Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone: Mark Gilbert

[Purveyor]

Commentary by Mark Gilbert

May 21 (Bloomberg) -- The odds on the dollar, Treasury bonds and the U.S. government’s AAA grade all heading for the dumpster are shortening.

While currency forecasting is a mug’s game and bond yields can’t quite decide whether to dive toward deflation or surge in anticipation of inflation, every time I think about that credit rating, I hear what Agent Smith in the “Matrix” movies called “the sound of inevitability.”

Several policy missteps suggest that investors should stop trusting -- and lending to -- the U.S. government. These include the state’s pressure on Bank of America Corp. to buy Merrill Lynch & Co.; the priority given to Chrysler LLC’s unions over the automaker’s secured creditors; and the freedom that some banks will regain to supersize executive bonuses by giving back part of the government money bolstering their balance sheets.

Currency markets have been in a weird state of what looks almost like equilibrium for the past couple of months. What’s really going on is something akin to an evenly matched tug of war that fails to move the ribbon tied around the center of the rope, giving the impression of harmony while powerful forces do silent battle until someone slips.

“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,” Lee Quaintance and Paul Brodsky of QB Asset Management said in a research note earlier this month. “In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”

Flesh Wounds

Why pick on the dollar, though? Well, not necessarily because the U.S. economy is in worse shape than those of the euro area, the U.K. or Japan. The biggest problem is that external investors -- particularly China -- have more skin in the dollar game than in euros, yen or pounds, which makes the U.S. currency the most likely candidate to meet the cleaver in a crisis of confidence about post-crunch government finances.

MORE...

BLOOMBERG: http://www.bloomberg.com/apps/news?pid=20601039&sid=aKOzWiTDseUE&refer=columnist_gilbert

[pscot]

1. No other country is cranking up the money supply

at the same rate we are. No nation has ever cranked up the money supply at the rate we are now. Owning some gold stocks or a mutual fund right now seems like a reasonable hedge.

[dixiegrrrrl]

2. A mutal fund in what, exactly?

Certainly not in Treasuries.

[pscot]

4. Vanguard and Fidelity

both have precious metals funds. Last time I looked,Vanguards was up 30% so far this year. I bought some shares of Fidelity Select Gold Portfolio a couple months back, and it's up 10%. Of course it goes down too, but right now I think it's good insurance. I think there's a $2500 minimum, but I can't swear to that. If interest rates rise, and there's no place else for them to go, then treasuries must fall.

[truedelphi]

6. Thanks for the advice.

I'm copying it to "Notepad" so I can "google" for more and to study up on.

I like Gold, but didn't know how to go about having it.

Do you know if Vanguard actually takes possession of its gold? Or is it trusting that its claims to own so much gold will somehow protect it from being defrauded?

[Lucky Luciano]

8. There is also the GLD ETF

I prefer ETFs because you can sell them midday. This one has a tracking error of about 15% which seems high to me and fees of about 0.40%. I am not sure how that compares to mutual funds since I know very little about mutual funds.

[pscot]

9. I don't believe Vanguard or Fidelity

buy any of the actual commodity. Their metals funds trade mainly in mining stocks, which are an effective surrogate for the metal. Vanguard deals in index trading. Their S&P 500 fund is peobably best known. They have very low management fees and charge no sales commission. Both groups have websites that allow you to browse their funds, looking at performance, costs, annual reports and lists of holdings for each fund. All highly educational stuff. You can put together a complete investment program without ever going outside those 2 fund families, or buying a single share of common stock. I've been using both groups for about 30 years and I have no complaints. Obviously, the more effort you put into educating yourself, the better you'll do. But having some skin in the game does wonders for your concentration.

[Zynx]

3. China's increasing their money supply faster than we are.

M2 money supply growth was higher in the 1983 period than it is today.

[pscot]

5. M-2 doesn't account for the

trillions the fed has poured into broken financial institutions, or the 2 trillion, most of it borrowed, that the Bushies pounded down a rathole in Iraq. You want M-3, a number the government no longer shares with us because it might frighten the children.

[Wednesdays]

7. K&R

:kick: