Tuesday, August 9, 2011
Developed World Debt Crisis Accelerates...
Developed World Debt Crisis Accelerates
It’s been quite an eventful week as events around the world unfolded in a negative light which saw global markets crash and see their worst weekly losses since 2008. The S& P showed a clear technical sell on Tuesday with the neckline of the right shoulder in a head and shoulders pattern being broken. The market then tried to capitulate but failed to break resistance confirming a new downtrend which led to a very ugly drop in markets the rest of the week. And then we had the downgrade after market close on US debt by S & P. Just what everyone needed.
The markets reacted negatively to the US debt deal with nothing being resolved leading everyone in the world asking what is wrong with American politics? If nothing changes, we are all doomed. If political gridlock remains for the next decade with no change in fiscal policies then the proverbial ‘worst is certainly yet to come’. What makes this insanely frustrating for everyone in the world who is not in Washington is that it is clear to all that a dual pronged approach of increasing revenue and spending cuts is what the country needs to even start to right its debt problem. It also leaves us precariously close to one more downgrade from either Fitch of Moody’s setting everything in motion to have things spiral out of control.
Add all this to the fact that Europe can’t keep their house in order long enough to go on summer vacation, we really do have a problem.
What should have been a positive or at least a ‘none event’ has become a landmark sentiment changer as political gridlock and bipartisanship have led capital markets to lose faith in America’s government to find a real solution. The 2 trillion in cuts that were made to the deficit over the next 10 years in a last minute deal fall way short and do nothing to alleviate one of America’s biggest problems. The widening wealth gap that threatens to destroy the middle class in American and turn them into the working poor, all the while corporations continue to real in record profits.
If the unexpected drop in markets after the debt deal was signed was not a big hint of a huge change in sentiment... then the S & P downgrading US debt to AA status should be another reminder of how close we are to going over a cliff. Real arguments can be made for inflation and deflation which I know sounds absurd but we have economic conditions for both going forward. Certainly when the debt bomb goes off, all we are going to hear about is inflation as the USD spirals into oblivion. Austerity measures taking place all around the world make the case for deflation.
We are not there yet and bets are that Europe takes it on the chin first but Friday’s downgrade no matter how telegraphed days before is still a landmark event where global markets will react negatively. This is all the beginning of the end as the USD being the global reserve currency. Ultra low interest rates will be coming to an end very soon. The only thing propping up US debt is China. As long as China follows a policy of pegging to the USD they have to buy treasuries and the USA has a buyer. But if China changes policy… the US may find it increasing ly hard to find a creditor. ANtoher thing that keeps the USA debt scam alive is that there is no other alternative around the world. Certainly not in times of panic… buying T-bills on a bad day in the markets is almost like a knee jerk reaction. The S & P downgrade will not have that much of an effect on global interest rates over the short term because of China, but this is a major shift in sentiment which is going to get the ball rolling towards what no one is really certain. But it is most likely not that good if the USA can’t get their house in order and many people think it is already too late.
AKA BEN and is QE.
The FED has to keep the rates low as they cannot afford the extra debt maintenance and will continue to keep them as low for as long as possible to keep from issuing even more debt just to pay increasing interest costs. This is the crux of QE. It is not stimulus and never was intended to be stimulus…
QE is all about…
Uncle Sam printing money to pay down his debt because he is broke.
It is only a matter of time until the bond vigilantes string Uncle Sam up by the gonads and start demanding higher rates to hold US debt. Is it next year? I doubt it as this will only happen when there are no more buyers of US treasuries. When that happens I do not know as I cannot predict Chinese policy or any other foreign policy. Certainly not the timing of it.
Obviously the politicians play to the ‘not in my term of office’ tune and will try and push it as far down the road as possible, but it is not up to them. China has been grumbling mightily this weekend and last about American politics not comingto a solution and now the downgrade by S & P. What I do know is it will put a spur in Ben’s butt to buy more treasuries as the US now has much less time than anyone predicted.
