Friday, May 22, 2009

Then again...



Yesterday I posted a commnet about how we are all going to get rich and retire when the idiot rating agencies downgrade the U.S. credit rating. I told you to wait until all the lemmings sell Treasuries, then we buy and make a mint as the price of those valuable savings accounts go back up. (Just like in the movie, "Trading Places!")

But here's where I could be wrong; where the whole strategy could backfire, terribly. I'm making you aware of this now so that you can protect yourself and put on a "hedge," right now, to earn a little money while waiting for the real fireworks.

If the Fed were to start raising interest rates after a downgrade of the U.S. credit rating, that would be a disastrous outcome. It would fuel unfathomable selling in Treasuries. Let us hope the Fed understands this. Let us pray the Fed understands this.

In the meantime, to protect yourself against such an outcome, buy the TBT. It's the Proshares Trust Inverse Treasury ETF. If Treasuries take a nosedive, this fund will skyrocket. I recommended this several days ago and it has already gained nearly 7%. Do yourself a favor and pick some up for insurance.

Hopefully the Fed will not mess this up, but something tells me there is that possibility.

Finally, don't despair about not getting your Yacht, because if the Fed DOES raise interest rates AND the credit agencies cut the U.S. credit rating, all you need to do is the opposite of what I told you yesterday. You would sell Treasury futures, buy puts and/or load up on that TBT I just told you about!

We'll still all having our yacht parties in the Caribbean somewhere!

4 comments:

Matt Franko said...

Mike,
FWIW I think your call here is the Contrarian position.
I can find few (Hugh Hendry in the U.K. only one that comes to mind) on any media outlet that takes a similar position on bonds.
Even Bill Gross "Bond King", said a downgrade was prob. inevitable on Bloomberg yesterday citing a future Debt to GDP ratio.
I got cold called from a commodity broker yesterday to go long gold and short dollar citing the usual negative blather as his sales pitch.
Resp, Matt

Mike Norman said...

It's all a very quick, once and done, with bonds recovering to pre-downgrade levels eventually.

Unless...it coincides with the Fed raising rates. Then it is complete disaster and not for the reasons that these debt idiots are talking about, but it won't matter. That's what they'll say and that's what everyone will believe.

Then it's time to find another home. Another country.

STF said...

Looks like your moment to go long Tsy's may be arriving sooner than we thought, and with little fear of the Fed raising in the near term. We'll see. TBT would have been a good thing to be in today, though.

googleheim said...

Can anyone explain in broad strokes what the heck is going on with the USD/GBP and USD/EURO, the Treasuries, price of gas/oil, UK downgrade making the Quid/Pound stronger, what the Fed is going to do with interest rates ?

All the talk about a market pullback has been hogwashed by the fact that it did not stall nor pullback ...

The dollar is getting weaker - the linkage is still there from last Fall and before -> gas goes up > pound goes up > market goes up > dollar goes down > nothing has changed in the dynamics ...

Is there going to be a pullback or not ?

Should I dump my dollars into a EURO or POUND account ?

Anyone know how?