August 5, 2011
Vilnius, Lithuania
Fridays are normally the days I like to engage in a light-hearted Q&A, answering subscriber questions on a variety of topics ranging from libertarian philosophy to exotic international travel to investment insights.
Given the meltdown that we witnessed yesterday, however, I wanted to take a moment to cut through the BS and point out some simple truths for you.
First, it’s interesting that the US government was largely silent on yesterday’s market carnage. The Treasury had no official comment, and the White House had no official comment.
Nobody wanted to touch it… let alone admit that the embarrassing debt saga coupled with the dismal performance of the government’s economic growth initiatives has caused a widespread loss of confidence. That would certainly have been a party-pooper on Obama’s 50th.
Only one official, the deputy director of the White House National Economic Council, stepped forward to say that the administration believes its new jobs growth plan will calm the markets: “There are things we know work and we know will have a positive impact, and these are the things we’re going to push for and fight for.”
This is scary for a number of reasons. How do you ‘know’ that something works, when nothing you’ve done has worked so far? How do you ‘know’ that something will have a positive impact, when just about everything that you’ve tried has been destructive?
And yet, they’re going to keeping pushing and fishing for more of the same– more spending, more debt, more money creation, all aimed at senseless, wasteful ‘job creation’ programs.
Three years and trillions of dollars into the full-on crisis, there are few tangible results to celebrate. The only jobs the government can create are within its own bureaucracy– more TSA agents to molest our grandmothers, more enforcers to shut down kids’ lemonade stands.
But in terms of adding real value to the economy, they haven’t a clue… and it appears that the financial markets got a good, stiff, sobering wake-up call to this reality yesterday.
Nearly everything tanked. Stocks worldwide plummeted, and the Dow Jones dropped over 500 points, closing near its low for the day. Gold, on the other hand, showed marked resilience, shedding just a fraction of a percent.
This is another indication of gold’s long-term growth trend– even when markets are plummeting, institutions are pulling their funds out of stocks and putting them into gold. To savvy investors, this inanimate hunk of metal is worth far more than a politician’s empty promises.
Bonds are the ultimate proxy of those empty promises… and given the sheer volume of misguided investment capital that went into the bond market yesterday, there’s an obvious opportunity in shorting the 30-year Treasury bond which closed yesterday at a yield of 3.68%.
Think about it– would you loan your hard earned cash at a fixed rate of just 3.68% for 30-years straight to the largest debtor in the history of the world?
That would be sheer insanity… yet there are plenty of fools who are doing it.
To put things in perspective, there have been only 95 times since 1977 when the 30-year yield was this low… and the average yield during this time period was 7.76%, more than double the current rate!
This is an absolute gift to speculators who can see that US politicians have solved absolutely nothing with their recent debt deal; the federal balance sheet will continue to deteriorate, and allowing for short-term fluctuations, betting on rising 30-year yields at this point will be a veritable gold mine.
I’ll have more on this in another letter. For now, I will bid you a happy and safe weekend as I am off to enjoy the Lithuanian countryside.
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