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.

Here are TIPs to Protect Yourself from Future Inflation

Today's guest blogger is Tony D’Altorio, a regular contributor for 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.


This article is another in my series of articles about common mistakes that the average individual investor makes in their overall portfolio allocation. For these articles, I drew from the 20 years of experience I had at Charles Schwab in dealing with clients face-to-face and helping them meet their financial goals.

In previous articles, I wrote about two areas which were dramatically under-represented in most clients portfolios – commodities and international securities. There is a third area which I found to also be under-represented and that is fixed income investments. Many clients had little or no exposure to fixed income investments.

The most difficult task I believe for allocating funds to fixed income investments is to choose what type of bonds an investor should buy from the myriad of choices available. Obviously, an investor’s specific financial circumstances will dictate the final choices. In this article, I will choose an area of the fixed income world that I believe most investors should currently allocate funds toward.


Right now the Treasury market is enjoying its own titillating little fantasy. It is the ultimate dream of everyone in the bond world. It is nirvana for bond market junkies. It is the D-word – deflation.

The media and financial authorities have fallen in love with the word deflation. The dim bulbs that appear on CNBC air are constantly talking about deflation. This fact alone sets off alarm bells in my head. When is the last time that the conventional wisdom as presented on CNBC ever came true? In fact, when is the first time?

I believe that all of this deflation talk is simply a way for the financial authorities to prepare the public for incredibly massive government spending over the next several years. It simply helps to justify even more massive government bailouts and spending programs. Look at the amount already spent on the “bailout” - nearly $8 trillion. I fully expect that figure to rise by tenfold or more.

I notice that CNBC conveniently seems to have forgotten about how the Treasury market crazies got it wrong in 2003. There was a huge deflation scare at that time too, although on a smaller scale than the current nuttiness. What followed that deflation scare? One of the most massive upward moves in history of the price of many commodities.

Right now, the Treasury market crazies have priced in massive deflation that will occur in the United States for the next decade or longer. They have also priced in corporate default rates of 21%! And this is in the face of massive printing of money and multi-trillion dollar annual deficits.

There is a major headwind that the Treasury market crazies will soon be facing. Over the next four years, 66% of America’s current $5.2 trillion of debt has to be rolled over. Who is going to buy all of this Monopoly paper?

Wall Street is expecting the suckers (foreigners) to buy it all. They seem to have forgotten that, thanks to Wall Street, these foreigners have major financial problems of their own. I strongly believe that most foreign investors’ funds will be spent in their home markets, buying their own bonds, and funding their own governments’ fiscal needs.

When this happens, the Federal Reserve will have to resort to cranking up the printing press to warp speed so that there is enough Monopoly money available to purchase the massive amount of Treasuries which will be issued. Can you say inflation?


In all of the Treasury market nuttiness, there are Treasury securities which have been completely mis-priced. These securities are Treasury Inflation Protected Securities or TIPS. The interest and principal on these securities are indexed to the U.S. Consumer Price Index or CPI.

TIPS have become mis-priced because liquidity has fled the TIPS market, just as liquidity has fled from the equity markets. After all, why would anyone want to own TIPS when everyone “knows” that deflation is here to stay and inflation is dead forever, right?

Wrong! For reasons stated earlier, I believe we will see a mass conflagration of the funds that are currently rushing into Treasury securities at zero or one per cent because of liquidity concerns. And once again, we will see that the conventional Wall Street wisdom will be proven incorrect.

I don’t believe we will ever see massive deflation in this country. I believe that the only possibility of  deflation in the US would be if we truly see 1930s conditions – where the US GDP collapsed by 50% in nominal terms and unemployment rates were at 25%  and corporate defaults were in the 15% range. Sorry, that scenario is not in the cards. What is much more likely is a return of inflation.


An investor can buy an individual TIPS bond, but with the current lack of liquidity the spread between the bid and asked of such securities is unusually large. A better choice may be an ETF which invests in TIPS securities.

Currently, investors have two choices for TIPS ETFs. They are SPDR Barclays Capital TIPS ETF with the symbol IPE and the iShares Lehman TIPS Bond Fund with the symbol TIP.

Both ETFs have many similarities – both ETFs have very low expense fees, both ETFs are down between 7% and 8% for the year, and both ETFs also have a similar average duration of the TIPS bonds that they hold of approximately 7 ½ years.

The only difference seems to be that TIP trades with a higher daily average volume than does IPE and is therefore a bit more of a liquid security.

Due to the current mis-pricing I believe is occurring in the US Treasury market, both TIP and IPE are currently yielding in the 8% range. Keep in mind – this is an 8% yield that investors are receiving on a US Treasury security!

Investors are urged to jump on the bargains occurring currently with regard to the TIPS market. I believe that an immediate purchase of either IPE or TIP will be a wise choice.


Tony D’Altorio
Analyst, Oxbury Research