2009-05-27

Deflation or Inflation?

Originally posted on 2009/05/25 9:46 PM...bumped to the top with an update
Two articles from the Telegraph: US bonds sale faces market resistance & China warns Federal Reserve over 'printing money'. From the former:
The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900bn by September.

"The dynamic is just getting overwhelming," said RBC Capital Markets.

The US Treasury is selling $40bn of two-year notes on Tuesday, $35bn of five-year bonds on Wednesday, and $25bn of seven-year debt on Thursday. While the US has not yet suffered the indignity of a failed auction – unlike Britain and Germany – traders are watching closely to see what share is being purchased by US government itself in pure "monetisation" of the deficit.
This is really getting hyped after the decline in the U.S. dollar last week. There's the potential for fireworks this week, in either direction. A successful sale could reverse the dollar's slide.

From the latter article:
Richard Fisher, president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature."

"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal.
Later in the article, Fisher discusses the massive "deficit" facing U.S. taxpayers if entitlement spending is not brought under control.

Government pumping of the money supply has the potential to spark inflation, but a failure in the Treasury market and rising interest rates would touch off another fierce round of deflation, one that may not spare precious metals.

UPDATE: Today's bond sale saw Treasury yields increase. iShares Barclays 20+ Year Treasury (TLT) fell 1.77 percent. ProShares Ultra Short Barclays 20+ Year Treasury (TBT) gained 3.76 percent. SPDR Gold Shares (GLD) fell 0.33 percent. PowerShares DB Crude Oil Double Short (DTO) lost 6 percent.

I've lost about 24 percent on DTO since adding it on May 15, and made about 14 percent on TBT since adding it on the same day. It's decision time on DTO. I usually cut holdings off around 10 percent, but I allow the leveraged funds a wider range because one day could reverse returns.

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