The Ship - RMS Treasuries

Today's guest blogger is Tony D'Altorio, an analyst for Oxbury Research. Tony's credentials include over 20 years as a stock broker and trading supervisor. Today, Tony tells a tale about the shifting market seas and how we look to captians to guide us through turbulent financial waters.


I am not sure where this old saying originated - “a calm sea does not a skilled sailor make.” This old saying is absolutely relevant in the investment world of today. The average individual investor turns to Wall Street investment “professionals” to guide them through these difficult economic times.

Yet most of these so-called professionals are clueless. Why? Because all they have ever experienced in their careers are bull markets in stocks and bonds – in other words, calm seas. They entered the investment business in the 80s or 90s and have seen only good times with very brief interruptions such as the 1987 swoon.

I still recall as if it were yesterday arguing with my colleagues at Schwab in the late 1990s. I kept saying that tech stocks were in a bubble and that, sooner or later, a bear market would ensue. I was always laughed at and ridiculed for my opinions. “C'mon, you'll never see a bear market again. Bear markets don't happen any more in modern-day America! After all, America is the leader in technology, the greatest military power, etc.”

I understood their perspective – they were 20 or 30 somethings who had joined the firm in the 90s and had only experienced markets which went up. They would advise clients with gems such as to buy and hold S&P 500 index funds for the long haul. I never did give such “sage” advice, which did not sit very well with my bosses. It was one of the main reasons I left the firm – I just could not tell clients in good faith such drivel.

A good example of a well-known clueless investment professional is Bill Miller of Legg Mason, of whom I've written about before. He became a Wall Street “genius” in the 1990s as his fund went up in sync with the tech bubble. His fund has been a disaster in the last few years as he bet heavily on financial stocks.

This past week Mr. Miller stated that the “bottom has been made” in US equities. That statement immediately told me we have further to go on the downside! Mr. Miller also called for - of course - the Federal Reserve to purchase stocks and junk bonds directly. Mr. Miller has that typical Wall Street combination of ignorance and a sense of entitlement.

Bond Market Bozos

However, even Mr. Miller's stupidity pales in comparison to the bozos in the Treasury market who are fighting each other in Wall Street's version of Thunderdome to “invest” their clients' money at rates of zero or one or two per cent. These people remind me of children gathered around a warm campfire on a cold evening roasting marshmallows who frighten each other with ghost stories.

Although instead of ghosts, it's deflation. Boo – deflation! “I think I see deflation”! There are panicked screams! “Oooh – I'm so scared”! “ I'd better go out and put every penny I “manage” for other people into T-bills at zero per cent”!

These frightened fools have priced in corporate default rates of 21% (the rate during the Great Depression was 15%) and deflation in the US for the next 5 to 10 years. As I've stated in previous articles, deflation is merely a bond market 'ghost story' meant to frighten people and separate them from their money.

At most, deflation would last in the US for no more than a few months. My view would change only if I saw actual 1930s type of economic statistics such as 25% unemployment or the US nominal GDP dropping by 50%.

Why do I think deflation is not a long-term threat? It's simple economics – a huge debtor nation such as the US cannot sustain deflation. In order to survive, the US needs inflation so that the country can pay back its debt with much “cheaper” dollars.

That process has already begun. Why do you think that the Federal Reserve is expanding our monetary base by more than $11 billion a day since September? And that does not include the latest trillion dollars that is being injected by the Fed into the financial system.

RMS Treasuries

The clueless sailors, or should I say pirates, of Wall Street have decided to put all of their remaining booty onto the ship called RMS Treasuries. Like it famous predecessor, the RMS Titanic, the RMS Treasuries is considered to be ultra-safe and “unsinkable.” I believe that much like its predecessor, the RMS Titanic, the RMS Treasuries will hit an iceberg and sink ignominiously into history.

The iceberg that the RMS Treasuries will hit will be inflation. Inflation will result from the massive printing of Monopoly money by the Federal Reserve in order to fund the US Treasury's seemingly insatiable need for tens of trillions of dollars to bail out Wall Street.

A side bar - sadly, America seems to be going down the road to where Wall Street is taken care of, it seems, but nobody else. A half-century ago, President Eisenhower warned Americans about an overly powerful “military-industrial complex”. I wonder what Ike would think about the “financial-political complex” that seems to be running the country now? And running it poorly, I might add!

Massive printing of money has, throughout history, always led to inflation. Despite what Wall Street says, this time will be no different. Always remember that the most dangerous words in the investment world are that “this time it's different”.

