreciating rates that they had no intentions of taking on what-so-ever.  To get out will mean taking a significant hit on the face value of the investment.  Treasuries may very well be government guaranteed, but 30-year treasuries are only guaranteed to be paid over a 30 year period.

It is the same concept that killed the liquidity in the municipal bond market.  I happen to know people vest there for short term purposes that just found that there was no market to buy the debt.  I doubt that all this talk about separating the municipal insurance from the mortgage insurance would fix this.   Investors just got a wake-up call that their liquidable investments are not as liquidable as they thought.  The rates go up for the risk regardless of what happens with the insurance.

But then, I think it is just the municipalities paying their debt servicing costs that is insured, not investors ability to sell that debt, which is an entirely different risk, one that has had the appearance of low risk through the 20 odd year walking down of interest rates.

Here's a link, same kind of thing, long term debt, short term buyers...  Of note, this is only showing one side of the economic hit, municipalities having to pay for the real cost of their debt.  Investors alreadying holding the underpriced debt are going to be hurting next. 

7 Comments – Post Your Own

#1) On February 19, 2008 at 4:03 PM, GS751 (27.50) wrote:

there was an article awhile ago about "the biggest bubble of all time US TBills"  It was very interesting.

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#2) On February 19, 2008 at 4:16 PM, Atleus (< 20) wrote:

Dwot, I think you're right on regarding the overall state of the economy.  Looking through your picks (almost all negative), though, and your statements to the affect that you're staying out of the market, I think you're really going to miss the commodities boat.  As the government throws the kitchen sink at the market in order to avoid a recession, the dollar will go into the toilet and real assets will jump enormously in value.  Combined with a long term increase in worldwide demand and a future with vastly increased instability due to the U.S.'s failed policies in Pakistan, Iran, North Korea and the Middle East in general, now is the time to buy.

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#3) On February 19, 2008 at 4:25 PM, DemonDoug (35.21) wrote:

dwot, I agree with atleus.

I also suggest you start reading some of the itulip.com articles.  Your analysis matches theirs, but they explain in many ways in great detail why currencies are going down (even though it would appear that banks with no reserves and can't lend money would be deflationary, paradoxically this isn't the case).

In a debt deflation, the Fed is using all it's other means necessary to print print print print, meanwhile, all the debt that our foreign creditors hold is being repatriated in terms of buying things that are useful, like oil and metals.  This is why I'm bullish long-term on oil, I think it can easily be 200/barrel by 2010, and would not be surprised to see oil at 300/barrel by then.

Which, again, is why I think you just can't go wrong with a canadian based oil company.  Do you have any thoughts or insights on candian miners or oil companies or royalty trusts?

-DemonDoug, long Suncor (SU) 

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#4) On February 19, 2008 at 4:43 PM, abitare (38.89) wrote:

dwot,

Put on a coat and get on a snow mobil and give us an update on the commodity market.

FYI -  I had some Canadians look at my apartment in HI. Stong currency is working out for some people.  

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#5) On February 19, 2008 at 4:45 PM, abitare (38.89) wrote:

I meant to say please. :) and an update on the Cannadian commodity market.

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#6) On February 19, 2008 at 6:22 PM, dwot (40.93) wrote:

On the commodities, I am waiting to see what happens as slow downs work through the economy.  There is a delay for demand to decline with a slow down.  Inventories start to build up, and then the orders stop or slow.  Also, when you take into consideration currency costs due to the falling US dollar, well, costs are going up so fast and I don't think financial reports reflect that yet. 

I think a few earning reports on the 4th quarter are going to be down.  They got less money for the commodities and had to pay more for wages etc due to weakening US dollar.  Bingham would be good because wages are  in US dollars so on the world market wages effectively declined with the falling dollar.

Up here where I am in the North West Territories I know of 4 "camps" that have started in the past year which are gas and oil.  The one guy that came to our school said that they only had 2 out of 15 rigs operational for gas because of the low price, but they were a company setting up a rig.  I think gas has gotten a little more solid on the pricing.

The price of oil is more about world politics.  I think the jump more has to do with the Exxon Mobile getting a court order to freeze a country's assets and the political unrest that goes with that. 

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#7) On February 19, 2008 at 7:32 PM, DemonDoug (35.21) wrote:

the problem is that m2 and m3 US dollars are going to grow faster than the slowdown will drag down commodities.  Currently the Fed is doing this through the term auction facility, and these loans can be rolled over ad infinitum (i'm sure you've heard the term "evergreen loans" before).

Yes, true about oil being more about world politics, but that's more to the point isn't it?  The canadian oil companies operate in a friendly place where there is virtually zero threat of terrorism or civic disruption, plus, the reason I'm huge on suncor is that their output is expected to grow in the next 4 years whereas many other companies and countries will be flat to declining.  Especially if Iran and Venezuela don't let the big companies in to do the job right.  Think the middle east and nigeria will be peaceful in the next 5 years?  Being the realistic person I think you are, I think you would agree with me that there is a small chance of a positive outcome for the world markets in iran, venezuela, nigeria, and other places.

i guess what i was wondering is since you are closer on the ground to where the canadian oil/gas companies are, you might have a better insight than I do, sitting in warm los angeles. :) 

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