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Running for the Exits. Hedge funds are dumping US Treasury bonds. Do they know something?
National Review ^ | 03/22/2011 | Jim Lacey

Posted on 03/22/2011 6:51:34 AM PDT by SeekAndFind

The wisest and most successful bond investor of all time, Bill Gross, has dumped his bond fund’s $150 billion investment in U.S. bonds. One should not ignore the importance of this event. The largest bond fund in America no longer believes that Treasury bonds are a good investment. Moreover, Gross is not alone. Blackrock, the world’s largest money manager, is now underweighting Treasuries overall and reducing the duration of the bonds it still holds. That means they are dumping their long-term bonds, which are the most sensitive to interest-rate changes, in favor of Treasury instruments that mature in a year or less. Other bond funds, such as the $20 billion Loomis Sayles funds, are also forgoing Treasuries in favor of high-yield corporate bonds. Virtually everywhere you look, from great investors such as Warren Buffett to insurance companies such as Allstate, everyone is dumping their long-term U.S. debt and either buying debt that matures in less than a year or moving their money elsewhere.

So who is still buying U.S. debt? According to Bill Gross, the “old reliables” — China, Japan, and OPEC — are still in the market for 30 percent of all new debt. The rest, however, is being purchased by the Federal Reserve. There is no one in else in the market. For the first time ever, Americans are refusing to purchase their own country’s debt.

Gross estimates that the “old reliables” are still good for $500 billion a year in purchases, and will be for some time in the future. This is pretty much the amount they’ve had to buy in the past to rebalance capital flows distorted by the U.S. trade deficit. Gross, however, may be wrong this time. Japan, needing to finance its reconstruction, is much likelier to be a net seller of U.S. debt, while China’s economy is slowing and actually ran a trade deficit in the last quarter. That leaves only one buyer of consequence — the Federal Reserve.

Researchers at Gross’s firm, PIMCO, estimate that in the last quarter, the Fed purchased 70 percent of all new Treasury debt. This is a disaster in the making. By printing new money to buy debt, the Fed is both holding interest rates artificially low and flooding the world with dollars. Fed purchases have lowered rates to the point where there was no room for further decreases. With no more upside potential to holding debt, investors are fleeing on the assumption that the Fed will soon exit the market, causing rates to rise dramatically. Such a rate rise lowers the value of all current U.S. debt: Who will pay $1,000 for a bond paying 3 percent when she can get one paying 5 percent? Anyone who wants to sell a $1,000 bond they already own is therefore forced to lower the price if they wish to attract buyers. No one holding any of the almost $10 trillion in U.S. public debt is getting much sleep these days.

When the Fed’s $600 billion QE2 buying spree ends, there will not be enough buyers left to purchase the $1.4 trillion in debt the administration has built into this year’s budget, at least not at current interest rates. Gross believes interest rates have to rise approximately 1.5 percent (150 basis points) to attract sufficient buyers. This may be optimistic.

The Fed is not only looking to stop buying new debt, it also wants to get rid of the nearly $1.3 trillion currently on its balance sheet. Absorbing $1.4 trillion in new debt, rolling over maturing debt, and simultaneously purchasing debt the Fed bought during its quantitative-easing forays is a lot to ask of the market.

Moreover, there is a real risk that bondholders who see the value of their assets fall will stampede for the doors. There are already signs that the smart money is looking for just such an event. Short sellers — those betting on a bond sell-off — pumped over three-quarters of a billion dollars into short positions in just the last quarter. This compares with a negative flow of short funds in the same period last year. If the short sellers are right, and there is a stampede, all bets are off. The bond-market bubble that the Fed’s purchases created will explode, likely setting off a renewed financial crisis.

Come June, the Fed will be in a bind of its own making. If it stops pumping money into the system, interest rates will increase, and not just on Treasury bonds. Mortgage rates will rise and business credit will become more costly. The recovery could be strangled in its infancy. If it keeps on buying bonds, however, it risks never being able to wean the markets off the equivalent of monetary crack. Worse, the flood of dollars will continue to drive down the value of the dollar, raise commodity prices, and propel global inflation.

There are already signs that inflation, while still subdued in the United States, is looking to break out. It has begun wrecking havoc through many areas of the globe, for example providing the catalyst for much of the upheaval in the Middle East. And when it strikes here, the Fed will be out of options. It will have to turn off the money pumps, raise interest rates, and batten down the financial hatches. The resulting recession will be long and nasty.

