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News that Moves: The Privateer: Gold vs. U.S.Treasuries & Mr. Mortgage: Rising Rates and Delinquencies

RCM Comment: 2008 was a successful year for us and 2009 seems to be continuing that trend. We are pressing our advantage in the month of January, focusing Fortune’s Favor I on three basic areas: 1) Long gold (silver) & related assets, 2) long energy pipelines, 3) selective short sales focusing on (but not limited to) the financial space. However, success can breed complacency and as Andy Grove (former CEO of Intel) used to say, “Only the paranoid survive.” So, with that thought in mind let’s touch the proverbial goal posts and see if our investment themes still hold water. The stories below should shed some light on this matter. Remember, in order to successfully navigate the treacherous waters of the financial markets one must constantly test one’s theories and be ready to react as the market changes. There is no room for ego in this business and the ability to reinvent oneself is tantamount to survival.

Gold Going UP – Treasuries Going DOWN – The Privateer

…especially in times of fiscal and/or financial strife, Gold and the yields on debt paper – especially longer-term debt paper – go in the SAME direction. THIS week (January 19 – 23) the yield on the US Treasury’s 30-year debt paper has SOARED – rising from 2.87 percent to 3.31 percent! That has led to the biggest plunge (don’t forget with debt paper, yields and prices on the secondary markets go in opposite directions) in the 30-year bond since 1982!

What most followers of Gold know is that the stellar decade for the metal in US Dollar terms was the 1970s. What some of them forget is that the 1970s was also known as the (all but) “fatal decade” for US Treasury debt paper. Yields rose throughout the decade as higher and higher rates were demanded by domestic and international investors alike to compensate for the “profigate” (for the time) spending policies of the US government and the downward pressure put on the US Dollar as a result

The spike in US long-term Treasury interest rates this week is ominous in the EXTREME! It is literally not possible for the rest of the world to “buy” the quantity of new debt proposed by the Treasury even if ALL global savings were marshalled for the task. The quantity of such savings would not buy more than 30 percent of it. This points with deadly accuracy towards a situation in which the Treasury, in order to sell the debt, is going to have to offer a higher rate of interest to potential buyers to offset the rapidly growing risk of holding the paper. The same thing happened in the 1970s, but the fiscal, financial and economic situation of the US in 2009 is VASTLY worse than it was in those days.

The already existing facts are that the British budget deficit will equal 9.4 percent of Britain’s GrossDomestic Product (GDP). This compares with 4.9 percent in the Euro zone and 8.4 percent in the US.When President Obama’s $US 825 Billion “stimulus” package is added, this year’s US budget deficit will climb to an historic 14.5 percent of US GDP. The farce that is the official US debt ceiling will have to be raised yet again to make room for this deficit explosion. Instead of Congress all standing with red faces, the climbing political likelihood is that the US will simply dispose of the “debt ceiling” and simply remove any legal “limits” to the debt of the US Treasury. The road is then open to unlimited debt.

MR. Mortgage:
Rates have shot up considerably in the past week and a half from roughly 5% at 1 point to 5.5%-5.625% at 1 point to the borrower. This was despite the Fed in the market buying $19 billion in Agency MBS last week. In the months leading up to the Fed announcing their QE plans, rates got under 6% several times — the mid’s 5%’s really is not that great. One would hope that with the Fed in there buying Agency MBS at the pace it is, rates could hold — but they have not been able to. This spike in rates will have a serious impact on the weekly MBA mortgage applications data that come out each Wednesday. My guess is that they are down this Wed and plunge the Wed after next.

The number of mortgages 90 or more days delinquent continued to rise at Freddie Mac (FRE: 0.68 +3.03%) during December 2008, reaching 1.72 percent of the GSE’s total single-family mortgage portfolio, the company reported Friday morning. That’s a jump of 62.2 percent from year-ago levels, and up 20 basis points from a 1.52 percent level reported for November 2008 — not surprisingly, as the nation’s housing woes have spread, Freddie Mac has posted a monthly rise in delinquencies throughout the entirety of last year.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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