What Kind of Investor is Happy to Lose Money Over 90 Days?


Your editor departs for Wellington for five days today to meet with an old friend about publishing his newsletter. His letter is a top-down, geopolitical, macro-economic report grounded in an exceptional knowledge of the credit cycle and history in general. We’ll keep you posted.

But there are some strange and perplexing crumbs to collect from news reports this morning. Yesterday we learned that for the first time in 70 years, yields on 90-day U.S. government securities were briefly negative. Investors – if you can call them that – were happy to loan money to the U.S. government for 90 days – and lose money.

Normally, the only thing that could explain such an unusual preference for liquidity at the expense of return is abject terror of equities. But stocks have been moving on up nicely. The plunge in short-term yields can’t be explained in terms of “risk aversion.” So what’s behind it?

It’s a pretty interesting question if you simply phrase it: what kind of investor is happy to lose money over 90 days? Is the move to the short-end of the U.S. yield curve part of a broader shift out of longer-dated maturities (10 year notes and 30-year bonds).

Even the New York Times is starting to freak out about the amount of U.S. debt that must be rolled over in the next four years. The times article points out what we pointed out at the beginning of the month: U.S. debt is far more interest rate sensitive than ever before, which makes it potentially far more expensive to service if interest rates spike.

But that doesn’t get us any closer to explaining the near-zero short-term yields. Granted, they were low to begin with. Maybe they are only unusual because they descended from such a low base to begin with. But is there another explanation that sheds light on what’s going on in the markets?

One possibility, and we admit we are speculating here, is that banks are beefing up on liquid assets to bolster their capital positions. Whether this action corresponds with the end of the year or some other force, well, we have no idea. But without a corresponding fall in some other asset, the fall in short-term bond yields must represent a preference by institutions for T-bills and notes right now.

Our colleague Kris Sayce thinks institutions might be using T-Bills as collateral for other loans, pyramiding their way up to new balance sheet growth. It’s possible. It’s also possible that banks are buffering their capital positions in anticipation of…turbulence.

In today’s Age, Eric Johnston begins his story with the headline, “Australian banks fail new capital test.” Gee, that sounds familiar! “Ratings agency Standard & Poor’s has warned that nearly all the world’s big banks – including Australia’s major lenders – have insufficient funds to cover their lending exposures and risk a ratings downgrade unless they move to bolster their balance sheets over the next 18 months.’

That might sound odd, considering that Aussie banks tapped equity markets for $20 billion in new equity last year. But did the new money actually bolster the balance sheet? Johnston reports that, “While Australian banks benefited from having a large exposure to low-risk residential mortgages, S&P said a narrow geographic and business base counted as a negative. It also noted that the capital raisings by the local banks had been used mainly to fund acquisitions or balance sheet growth.”

More home lending baby!

It’s probably a stretch – given we have no evidence whatsoever – to suggest that global banks (Australia’s included) are bolstering capital by moving into short-term U.S. debt. It’s also arguable that U.S. debt – even short-term near cash bills and notes – are a quality asset to be adding to your capital mix. But it’s a lead and we’re chasing it down.

Why does it matter? Well, the last time yields went negative like this was in 1938. That preceded a collapse in the stock market and the onset of the “Great” part of the U.S. Depression. Of course in 1938 the Fed began tightening up monetary policy again (prematurely, some argue). It won’t do that today.

Meanwhile, some other troubling pieces of information from the bond market. Bloomberg reports that Telstra, “scrapped a domestic bond sale plan after it couldn’t reach an agreement with investors on the terms of the securities. ” Apparently bondholders “wanted the 10-year debt to include assurances compensating them if Telstra’s credit rating gets downgraded.”

Geez. Creditors are getting pretty choosy these days, aren’t they?

There are other stories we’d like to have a closer look at today. For instance, a Brazilian steel-maker has plans to buy 16.5% of coal explorer Riversdale Mining for $190 million. This fits the pattern we described earlier this week of major international companies seeking to buy independent junior miners in order to guarantee resource supply. We’ll have to ask Dr. Cowie what he thinks.

