S&P Under Attack from the Government

Posted by Ray on August 8, 2011 under Main | Be the First to Comment

I had made a prediction last year, found HERE, that US Treasuries would be put on negative watch by Fitch and downgraded to junk by China. Well, I was wrong as it was S&P who made the call and actually did downgrade the US to AA+ which is still a joke as the government will never be able to actually repay much of the $14T it has outstanding without just printing money, which IS a form of default. China is now saber rattling about the US dollar again, but this time they are serious, I think at least, asking for a new reserve currency and I think they will get what they want as other countries have raised the same concerns.

The US deserved to be downgraded and we should be downgraded much further than AA+ as we will not get serious about debt reduction. To prove my point all we have to do is look at how the debate is structured. The politicians are all talking about annual deficits and NOT the outstanding debt load. They do all sorts of double talk to make sure the average person only believes we have a trillion or o in outstanding debt, but that trillion is just the annual deficit and no one talks about the big number of $14T in outstanding current liabilities. S&P gets it and that is why they are the first one to downgrade the US.

When the downgrade happened the Treasury Department acted quickly calling the move unjustified, political, terrible lapse of judgment, S&P made a mistake, and these are the same people who rated junk bonds AAA to begin with. While it is easy to criticize S&P for their prior actions, but relative to its sovereign debt ratings those arguments hold no water and anyone with a stitch of unbiased rationale realizes that the US is indeed in big trouble and we do not deserve a AAA rating. The worst part about this downgrade is the fact that the government is now baring down on S&P about this downgrade.

It was just announced that the Senate Banking Committee will be looking into the downgrade. While we do not know if hearings will happen or not the person close to the matter did say all options are on the table. I was under the impression that Congress wanted independent ratings agencies along with an independent Federal Reserve. Silly me I guess as the minute a ratings agency does the right thing they try to crush it with Senate investigations, but the Federal Reserve can monetize trillions in US debt without Congress blinking an eye, unreal.

What Congress is saying is be independent as long as you do what we say and want and if you decide to think for yourself, well, we will hunt you down and skin you alive. The government is acting very much like the old Soviet Union and is sending a message, not matter what we do keep us rated AAA. How can a ratings agency offer an independent review of a security if the government demands that it gets what it wants regardless of what the facts are? It is insane to think that the ratings agencies will remain independent if Congress has investigations if the US is downgraded. Frankly, this is extortion, blackmail or a combination of the two since the government is the one who issues S&P with its ratings license. Will S&P lose its license over this? I do not know, but it is possible and shameful if that is what happens.

As an American you should be angry over the downgrade, but not at S&P. You should be angry at the people who rubberstamps every bill that comes along wasting billions of dollars. You should be angry at their inability to work with each other and address the seriously obvious structural issues that will consume immense amounts of capital in the coming years. You should be angry that the Senate wants to investigate S&P while saying other quasi government agencies are left alone even though they are part of the problem. You should be angry that Alan Greenspan, Mishkin, Bernanke and every other clown out there says the US will never default because we can print our own money to pay the debt, devaluation IS a default.

You should NOT be mad at S&P and you should demand that Congress work on real problems because their lack of dealing with those problems is exactly why S&P downgraded them to begin with. We are not showing the world that we are capable of fixing any real problems. What we are showing the world is that if we do not get our way we will simply create problems were none exists and threaten the “trouble maker” with depriving them of their livelihood or by throwing them in jail. Way to go America.

Subscribe to Annuity IQ's Feed

LS Blogs


Sphere: Related Content

Palladium!

Posted by Ray on April 14, 2010 under Main | Be the First to Comment

Those who read my material know that I am a bull on precious metals and have been for some time. The main reason is because over the long-term the Federal Reserve intentionally devalues the dollar, its buying power is down some 95% since 1914. The most recent reason to be bullish on commodities as a whole is because of Obama’s plan to double exports within 5 years. This is a lofty and unachievable goal unless you plan on devaluing the dollar. Based on our debt load the devaluation of our currency will happen whether we like it or not.

