Gregor Weekly Model Portfolio Update: 30 December 2009

• Gregor Macdonald
• December 30th, 2009

I wish the prospects for wage growth in the OECD were as robust as the outlook for coal demand in Asia. (no need to expand much on this opening line, and so I’ll move on to the next paragraph).

According to Bloomberg, 2009 will be the worst year for government bonds since 1978. Obviously that was made possible by the spike highs (in price) in December of 2008. I would note, however, that I and many others observed in February that when the BOE and the FED announced quantitative easing in 2009, that yields on both Gilts and Treasuries did not quite make it back to their December highs. That was indeed a warning of the classical, textbook variety.

As I wrote to you several times this Autumn, I have been wanting to go short Treasuries for over two years. But, I never felt the coast was clear. Even during the commodity highs of Spring 2008, and even though I knew then as I know now that Treasuries were junk, I remained wary that some confluence of events either in geo-politics or the financial system could cause short-term stampedes into Treasuries. However, I changed my mind in December. (Below is a chart of the price of the US 10 Year Treasury)

The collapse in State and Federal tax revenues here in the United States, and the reduction in volumes of international trade, have as yet to be connected by the market to the cash flows required to support our gargantuan issuance of Treasuries. This has been talked about all year in the hedgie and macro community of course, but it remain a thesis waiting for a trigger. Odd as it may sound, I see a connection that’s not causal but indicative in the triangle of revived Asian coal consumption, the start of sovereign debt problems in the central and peripheral EU, and the prospect that tax revenues here in the States will be terrible for at least another few years. (this article continues for subscribers through the membership gateway, on the right side of this page)

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