If interest rates shoot up overnight to 10% then the US will go straight to default. This will not happen of course, but I do expect 10% rates by the end of the decade and maybe even higher which makes the debt market the worst place to be. It certainly would make Uncle Sam;s debt payments by the end of the decade at only $2 trilion cuts unmanageable. Without QE… the US might already be in default. QE isn’t about stimulus, it’s about paying off their bills. The easiest way I know how to pay the bills is just to print more money. Paper costs nothing. It's what the crooks do. When did the mafia start running America?
Unfortunately the crooks mindset is this...
You tell me what is better? Default by debt monetization or an outright slowdown in the economy, a double dip recession which forces the country into bankruptcy. Ben better print those dollars as fast as he can because sooner or later someone is going to slap the handcuffs on the US printing press which will be around the same time the bond vigilantes start to ratchet things up. This situation could eventually lead to huge global tensions but USA will do what is best in their interest as other nations will do for themselves. In my opinion debt monetization is the least painful solution to a very bad situation... but morally the wrong way to go... especially when you are supposed to be the gatekeeper of the worlds financial system. Here is the image I like to leave you with. We are all playing monopoly and we all get a certain sum of money to buy proeprty and houses and have to pass go to earn money or get rent later in the game. Except for Sam the banker who gets his sum of money, but buys all his properties and house and hotels with the banks money and he still collects for passing go!
If Sam was playing with any of US.. we would accuse him of cheating. Problem is that the world is passive because the alternative scenario is worse. Especaily in the short term. What do I tell my subscribers to do in unceratin times like these? Buy gold… ETF’s, producers, majors, developers, and explorers. Seasonally it’s the time to load up and gold is just starting to gain some real steam with the impending debt crisis showing some legs.
Current downgrade… likely a “Capitulation Event” for Traders
This is certainly what you call the ‘dog days of August’ and with the S & P futures already down 25 points and gold up to $1700 this Sunday evening you know Monday is going to be a blood bath. I wouldn’t be making any long bets on Monday but at some time this week you are going to see some pretty good trading buys appear in the market. Despite my doom and gloom comments above, this is not the end of the world, not yet and recent events will push the fed to ramp up QE again. The last thing everyone wants to see is a double dip recession which is now looking much liklier with signs of the global economy weakening especially without QE. Keep your eyes and ears glued to Ben at Jackson Hole, if QE is not announce, it is almost a 100% certainty that the markets will acceleration to the downside this fall. With QE… it will be a tug of war. Certainly relief will come into the markets as QE in my opinion staves off default but not much more than that. It certainly creates a grae envirnoment for commodities and the risk on assets that I talk about.
Global markets are weakening
There have been several global macro trends that lead me to believe that the developing world is about to hit a recession. There has been a decline in the service sector globally. This is never good news as the service sector benefits from the fat in society and if there is not much fat the service sector is the first place that gets hit. Another big clue that global markets are at a head… INVERTED YIELD CURVES. Yes this is an old clue, but it is tried, test, and true and 99% of the time indicates that a recession is on the horizon. The US economy is still the engine that drives the global economy and a faster than expected slowdown in the US is showing up everywhere else in the world. Many will have a false hope that QE will save the global economy. QE is just softening us up for the inevitable. A default… in fact we are in a soft default. If FED couldn’t print money. There would already be a very different tune.
Gold Producers lagging Gold Price – Changes in the wind ahead
For the first part of the gold bull run from early 2002 to 2007, the gold producers outperformed the spot price of gold. The producers led the charge. Since then the spot price has led while producers have lagged big time. There are several reasons for this with a lot of people saying the wide choice of investment alternatives as the culprit. I am not so sure. The real reason’s the producers have lagged is rising costs in the industry over the last 5 years which pretty much matched the rise in price of gold until early last year when gold traded above $1100. The price of gold has accelerated so much that there is no way that costs can out pace the recent price gains or future projected gains. This is now being realized with the majors recording record revenues over the past year and these earnings are going to get that much crazier as gold continues its onslaught towards $2000. Last year was a land mark year for most gold producers as they are now profitable on a real return basis and not just nominally. I would buy the producers b/c this year is the year that the pendulum starts to swing back in favor of owning gold equities over the physical metal or an ETF.
