“Thanks for all the info in Money Morning, but how can I make money from it?”
That was the rough gist of the question we were asked at the Doomer’s Ball on Tuesday night. It’s a good point. You read a lot in here about falling interest rates, falling currencies, falling stock markets, rising stock markets, failing car companies, failing child care centres, failing investment banks, and so on.
But where are the opportunities to make a quid out of it?
The interesting one at the moment are bond prices. On Tuesday an auction of US government 30 day treasuries sold for par value. In other words, the US government is borrowing $100 today and repaying $100 in thirty days time.
It is effectively getting free money. Of course it borrowed much more than $100. The total auction value was for USD$32.4 billion.
What a result! The government can cut its interest bill by paying off older debt that was incurring interest payments with new debt that is paying no interest. Of course, they aren’t paying back any principle, but who cares?
If there ever was a signal that we have a bubble in bond markets, then a 0% interest rate is that signal. But back to the question. How can you take advantage of it?
You’ve got a couple of choices. One is to set up a futures trading account. The other is to use a Contracts for Difference (CFD) provider. That way you can take a punt on the direction of bond markets. It isn’t without potential downside risk so you need to check out all the details.
But taking a look at the interest rate CFDs through my old mob, CMC Markets, the prices have been shooting up recently (rising bond prices means falling yield – and vice versa).
You only have to take a look at the chart for the CFD on the US 10-year Treasury note future. It’s trading at a price of about USD$122. The yield on the actual bond is only 2.68%.
It’s screaming out for the short sellers to come in. Surely bond prices can’t get any higher. If they do go any higher investors will be paying the government for the privilege of lending it money.
It sounds crazy, but crazier things have happened.
Caught in the Headlights
There’s nothing like seeing a politician caught in the headlights. The look of disbelief is something to treasure.
That was the look we saw on the faces of US politicians on TV this morning. They were grilling Neel Kashkari, the head of the Office of Financial Stability. That’s the US government body looking after the TARP.
We don’t recall every word they said. But, in a nutshell it amounted to “We just can’t believe that you’ve spent all the money we’ve given you on stuff that it wasn’t supposed to be spent on.”
Really?! They didn’t think that when they handed over the multi-billions of dollars that companies would use the money for their own benefit.
As Mark Latham (yes, Mark Latham) writes in today’s Australian Financial Review “If hand-outs to businesses and consumers are the answer to the competitive challenges of an open economy, why haven’t they worked at any time in the past 35 years?”
Not only that, but Latham has picked it right on the current shift in economic thinking. He writes, “Incredibly, Keynesianism and industry welfare, doctrines thoroughly discredited in the 1970s and 1980s, now form the basis of fiscal policy in Australia.”
It’s amazing what a few years in exile can do to the brain.
Cheers.
Kris.
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