When is the right time to short the US government?

By: ispeculatornew
Date posted: 02.16.2011 (5:00 am) | Write a Comment  (2 Comments)

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The US economy remains by far the top economy in the world and while others are catching up, they are still decades away in GDP terms and probably even further in terms of education, research, innovation, military, cultural and other ways of comparison. The US remains the place to be for most of the premiere events around the world no matter what the field and the top companies in the world are usually headquartered in the US.

All of that being said, there is one very worrying trend from an investment perspective, the growing debt of the various government levels. Just to be clear, this post is mainly geared towards the Federal Government and its ability to repay its debt. We could easily (and might in the future) discuss the problems of various states and municipal governments but since those are much more difficult to trade, I will leave them alone for now. The one thing to know is that these two levels of government are as much if not more in trouble and the federal government will not be able to count on any assistance from the states or municipalities.

A problem that is growing very fast

A few days after seeing Barack Obama present his budget, we are forced to face the fact that deficits will be here for a long time as candidates from both parties cannot agree on what to cut. I don’t think anyone in their right mind thinks that the US federal government can sustain its current level of spending but if no party wants to take political risks in cutting specific portions, we will keep delaying the problem until its too late.

The man who won the White House thanks to his speech of “Yes we can” is not getting it done in terms of getting the budget back in order and there’s nothing to make us believe that deficits will be reigned in anytime soon. I am truly worried about how this will end. Why? Because there is huge pressure on politicians to avoid discussing specific cuts, and that will become even more intense as we approach the 2012 elections.

The US is not the worst (total debt this time, not only public debt)

As you can see in the chart on the left, the US is not in the worst situation. A lot has already been said about the great problems of the United Kingdom and some have even discussed a still unlikely possibility of a UK bankruptcy. Japan is also in a very serious position although it is helped greatly by the very high savings rate of its citizens but even more so by the fact that these savings are sent towards government bonds which has helped keep the situation under control.

But do you remember all of those talks about Spain’s big problems and how it could be the next European country to be in major trouble and require assistance from the German-French alliance? Well, Spain is not that different from the US. Sure, there are differences, especially in the health of the banking sector but I think it’s easy to find excuses for the US government and much more difficult to turn the situation around.

How to profit from Uncle Sam’s problems?

Like many of the recent bubbles, it’s not very easy to invest in order to profit from a possible decline in the US Federal government. Here are a few ideas:

Long Gold (GLD): No doubt, a slow and steady decline of the US would likely be very bullish for gold both as a reserve currency and as a sure investment when the US dollar would suffer

Long Inflation (TIP): Many ETF’s, including TIP are focused on profiting from a situation where inflation would pick up. One way governments usually get out of sticky situations is by printing money and that would lead to inflation

Long interest rate rise (SHV): There are many different ways to play this but as investors become less interested in holding US government bonds, it would likely raise funding costs for the government and then for everything else in the US. One interesting play is SHV, which is short US governemnt bonds.

Short real estate (REK): A decent rise in interest rates would have a dramatic effect on an already fragile real estate market.

When to actually go short?

This is the big problem of course. Like  “trading any other bubble“, irrational things can go on for much longer than we can usually expect and going short on the US government could be a very costly trades over the next decade or two. I would be careful and simply be vigilant about a moment when things could start to turn sour for Uncle Sam.

What are your thoughts?

I’m not trying to be dramatic and sound too negative but I think it’s more than time for the leadership in Washington to start acting on this problem and the most recent budget was nothing close to a good first step. Am I alone being worried here?

Disclaimer: No positions on any of these ETF’s.

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  1. […] Unfortunately the fundamental outlook does not look any rosier. The government is trying to spend their way out of this recession (oh wait apparently that ended in 2010 but don’t tell anyone who is still looking for employment) and all they are doing is adding to the bill that they will eventually have to pay off later. On April 27 Fed Chairman Ben Bernanke said that the second round of quantitative easing will end as planned in June but that only address one problem. Currently the national debt is well over $14 trillion and climbing and unfortunately nobody has any new ideas on how to resolve this. We even did discuss the idea of shorting the US government. […]

  2. […] enough with the long-drawn out metaphor. The reality is that the U.S. economy is in some very big trouble and investors could end up holding an empty bag. In an interview earlier this month Secretary […]

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