Time to board the plane now and cross the Tasman. We’ll report tomorrow from the east coast of the North Island. Until then.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. There is a sense of trepidation, of waiting, the narrative itself is stale because most has been revealed. I am staying with “select” equities for the same reason that I chose to tilt toward them in early 08. Liquid nta backed equities are better than trashed fiat cash or bills of promises by governments backed only by the very tax collections that are in an accelarating rate of collapse. A couple of quick bucks as the USD does the last dance of the super nova but otherwise I am long.

  2. I genuinely thought you were in the deflationist’s camp for some reason Ross. Was I mistaken?

  3. The UST market is by far the largest & most liquid on the planet and has been for many years.

    Here are some quotes from 1983!;

    “A huge expansion has occurred in recent years in total Treasury debt outstanding”……….”The sharp increase in Treasury debt has caused a substantial rise in the amount of marketable Treasury securities outstanding. Most of this rise has occurred through increases in the amounts of notes & bills outstanding. Negotiable bonds represent the smallest component of the Treasury’s total marketable debt”………..”The constantly increasing amount of Treasury debt outstanding & the increasing volatility of rates have caused some to wonder if Treasury debt issuance might at some point breach the limit on the amount of Treasury debt dealers are able to underwrite or on the amount investors are willing to absorb”

    After 26 years the answer is evidently no, the limit has not been reached. However, “As one Treasury official noted, “Rate volatility helps make the market because traders make more money when markets are volatile than when they are not”” and “You have a lot of speculators who are not primarily government dealers but rather futures market participants who are now bidding directly in government auctions”.

    Perhaps there is your answer Dan.

  4. It’s the money based hypocrisy of all this stuff that gets up my nose – China loses another 100 odd workers in a coal mine disaster – And the West goes tut tut – As if the West actually cares what happens to a 100 “chinks”. Way more a matter of them being concerned about the Chinese outcompeting them “methinks”? (Or else they’d be saying Yeh, that killing of 160,000 odd Iraqi citizens we caused over the last few years WAS a bit iffy!)

    Breaking news: 2 Chinee man get bullet in blain over Tainted milk scandal! (As it reflect badly on Chinee people national image!!!) Heck, in Oz you can rape and murder all your granny’s best mates and all their paramours by all their various liasons and all the partners of those paramors over the ages and all the progeny of all those innumerable unions and not be dealt with THAT sternly? And if you are a Yank who produces salmonella tainted peanut paste that causes a few deaths, it’ll dilly dally through the courts ad infinitum until they might ask you to try and do better next time please? Providing they actually notice because they aren’t too busy turning a blind eye to all the scumbag’s opportunist looting and general mayhem and murder after things like the Rodney King verdict and cyclone Katrina – One really MUST laugh! It’s all just so sad and so sick! With big ears and Biden and the “ary” bit of “Billary”, STILL wanting to stuff America’s superior ways down the world’s throat.

    Wouldn’t it be a hoot if we should actually find out that mobile phones DO cause brain cancer and the Yanks invented them and so America owes the world umpteen numpteen billion trillion squillion dollars over the next 70 years! (But not so funny if you’ve got brain cancer I guess?)

    Bloke I’ve got a real lot of time for is me part Abo mate who owned a couple of pubs in a ‘rather’ (use Brit accent on the word please) racially “challenged” region of NSW – As he said to me: They knew I wasn’t racist – I had a gun behind the bar and I’d shoot ’em regardless of whether they were black or white! (I like straight “shooters” – Smile!)

