 | | The Daily Reckoning | Friday, July 15, 2011 |
- Global debt crises erupt: "That's why they made gold and silver,"
- Revisiting the "Greater Depression" thesis a decade on,
- Plus, Bill Bonner with more on the virtues of a benevolent dictator and plenty more...
|  | | Better By Comparison
| | Why the Gold Price Continues to Hit Record Highs | |  | | Eric Fry |
Reporting from Laguna Beach, California...
Gold up. Stocks down. Dollar down. Bonds down.
That's not the sort of market summary that thrills very many folks, except, perhaps, about 99% of the folks who read The Daily Reckoning. But evenDaily Reckoning readers like to see the stock market go up sometimes...and they usually don't mind much if the dollar doesn't fall.
Nevertheless, successful investing is never about what you would wish; it is about what you expect.
Despite their wishes, for example, your editors here at The Daily Reckoning have been expecting for a very long time that gold would go up and the dollar would go down, while most other investible assets went nowhere. That Big Picture call has been pretty much on target for more than a decade, and your California editor sees no good reason to alter course...or speed.
On second thought, you may want to alter speed a bit. You may want to acquire gold, silver and other hard assets more briskly than before.
Gold hit another new high yesterday. All-time highs are not usually the opportune moment to buy an asset. Then again, the gold price has nearly doubled since early 2008, when it hit a then-new all-time high of $850 an ounce. We would not be surprised to see the price of the yellow metal double again over the next three and a half years...or triple.
We don't expect the gold price to soar because gold is such a great thing; we expect it to soar because the world's major currencies are not such great things. A dollar bill looks good, only when you place it next to a euro or a yen. But all three look sickly when you place them next to a bar of gold.
The value of gold is backed by a 3,000-year legacy of being the ultimate currency and store of value. The value of a dollar, on the other hand, is backed by the full faith and credit of the United States. The problem is, there's too much credit and not enough faith.
Yesterday, Moody's and Standard & Poor's both threatened to downgrade the credit rating of the United States. The threat of an official downgrade resonates with the real-time unofficial downgrade that is already underway in the market for credit default swaps (CDS).
To review: CDS are a kind of "default insurance." The buyer of a CDS is buying insurance against default by a specific issuer of debt, whether that be a company or a country. The greater the apparent likelihood of a default, the higher the price insurance. That's why the price of a Greek CDS is 1,000 times greater than the price of a Norwegian CDS.
This extreme pricing difference is to be expected. In absolute numbers, the national annual deficits of Greece and Norway are identical. But while the Greeks are running a budget deficit equal to about 14% of its GDP, the Norwegians are running a budgetsurplus equal to about 14% of GDP. Greece might default tomorrow. Norway is unlikely to default any time this century...or at least not until its North Sea oil runs out.
Interestingly, the price of 5-year CDS on US debt is also higher than that of Norwegian CDS. Both issuers are rated AAA. And not so long ago, CDS prices on both of these sovereign borrowers were identical. For a short while, in fact, Norwegian CDS were more expensive than their US counterparts. But the spread between the two has been widening out during the last several months. In other words, US CDS prices are rising relative to Norwegian CDS.
As of this morning, US CDS are more expensive than the CDS of six other AAA-rated sovereign borrowers. According to CDS buyers, therefore, the United States is somewhat less deserving of its AAA rating than Norway, Sweden, Switzerland, Finland, Netherlands and Germany.
Counterintuitively, despite the threat of downgrades and the rising price of CDS, demand for long-dated Treasury bonds appears to remain fairly strong. Yesterday, the Treasury attracted higher-than average-demand for an auction of 30-year bonds. "The bid-to-cover ratio on the $13 billion in bonds," Bloomberg News reports, "which gauges demand by comparing total bids with the amount offered, was 2.80, versus a 2.64 average at the past 10 sales."
But the longer Congress dithers about the debt ceiling and budget cuts, the greater the peril the US Treasury market faces...and the higher US CDS prices climb. Most likely, Congress will figure out some way to finagle a non-default by pretending to implement "tough" budgetary revisions, while functionally kicking the can down the road. Whatever the near-term outcome, the protracted bickering on Capitol Hill has confirmed what America's largest creditors already feared: America has an enormous debt problem and has zero resolve to dealing with it.
But as one of our guest columnists recently remarked, "That's why they made gold and silver."
