With U.S. Obama bail-outs going exponential this year, it makes one wonder where these funds will come from and what will be their potential effects. In their weekly report, TSG analyses the TIC data and makes the following comments below.

Regards - VHF

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TSG Stock Market Letter

April 26, 2009

Last week we discussed the declining sales of US Treasuries with a net drop (redemption) of $97 billion in Treasuries by foreigners in February in the latest Treasury international capital flow (TIC) data. This followed a record net redemption of $148.9 billion by foreigners in January.

The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to an recent estimate by UBS. How does this compare with past Treasury sales? From October through December, the Treasury sold a record $569 billion, up a whopping 693% from the $82 billion it sold during the same period a year earlier, and auctioned another $493 billion in the last quarter up from $156 billion the year before according to Bloomberg, as the government increasingly finds itself squeezed between rocketing expenditures and collapsing tax revenues (see article “Soaring US Budget Deficit…”).

Net international capital flows into U.S. Treasuries over the last three years falls far short of the $200 billion/month now required but there is also a disturbing negative trend in investor interest.According to my calculations, TIC flows have averaged $57.3 billion per month since January 2005. This latest estimate of $2.4 trillion for 2009 means that Treasury sales will have to increase more than 300% to foreigners to cover the gap or this shortfall will have to be made up through domestic sales.

Be sure to look for our upcoming monthly report entitled Paying the Presumptuous Piper that discusses the Obama plan to raise tax revenues 40% by 2013 and the impact it will have on taxes and the economy. Unless the economy experiences a miraculous recovery, increasing the tax burden amid a declining economy is not only an extremely bad idea, it turns Treasury’s gargantuan task of financing the rapidly rising debt burden as spending soars into Mission Impossible.

What does this mean for traders and investors? First, this is inflationary because if history is any guide, the government will print more money and employ more helicopters from which to throw it into the economy, a methodology euphemistically labeled “quantitative easing.” The next all-too predictable development will be strong upward pressure on interest rates as U.S. Treasury investors demand higher returns to offset their losses due to increasing inflation.

Do you see where I’m going here? In this increasing hostile investment environment, any investment strategy will need to take rising interest rates and increasing inflation into account.