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I wrote about a possible credit downgrade on July 28th and split the probable reactions and consequences into what should happen and what (most likely) will happen. Lately, and with good reason, we’ve all become conditioned to the idea that what actually happens in the financial markets is not what should be happening.

Take this latest move. Nothing that the S&P has done by downgrading US long-term debt obligations from AAA to AA+ has done anything to change the fundamental math of the equation. The US is just as insolvent after the downgrade as it was before the downgrade.

But in a fiat money system, faith is very important, and what just took a big hit was the perception of safety that surrounds US Treasury debt. Further, the downgrade came at a rather awkward time for the financial markets. I suppose there’s never a great time, but some times are a little worse than others, and the financial markets are already highly unsettled after a few weeks of piss-poor economic data signaling the arrival of another downturn and a rising debt crisis in Europe that is still devolving rather than healing.

Here’s a good reader observation and question to which I’d like to respond:

On Thursday, August 4th, the stock and commodity markets took a turn for the worse, the dollar and US bonds went up, and gold held firm.

This pattern is exactly what we have been expecting around here since early March. It still has quite a ways to run, and I remain convinced that it will result in a third round of quantitative easing (QE III).

Thursday, July 28, 2011

Executive Summary

• How stocks, bonds, precious metals, commodities, the dollar and, real estate will most likely fare post-August 2nd
• Why August-October will be a period of particularly high stress for the Treasury market
• What the “big picture” endgame is beyond today’s debt ceiling histrionics and how it is now accelerating towards its inevitable conclusion
• Why it’s now time to hedge your bets

Part I – Debt Ceiling Dilemma: The Foul Choice Facing Investors

For the record, I still believe that there will not be a breach of the debt ceiling and no overt default for the US. Things will be worked out in the nick of time, like they always are.

However, the media is full of articles wondering about what ‘investors’ might do in response to a US default and/or credit downgrade. What will happen to Treasury prices? Will they go down as investors dump them en masse in response to a credit downgrade forcing interest rates to climb?

On one hand, I am glad that Washington DC is finally (!) talking about the unsustainable borrowing and spending habits of the United States. It had to happen sooner or later; better now than never.

On the other hand, the tenor and substance of the dialog and proposals reveal just how far up the creek we really are and just how hopeless it really is to plan on something sensible emerging. After trying to make sense of the various proposals I think I can summarize them all with a single phrase: You’d better be ready. We’ll get into the ‘for what?’ down below.

The most aggressive of the proposals seeks to reduce the overall deficit by an impressive-sounding $4 trillion over the next ten years. Of course, this merely trims $400 billion each year, which only reduces the deficit to something close to a trillion dollars a year, or double what it was at the beginning of the crisis.

A trillion a year is still far too much to carry, and the message has not been lost on gold, which is now performing the Dance of the Big Round Number at the $1,600 mark.

It’s time to face a few facts. The recovery, such as it is, was bought at a very high price, too high, really, and it is both false and unsustainable.

Politicians are essentially and effectively clueless at this juncture, posturing over the wrong issues and proposing the wrong sorts of responses. For example, even if one did not know anything about Peak Oil, promoting the highway bill as a legitimate means of promoting economic growth when oil is near $100 per barrel is perhaps not the best use of a couple hundred billion dollars.

Central banks are no better punishing savers and the prudent with zero and/or negative interest rates as they attempt to bail out the reckless banks and get credit flowing again like it once did.

The debt problems of the United States and Europe are almost exactly the same. Both regions drank the Greenspan Kool-Aid offered up in the 1990’s and 2000’s, and both are now saddled with too much debt and promises that are too large to keep.

Three simple words are all we need to understand the economic malaise: Too much debt.

That’s the fundamental problem here, not a failure to tax enough, or tweak a few policies, or print some more thin-air money, or even to get credit flowing again (read: growing again).

That’s the long and the short of it. Anybody with a calculator and a modicum of common sense could tell you that such a state of affairs was not sustainable, nothing can grow forever yet, and believe it or not, that was the plan.

How to Play the Greatest Gold and Silver Bull Market of Our Lifetime

Wednesday, June 29, 2011

Executive Summary

• The extent and impact of price manipulation on current bullion prices
• How to build or increase your allocation to gold and silver (how much is right?)
• The best vehicles and storage options for owning precious metals
• Exit strategies: what indicators to watch to know when it’s time to start selling
• How high are gold and silver prices likely to climb by the end of the current bull market?

Part I – The Screaming Fundamentals For Owning Gold and Silver