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| | The Daily Reckoning Presents | | The Greater Depression Is Upon Us | |  | | David Galland |
The phrase "Greater Depression" was coined by Doug Casey a decade or so back, as a way of describing the economic crisis he foresaw as inevitable, and which is now materializing.
Doug Casey now believes that the unfolding crisis is going to be even worse than he first imagined, and the longer the rest of us at Casey Research study the tea leaves, it is hard to disagree that the Greater Depression is still ahead.
Consider:
- The eurozone is growing increasingly desperate. Watching the heads of Europe dither and debate over further bailouts to the unhappy Greeks and other troubled PIIGS – before ultimately reaching back into the pockets of the equally unhappy citizens in Germany and the decreasing number of still-functioning economies in the eurozone – reminds me of a down-on-his-luck blackjack player. He's mortgaged his home to play the game but is now down to his last chips. He doesn't want to risk his remaining resources but has no choice, because to walk away now will mean taking up residence in a cardboard box. And so, reluctantly, he shoves across another pile. As the PIIGS start to default and either leave the eurozone entirely or are shunted off into some sort of sidecar organization, there will be great volatility in the euro and in the European markets.
- The U.S. debt situation is far worse than anyone in Washington is willing to admit. We keep hearing calls for more, not less debt creation. But if people would stop kidding themselves and tally up all the many demands the U.S. government has against it, the actual debt-to-GDP ratio rises to something on the order of 400% – and even that is likely understating things. The fundamental flaws in the U.S. monetary system – flaws that have given license to the bureaucrats to smash the limousine of state straight into a wall – have required a remaking every 20 to 30 years or so. The problem is that there is pretty much nothing else that can be done to save the status quo at this point, and so the monetary system is likely to collapse. That means big changes ahead, including – or perhaps starting with – a poisonous ratcheting up of interest rates.
- China's miracle mirage. While having aspects of a free market, the hard truth is that China is run as a command economy by a cadre of communist holdovers. This is apparent in the cities that have been built for no purpose other than creating jobs and boosting GDP. It is also apparent in the growing inflation in China – the inevitable knock-on of the government's decision to yank on the levers of money creation harder than any other nation at the onset of the Greater Depression. Meanwhile, signs of social unrest crop up here and there. Though so far they have been swiftly put down, there is no question that the ruling elite has to walk a very fine line. If the Chinese economy stumbles seriously, all bets are off. That we are talking about the world's second-largest economy means this is not of small consequence.
- Japan is essentially offline. Reports from friends in Japan – including one who was initially skeptical about the scale of the problems at Fukushima – have now changed in tone by 180 degrees. You can almost feel the growing sense of desperation as the already massively indebted nation begins to slide toward an abyss. There is little standing in the way of the world's third-largest economy's slide.
- The Middle East is in flames. This, too, is far from settled. As usual, the U.S. government has been hopping here and there in an attempt to maintain its influence, but at this point pretty much everything is up for grabs. The odds of the U.S. retaining the same level of influence in the region that it has enjoyed over the last century are slim to none, especially now that even the Saudis are shipping more of their oil to China than to the U.S. Again, big changes are ahead.
I'm convinced that nearly everything about today's world is going to change over the coming decade... much of it for the worse.
But that doesn't mean that people – you – can't come through this in more or less good shape, just as our parents and grandparents made it intact through the last Great Depression. Pay attention and take action, and you'll do far, far better than most.
Some investment ideas...
First and foremost, protect yourself against the collapse of the U.S. monetary system. It is not as simple as ducking into the nearest coin store and loading up, though that should certainly be one part of your strategy. Between now and the endgame that leads into what we can only hope will be a new money based on something tangible, there will periodically be opportunities to make big moves with your portfolio.
As Doug also likes to say, you should do whatever you want in this world, as long as you are willing to accept the consequences. If you are willing to risk going down with the ship, then do nothing.
Some other investible ideas...
- Everyday essentials. Energy is the classic essential. Sure, energy use and prices will ebb and flow with the economy, but ultimately everyone uses energy every day, and the people in emerging markets want to use a lot more of it. Carefully thought-out investments in energy, ideally bought on the dips, belong in everyone's long-term portfolio.
- Breakthroughs to a brighter future. Throughout modern history, companies that make significant technological advances transcend bad economic times. Do you think that the company that finds a cure for a common variety of cancer will be weighed down, even by a stock market crash? Hardly. In cautious amounts, these sorts of potential breakthrough stocks belong in your portfolio.
