http://www.zerohedge.com/article/visualizing-upcoming-treasury-funding-crisis

In this kind of crazy situation, do you have any opinion about investing in emerging markets debt (sovereign bonds etc)?

I would also be comfortable committing new money to the boring stable stocks that have traded like Treasury bonds but have likely dividend growth. There are not many of these IMO:

I have been increasing my holdings of the stable growth stocks MCD and FPL ever since Credit Writedowns also spotted those young plants that now are nameless this spring; since even a Fake Recovery is a “recovery”, I have increased my exposure to these names. MCD has a 7% earnings yield and a 3.5% dividend yield that likely will double in 10 years or less; FPL has an 8% earnings yield and a 3.4% dividend yield, has the country’s dominant pos’n in wind power, and sells for modestly less than the sum of its conventional and unconventional power parts.

These guys have gone nowhere since the March mkt bottom and IMO are better suited for a muddle-through economy than bonds. MCD shrinks its shares outstanding; wish the Govt were doing the equivalent!

Wall Street lore also says to sell Rosh Hashanah and buy Yom Kippur!

So, when meltdowns happen, there a lot unknown unknowns, if you will. And that means the only thing you can do to protect yourself is to reduce risk while still profiting from the volatility via hedges.

That is what’s commonly known as a “utility and options” strategy.

I think any reasonable observer would agree that it’s rubbish. 

Having said that, is it not true that the USD has risen during recent meltdowns, even if they are of our own making?  Do you think we can expect that again, or will the USD take another big hit when we have our next meltdown (e.g. when the mortgage resets arrive)?

Barry

You acknowledge that the Carry Trade is a significant current contributor to dollar weakness. We have also seen that the dollar seems to perversely climb during episodes which ought to cause it further weakness, like the Meltdown, while it has dropped during perceived periods of greater stability (as we are seeing today).

I am paying close attention to reports that we are about to see two major crests of additional mortgage defaults in 2010 and 2011.

Will the dollar (in your view) rebound during the next major crisis, or will this whole “flight to quality” thing turn out to be a mirage?

Barry

“(Gold) is just as likely rising due to fiat currency revulsion”

On one hand, people are revolted by fiat currencies (& buying gold because of the expected effect of current and future actions), and on the other hand people are investing in those self-same currencies longer term by buying bonds! Both gold and the bond market are coming from opposite ends of the same one-way street, so an almighty pile-up is unavoidable. However unrealistic, the American psyche will absolutely not tolerate economic weakness for any length of time, so the outcome will be inevitable (and anyway, gold is of course heavier than paper..!)

Until shown reasons to think otherwise, am still convinced that even a hint of ongoing deflation (let’s omit the adjective “meaningful”) a la Japanese experience will result in panic stations because it’s just too late for the hard way out because it’s now too damned hard to even contemplate!

So, on the whole, gold is really more of a dollar crash hedge than an inflation hedge. While treasuries are not only a deflationary (disinflationary) bet but also a bet for economic weakness.

You’d want to be in treasuries even if the dollar fell if you expect the deflationary forces to outweigh inflationary forces from the currency depreciation. You’d want to be in gold if you think the inflationary forces of the depreciation would feed through.

Right now, both trades are being put on i.e. gold is rising and so are treasuries. When it becomes more clear which force is winning the deflation-inflation tension, I would expect a reversal in one or the other.

Remember my post about the Scylla and Charybdis of inflation and deflation. I think that’s what we’re seeing right now.

Ed – well (and not for the first time) I don’t get it. By “escape hatch” I assume you mean to help reflate the economy and devalue the debt. I remember reading somewhere ages ago that for the dollar, every 10% decline (presumably against some sort of currency basket ) would result in only a 1% increase in inflation. That would mean a lot of decline for any sort of “bang”, especially when the currencies of most other developed economies want/need the same thing! If you believe (as I do) that the powers-that-be will do whatever it takes and use whatever as-yet unheard-of tools to avoid meaningful deflation (because the consequences of such deflation would make “very intractible” debt even more overwhelming), then who in their right minds would be buying U.S. Treasuries at these levels? And all this is before the Fed even starts to unwind – or (giggles) trying to unwind….