Treasury-only money market funds

6 Aug 2008 12: 53 am |  In: bonds

The key is that these funds only invest in short-term US Treasury bills, the safest bonds around, not corporate debt or mortgage debt like most money market funds. They pay a little less interest, but they more than make up for it with safety. You actually can lose money in a money market fund, and it has started to happen with some funds. There was a shot across the economy’s bow early last fall when a GE money market fund traded at 96 cents.

These are infinitely safer than banks. For spending money, you can just write checks from them to your checking account once a month or every 2 weeks or so.
American Century Capital Preservation Fund (800-345-2021),
Dreyfus 100% U.S. Treasury Fund (800-645-6561),
Fidelity Spartan U.S. Treasury Fund (800-544-8888),
USGI U.S. Treasury Securities Cash Fund (800-873-8637),
Vanguard Treasury MMF (800-662-7447), or
Weiss Treasury Only Money Fund (800-430-9617).

Do your own research, but to my knowledge the American Century and Dreyfus funds are not affiliated with any banks. This may be a good thing.

I like Whole Foods. In New York, we bought about 50% of our calories from them. There were three stores about equidistant from our apartment.  Anyone who has been in one can tell you how clean they are, how knowledgeable the salespeople are, and what a fantastic selection of really high quality food they stock. I’m a bit of an amatuer foodie, and grocery shopping is always fun for me, but I just had a really good time in these stores. Even the checkout experience is not unpleasant, since they always had at least 10 and sometimes two dozen competent and often friendly clerks working at once.

Their prices on comparable staples were actually usually better than the boring and grungy NYC alternatives, so it was not necessarily a wallet busting habit, unless you went for things like the fancy cheese or boxed snack foods. You can tell that John Mackey and the rest of the crew really care about their stores and good food.

So, while I saw that this stock was a great short, it doesn’t give me the same pleasure as seeing my MER or LEH or COH puts in the money, since a world with fewer Whole Foods is a more drab and dreary and less healthy place. Whole Foods as a concept (a grocery chain that cares about the origins and taste of its wares) doesn’t depend on a credit bubble. It is something that actually enriches our lives, unlike the ponzi schemes of bankers and baubles for the women who love them.

But the credit bubble lead Whole Foods to expand too far too fast, and to depend too much on high-margin and high-priced items like fancy crackers, exotic chocolates and $7-a-pack blueberries. MER and LEH and the rest created the illusion of wealth for the everyman with their easy credit, so people paid those prices and the demand encouraged Whole Foods to build too many stores. I even bet an organic blueberry farmer or two out there expanded his operations and paid a price for land that just isn’t justified now that shoppers only have $2 to spend on berries.

So all of us suffer. Capital was wasted. It was wasted by tearing up the farms and forests to build those new suburbs, it was wasted on the giant new stores, and it was wasted in the efforts of Whole Foods tasters and executives to search out the most exotic snack foods, price be damned, as it was wasted by the manufacturers of those snack foods. It was a waste because those allocations of physical assets and real efforts were based on an illusion of wealth created from nothing: credit.

The banks created credit out of nothing, due to the magical fraud of fractional reserve lending. They had a bit of real wealth on deposit, the product of actual work and production and savings, yet they created many times that amount more dollars to lend out, just because they could. Because they knew that when the castles built by those new dollars came crumbling down, they wouldn’t be on the hook, since Uncle Sam has always had their back. Old Uncle Sam knows what’s good for him, doesn’t he?

If it were only good for the rest of us.

A violent depression: bank on it

6 Aug 2008 12: 48 am |  In: TEOTWAWKI, depression

Mike Morgan pulls no punches:

Let’s talk about what is happening now . . .

Depression - Totally unavoidable. Bank on it. Well . . . you won’t be able to bank on it, but you can bet on it. We are not only headed for a Depression, but a violent Depression that will be far worse than 1929. Some experts believe the United States will fall into the chaos, bedlam and anarchy that tore apart Yugoslovia. I am not going that far, but I know our morals and ethics are not the same as they were in 1929. Moreover, we are a far more violent society and totally dependent upon a well oiled system for delivery of food and basic services.

Admitting Defeat - The lenders I speak with know they are dead. They have no problem admitting it now. They realize their jobs are over, and they are on borrowed time. They are nothing more than liquidators now, and they are doing a lousy job at it.

Housing Prices - Let me touch on this briefly. Prices are going to drop another 20-50% without a Depression. As we move into Depression, it will be an event we have never experienced at the scale we are entering.

Pawning for Potatoes - I have a few clients and readers are in the pawn shop and/or jewelry business. There emails are great - Behind Enemy Lines - information. Let me share a few with you, because people are now selling what’s left just to put a meal on the table:

1 - 3/4 kt round diamond ring, vs1, color G, 14kt gold setting with 8 diamonds…..lady needed $200 because her water got shut off

2 - I had a guy come in with his wife. She was crying because they were selling her engagement ring. It was all they had left. He walked out crying and I wanted to shut the shop down for the day. Its getting gut wrenching.

3 - The BMW 7 Series people are showing up with goods.

Bullish on the biggest deadbeat’s debt

6 Aug 2008 12: 15 am |  In: bonds

I have come around 180 degrees from last summer, and I’m bullish on long bonds now. The trend is clear over the past 12 months. The yields are moving with stocks.  The old correlation still holds, despite the dropping dollar and recently soaring commodities. The final flameout for the dollar is coming, but not just yet.