    PS: Did a bit more checking on Russia’s CO2 emissions – Seems they ARE high? – But WAY lower than allowed under Kyoto – So they’ve got credits to burn! – Gimme da loot HAS to be Putin’s call : http://www.euractiv.com/en/climate-change/russian-hot-air-threatens-un-climate-deal/article-186633

    PS2: I have no special love of banks – But credit where it is due – Rang NAB a while back and asked when my bonus rate on my iSaver expires – 21 November was the answer (I believe!) Went in on 20 November and sorted it out. But on looking I wasn’t credited with the bonus rate for any of November? Have spoken to NAB – Seems the bonus rate actually expired on 2 November. So the info I was given was wrong. Or I’m a confused dumby!!! (Regardless of what I had written down?) Not easy … Do you take my word for it I says? Ultimate answer: Yep Mr Ned, we will do that. FULL CREDIT TO NAB – And BIG ta! Ned. (They could have been pricks but weren’t!) But triple check them and everyone else because they are staffed by incompetents these days – I believe! Such is life … In Oz!

  5. The ‘Great’ of the Great Depression?

    Dan wrote that the Fed “won’t do that today” – that is raise interest rate prematurely.

    The Fed is doing something even worse – holding down interest rates enabling the Government-Finance Bubble. As in 1931 the Fed will be forced to raise interest rates, not to maintain the gold standard, but to contain inflation in the present ‘fiat monetary system’. That will be the signal that the “Great” phase of the global financial crisis is near.

    (Andrew Mellon’s advice to Hoover was the correct advice).

    “By the summer of 1931 … the United States was in the grip of a severe depression. But if recovery had come then, the downturn would have been within the historical range of business fluctuation. It would have been a hard time, but not the disaster of the 1930s. The growing depression was turned into the great depression by the Federal Reserve in the fall of 1931” (Peter Temin, “The Great Depression”, The Cambridge History of the United States, (CUP, 2000), p.311).

    From May 8 to October 9, 1931 the discount rate was 1.5 per cent; but it was not to last as external events impacted the American economy:

    “The deterioration of the situation in Europe added to the problems of the American authorities. In May 1931 the Credit Anstalt of Vienna was obliged to close and the German banks to which it was heavily indebted were soon in difficulties. They could not meet their short obligations to London, and this frightened other Europeans, especially the French, into withdrawing their balances from Britain. By September England had lost so much of its gold reserve that it was forced to devaluate the pound, an action that set off a series of devaluations around the world. This did not solve the balance of payments problems since it left most countries in about the same position relative to others as before.

    “During the latter months of 1931 the United States also faced a heavy loss of gold. In an effort to stop the drain, the Federal Reserve Bank of New York raised its discount rate from 1.5 to 3.5 percent, with only temporary effect. By February 1932 the gold of the Federal Reserve Banks was close to the legal minimum that the Glass-Steagall Act was passed; it permitted government securities to be substituted for gold as collateral for Federal Reserve notes, above the minimum of 40 percent. This made it possible for the Reserve Banks to increase open-market purchases and pump new funds into the market, but the flood of bank failures continued” (Margaret Myers, A Financial History of the United States, (New York: Columbia University Press, 1970), p.306).

    “In the agonizing interval between Roosevelt’s election in November 1932 and his inauguration in March 1933, the American banking system shut down completely. The global economy slid even deeper into the trough of the Depression. The world also became a markedly more dangerous place. Adolf Hitler was installed as chancellor of Germany, after massive unemployment had seeded despair into millions of German households.

    “… yet another banking panic. This one started in Michigan, where the governor declared an eight-day banking “holiday” on February 14, to protect the reeling banks in his state from collapsing. The drastic action in a key industrial state set off tremors throughout the country. Public apprehension about the banking system and disillusionment with bankers were amplified at this moment by … scandalous admission of malfeasance, favouritism, tax avoidance, and corruption from the princes of Wall Street…

    “After suffering through three years of depression and witnessing more than five thousand bank failures in the last three years, Americans reacted this time with hair-trigger haste and last-ditch desperation. By the thousands, in every village and metropolis, they scurried to their banks, queued up with bags and satchels, and carted away their deposits in currency and gold. They hoarded these precious remnants of their life savings under the mattress of in coffee tins buried in the back yard. Wealthier deposits shipped gold out of the country. Stock prices plummeted again, though not from their 1929 heights.

    “… in bank lobbies throughout the country, there was no silence. Shouting depositors jostled and shoved up to the tellers’ wickets, demanding their cash. In state after state, the banking system quivered, buckled, and was saved from final failure only be gubernatorially decreed holiday. Maryland’s banks were closed for three days by executive order on February 24. Similar closings followed in Kentucky, Tennessee, California, and elsewhere. On the morning of inauguration day, the New York Stock Exchange abruptly suspended trading; so did the Chicago Board of Trade. By then government proclamation had shut every bank in thirty-two states. Virtually all banks in six others were closed. In remaining states, depositors were limited to withdrawing a maximum of 5 percent of their money, in Texas no more than ten dollars a day. Investors had ceased to invest and workers had ceased to work. Some thirteen million willing pairs of hands could find no useful employment. Many had fidgeted idly for three years. Now they wrung in anxious frustration or steepled hopefully together in prayer. History’s wealthiest nation, the haughty citadel of capitalist efficiency, only four years earlier a model of apparently everlasting prosperity, land of the pilgrim’s pride, of immigrant dreams and beckoning frontiers, America lay tense and still, a wasteland of economic devastation” (David Kennedy, Freedom From Fear: The American People in Depression and War 1929-145), New York, OUP, 2001, pp.131-33).

    “Banks, already hurt by the speculative real-estate boom which, with the usual help of self-deluding optimists and mushrooming financial crookery, had reached its peak some years before the Big Crash, loaded with bad debts, refused new housing loans or to refinance existing ones. This did not stop them from failing by the thousands, while (in 1933) nearly half of all US home mortgages were in default and a thousand properties a day were being foreclosed (Miles et al., 1991, p.108)” (Eric Hobsbawm, Age of Extremes, (London: Abacus, 1995), pp.100-101).

  6. “permitted government securities to be substituted for gold as collateral for Federal Reserve notes, above the minimum of 40 percent. This made it possible for the Reserve Banks to increase open-market purchases and pump new funds into the market, but the flood of bank failures continued”

    I don’t think the situation is so different now. The Fed & the RBA now collateralise their credit with not just government securities but all kinds of worthless bank paper MBS, BA’s etc. Yet just as banks continued to fail in 1932 because depositors demanded their deposits in gold (as written on the banknote) & not more paper, the price of gold now continues to rise i.e. depositors demand their deposits and redeem it in gold.

  7. I’ve also read that the real trigger for the Great Depression was the devaluation of the pound in 1931, actually the British government defaulting on its obligation to redeem its banknotes in gold, as written on the banknote. I have a neat picture of the scene outside the BofE when devaluation was announced, panic among the pin striped suits & bowler hats!

    Up until this time most global trade was financed by bills of exchange, denominated in Pounds Sterling, cleared through London. Upon devaluation, 30% in one day!, these bills could no longer be cleared, so world trade ground to a halt, leading to mass unemployment, starvation, riots etc.

    Again, I don’t think the situation is so different now. The value of the various currencies is uncertain & they are all being devalued against gold.

  8. Ned, deflation first with a rapid deleveraging and short covering, then inflation to shortly thereafter follow. In the Weimar era there were those that rode both ‘flations at different times. As Prozac says velocity counts, there are many that discount it, but they are wrong. Right now all that liquidity is not enough, only half the RMBS and even less of the REIT has been accounted and 80% or more of the liquidity is stuck in dud balance sheets of both govt and banks or released into the carry. In the US we are looking at a 7 trillion hole and helicopter Ben only doing a 3 trillion drop and virtually none of that into the real US economy.

  9. Thanks Ross – Much appreciatted!

  10. Justin, perhaps, for the owners of gold, this run on gold (which arguably is occurring now) is an opportunity to gradually offload the shiny stuff for profit and convert it into the trade of the next decade (what could that be I wonder?). Perhaps it’s a little early, perhaps they should do it into next year and 2011.

