Monday, August 17, 2009

Are U.S. Treasury Bond Auctions Failing?

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August 17, 2009  

I must be "old-school." Whenever I play a new golf course, I keep a scorecard and pencil as a memento of the round. But my playing partner this weekend had no use for either…

He used his iPhone to download the course schematics, keep track of his strokes and calculate the yardage of every shot. It seemed to me he spent more time on his phone than I did with my pen and pencil. But such is the nature of progress.

Speaking of iPhones, AT&T is counting on them to save its business. As anyone with an iPhone knows, you have to buy AT&T service to use one. Right now, 60% of AT&T's new subscribers came in through this forced deal.

You can guess what would happen to AT&T subscription numbers if they lost this exclusive deal. I know lots of iPhone users whose only complaint is the requirement to use AT&T. When the agreement expires in 2001, it is likely Apple will allow their customers a choice of service providers.

So what is AT&T doing to prepare for the upcoming blow?

Ralph de la Vega, head of the company's wireless unit, said they are looking for "the next great set of devices that customers are going to want."

We wondered what he meant. Upon further inquiry, it appears that he means cameras, an electronic book-reader, and a dog-tracking collar. Yes, a dog-tracking collar. If you own AT&T stock, consider this a warning.

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Market Window

Guess who is calling the Securities and Exchange Commission incompetent? No, it's not the brokerage industry…

In a recent interview with Fox Business, former SEC Chairman, William Donaldson called for Congress to create a "Systemic Risk Oversight Board". Donaldson said the board would be independent and "able to catch any oversights that other regulatory bodies might have missed." Donaldson said the board would have to have the "power to go anywhere, to look in the cracks and see where risks are arising, and then to turn that data and information over to the proper regulatory agency."

In other words, Donaldson wants an oversight board to do exactly what the SEC is supposed to be doing right now.

In an exclusive IDE interview last fall, former Assistant U.S. Treasury Secretary, Paul Craig Roberts warned that our continued military "over reach" would be the death blow for the dollar.

Our military "hubris," as he put it, has eroded US authority and credibility and prompted the rest of the world to move away from us. He said the only way we can solve the financial crisis was to slash the military budget and put an end to "gratuitous" wars.

Has Washington listened? Of course not. While more and more Americans are moving into tents, a military juggernaut is being built in Afghanistan

In a recent article titled, The Expiring Economy, Roberts pointed out that during the "worst economy since the 1930s," the administration has"embarked on a $1 billion crash program to build a mega-embassy in Islamabad, Pakistan."

Who is going to pay for the $636 billion national "defense" budget the House just approved, he asks. What happens when foreign countries have no more surpluses to recycle into dollars? And what happens when the Fed can't print more dollars without driving up prices?

That's when Uncle Sam will come back to us, we predict, and float the prospect of a nice, fat tax increase on the middle class.

We may soon find out the answers to Professor Roberts questions. Foreign buyers of U.S. Treasurys have already started leaving the trading floor

At the end of last month, the U.S. 5-year Treasury bond auction effectively failed. If it were not for the primary dealers – those required to bid in exchange for their status as "primary dealers" – there would not have been enough interest to fully subscribe the issue.

Failed bond auctions are the hallmark of third world banana republics. What does this say about the United States? That we have finally reached our credit limit?

This is very bad for the Fed and the Treasury. So it should come as no surprise to learn that they are trying to hide it from the market.

One day after the "failed" 5-year auction, an auction of 7-year Treasury bonds went surprisingly well. The mainstream media reported that demand was strong. But how could that be, considering such weak demand for shorter-term Treasurys the day before?

Now we know the answer. And it's not pretty.

Primary dealers purchased $10 billion of those bonds… and then five days later turned around and sold $4.8 billion of them to the Federal Reserve.

In a deal that would almost have to have been pre-arranged, the Fed came in and took those bonds off the hands of the primary dealers. We presume they felt that five days later was long enough for the trail to go cold. Thankfully, we have independent researchers who do the job our captured media should be doing. Chris Martenson was the first to dig it up. He writes:

"A more honest and open approach would have been for the Fed to simply buy them outright at the auction," he said. But by using "primary dealers" and "POMOs" they clouded the fact that the Fed is openly monetizing U.S. government debt.

Why isn't the mainstream financial press on this story?

We don't know. But keep your eyes on IDE and we'll keep you plugged in.

Yes, the stock market has been screaming skyward for several months, but watch out below. These are signs of financial desperation. The demand for U.S. Treasurys is not nearly as strong as advertised. And the Federal Reserve is trying to hide that fact from U.S. citizens through subterfuge and concealment.

Oh, and don't forget… the U.S. is scheduled to borrow another $400 billion next quarter.

When you consider these facts, it's impossible to imagine that this pyramid scheme won't be reflected in the gold market…

As we see it, gold has been biding its time and building strength before another run beyond $1,000. When will it happen? We don't know, but we'd guess it's coming soon.

And when it does, precious metals mining stocks will soar, says IDE's own Dr. Russell McDougal, who has spent 20 years studying and investing in the mining and exploration sector.

Subscribers to his research service, Resource Windfall Speculator are already holding winners on 15 of his last 17 recommendations. And they are exceedingly well-positioned to profit from the coming run in gold and silver. You should be too. If you're interested, click here to learn more.

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Editor Emeritus


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