Why I’m shorting TLT (Long-term treasuries ETF)

Basically, the US has very high debt and spending is out of control.  Bondholders are not going paid enough interest to compensate them for the risk that they are taking.

Congressional Budget Office

They issue reports on the projected US deficit.  Read them for yourself!  The issues I have with the reports is that:

  1. They don’t even predict an elimination of the budget deficit.
  2. Their predictions are based on assumptions that will likely turn out to be false.  (Such is the nature of the prediction game.)  If they were smarter, they would provide a range in their estimates.
  3. Historically, politicians always say that they are going to slowly eliminate the deficit.  But they never do.  Why do you think the US has so much debt in the first place?
    Or look at Greece.  The politicians have been hiding their problems for a long time and understating inflation.  But eventually the proverbial excrement will hit the fan and everybody will be panic selling their debt.

Obama’s advisors

Warren Buffet used to be one of Obama’s economic advisors.  His shareholder’s letters at Berkshire Hathaway outlines his thoughts on what the administration should do (lower health care costs / make the system more efficient, cut greenback emissions, etc.).  Needless to say, Obama does not listen to him.

So who is still one of Obama’s economic advisors?  Lawrence Summers.  Nothing against him as a human being, but he has a track record of failure.  At Harvard, he presided over Harvard’s failed gamble on interest rates.  As US treasury secretary, he helped to repeal the Glass-Stegal laws.  It turns out that wasn’t such a good idea as investment banks became “too big to fail” and did all sorts of crazy things.

Wasteful spending

The US military is funding the Taliban and Afghan warlords.  The US military outsources the trucking/delivery of its supplies to a select list of approved companies.  It is cheaper for these companies to pay off the Taliban and local warlords than to protect trucking convoys with troops.  (They also aren’t allowed to use heavier weaponry so they may find themselves outgunned.)

Now all governments and organizations are going to have wasteful spending to some degree.  But as far as I can tell, the politicians are aware of this counter-productive spending and are doing little about it.  It is going to be a little difficult for the US to pay off its debts when you have a system that doesn’t care about correcting its mistakes.

Some of the numbers

10-yr treasury yield: 2.125%
30-yr treasury coupon: 3.750%

Gross debt to GDP: ~98.60%
Revenue to GDP: ~30.83%
Spending to GDP: ~46.41%

Let’s suppose that the US government turns around and starts saving 30% of what it makes (this is the average household savings rates among some Asian countries).  The US will be in some incredible pain as government spending will have to drop from ~46% of GDP to ~21% of GDP.  The US would have to cut slightly more than half its spending (I am guessing that there would be riots in the street).  Then it would take a painful decade to get out of debt.  If the US government only saves 10%, spending will still have to drop drastically and it will take three painful decades to get out of debt.

Of course it will never happen.  It will probably end up like Greece, where the politicians keep running up the deficit while the citizens and media do not hold their governments accountable.  And there will be rioting, much like in Britain.  Historically this is the pattern and it does not look like the US will be the exception.

Disclosure: I am also long US stocks like Microsoft and Apple and a lot of commodity stocks (PG.TO, CLQ.TO, NOT.TO, NFD.A, MCF).

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