IMF head accused of rape... Greece wants more money... Zimbabwe scared of the U.S. dollar... An excellent interview with Stanley Druckenmiller... Gross owns lots of gold... China sells more Treasurys...
The big news over the weekend was International Monetary Fund (IMF) head Dominique Strauss-Kahn's alleged rape of a New York City hotel employee. We won't make any social comments on the situation. However, it does have implications for the market. Strauss-Kahn will miss the Greek bailout talks, scheduled for 3 p.m. in Brussels today. Instead, he's facing arraignment in a Manhattan court. A former French finance minister, Strauss-Kahn is naturally sympathetic to Europe. With his absence, the IMF may not be so quick to give Greece even more money.
At the Brussels meeting, Greece will plead for an increase to its current $155 billion bailout from the European Union (EU) and IMF. But Europe's donor countries, led by Germany, are demanding severe austerity measures in exchange for further aid and/or extending Greece's loans. The EU is also considering making bondholders share the costs... A tactic the U.S. government used in GM's bailout.
The end game is clear... The destruction of the euro. Either the stronger European nations – Germany and France – will tire of bailing out the weaker EU members, or they will continue printing ever-increasing amounts of money to paper over the problems. Either way, the euro's days are numbered. Porter and Braden outline the entire situation – and how to profit from it – in the latest Stansberry's Investment Advisory. To learn more about the service and access the advisory, click here.
Strauss-Kahn's alleged rape wasn't the weirdest development of the weekend... The land of the $100 trillion bill – Zimbabwe – is now worried about the U.S. dollar. The Central Bank of Zimbabwe is now considering a gold-backed currency. And in a public statement, the Zimbabwe government said the "days of the U.S. dollar as the world's reserve currency are numbered." When the poster boy for currency devaluation issues negative statements about the U.S. dollar, you know things are bad.
Billionaire financier Stanley Druckenmiller granted the Wall Street Journal a rare interview over the weekend. You can read it here.
Druckenmiller, who closed his Duquesne Capital hedge fund last August, said he agreed to an interview because he thinks fears surrounding the issue of the U.S. debt limit are overblown. Druckenmiller knows currencies. He is credited with orchestrating George Soros' 1992 short of the British pound – a legendary trade that earned Soros approximately $1.1 billion. According to the Journal article, Druckenmiller says a "technical default" is the answer for the United States...
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"Here are your two options: piece of paper number one – let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years... and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says. |
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Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one." |
Druckenmiller is spot-on. Markets despise uncertainty. The world would handle a technical default much better than continued money-printing. At least we'd know the risks... and we could begin to calculate repayment. If the U.S. continues its money-printing, nobody knows when the house will collapse... only that it will.
Also in the interview, Druckenmiller recalls the government's debate to raise the debt limit under Clinton in 1995. Then-Treasury Secretary Robert Rubin warned if a political standoff forced the U.S. to delay debt payments, the Treasury market would suffer for 20 years.
Druckenmiller poo-poos the short-term thinking... "Excuse me? Russia had a real default and two or three years later they had all-time low interest rates," he says. In the future, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order."
Druckenmiller also agrees with us and Bill Gross about the record-low U.S. interest rates. He says the argument that our financial situation isn't that bad because investors still lend to us at low rates is "complete nonsense"...
The Federal Reserve is buying 70% of all newly issued Treasurys. "It's not a free market. It's not a clean market," Druckenmiller said. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week."
We all know Bill Gross, co-CEO of bond powerhouse PIMCO, is bearish on U.S. government debt in his Total Return Fund. But if he's so worried about our country's currency, why doesn't he own gold?
It turns out, he does... Just not in his fund, which is limited to fixed-income investments. PIMCO launched its EqS Pathfinder equity fund in 2009 – the firm's first foray into equities. The $1.2 billion fund is run by Anne Gudefin and Charles Lahr. In a recent interview with Fortune, Gudefin expressed her fondness for the yellow metal.
"The largest position in the fund is gold, which we think is a very good form of protection against what can go wrong. We were encouraged by the fact that a lot of the central banks, especially in Asia, are big buyers," Gudefin said. "We think that's an underlying trend that's very favorable for gold."
Even if PIMCO invested the entire EqS fund in gold, it would still represent a tiny percentage of the firm's overall assets. But the fact that PIMCO launched its first equity fund, then plowed it into gold says something.
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New 52-week highs (as of 5/13/11): Invesco High Yield Investments Fund (MSY), Eli Lilly (LLY), Procter & Gamble (PG), McDonald's (MCD).
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