It is time to face facts. Spending is so out of control that Treasuries are no longer a safe haven for investors. The markets are saturated with U.S. debt and increasingly unwilling to absorb more. There is only one way out of this mess — cut spending, fast and deep.

Given that the Congressional Budget Office last week stated that the administration’s budget would raise the debt by $2.3 trillion more than the White House Budget Office claims, these cuts are going to hurt. They will probably hurt a lot. That is the cost of fending off a true catastrophe.

— Jim Lacey is the professor of strategic studies at the Marine Corps War College and the author of the forthcoming book The First Clash. The views in this article are the author’s own and do not in any way represent the views or positions of the Department of Defense or any of its members.


TOPICS: Business/Economy; Culture/Society; News/Current Events
KEYWORDS: bonds; debt; hedgefunds; preppimg; prepping; ustreasuries

1 posted on 03/22/2011 6:51:41 AM PDT by SeekAndFind
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To: SeekAndFind
"...China, Japan, and OPEC — are still in the market for 30 percent of all new debt. The rest, however, is being purchased by the Federal Reserve. There is no one in else in the market. For the first time ever, Americans are refusing to purchase their own country’s debt."

This is really, really, really bad.

2 posted on 03/22/2011 6:54:12 AM PDT by Former Proud Canadian (How do I change my screen name now that we have the most conservative government in the world?)
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To: SeekAndFind

They must see something...


3 posted on 03/22/2011 6:54:16 AM PDT by therightliveswithus
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To: SeekAndFind

They must have seen the following web site,

http://www.usdebtclock.org/

Factor in another war, spending like there is no tomorrow and the new Obama Care... I don’t think the US Dollar is going to last much longer.


4 posted on 03/22/2011 6:56:06 AM PDT by Sprite518
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To: therightliveswithus
There is no way to avoid inflation based on all the phony money being printed and put into circulation.
5 posted on 03/22/2011 6:57:15 AM PDT by Eric in the Ozarks (Go Hawks !)
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To: therightliveswithus

If you were a Hedge Fund manager and you heard the announcement of QEIII what would you do? These guys know suicide when they see it. We are going to see a bond market collapse at some point. This train has been going down the tracks for awhile now.


6 posted on 03/22/2011 6:58:35 AM PDT by Georgia Girl 2 (The only purpose of a pistol is to fight your way back to the rifle you should never have dropped.)
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To: Former Proud Canadian
This is really, really, really bad.

Understatement of the century.

7 posted on 03/22/2011 7:01:33 AM PDT by Jack of all Trades (Hold your face to the light, even though for the moment you do not see.)
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To: SeekAndFind
Anyone else hear the chickens clucking?

Mike

8 posted on 03/22/2011 7:03:04 AM PDT by MichaelP (The ultimate result of shielding men from the effects of folly is to fill the world with fools ~HS)
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To: therightliveswithus

National Security Issue.


9 posted on 03/22/2011 7:03:28 AM PDT by servantboy777
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To: Eric in the Ozarks

We are one failed treasury auction away from complete financial disaster..................


10 posted on 03/22/2011 7:03:42 AM PDT by Red Badger (How can anyone look at the situation in Libya and be for gun control is beyond stupid. It's suicide.)
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To: SeekAndFind
There is only one way out of this mess — cut spending, fast and deep.

Actually, there are many ways out.

"Cut spending, fast and deep" is the least probable - in fact, it"s SO improbable that I'm surprised you even mentioned it.

11 posted on 03/22/2011 7:06:03 AM PDT by Jim Noble (I'd crawl over broken glass for her. Alea iacta est.)
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To: Former Proud Canadian

” “...China, Japan, and OPEC — are still in the market for 30 percent of all new debt. [......] This is really, really, really bad. “

Not nearly as bad as it’s gonna get if/when Japan is forced to liquidate its Treasuries holdings to finance its rebuilding....

We ain’t seen nothin’, yet....


12 posted on 03/22/2011 7:07:04 AM PDT by Uncle Ike (Rope is cheap, and there are lots of trees...)
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To: SeekAndFind

PIMCO did the same thing in June 2009. They chase yields and right now yields are low on US treasury bonds. It doesn’t mean anything.

I don’t have much respect for bond funds anyway. They pretend to be a replacement for buying and holding bonds directly. But because they constantly have to buy and sell bonds as funds flow in and out of their mutual fund, they behave like equities, not bonds.

I really think bond funds should be eliminated from most people’s portfolios.


