How Wall Street Plays Tit for Tat with Washington

No sincere financial advisor will tell a baby boomer anymore: "Put your money in US Treasury bonds. There's absolutely nothing to worry about."

The Cross Roads of Hard Decisions is Behind Us

While the stock market is adjusting as expected and directed, (lower faith in equities and commodities means higher faith in treasuries), I’m starting to feel that the number of black swans in our economic ponds is becoming a bit overwhelming. Apparently a lot of investors and retiring baby boomers are wondering the same.

First there is of course the S&P downgrading from AAA to AA+, even though not overly alarming, it is a blow to the Status of Being Invincible, primarily caused by bickering politicians, resulting in the understated fact that historic confidence in steady, on-time coupon payments of US Government bonds is no longer guaranteed.
After the recent debt ceiling debate, I don’t think any sincere financial advisor could tell a baby boomer couple, “Put your money in U.S. Treasury bonds. There’s absolutely nothing to worry about. The payments will be there every time you need them.”

For a country with a large debt load and uncertain cash flows due to political bickering, it’s rational to take the rating down a fraction of a notch. If the coupon payments cannot be guaranteed, then the U.S. does not deserve the “risk-free” reputation of a AAA rating. If it doesn’t pass an elderly couple’s retirement test, it shouldn’t pass the ratings agencies’ tests either. The rest of the agencies should catch up with S&P and downgrade as well.

Then there is Wall Street dropping 1,900 points in a week; something the Dow Jones does not want to experience nor explain too often. Yet, as always, some win and others loose. There is a good amount of profit taking going on, given by the fact that this morning stock futures were actually rising!

Actually, for many stock market players, last week has been a rude awakening from their Summer Siesta. The news from Europe is that in spite of all the bailouts, the yields on all levels (production, employment, profits, debt reduction) are sadly contradictory to the political prophecies of a turnaround. The Millstones around the Euro’s Neck are weighing heavy, especially on the German and French Banks, which combined are owed something like $2 trillion by the porkers in the southern parts of that continent.

Moving on around the globe, it is clear that the Japanese government’s second intervention in the Yen’s position in one week predicts a long struggle, additionally burdened by natural disasters, nuclear fall out, the growing commercial challenges from China, South Korea and even Vietnam, and worst of all, the rapidly altering demographic challenges of a greying population and the plunging savings rates, the forecast for the world’s third largest economy is less than rosy.

China, having accomplished remarkable growth in recent years, may find one overriding bump in its future emergence as the world’s reigning economic powerhouse, which is the often overlooked fact that it is in essence a capitalistic country with a communist steering structure.
So far the comrades have done quite well, largely by getting out of the way of human nature when it comes to basic needs for inexpensive housing, food and transportation. The massive amount of people in that country share one interest, and that is a job that allows them to live in decent housing and put food on the table. History has proven time and again that those jobs don’t come from government but from free wheeling commerce. The freer, the better. Latest official reports show that Chinese overall inflation is standing at 6.4%, but the price of food has risen 14%.
Scrambling to keep employment high while also keeping inflation low, the Chinese government has been throwing all sorts of ingredients into the mix – building ghost cities, raising interest rates, stockpiling commodities, clamping down on dissent, hacking everyone – but in the end, the irrefutable laws of economics must prevail. And so the Chinese government will have to atone for the massive inflation it unleashed in 2008, and for the equally disruptive mis-allocations of capital that are the hallmark of command economies. Expect some big bumps ahead there.

What happened to Wall Street this week?

Consider this scenario and then draw your own conclusions.

1. An increasing number of people and institutions are coming to understand just how intractable the financial, political and economic problems are.

2. The two quantitive easing programs initiated by the federal reserve have proven both times to be triggers for steep Wall Street profits, but have done nothing to improve the economy and grossly undermined the already weak position of the dollar.

3. With the Fed standing aside (per Bernanke’s silence on the topic), the government will be hard pressed to find all the buyers for the many billions of dollars worth of Treasuries it needs to flog in order to keep the scam going. Unless…

For “the sake of the nation” Wall Street organized a good old-fashioned stampede out of equities to send billions chasing after “safe” Treasuries… which as it turns out, has been exactly the case last week.

Make no mistake, the Feds will have to roll out another round of quantitative easing to save the system from collapsing for a while longer. Delaying the QE3 announcement however will temporarily help the Treasury find some demand for its paper. It is actually good policy for the short term to have the Feds sit on its hands, especially considering the unfolding dramas in China, Europe and Japan, three of our major global trading partners. The resulting turmoil in global equity markets may provide the necessary demand for treasury paper to clean up the backlog and keep the U.S. government operating for now.

But be prepared that when the Fed returns to the market with more financial easing, lacking any other tool to support the economy from sinking in the abyss, it will ring in the endgame for the current fiat monetary system.

At SearchAmelia we have followed this process since the dark days in the fall of 2008 when much of our fiat wealth was shattered , and gold traded at under $845 per ounce. Yesterday GOLD shattered the $1,700 mark ending at $1,755 for the day.
Silver on October 13, 2008 was just over $10 an ounce. Yesterday it closed at $37.60
One last consideration if you plan a route of precious metals to protect your wealth. There are two factors involved when the prices go up:
One is the weakening of the US dollar (inflation protection) and one is buyer demand. Gold prices went up $18.60 yesterday. $10 was the result of buyer demand; $8.60 was the result of a weakening US dollar.

Yes, it is increasingly clear that Americans are waking up to the reality that we have left the crossroads of hard decisions behind us and preparations for the times ahead are needed.

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  1. Pingback: Bernanke : Mum is the Word on QE3

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