- Investing in the inevitable. A ton of charts and data point to just how unusual and unsustainable today's low, low U.S. interest rates are. When these sorts of baseline trends eventually change direction, they tend to move in the new direction for years, and even decades. No one can pick the bottom, but anyone who is paying even a little attention can and should be getting positioned to profit from a sea change in U.S. interest rates while they still can.
- One foot over the border. History has shown that having even one foot over the border can make the difference between losing everything and coming out just fine. Internationalizing your assets is not always easy or convenient, but that doesn't make it any less urgent that you do so.
The bottom line is that while the scale of the crisis is beginning to become more widely apparent, and reading and thinking about it can become fatiguing for those of us who have been on this story from the beginning, the base case for a Greater Depression is fully intact. We need to gird our loins and continue to take active measures to prepare – with the caveat that even in this base case, there are prudent measures you can take to ensure that not all your eggs are in one basket.
Regards,
David Galland,
for The Daily Reckoning
Joel's Note: Gold and silver are still the best protection for any portfolio...especially now that China and other countries are getting ready to dump the US dollar. Read more on how dangerous the situation is, and how you can come out ahead – free report here.
| | | | Forget QE3 – America's Going Bust, on the Road to Bankrupt Hell |
If America had a credit card, it would get mercilessly cut up and thrown back in her face.
The country's basically broke and isn't paying its debts. Harsh, but true.
All of that – and how it could affect your family and your retirement – is revealed in this urgent video report.
Don't wait, watch now.
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| | | | Bill Bonner | | Sticking With the Golden Formula As Empires Crumble | |  | | Bill Bonner |
Reckoning from Paris, France...
Yesterday, the concrete cracked...the glass broke...empire continued to crumble.
Not that there was anything special about yesterday. This happens every day.
In the markets, the Dow fell 54 points. Gold rose to a new record of $1,587.
"Sell stocks on rallies; buy gold on dips."
That has been our advice for the last 11 years. Don't we have anything to add? Haven't we discovered any new tricks? Isn't it time to try a different strategy?
Nope. Stick with the formula. It's a formula that doesn't work very often. But when it does...it's, well, golden.
It doesn't work very often because empires and their money don't fall apart very often. Usually, you can trust Caesar and coin to stay put. More or less. But now, Caesar's money is phony. And it has allowed the empire to grow in absurd and grotesque ways...so its center of gravity no longer rests on a solid foundation. The whole thing tilts to the left...and appears close to toppling over.
According to the papers, Republicans and Democrats work feverishly to set things right. The Republicans want spending cuts, but no new taxes. The Democrats want higher taxes...but few spending cuts.
Surely they'll get their act together sooner or later, say the journalists. If not, it will be like "committing suicide," says a source in The Financial Times.
Hmmm...
If so, we'd like to offer a sharp razor. Our reading of history shows that governments don't stop borrowing and spending until they have to. And the sooner they have to – that is, the sooner the markets tell the politicians to 'Drop Dead' – the better off they are.
But that is not likely to happen. Congress has raised the debt ceiling 93 times in the last 94 years. Our guess is that it will strike a deal and do so again. That way, Congress, the White House and the vast bureaucracy can get back to doing what they do best – wrecking the economy.
Eventually, the markets will call a halt. But that is probably well in the future.
And here's someone who shares our views. CNBC has the story:
A US default isn't a matter of "if" but "when," David Murrin, chief investment officer at Emergent Asset Management, told CNBC.
"It's inevitable that the US will default – it's essentially an empire which is overextended and in decline – and that its financial system will go with it," he said.
In his book "Breaking the Code of History," Murrin argues that the balance of power has shifted away from the West, with America as the superpower, towards the East, led by China.
He believes the US cannot afford to compete with the rise of Eastern powers.
"It's very simple, its (America's) empire system, its financial system is in decline, we've seen very little growth for over a decade apart from financial engineering and leveraging, which ultimately caused the debt crisis of 2008," Murrin said.
"The only similar example is Britain. It was once an empire and when it lost its power over (the Suez Canal crisis of 1956) it had a large amount of loans outstanding to the Empire, and America owned most of that," Murrin said. "That was the power America had over Britain and it ended the pound, but their values were very similar in terms of global geo-politics and the world didn't really change that much."
For investors wondering where to look in this environment, Murrin said one thing is clear: "You probably shouldn't own dollar- denominated assets." Yes, dear reader, that noise you hear. It is an empire crumbling. The American Empire. The Anglo-Saxon Empire. The European Imperial Hegemony that has been in place at least since the invention of the steam engine.
And more thoughts...