13 posted on 03/22/2011 7:09:12 AM PDT by DannyTN
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To: SeekAndFind
Possible future events:

1. Qualitative easing (i.e. the Fed creating money from thin air) ends and the interest rates have to rise significantly to convince buyers to come buy our bonds: interest rates rise and old bond values drop.

2. Qualitative easing is renewed and the Fed prints up even more funny money. Inflation rises and long term interest rates also rise so old bond values drop.

3. A miracle occurs, the sun breaks through the clouds and the economy really recovers in 1980s style. Business grows, people start buying houses again and more demand for loans occur: interest rates rise and old bond values drop.

I have a hard time seeing any situation where interest rates for loans stay at their current, artificially low rates for much longer. If you want to buy a house or refinance your current one with a low rate long term loan, do it quickly.

14 posted on 03/22/2011 7:09:45 AM PDT by KarlInOhio (Washington is finally rid of the Kennedies. Free at last, thank God almighty we are free at last.)
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To: SeekAndFind
The money quote:

It is time to face facts. Spending is so out of control that Treasuries are no longer a safe haven for investors. The markets are saturated with U.S. debt and increasingly unwilling to absorb more. There is only one way out of this mess — cut spending, fast and deep.

Since the coalition of Dems and weak-kneed Republicans are clearly unwilling to make the $1.5 trillion cut that it will take to avoid this catastrophe I conclude that they are seeking just such a disaster. Collapse is the goal.

15 posted on 03/22/2011 7:14:02 AM PDT by InterceptPoint
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To: SeekAndFind
They know Bill Gross said he was selling. They know their algorithms can identify a trend change and follow it.

The last people to see anything are hedgies. They are the ultimate sheep. Its only leverage and press releases that give them any influence.

16 posted on 03/22/2011 7:14:07 AM PDT by the invisib1e hand (You is what you am.)
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To: Georgia Girl 2

I fear the same thing.


17 posted on 03/22/2011 7:18:17 AM PDT by cvq3842
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To: Jim Noble

Actually, there are many ways out.

“Cut spending, fast and deep” is the least probable - in fact, it”s SO improbable that I’m surprised you even mentioned it.
############################################

OK, I’ll bite. A huge tax increase is an option. What are the others?


18 posted on 03/22/2011 7:19:05 AM PDT by InterceptPoint
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To: AngieGal

ping


19 posted on 03/22/2011 7:20:12 AM PDT by PetroniusMaximus
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To: Red Badger

.....We are one failed treasury auction away from complete financial disaster....

If the Fed is now purchasing most of the debt, have not we already reached that point?

It depends on the definition of failed. It seems to me that point is already passed.


20 posted on 03/22/2011 7:23:36 AM PDT by bert (K.E. N.P. N.C. D.E. +12 ....( History is a process, not an event ))
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To: Uncle Ike

Japan’s priorities sure changed since 9 days ago.

And as much as Qadaffi annoys the other arabs by his crazy drama queen behavior, we are not making friends among the arabs in OPEC by carpet bombing Qadaffi’s army, tribe, and family under the guise of enforcing a no-fly zone


21 posted on 03/22/2011 7:26:33 AM PDT by silverleaf (All that is necessary for evil to succeed, is that good men do nothing)
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To: bert

You may be right. China has slacked off their $ holdings, Japan probably won’t be able to afford any more because of their disaster costs, and others, like India and EU will not have enough monetary strength to take up the slack. If the Fed becomes the only ‘buyer’ of T-bills then technically the auction has failed and we become just like Zimbabwe...............


22 posted on 03/22/2011 7:28:18 AM PDT by Red Badger (How can anyone look at the situation in Libya and be for gun control is beyond stupid. It's suicide.)
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To: therightliveswithus

-——They must see something...-———

Somewhere, perhaps several somewhere’s there are guys up in wonderfully decorated offices up high in a skyscraper with the same problem.

Every day their office is deluged with stacks and stacks of US$’s. If they don’t put it somewhere they can’t get in and out of the office. Not only that but even when they put it somewhere more and more keep coming.

It must be put somewhere safe. Where is the safest place for that mind boggling amount of $$$? The consensus seems to be that for the mega quantities of US $’s the only place is US Treasury bonds.


23 posted on 03/22/2011 7:30:54 AM PDT by bert (K.E. N.P. N.C. D.E. +12 ....( History is a process, not an event ))
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To: Eric in the Ozarks

We can avoid inflation, pay off the debt, and pay for entitlements by simply backing the dollar with US oil, coal and natural gas reserves.

