Sell These Assets Before The Ground Gives Way Beneath Them.
Bill Bonner - Mon 15 Dec, 2008
The ground is giving way beneath our feet: Sell the dollar... Sell Treasuries...
Sell these assets before the ground gives way beneath them Sell the Dollar and Sell Treasuries London, England
The ground is giving way beneath our feet: Sell the dollar...Sell Treasuries.
People still stand their ground...they do not panic. They do the right thing. But then, they go into work – but find they have no jobs. They look at their pension account – wisely invested in a diversified portfolio – and find that it has lost half its value. And their houses lose 20% of their value. In places such as San Diego, Las Vegas and Miami, the losses are more like 30%- 40%.
The ground gives way...and they find themselves in Hell.
Friday, the Dow registered a 61 point improvement, after much disappointment the day before. Is the rally on or off? We don’t know...
But what MUST happen, WILL happen. Fish gotta swim. Birds gotta fly. And bubbles gotta pop. The bubble in private debt has popped already. And now, the bubble in public debt has to pop too. And the dollar’s got to go down. That’s when the ground will really give way... For many people, the collapse of the dollar will wipe out what is left of their assets. Pension funds and insurance companies will be devastated. Savers will be unsaved.
Investors have rushed from risky investments of all sorts – emerging markets, mature markets, real estate, commodities – into the strong, welcoming arms of the US Treasury market. “Give me your tired, your poor huddled masses of dollars...yearning for protection from capitalism,” says Uncle Sam. “And I’ll give you 2.58% return over 10 years. Give me your money for 91 days, and I’ll give you nothing.”
Is that a good deal, dear reader? It depends on how solid the ground is under the US Treasury market. So far, as the ground gives way under other asset classes, the Treasury market has held solid.
But here is why the word “must” was invented. When something’s gotta happen, it’s gotta happen. The US Federal government already has an official national debt over $10 trillion. The deficit for next year will likely exceed $1 trillion...and could reach up to $2 trillion by 2010 – or more than 4 times the biggest deficit the country has ever run...and more than the entire US budget only 7 years ago. At this rate, in a couple of years, US debt will exceed US GDP.
Is it likely that the feds can so greatly increase the quantity of US debt without reducing the quality of it? Is it likely that the last IOU issued by the federal government will be as valuable as the first? No, it’s not likely. Something’s gotta give.
And we are talking about big money. A business or a small government can sometimes borrow more than its annual revenues. It’s borrowing can be funded by a small percentage of the world’s reckless savers. Lending to US government on such a scale is another matter. It takes up a large percentage of the world’s total savings, effectively shouldering other borrowers out of the way, and actually reducing the world’s capacity for economic growth.
Everybody, except bankers of course, knows that lending large amounts to a small country is extremely speculative. But lending to the US for ten years at 2.58% has a nasty stink of certainty about it. You can’t borrow that kind of money without some consequences...and the consequences of that much debt are bound to be bad.
To us, it seems almost inevitable that it will turn out to be a bad place to put your money. Because the ground is almost sure to give way beneath the feet of Treasury-market investors. How so? Ben Bernanke has already told us. When the borrowing gets tough, the Fed will turn to other forms of liquidity – buying US treasury bonds itself. In other words, instead of borrowing from savers – thus leaving the net money supply unchanged – the Treasury will borrow from the Fed. Where will the Fed get trillions of extra dollars? It will create them out of thin air.
That’s why the dollar has turned down.
“Greenback’s haven status thrown into doubt,” reported the Financial Times.
Last week, the euro jumped to $1.33 – a level it hasn’t seen in many months. And gold keeps edging up. It’s up to $820 an ounce as of last week.
The dollar is Hell-bound, dear reader. Sell it. And sell Treasuries too. We might be early with this advice. But we won’t be wrong.
*** If you want to own gold coins, you’ll pay $870 - $890 an ounce. Coins are scarce. People are looking for something solid to hold onto. Coins are solid. They are portable. They have no hidden liabilities.
And you won’t pick up the paper and find that a crook like Bernard Madoff has stolen away the value of your gold coins. The latest Wall Street desperado took investors for some $50 billion. And now the FBI, SEC and all the gumshoes and hacks are making a big deal of it.
Of course, in purely financial terms it is a big deal. The press has labeled it a “ponzi scheme.” But Charles Ponzi took in only $10 million. Peanuts compared Madoff’s scheme.
Another important difference. Ponzi took money from ordinary investors, widows and orphans. But Madoff went for bigger game – hedge funds, banks, and professionals. Today’s news tells us that the world’s largest bank – HSBC – was a victim. Banks in Geneva said they were out $4 billion. The Fairfield Greenwich Group said it had invested $7.5 billion with Madoff.
Of course, we don’t like to see widows and orphans get scammed. But hedge funds? Banks? Who can honestly say that they don’t enjoy seeing these mighty moneymen tripping over their own greedy delusions? Here at the Daily Reckoning...the news of Wall Street’s losses cheers us up...like reading the obituaries and finding no mention of our own name.
But when you own a gold coin you won’t have to wonder if the balance sheet is made up...or if the trades were fictitious...or why the SEC was asleep at the switch. A gold coin is what it is...no more, no less.
When the ground gives way...gold coins stay right where they were – or go up in value.
Not that we’re urging you to buy gold coins. We did that for the last 8 years. Now, you’re on your own.
*** Word from the Washington Post is that autoworkers are “angry.” Why should they be angry? They’ve been paid far too much (compared to autoworkers in, say, India) for far too long. Now their gravy train seems to be stalled on a sidling and they want the government to “do something” to get it going again.
It isn’t fair for the feds to bail out Wall Street but not Detroit, they say.
Elsewhere in the news, Bloomberg has asked the Fed to reveal what it did with the $2 trillion in emergency loans it passed out. Surely, the money went to the Fed’s clients – banks, and financial institutions generally. How? To whom? What were the terms? The Fed wouldn’t say. It refused the Freedom of Information Act petition on several grounds.
“Blank check for banks, pink slips for Detroit,” is how Gretchen Morgenson explains it in the New York Times.
The UAW (United Auto Workers) has a point, of course. Neither industry should be bailed out. But if you’re going to throw money around in Manhattan, why not toss some to Detroit?
But the autoworkers can stop kvetching. Detroit will get its bailout too. Just wait.
*** “What Hell Really is...” said the sign in front of a church in Arizona. “Choir practice at 4 PM!” was the next line.
