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Rainbows over Canyonlands - Dave Stoker

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Wednesday, July 20, 2011

Gold and Silver Are Profitable Safe Havens

History has shown that people who are in power, or want to be in power, or who are afraid of losing power; will do irrational things at the wrong time and shock routine events to spin out of control.
Unfortunately, the politicians in Washington are still behaving like circus performers; they are playing with the debt ceiling limit that should not be an issue, rather, a routine procedure. It has turned into something dramatic and somewhat dangerous because S&P and Moody's both stated this week that they were going to place the AAA credit rating of the U.S. government on negative watch.
Moody's also stated that because of this change they would include GSEs and about 7,000 different municipal bonds issues on credit review for possible downgrade. There are over 2 million different outstanding bond issues.
I have no idea whether or not Congress will do the right thing before August 2, and raise the debt ceiling limit. It would be the rational and logical thing to do.
History has shown that people who are in power, or want to be in power, or who are afraid of losing power; will do irrational things at the wrong time and shock routine events to spin out of control. That is a possibility at this point in time, not a probability. However, we cannot really rule it out. So the next 10 days will be very, very, important.
We are at a historical crossroad. Leaders here in the U.S. and globally are required to employ sagacious judgment to keep the world from falling into the abyss. It will be touch and go. I outlined last August the long-term case for $5,000 an oz. gold. Two months later in October, I listed 10 reasons to buy gold at $1,300 an oz. I continue to recommend gold and silver as one half of a barbell portfolio strategy. The fundamentals have not changed.
The whole world is watching Washington navigate uncharted waters and the repercussions of our elected officials not doing the right thing is enormous; not just because of how it would affect us but particularly how it could set off a domino effect of negative consequences with every partner in our trading block. If we do default, how will global markets react? The latest Treasury bond auctions showed the U.S. having no problem in selling debt. Could the world markets overlook our ineptitude without extracting a price, short-term?
What is under reported here in the U.S. is the turmoil breaking out across Europe resulting from their austerity measures. We've almost forgotten about what's going on in Greece. We are ignoring what Ireland is currently experiencing and now those same political and social disturbances which befell those countries are about to break out in Italy.
Italy is a $2 trillion economy. It is the second largest economy in Europe and if their capital market comes under attack like those of Greece and Ireland, whose economies are a fraction the size of Italy's, then all bets are off. Were this happening to Italy in isolation it would be an enormous financial situation. If Washington does something truly foolish you now have two major events overlapping. This is how perfect storms begin or how black swans are created.
The U.S. economy is still healing from the Great Recession of 2008. The latest anemic GDP numbers, flat housing numbers and swelling unemployment figures show that this economy is still extremely fragile. If Congress votes to enact significant spending cuts at this time, this economy will slip into recession. Goldman Sachs’ 2012 forecast is under review. A Bloomberg survey of 60 economists recorded a median estimate for 2012 is 3%.
Raising the debt ceiling limit and appropriating funds are two separate issues that have been conflated for political purposes. The first is for past expenditures while the second is for current operations. The federal debt is a long-term problem that must be addressed. Multiple foreign wars only exacerbate the total amount due. Likewise, dollars spent overseas on other countries’ infrastructure are the least productive use of U.S. taxpayers' money.
Jobs are an immediate problem which requires additional spending if you wish to continue this economy’s expansion. Government spending, according to the Bureau of Economic Analysis, contributed a combined 1.1 % to growth from 2008 to 2010, while the economy overall grew 0.3%.
The White House and Congress both want to do something big to cut long-term spending. Both political parties so far have rejected a clean raise the debt ceiling limit law that's been done dozens of times in the past.
Washington’s spending is contributing greatly to this economy’s marginally positive but retarded GDP. Reduce public spending without a real pickup in private spending and hiring and our GDP goes negative. Main Street isn’t being informed that the risk of a new recession increases with the reduction in federal disbursements throughout the economy. What Congress is selling is an abstract notion of spending cuts in esoteric programs to citizens that warned government two summers ago to keep its hands off their Medicare.
Short-term, a slowdown from austerity measures should benefit high quality bonds. The market risk [interest rates] posed by a slowdown would be if Bernanke panics and begins flooding the economy with liquidity. That will debase the dollar, in theory.
Considering the quantity of outstanding debt that requires serving; over $7 trillion in wealth destruction over the last three years, tenuous political situations in other nations, the deleveraging that America is going through, an aging population, and our high unemployment and productivity rates, inflation isn't going to be universal; at best it will be selective.
Credit risk for high quality bonds would appear if the economy went to an entirely different level of economic contraction - to depression. Meanwhile, there is no longer a high correlation between equities and the broader economy; however, equities will kneel before a serious financial or economic jolt when they do occur.
In this new world order that’s been created in the past 25 years, going forward, the effects of inflation on the global economy will produce three groups; winners, losers, and the unaffected. How is this possible? Will we not experience 1970’s style inflation? The short answer is no.
The 21st century global economy isn’t monolithic with recalcitrant variables as in the past. Labor, capital, raw materials, finished goods, and even creativity, are now portable in a way never imaginable 40 years ago. Also, the popularity of variable rate debt in business provides capital with elasticity heretofore unknown to counteract inflation. Every economy today is unique; in one sense a virtual construct, malleable, enabled for the first time by a digital world.
Today, investors can choose to have virtually 100% foreign currency risk in their cash portfolio. A resident of Nevada or Arizona or Florida can benefit from the collapse in those local real estate markets by renting or leasing instead of buying. Speculators can profit from the rising food or petroleum prices in Brazil or India while at the same time defray local rising costs by becoming a vegetarian and by driving an electric car or using public transportation.
Businesses can operate from seven continents. They can select from seven billion potential employees. A firm today can speak to one employee or 100,000 employees simultaneously – in multiple languages. Time and space have been erased.
In our 21st century world, an individual can construct whatever economy they desire with greater ease and specificity than ever before. This also means that the 20th century world we knew is decaying and, eventually, will cease to exist. There is no going back. During this period of transformation from the old to the new, gold and silver are profitable safe havens.

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