If t-bills were converted to anwar backed securities, the debt would be reduced dramatically.


24 posted on 03/22/2011 7:40:05 AM PDT by updatedscreenname
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To: SeekAndFind

Stock up on Spam, Mountain House, water and medicine.

It’s coming folks, and it ain’t going to be pretty.


25 posted on 03/22/2011 7:41:51 AM PDT by Red in Blue PA (For the first time in my adult life, I'm scared of my government.)
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To: SeekAndFind

When you see the Captain and First Mate furtively getting into the life rafts, you may want to consider how to get to the nearest landmass without benefit of the boat you are aboard.


26 posted on 03/22/2011 7:43:07 AM PDT by Dr. Sheldon Cooper (If Mohammed were alive today, he wouldnÂ’t be allowed to live within 1000 yards of a school.)
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To: InterceptPoint
What are the others?

Get the economy roaring again by scrapping the tax code entirely in favor of a flat tax or NRST. Cutting Capital Gains taxes to zero frees up TONS of investment capital that is currently sitting on the sidelines. Cutting the Corporate tax rate to zero will bring business flooding into the USA. Reduce regulation of business, like the ridiculous "Sox" regulation. Allow interstate competition between health insurance carriers to further reduce the cost of doing business. Announce an all out plan to open up all US domestic oil and gas reserves, plus the approval of 50 new thorium reactors, insuring reliable, stable, affordable energy supplies well into the 2040's. Lastly, a balanced budget amendment.

There are many other steps we could take, but those alone would go a long way towards bringing back a roaring economy which would result in massive positive cash flow to the gubmint. The key is to not let the congresscritters spend the new revenue on anything but debt.....

27 posted on 03/22/2011 7:43:39 AM PDT by Thermalseeker (The theft being perpetrated by Congress and the Fed makes Bernie Maddoff look like a pickpocket.)
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To: Jack of all Trades


28 posted on 03/22/2011 7:44:30 AM PDT by Illuminatas (Obama - Dumber Than Bush!)
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To: InterceptPoint
OK, I’ll bite. A huge tax increase is an option. What are the others?

1) Hyperinflation

2) Inflation held constant at around 10-15%/annum

3) A deflationary depression

4) Default of the public debt

5) An executive order waiving all private debt

6) An act of Congress doing the same thing

7) Planetary thermonuclear war

29 posted on 03/22/2011 7:46:59 AM PDT by Jim Noble (I'd crawl over broken glass for her. Alea iacta est.)
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To: updatedscreenname

” If t-bills were converted to anwar backed securities, the debt would be reduced dramatically. “

It’s probably caffiene deficiency, but I’m not following your argument —

It would seem, to my admittedly numbed mind, that if one were to convert unsecured T-Bills to secured instruments, the natural result would be to sell *more* of ‘em, which, by definition, increases the debt level.....

Time to go pour another cuppa..... ;)


30 posted on 03/22/2011 7:47:27 AM PDT by Uncle Ike (Rope is cheap, and there are lots of trees...)
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To: Jim Noble; InterceptPoint

I think that the message the estimable Mr. Noble is conveying, is that there are few, if any, *good* options or outcomes....

I’m afraid I must agree....


31 posted on 03/22/2011 7:50:02 AM PDT by Uncle Ike (Rope is cheap, and there are lots of trees...)
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To: Jim Noble

Nice list but I think the author of the article was looking for good solutions not likely outcomes of the sort you have correctly listed.

Sad to say.


32 posted on 03/22/2011 8:01:08 AM PDT by InterceptPoint
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To: InterceptPoint
Nice list but I think the author of the article was looking for good solutions

No elected legislature anywhere in the world (and, in the US, including Congress and all 50 states) has reduced the public debt or eliminated any government office, bureau, program or function (without reassigning it elsewhere) since 1945.

If you think a bunch of idiots voting to choose "representatives" can accomplish this task, I think the burden of proof is on you to demonstrate that it is possible.

33 posted on 03/22/2011 8:10:03 AM PDT by Jim Noble (The Constitution is overthrown. The Revolution is betrayed.)
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To: Thermalseeker

You forgot another solution...dump the current occupant of the White House.


34 posted on 03/22/2011 8:13:34 AM PDT by 23 Everest (A gun in hand is better than a cop on the phone.)
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To: 23 Everest
You forgot another solution...dump the current occupant of the White House.