The clueless Wall Street sailors have basically turned the US Treasury market into a market with “return-free risk”. Investors should not ignore the flashing warning light – credit default swaps which insure against a default by the US rose to an all-time high this past week.

WANTED – A Few Good Sailors

It saddens me to see that the money entrusted to Wall Street “professionals” by average Americans is being lost. Somewhere along the route to prosperity for everyone, the Wall Street pirates hijacked the ship containing investors' capital. These Wall Street pirates had a huge drunken party with other peoples' money.

Much of that money has already been lost. What I fear is that the remaining money will go down with the RMS Treasuries and also disappear forever. It will be a devastating blow to our country to see an entire generation of Americans' hard-earned savings go down the toilet, just to finance the party that Wall Street had.

What can an individual investor do? The best advice I can give is to keep an open mind, look for opportunities, switch off CNBC, and get opinions and advice from sources which are completely independent from Wall Street.

I still have many friends in the investment industry working for brokerage firms, financial planners, and financial advisory firms and the advice they give has changed little. It's still the same drivel they were spewing in the 1990s. They are expecting “calm seas” to return any day now.

I would rate their skills as “sailors” right up there with Bob Denver's famous character – Gilligan. My kingdom for good sailors to help average investors navigate the current treacherous economic seas!

Smooth Sailing,

Tony D’Altorio

Analyst, Oxbury Research


Originally formed as an underground investment club, Oxbury Publishing is an investment think tank second to none. The research team is comprised of a wide variety of investment professionals from equity analysts to futures floor traders all independent thinkers and all capital market veterans.

8 thoughts on “The Ship - RMS Treasuries

  1. I'm loading my PF with PM stocks. Gold and Silver are ready for a big leg up and stocks will follow

  2. To Buy Gold Bullion? Walk into a major Bank Of Nova Scotia,with a 1/2 ton truck. Buy all the gold you want. Bank of Nova Scotia handles the gold depository for CDN.

  3. Great post Tony!

    The feds don't have a clue how to handle deflation and yet they think they are masters of the art of managing inflation. But they're not.

  4. Thurs. 10th, a big surprise hit the 10 yr. note. It collapsed, dropped $7.50 in price and the yield skyrocketted. This sure puts a kink in the defalationary theory.Somebody is selling the 10 yr. note BIG time, while just yesterday the 3yr. $32 billion treasury auction, oversold with record low yields. Is China selling, or Wall Street? The US dollar has just done a dive also this morning. All this points to a infaltion period that has us all worried. This balance sheet reccesion led by financials could easily slip into a currency failure which is a recession that is impossible to recover from..

  5. This is a very worrying development and it seems that there will be no let up any time soon. There seems to be an exponential growth in the money supply, and the prospects of repaying this debt are diminishing by the day.

    In these circumstances you have to ask what will be the outcome. There are only two ways to cross this bridge.

    Either the US will default on the Treasury bonds that have been purchased in their billions by foreign governments, as a way of diversifying their foreign exchange holdings.

    Or alternatively, the debt will be massaged away by allowing hyperinflation to run riot.

    It seems to me that the second alternative is most likely to be the course followed, as it is one that will happen by stealth and without as much main stream media attention. It will be a gradual process of destroying the purchasing power of US citizens remaining money.

    Do you really think the Chinese and other sovereign nations who are creditors for the trillions of US T-bills are going to allow their investments to lose their value in an inflationary spiral?

    Ask yourself why Iran has converted almost all its foreign exchange reserves into gold and why many Saudi privaye investors have been accumulating more gold bullion.

    Physical gold is the best way of preserving your capital and purchasing power in the coming months and years as most paper currencies lose their value against the yellow metal.

    It is of course still possible to trade the movement in the gold price and not necessarily by exposing yourself to gold futures on margin. In fact I would ssay that is not the best way forward.

    There are a few bullion specialists who allow investors to trade physical gold in amounts from as little as one gramme (about $25 at current prices). The key is that this is physical gold that YOU own, not some paper certificate which is a claim on the metal.

    What could be better than accumulating or trading allocated physical gold bullion which holds its value as currencies like the dollar weaken further?

  6. Tony:

    You are right-on about a giant bubble in Treasury Paper.

    However, I think we could end up with the worst of both worlds---deflation and inflation.

    Easy credit has resulted in massive overbuilding of capacity which is now being forced to liquidate. That is deflationary.

    Voodoo Economics has given us massive Government Debt which is being covered up by Printing Federal Reserve Notes (money) which is going to lead to run-away inflation and a worthless dollar.

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