Three Analysts Explain Debasement From Different Vantage Points
Inside today’s Daily Journal…
Essay: The Dollar Ain’t What It Used To Be
The (commodity) costs of war
Where hedge funds are investing
Public debt and the price of bonds
Chart Of The Day… Credit Acceptance
Today’s Mailbag
Editor’s note: Porter is hosting his first of many Mastermind events at his farm in Maryland today – a day-long group discussion about investing, portfolio management, and wealth creation. Porter will return to the Journal tomorrow.
Porter & Co. analysts are aligned on one common thesis… That in one way or another we are due for a major financial reset. Porter invited each of them to discuss the melt-up and eventual meltdown – and each offered a way you can benefit from it.
But each analyst has also highlighted a longer-term threat to the economy and to the U.S. Over the last three weeks, three Porter & Co. analysts – Tech Frontiers editor Erez Kalir, Distressed Investing’s Marty Fridson, and Porter himself – have warned of a major structural change to the American economy… and therefore to the global economy.
First it was Marty, who told readers in an April Daily Journal…
The U.S. government has spent its way into a collapse of the sovereign U.S. Treasury debt regime…
Tighter banking regulations following the Global Financial Crisis raised the cost for banks to provide dollar funding to the rest of the world. As a result, Marty wrote, the premium paid by foreigners for directly accessing dollars went up.
Even with those added costs, the rest of the world still wants dollars, and the Fed has been creating those dollars with seemingly no limit. Neither the euro nor the Chinese yuan is on the verge of usurping its place in global trade… yet.
For U.S. Treasury bonds, on the other hand, a grim future has already arrived, Marty explained…
Up until 2023, Treasury bills, which are issued with maturities of one year or less, still enjoyed their special privilege, yielding less than comparable foreign obligations. No longer, thanks to the Treasury flooding the market with this near-cash type of paper. Between 2013 and 2019, the amount of Treasury bills outstanding expanded by 52%. In the next six years the amount ballooned 171%.
There’s no mystery about the Treasury’s increasing reliance on these very short-term obligations. At most times, T-bills represent cheaper funding than bonds, which have maturities of up to 30 years. At certain times during the last 20 years, the gap has been as great as two percentage points. That means the government can save taxpayers billions of dollars by issuing shorter-dated debt.
The problem is that the Treasury could have to replace a large portion of its debt at a difficult time in the market, when borrowing costs are higher.
Given these disturbing facts, he concluded, it’s not surprising that America’s debt has already lost its elite investment status. He also warned that we should not be complacent about the foreigners’ longstanding love affair with the dollar. There have already been some rumblings of discontent.
If the dollar falls off its pedestal sooner rather than later, he concluded, don’t say you haven’t been warned.
Erez took us back 70 years when the British government did not heed the warning when the integrity of its own currency was being undermined.
In 1956, Britain had launched a military attack to maintain its control of the Suez Canal, which Egypt had determined to put under its control.
At the time, Erez explained, Britain still clung to the illusion that its currency, pound sterling, remained the global reserve.
