I think $30 billion of Treasury Bills were purchased with a zero yield. And short-term Treasury Bills in secondary markets are now trading with a negative yield. It's extremely interesting, especially in light of the horrible fiscal position of the Treasury. The Treasury has replaced a lot of its assets with ownership of insolvent financial institutions and is essentially committed to monetizing all of this toxic debt. And yet the US Treasury is able to borrow with zero cost. I applaud that; they should keep borrowing at zero cost. I wouldn't be surprised to see new Treasury Bills issued with a negative coupon. Why not make people pay to loan money to the US Treasury?DESCRIBING HIM as "the Indiana Jones of frontier stock markets," the Financial Times praises emerging-markets investor James Passin for visiting "rough, difficult places, rather than swanning around the more comfortable nightclubs..."
This really is a manifestation of a deflation bubble, which will prove to be short-lived. At this point I don't have a short position in US Treasuries, but I think it's an interesting time to begin contemplating shorting US Treasury, given the cost of servicing that position is effectively zero.
The corollary of what's going on in the Treasury market is what's going on in the commodity market. Commodities have now collapsed and the CRB Index is back to multi-decade lows. There are quite significant short positions in all of the exchange-traded commodities and most commodities now are at levels that are very quickly ruining mining companies. A number of projects that were previously quite profitable are now unprofitable and there's no debt or equity capital to finance the losses needed to sustain production. This is leading to wholesale abandonment of mining projects, of energy projects.
If commodity prices stay at these levels for very long, given the absence of capital for anything, we're going to see a dramatic reduction in the output of raw materials. The interesting question really is to what extent the resource industry's financial pain and the ensuing destruction of raw material output will offset the falling demand.
We're starting to look for signs of distress in the commodity market, the kind of signs that would signal the bottom. We're seeing that everywhere from the collapse of hedge funds focused in commodities to the hundreds of junior resource companies that have market caps below their cash on the balance sheet. I think we've reached a point where if you have the time horizon and risk appetite, the market will reward you for aggressive bets on commodities.
Former editor and research director at investment newsletter Taipan, James is now a fund manager at Firebird Management LLC, which runs four private funds dedicated to investing in publicly traded equities of companies operating in the former Soviet Union and early-stage Eastern European countries, as well as two global portfolio equity funds. He also serves on the Board of Directors of National Investment Bank of Mongolia; Sharyn Gol, a coal producer listed on the Mongolian Stock Exchange; and Maghreb Minerals PLC, a mineral exploration company listed on London's AIM.