Dropping US, UK and Swiss government bond yields signal deflation and depression. I think they are a great speculation, particularly the Swiss bonds, since the country and currency are strongest.

Whatever you do, I wouldn’t buy one of those inverse bond funds, except for an inverse junk bond fund (such as RYIHX). In Depression #1, Treasuries soared and corporates were decimated.  And clearly, municipals are burnt toast. Sucks to be a government that can’t print money (sorry, Panama).

How to play it? I like 2010 calls on TLT.

Deflation? Are you serious?

6 Aug 2008 12: 09 am |  In: deflation, gold

From a July 9 letter to a friend inquiring about my thoughts on gold:

I think everyone needs to own some physical gold now, since the dollar will flameout eventually, though I don’t think just yet. Also, things could get really hairy, so along with gold I’d have an account or two outside the country and a list of favorite safe-havens. If it gets so bad that you might need guns and gold coins, it’s better to get out and watch it on TV!

On the other hand, crazy as it seems, I do not think of this as an inflationary period right now, but deflationary. The best way to think of inflation is not as price increases, but as credit expansion–easy money–which happens to result in higher prices. Credit expansion has turned to credit contraction in the US and most of the rest of the world, though China and some other eastern countries are lagging. The UK and Europe and Latin America are very close on the heels of the US–Spain is a bloodbath right now, and the UK is about where we were last fall.

As credit is withdrawn (no more HELOCs or CC offers), people have less money to spend and many are levered to the gills already so it is all they can do not to default, let alone take on more debt. They can’t and don’t feel like splurging on cars and vacations and consumer goods anymore. And the Banks’ balance sheets have been laid to waste from all the defaults on under-collateralized loans, so they can’t lend, and would be too afraid to if they could.

In an economy like the US, when credit dries up, whole industries crash–housing, autos, retailers, restaurants, airlines, and people get laid off. They stop shopping and start defaulting, and the banks get hit even harder, so they can make even fewer loans, and the shit gets deeper. This goes on and on until all of the reckless borrowers and reckless banks are bust. Usually, they are just a few, but things got so crazy lately that it is going to keep spreading to include almost every consumer and every bank in some way.

This is a long-winded way of saying that nobody has any money anymore. So far just in the West, but soon in Asia too, since this is one global economy. With everyone broke or tight-fisted, how can people keep bidding prices up on anything? Already stocks, houses, cars, clothing, electronics and other toys are getting cheaper. All that is still going up are commodities, since China is still booming and building a new Milwaukee a week. But they have borrowed too much and built too fast just like us, so will feel the hurt before long. Their exports are slowing by double digits, and their stock market is down by 50% since last summer, so I think this is already happening.

So while Obama will channel FDR and try to spend us out of this mess (and make it worse), those programs will be slow in coming and actually pale in comparison to the credit destruction and loss of wealth that is going on right now. Crazy as it seems, dollars are great to have right now, though Swiss Francs are better.

I like physical gold, though I’ve been selling my gold shares. I think gold topped out for now back in March at 1000, when advisors were about 98% bullish on it, and I think it could drop under 700 before long if not to 600, so I’ve hedged what I have with puts on GLD. But everything else will drop a lot more than gold, so gold’s real purchasing power should continue to increase for a long time.

So I think this inflation scare will pass soon. The bond market is way smarter than the stock market and it has been signalling deflation with falling yields across the curve. I think we’ll see 1.5% T-bill rates again soon.

I’m very aggressively short so I don’t have much cash myself, but I think cash will be king. The markets tend to inflict maximum pain on the maximum number, so it doesn’t bother me that almost nobody else is thinking deflation right now. One great blogger who is is Mish Shedlock: I’ve learned a lot about the credit cycle from him and from Bob Prechter. The other side of the inflation/deflation argument is held by guys like Jim Grant, Jim Rogers, Doug Casey, Marc Faber, and Peter Schiff, all of whom I read and respect a lot.

Won’t the Fed print? Yes, but not fast enough or nearly enough, when you consider that there is about 40 Trillion in private debt (govt debt is another 60 Trillion including entitlements) in the US and the Fed’s balance sheet is less than 900 billion. They just don’t have the ammo to make much difference in the short-run (2-3 years), though they certainly will destroy the dollar before this is all over many years from now. This is why when I am done shorting in a year or two I’m going to put my proceeds in gold.

The grocer is trading down 19% after hours on news of 24 cents in fully-diluted earnings last quarter and projections for full year profits of 93 to 95 cents.  They also halted their dividend and announced that only 15 new stores were in the works for 2009, down from up to 30.

The stock is down from over $70 two and a half years ago, but is still expensive at 20 times earnings with no yield. Why would you buy a high-end grocer at this point in the credit cycle when it doesn’t even pay a dividend? Aren’t dividends what grocery stores are for, anyway?

Disclosure: this post is a bit of a brag, since I bought puts last summer and am holding pat.


5 Aug 2008 10: 26 pm |  In: positions

Long: a few microcap oil and mining companies (only a little left here, since I don’t like these sectors anymore)

Neutral (long plus 100% hedge): bullion

Short: everything else

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