  11. Silver barely started to move yet but its gonna be big when she blows.

    Lachlan Scanlan
    November 26, 2009
  12. http://en.wikipedia.org/wiki/Executive_Order_6102

    I’ll be back as one prominent californian governor used to say.

    Be wary.

  13. Didn’t say anything about hoarding gold plated tungsten though, Joe.

  14. Not likley Joe. A Obama will just start war or step up an existing war to save the day. Hes already talking about a war tax to fund the Mid East misadventure.
    I wonder if the tungsten thing was for real or just urban myth?

    Lachlan Scanlan
    November 26, 2009
  15. Dan, I’ve heard from someone more knowledgeable than I that the time to trade your gold, for stocks at least, is when the S&P is worth half an ounce of it, still a ways to go yet.

  16. Gold fever…..always with the human spirit in some form and certainly good reasons for it being with us now. Just a timely warning from one who has seen previous gold scams…no they don’t salt mines much these days…don’t have to, as in a gold rush these days they only have to sell you a piece of paper saying you own gold, and that piece of paper is as valuable as the amount of gold it says you “own”. Used to least have to see the gold mine and be tricked. My humble contribution to this site is to caution that when the music stops there might be 10 pieces of paper for ever equivalent quantity of gold sold in the current rush. There is much talk of fiat money and that gold is the answer. Is there any such thing as “fiat” gold on a micro level that is not backed by actual gold holdings.Careful when you swim with the sharks, they smell blood in any bubble.I know there are people on this site who “hold” gold and want it to go higher..and likely will but….Well make sure you have physical possession of any bullion gold you “own” or you may find out a costly lesson.protect yourselves as the growing focus on gold can cause people to loose focus on self protection. best wishes to all.

  17. Agreed, Gerry. I think if you invest in an economically active entity then you are taking a much smaller risk. I mean, a city house on 500sqm land, paid off and rented out generates about as much rent as, well, a city house on 500sqm land, and is worth about the same as any other such house generating the same rent (forgive the tautology). Compare this to gold.

    Who cares if house prices halve or double, because in the end you aren’t worried about the price but the value. Because more than likely if you have adjusted your lifestyle (by having no debts and living efficiently) the rent will cover you come rain or shine, plus or minus a bit extra, and when the time comes you will have something useful and easy to understand to hand on to your progeny.

    Same can be said for a business, if you can have a genuine ownership in it (not just a 0.00000001% stake which makes you no more than a sucker), and can see that it is a useful, relevant and profitable enterprise, then you have something very precious and good. Compare this to gold.

    But if you are in debt, then it doesn’t matter what you do, you are someone else’s until you pay it all out. Nothing about that has changed in aeons.

  18. Gosh, you can sure see why that saying from the Great depression came about: “If you don’t hold it, you don’t own it”

  19. Dan, I worry that you have missed the point entirely of Gerry’s comment, he is merely warning that the value of paper gold is subject to fraud and manipulation, he does not question the value of physical gold.

    I agree with you that rental income from a house that is wholly owned is a safe way to provide an alternative income.

    However consider that a 5% yield on property, (probably 3% after tax) is the same rate that you can get on a 5 yr goverment bond, or less than 6% which you can get on a 2 yr term deposit with Mac bank.

    Without timing purchase and sales of property, you’re probably doing little better than standing still. Thus i would argue that when investing in property, price fluctuations do matter. Also despite owning the property the price (not value) can vary at the whim of councils and governments who may play with taxes (income tax, capital tax, land tax) manipulate interest rates and introduce or repeal price manipulating measures such as negative gearing, FHBG etc. The same cannot be said for a lump of gold.

    Property is not the panacea many people think it is, I’m sure if you could go back in time the people who’s houses were flattened by Hurricane Katrina (and subsequently “forgotten” by insurance companies), they would happily exchange their house for the two ultimate forms of wealth for thousands of years.

    2.A weapon

    I’ll admit this is a hairbrained way of making the point that property is not everything, and gold is not nothing. Which is the philosophy trotted out by most financial “advisers”

  20. Yeah, ok, good point :)


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