Who will Buy Treasury when the Fed doesn't?

BY Stansberry & Associates

Our country's next D-Day is coming this year… The Fannie and Freddie Ponzi scheme… UniCredit in the sh*t again… Gold hits an all-time high… The government's out of silver… Building a monument to a whiny subscriber… Investment advice for a 17-year old…

 

  "Investors should view June 30th, 2011… like D-Day"

The above quote is from Bond King Bill Gross – who manages the world's largest bond fund for PIMCO. On June 30, the government's second round of quantitative easing (QE2) ends – after a combined $900 billion between new money and maturing bonds. As a massive purchaser of U.S. Treasury bonds and municipal bonds, PIMCO is worried. Currently, Gross says, "Bond yields and stock prices are resting on an artificial foundation of QE2 credit that may or may not lead to a successful private market handoff and stability in currency and financial markets."

As Gross notes, the Fed has purchased nearly 70% of the U.S. government bonds issued since the beginning of QE2. China, Japan, and other sovereigns purchase the rest. So the Treasury issues bonds, and the Fed buys them. It's a scam. And the important (and obvious) question Gross poses is, "Who will buy Treasurys when the Fed doesn't?"

 
At current yields (10-year Treasurys at 3.24%), we'd say the government will have a hard time finding buyers… But everything is a buy at the right price. The next question is, what's that price? In Gross' opinion, "Treasury yields are perhaps 150 basis points or 1.5% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%."

Gross concluded his letter saying, "PIMCO's not sticking around" to see how this situation plays out. You can read Gross' full letter here. When one of the world's biggest investors issues such a dire warning, pay attention…

    What else is the Fed spending its QE2 money on? Fannie Mae and Freddie Mac, of course. As part of their takeover, Fannie and Freddie are required to pay a 10% dividend on the Treasury's preferred shares. It costs the firms around $15 billion a year. According to the Wall Street Journal, "The firms have paid $7.5 billion in total dividend payments, while receiving injections of $5.7 billion to help keep them in business."

It's ludicrous, but Fannie and Freddie say it's working. Fannie reported fourth-quarter income of $73 million last week – its first profitable quarter in 3.5 years. Oh… but that doesn't count the $2.2 billion Fannie had to pay the government (the government gave Fannie $2.6 billion that quarter).

"Even in their best years, they rarely had the type of income to pay these dividends," said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse. 

    So the Treasury sells its bonds to the Fed, which it pays for in printed money. And the Treasury "loans" billions to Fannie and Freddie (the U.S. housing market), which they then pay back to the Treasury. This is a Ponzi scheme… plain and simple. Except in this case, the patsy and the beneficiary are the same entity. One day, this will all end. And it will be ugly.

    Porter dedicated the lead in his March 2010 issue of Stansberry's Investment Advisory to the history of Oesterreichische Kredit-Anstalt, Austria's largest bank – and the leading bank in all of Eastern Europe. Following the crash of 1929 and the ensuing chaos, the bank became insolvent on May 11, 1931. The bottom line of the story is Kredit-Anstalt (now known as UniCredit) is a flawed bank. If there's a crisis somewhere in the world, you can bet UniCredit is involved. From Porter's issue: 

 

[R]oughly 75 years after its collapse set off the banking crisis that ended the gold standard and destroyed the world's financial system, Kredit-Anstalt (now known as UniCredit) is once again the largest bank in Eastern Europe.

I believe it will soon fail again, setting off another global banking crisis that will signal the end of the U.S. dollar standard. – March 2010 issue of Stansberry's Investment Advisory

    When UniCredit needed a bailout in 2008 (following the subprime crisis and heavy losses from Madoff), who came to the rescue? It wasn't Italy, the U.S., or Germany. It was Libya.

Muammar Gaddafi invested $1 billion in the company for a 3.6% stake. As you know, Gaddafi's seen better days. He's currently in the middle of a massive civil war. And he's threatening to kill all opponents. Meanwhile, banks around the world are freezing his assets… The U.S. seized $30 billion of his assets. Canada froze $2.4 billion, Austria froze $1.7 billion, and the U.K. $1 billion. Where do you think Gaddafi had his assets? Libya's sovereign wealth fund and central bank (we use those terms loosely) own 7.3% of UniCredit. Assuming the majority of Gaddafi's wealth is parked at UniCredit, a freeze on his global assets will destroy their equity. The bank hit its lowest point is down another 1.5% today to its lowest point since the Libya crisis began. 
    In the midst of the madness, gold and silver are soaring. Gold hit an all-time high of $1,438.20 an ounce. And silver is approaching $35 an ounce. The dollar is still plunging.
    On the topic of silver, the U.S. Mint just halted production of American Eagle silver coins (in addition to its indefinite halt of American Buffalo coins). The Mint stated:
 

[B]ecause of the continued demand for American Eagle Silver Bullion Coins, 2010-dated American Eagle Silver Uncirculated Coins will not be produced. The United States Mint will resume production of American Eagle Silver Uncirculated Coins once sufficient inventories of silver bullion blanks can be acquired to meet market demand for all three American Eagle Silver Coin products.