You gotta flush Congress, too. 100% turnover. Leave no congresscritter standing. Congress is more culpable for this mess than all the Presidents, including Obama, combined......

35 posted on 03/22/2011 8:22:05 AM PDT by Thermalseeker (The theft being perpetrated by Congress and the Fed makes Bernie Maddoff look like a pickpocket.)
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To: Thermalseeker

I concur! :-)


36 posted on 03/22/2011 9:02:11 AM PDT by 23 Everest (A gun in hand is better than a cop on the phone.)
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To: Thermalseeker
Get the economy roaring again by scrapping the tax code entirely in favor of a flat tax or NRST. Cutting Capital Gains taxes to zero frees up TONS of investment capital that is currently sitting on the sidelines. Cutting the Corporate tax rate to zero will bring business flooding into the USA.

The problem can be solved in several years. External debt is small in the scheme of things. Political leadership is the missing component. With leadership, people will vote for more than their pocketbook. There is a potential 2012 candidate that demonstrates that leadership.

37 posted on 03/22/2011 9:02:43 AM PDT by Kennard (io)
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To: Jim Noble

If you think a bunch of idiots voting to choose “representatives” can accomplish this task, I think the burden of proof is on you to demonstrate that it is possible.
############################################
Don’t get me wrong, I have very little hope that the politicians will sacrifice their careers and make the necessary cuts. My expectation is that they won’t and the American public will continue to sacrifice in order that we can keep a bunch of gutless politicians employed.


38 posted on 03/22/2011 9:12:15 AM PDT by InterceptPoint
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To: Jim Noble
No elected legislature anywhere in the world (and, in the US, including Congress and all 50 states) has reduced the public debt or eliminated any government office, bureau, program or function (without reassigning it elsewhere) since 1945.

You are quite correct. Our Founders knew this day would arrive -- when our Republic is pushed to the verge of Collapse, or move into total Socialism.

The odds are near zero for our elective Representatives to do the right thing -- massively slash government and fire large numbers of parasites (i.e. govt bureaucrats) This needs to be done at all levels of government.

This most certainly will NOT happen. So this leaves only two likely options -- (1)total economic collapse (fast=currency collapse/ slow=descent into Socialist hell), or (2) another Revolution. The timing is the issue - six months, six years, 30 years. No one knows for sure. (1) is most likely.

39 posted on 03/22/2011 9:16:35 AM PDT by sand88
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To: Kennard
There is a potential 2012 candidate that demonstrates that leadership.

And Herman Cain is his name!

40 posted on 03/22/2011 9:18:30 AM PDT by Thermalseeker (The theft being perpetrated by Congress and the Fed makes Bernie Maddoff look like a pickpocket.)
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To: SeekAndFind

Long term Treasuries right now are very risky. Rates are likely to go up soon.


41 posted on 03/22/2011 9:18:56 AM PDT by Walts Ice Pick
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To: SeekAndFind

This maybe?


Glenn Beck Now !! Unions Preparing to Collapse Economy in May (25 minute tape)
http://www.freerepublic.com/focus/f-chat/2692690/posts


42 posted on 03/22/2011 9:38:04 AM PDT by Arrowhead1952 (TX and MI - When the going gets tough, the dims run and hide.)
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To: therightliveswithus

They know that Obama is president for the next two years, and possibly 6.


43 posted on 03/22/2011 10:04:37 AM PDT by TexasFreeper2009 (Obama = Carter 2.0 The Epic Fail Edition)
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To: Thermalseeker

ROFL

Cain...

ROFL

Palin, Bachmann or total collapse.


44 posted on 03/22/2011 10:07:36 AM PDT by TexasFreeper2009 (Obama = Carter 2.0 The Epic Fail Edition)
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To: TexasFreeper2009

You might want to take a good, long look in Bachman’s closet. I don’t recall that Palin or Bachman have either announced anything regarding their Presidential aspirations........


45 posted on 03/22/2011 10:10:30 AM PDT by Thermalseeker (The theft being perpetrated by Congress and the Fed makes Bernie Maddoff look like a pickpocket.)
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To: therightliveswithus

Maybe long-term U.S. debt no net return.


46 posted on 03/22/2011 10:15:28 AM PDT by Vaduz
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To: Red in Blue PA

Ah... yeah. Good luck trying to buy Mountain House. Their back orders are so large that they are not taking any orders from any vendor or reseller.


47 posted on 03/22/2011 12:38:41 PM PDT by Obadiah (If you were going to shoot a mime, would you use a silencer?)
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