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U.S. Treasuries: Worse than the US Dollar!

Interest-Rates / US Bonds Jul 29, 2008 - 03:04 PM GMT

By: Mike_Stathis

Interest-Rates Best Financial Markets Analysis ArticleThat's right. You read it correctly. Now why would I say something that even most “experts” would laugh at? Because I want to point out once again how so many out there are in the dark, even the so-called experts; you remember, the guys who missed this entire meltdown. Of course, now with so many banks in a dangerous position, I've seen many advisers change face and jump on the doom bandwagon.

Some have advised investors to remove their money from banks and buy U.S. Treasuries as a safer investment. The rational goes as follows. “U.S. Treasuries are backed by the full faith and credit of the U.S. Government and they have never defaulted.”

The first point I'd like to make is this….there's always a first time. Prior to the present, the MBS market never blew up either. And it's obvious to any sophisticated investor that the credit risk for U.S. Treasuries continues to increase . While it could take some time, the fact is that the FDIC will cover all bank deposits that do not exceed the $100,000 limit. After all, the FDIC is a government agency. So can we not say that it too is backed by the full faith and credit of the U.S. government? Sure we can because it's a fact. So as far as safety of principal, the FDIC is equal to U.S. Treasury securities.

Now let's look at the disadvantages of buying U.S. Treasuries. First you are dealing with interest rate risk…a very big risk given the fact that coupons on U.S. Treasuries are very low and are almost certain to rise much higher in the coming years. When rates go up, those holding bonds will see the value go down. This will force them to hold the bonds longer, perhaps even until duration. Therefore, I would not consider U.S. Treasuries to be particularly liquid for individual investors.

The next point I want to make is that bonds get hammered during rising inflation due to purchasing power declines. Bond values also decline in value when rates rise as a result of rising inflation. So you get a double-whammy. While the dollar also gets hit with diminished buying power seen during rising inflation, you don't get the double-whammy seen in bonds.

Most important, your dollar deposits are liquid. If your bank fails, you will lose some temporary liquidity, but nowhere near what you could see from U.S. Treasuries. While waiting for rates to go back down, those in U.S. Treasuries might be stuck holding them for many years.

Finally, as the credit risk of the U.S. government continues to increase, U.S. Treasury bonds will decrease in price, causing investors to hold them longer – i.e. even less liquidity. So as far as my bank money, I'm sticking with my dollar deposits because I want liquidity. If liquidity is important to you, you should do the same.

The real problem is trying to save your money from the damaging effects of inflation. One solution to this would be to invest in foreign currencies like the Yen and Swiss Franc. Sure, you may not have the liquidity of a U.S. bank deposit (although you might depending, on how you invest in these currencies) but at least your buying power will be preserved and will most likely increase.

Always question the advice of those who write about investments for which they try to sell you, because most of the time the only interests being served are theirs.

By Mike Stathis

Copyright © 2008. All Rights Reserved. Mike Stathis.

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.

Restrictions Against Reproduction: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the copyright owner and the Publisher. These articles and commentaries cannot be reposted or used in any publications for which there is any revenue generated directly or indirectly. These articles cannot be used to enhance the viewer appeal of any website, including any ad revenue on the website, other than those sites for which specific written permission has been granted. Any such violations are unlawful and violators will be prosecuted in accordance with these laws.

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Books Published
America's Financial Apocalypse: How to Profit from the Next Great Depression . Condensed Ed. Copyright © 2007.
Cashing in on the Real Estate Bubble . Copyright © 2006.
America's Financial Apocalypse: How to Profit from the Next Great Depression . Copyright © 2006.
The Startup Company Bible for Entrepreneurs: The Complete Guide to Building Successful Companies and Raising Venture Capital . Copyright © 2004 and 2005.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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