- A Very Merry Christmas!Privateer Subscribers, please go and take a look at the charts showing Treasury bond yields.
Even a master of hyperbole couldn't describe it, so we'll just settle for "WOW!!". Consider this: A week ago, 3-month T Bills were yielding 6.01%. On December 22, that yield was down to 5.26%, having fallen by 50 basis points over the past two days!
Now, there is investment, like buying something and hoping it will go up. Then there is speculation, like buying something and hoping it will go up LOTS. There is also gambling, like drawing two cards for a flush when there is already ten grand on the table. And there is the "sure thing", like putting half your money on the "red" and half on the "black". There are all of these things, and we are still not sure of what to call what is presently going on in U.S. Treasury debt markets.
Suffice it to say, for now, that we are witnessing the biggest bet in recorded history that Mr Greenspan and the Fed will lower U.S. interest rates. More, we are seeing a humongous bet that he will lower them a LOT. Still more, this is a bet that he won't wait for the next FOMC meeting (on Jan 30-31, 2001) before he starts lowering them.
Judging by the crash dive in Treasury yields, all of the above is looked upon as being the surest thing ever. And looking beyond the bet itself, what is also looked upon as the surest thing ever is that the Fed will wave its magic wand and, as has "always" happened in the past, everything will come up roses. Leaving aside the fact that the Fed hasn't "always" been successful in fixing things in the past, what EVERYONE is COMPLETELY ignoring is the potential effect of lower U.S. rates on the U.S. DOLLAR.
As has already been demonstrated this year, a concerted fall on U.S. stock markets has not erased investor complacency. Niether has some sharp falls in the Dollar. But now, Mr Greenspan has to try to rescue the markets while not causing a big Dollar sell off AND not causing the $US Gold price to come to life. We don't think he can do it, but it will be fascinating watching him try.
(From the Gold Commentary - December 15, 2000)
On Wednesday (Dec. 20), the Dow swooned, the S&P 500 and the Nasdaq crumbled, and the Dollar just kept on sliding. The big bad Fed had refused to spike the punch bowl. No rate cut for Christmas! The next day, Treasury yields, which had already been falling fast, went into overdrive. Five-year yields dipped below 5.0% and "cash" (3-month T Bills) went vertically down. By the end of the week, 3-month yields were below 30-year yields for the first time since February 2000.
For all those who have been greviously disappointed by the inability of Gold to move higher this week as the Dollar accelerates downstairs, please consider the consequences of a spike in the $US Gold price while all THIS is going on. While few inside the U.S. seem to be able to see any danger from the falling Dollar, you can bet your last Krugerrand that many OUTSIDE the U.S. see it.
The Dollar is falling fast while U.S. debt yields are plummeting. Obviously, Wall Street expects big Fed rate cuts and it expects them SOON. In any other nation on earth, a fall of this magnitude in the currency would not lead to lower government debt yields, it would lead to HIGHER ones. Remember the yields in Asia during the "crisis". More recently, remember when the Turkish currency crashed? Their was a capital flight of such proportions that "cash rates" spiked to 1700% while the Turkish equivalent of the Fed Funds Rate spiked to 253%.
Yes, we know, the U.S. Dollar is "special". But for how much longer? For all those outside the U.S. who have been pouring their capital into the U.S., the rise in Treasury debt prices (as yields fall, prices rise), has been offsetting the fall in the Dollar nicely, so far. But will that continue AFTER the Fed cuts rates?
There is an old investment adage: Buy the rumour - SELL THE FACT. Before they fell further on Dec. 22, the "spread" between 10-year Treasuries and 10-year German bonds was already down to 18.5 basis points. The six month average for this spread is 58 basis points. For a month now, the Dollar has been falling against the Euro (and the D-Mark). Now, it is plummeting. With a falling Dollar, and no rate advantage of holding Treasury debt paper, how much longer are Europeans going to go on doing so. And what happens to the Dollar, and the U.S. financial system, if Europeans begin to pull out of $US paper?
The rest of the world too, has been pouring their capital into the U.S.. Given lower U.S. rates on top of an already falling Dollar, they will be mightily tempted to either repatriate the funds or place them elsewhere - in Europe, for example.
The problem is that there is no adequate substitute for the U.S. and its Dollar as a place to park money, however "hot". The U.S. is about to embark on another episode of the type best exemplified by a U.S. Treasury Secretary who said to his European counterpart back in the early 1970s (this is a paraphrase): "We've got the Dollar - and that's your goddamn problem!"
So it is, and so it has been for many years. But the Dollar and the system which has developed around the Dollar has never been so much at risk as it now is. The pressure is building - and it is building under Gold even faster than it is building over almost everything else.
There are two "saving graces" in the system as of now. One, the Dow remains above the 10000 level, allowing everyone to go on thinking that the U.S. bull market remains intact. Two, Gold still languishes at or near 21 year lows, letting everyone go on thinking that the present "volatility" is just another glitch waiting for the Fed to paper over.
The one thing we know right now is that there will be a concerted effort to make 2000 look as good as possible over the four trading days which remain in it. The Dow hasn't suffered an annual loss since 1990.
But after the New Year celebrations, and especially after the Fed rate cut (whenever that occurs), the dangers will hugely intensify. Everyone in the U.S. is betting on a rate cut. No one in the U.S. is looking beyond that rate cut. Stay tuned, we will be updating this commentary next week as usual, on Dec. 29-30.
In the meantime, we wish all of you - and especially all of you who subscribe to The Privateer - A Very Merry Christmas!