Another reason the producers do not get much love from the investment community is that they pay a paltry dividends. This is now starting to change with producers like Newmont tying the dividend to the price of gold which will inevitably attract a new class of investor to the producers that are seeking yield. This is in addition to the risk adverse investors and the growth investors. The perfect storm is finally brewing for the gold producers.
This gold fever about to hit the market will trickle down into the developers as gold companies have never had so much cash in their lives and they need to replace the ounces. It is much easier to buy the ounces and put the final touches on a mine than start from an exploration project…. especially with the value that a lot of these gold stocks represent. The producers could never add the ounces for the price that many of these stocks are trading for. Why drill when you can use cash from operations to buy the ounces at hugely discounted prices?
All gold stocks from here on out are going to sell at a premium!!! Even if the market crashes… gold stocks will barely flinch as people will see this as the only way to hold real money with impending debt crisis and currency crisis issues happening globally.
We are now entering a period of seasonal strength for the entire gold sector so this should be another stellar late summer run for all gold stocks.
My initial thesis was that QE3 would come on the heals of a rocky summer that would guarantee another stellar season for the gold sector and save the markets. I am now doubting QE3 will save the markets and will only provide a temporary relief. Half the world is bankrupt, the other half is cash rich trying to figure out how to protect itself from the other half going broke. The only solution that anyone will find to ease the pain during the crisis is to buy and hold stuff, certainly not paper.
BUY SILVER… It is going to be trading $50 plus by the end of August!!! POS always lags POG in the summer by approximately 3 weeks. BACK UP THE TRUCK!!!
Gartman says that anything you can drop on your foot that hurts is a good investment. I tend to agree… with the caveat that precious metals will lead all materials. Non-precious metals will play catch up according to their strategic nature. This will continue to happen until the debt crisis is solved.
Some stock picks…
It’s time for the producers to outperform and outshine all others. It’s time for gold to bring back its shine... especially to the producers. I got 3 small guys that are close to home and deserve a serious look, all being in historical areas.
Barkerville Gold Mines $1.50 is going to be hot having consolidated the historical lands surrounding one of BC’s biggest gold rushes. This producer is a top pick for small scale producer that could seriously ramp up to well over 100,000 ounces per year once in full production. Barkerville has been consistently been getting excellent results so expect a very large resource on this project.
Bralorne Gold Mines BPM-V $1.04 is the site of another historic gold rush in BC where millions of ounces have been produced between BPM’s current site of operations near Gold Bridge in BC. BPM is easily a 5M – 10M ounce deposit of untested high grade gold. These guys are starting small with 20,000 – 30,000 oz’s of production a year and financing future exploration and expansion out of cashflow. BPM could eventually be an underground operation capable of producing 3 – 4 times the current start up focus.
Sutter Gold Mining SGM-V $0.205 is another gold producer who is focusing on initial production of 25,000 ounces at their Lincoln Gold Project in California. They are fully permitted, fully financed and on track for production in the first quarter of 2012. Lincoln is a site similar to Bralorne where the company is mining a site between 2 historic sites with millions of ounces produced and multimillion ounce exploration potential.
With projects like BPM and SGM… it is easier to put in production without going through all the stages of feasibility and spending half a billion dollars chasing high grade veins with a drill bit when you can just dig it up because the mines never dried out, they just went out of business when the gold prices came down.
Another that might be fun if markets continue to crash… TVIX.
Happy Trading and buy gold. You will lose a lot less sleep over the next couple years.
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