The European democratic social welfare model – which took root in North America, Australia and other colonies throughout the globe – is putting in a giant, multi-decade top. Birthrates are low. GDP growth is low. Job creation is low. Debt is high. Its money corrupted by the paper-based dollar, the whole system has degenerated...ossified...and decayed. Now, it is dominated by frauds, incompetents and parasites.
Kurt Richebächer used to call it 'late, degenerate capitalism.' We call it Zombiedom!
Hold onto your gold.
We left you yesterday just as we were describing how the US slipped into corruption and degradation. It was nothing personal, we were about to say. It was nobody's fault in particular. That's just what happens.
We were also musing – on Bastille Day – on why monarchy was not such a bad system of government, after all. At least, Louis 16th was less sensitive to mob pressure; he didn't have to keep his eye on the opinion polls. He could do things that were necessary, even when they were unpopular.
As a government matures, more and more people find ways to game the system. This is true of all forms of government, not just democracy. People always want to get ahead in the easiest, surest way possible. Often, it's easier to steal money than to earn it. In a monarchy, people court favors and privileges from the ruling class, just as they do in any other system. They win battles, procure women, keep secrets or tell them, they don't rebel...or they do, they are useful...or troublesome. They connive. They plot. They flatter. They use their elbows and their brains. They do what they have to do to gain an advantage.
In democracy, they grease the legislature to get special laws limiting competition...special tax breaks...bailouts...jobs...and titles. Why do you think Wall Street is the single largest contributor to Congressional campaign coffers? Because it has a lot at stake. And who would have thought – 100 years ago – that the president of the United States needed a well-paid assistant in charge of African-American Media? Does he also have an assistant in charge of Irish-American Media? And who covers the Yiddish press for him?
There's a little niche...a sinecure...a bit of spare change for almost everyone.
As time goes on, the number of leeches, parasites, and blood-suckers multiplies. You see it at the local level as at the national one. If you want to build a house in Anne Arundel Co., Maryland, for example, you have to be prepared to pay thousands of dollars in bribes. Engineers, clerks, administrators, environmental protectors – a whole gauntlet of zombies stands between you and finally breaking ground.
Last week, at the dump, we noticed a large group of men in clean white shirts and hard hats wandering around. They seemed to have notebooks in their hands and stopped from time to time to write something down.
Who were they? Surely they were on the government payroll somewhere, somehow; they were probably making sure that the county dump was run according the latest standards of Zombiedom.
But it is not just government that is corroded. The private sector – especially those parts of it that are most closely connected to government – gets twisted too. Education in America is a government industry – even though there are plenty of private schools and universities. At the university level, it is almost impossible to exist without doing Washington's bidding. Students are supported by grants and loans – coming from the government. And universities depend on government research and other projects for a major part of their funding.
Plus, the universities are no different from any other advanced, degenerate system. As they age, they too are full of their own tweedy leeches. Americans came to believe that their children would do better in life if they had a university education. This proposition was so little challenged that it led to almost a complete lack of price resistance. The more people paid, the better they liked it; presumably, because they were sending their children to the 'best' universities. Families mortgaged their houses in an effort to pay for their children's college education.
Now, of course, the nation is saturated with university graduates who are largely illiterate and incompetent. People are beginning to realize that a college diploma is as bad an investment as a house. The Financial Times:
The cost of education...in the US has soared in recent decades while median incomes have stagnated... In the past decade, tuition rates at public universities have risen 5.6% a year above inflation...
"Over the past 60 years," says Jim O'Neill, head of the Thiel Foundation, "owning a house became part of the American Dream. People were told: 'buy a house, don't worry about the price; you'll earn it all back later.' Now it's the same thing with college." In the curious way that Zombiedom takes over, the idea that a university degree would pay off was not entirely an illusion. As society became zombified, the value of phony professionalism grew. Degrees and qualifications are important in organizations that don't actually produce anything. An active, profit-oriented entrepreneur will not particularly care if a person has a degree or not; he wants a producer. But universities, the health care industry, many large corporations, and the government itself are not output oriented. Usually, no one knows if they do anything useful or not. So, how can they select or advance employees – except by reference to degrees and qualifications?
The cost of a university education, as a percentage of disposable household income, has risen from about 18% in 1985 to nearly 35% today. But did a college degree really pay off? Guess how much more a university graduate earns today...in real terms...than, say, a college graduate in 1985.
Zero.
More to come...
Regards,
Bill Bonner
for The Daily Reckoning
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