I have been more bullish on silver and palladium over the recent months. I started buying silver at $9/oz and palladium at about $230/oz so I have hefty gains already, but I believe this is only the beginning. With both of these metals you are playing both a global recovery, which I see happening, but not as robust as the talking heads claim, or if you believe the world is going to end. Either way, you should own these metals, perhaps wait until they selloff in the near future, but nevertheless, why wouldn’t you own them?

Silver is used in almost everything you have in your house, from your TV to your cell phone. Silver is also going to be under tremendous pressure in the near future as the global population grows and people are lifted out of poverty because everyone wants a cell phone, computer or even a mirror, yes silver is used in mirrors as it is the most reflective metal in the world. Silver is a dual purpose metal as it is used in industry and as a store of wealth. The Chinese and Japanese used a silver based currency in the 20^th century along with the U.S. as a bi-metal currency. Regardless, whether you think the world is going to end, own silver, or whether you believe in a global recovery, buy silver. Surface supplies are dwindling and all the easy silver has been mined. Combine that information with a growing population and we are bound, rather soon I suspect, to have a shortage in the supply/demand curve. Silver is an easy sell.

Palladium has been on fire lately moving up from $420/oz to $545/oz as of today, it was up $25 today alone! Palladium is used as an industrial metal first, mainly in catalytic converters, but it also is used in jewelry and as a precious metal, it was only recently that this usage has grown. Palladium is also a “green metal” as it can be used in several clean energy items, hydrogen cars for example. In short, it is a cheap alternative to its bigger brother platinum. Believe it or not, palladium is rarer than platinum and the largest world supplier of palladium is Russia.

I personally believe Russia is a pretty volatile place, I think history proves that point, which means the supply of palladium can be reduced if Russia throws a temper tantrum. There is always the possibility that Russia does something we do not like, like go to full war with Chechnya or invade Georgia, the country not the state. We could also upset Russia as well by invading, say, Iran, North Korea whoever which could create tension between the U.S. and Russia which could lead to less exportation of palladium to the U.S. If that happened prices would go through the roof.

The big story with palladium is the growth of automobiles in India and China. Between the 2 countries there are over 2B people who are being lifted from poverty to the middle class. As they ascend from poverty they will want what we have, cars. This means lots of catalytic converters in lower cost cars. Ultimately this means they will use less platinum and more palladium, regardless of where it comes from. All of this is a bull case for the metal and I think it could go much higher over time.

I believe the metal will be volatile, silver as well, because of the ETF’s designed to buy both metals. These ETF’s are likely the reason we see prices climbing recently so it is tough to know if the demand for the metals is organic or artificial, for investment purposes. Eventually people will sell PALL or SLV which will cause the prices to drop and that is the time to buy, IMHO. Also, if the dollar strengthens, which is what I think will happen, prices will drop then to. However, long-term I believe both metals are the trade of the century.

I am in no rush to sell what I have and am an active buyer, even at these levels. If you do a Google search for palladium coins or bullion you will see the supply is tiny. You can get palladium bullion, but you will pay a hefty premium for it. This is because supply is so limited and, as we know, you cannot just make more natural resources so the supply is finite. The price action is very exciting to those of us holding the metal already and what I like is the media never pays attention to either metal, never palladium though. Today with a 5% rise in value, no one said a thing, but if it was gold we would hear all about it, mostly negative things and gold bug jokes.

Silver and palladium are no joke and one should consider owning them. At the very least it is diversification especially if you own PM’s already. I am sure there is a bear case out there for both these metals, but I cannot find one that is reasonable.

Subscribe to Annuity IQ's Feed

LS Blogs


Sphere: Related Content

U.S. debt, no big deal?

Posted by Ray on March 7, 2010 under Main | Be the First to Comment

I just read a Time Magazine article today about the U.S. debt and how it is no big deal the U.S. has so much debt. In fact, Zachary Karabell actually believes that our debt is a good thing. I have actually met Mr. Karabell last year at a conference we both spoke at, although he was paid and I was merely on a panel, but it is unlikely he would remember me. Regardless, I have to humbly disagree with the conclusions he came up with in his article.

Debt can be a good thing, but only in small amounts and for productive reasons. For example, a business that takes out a loan to hire a new employee to expand their business would be productive debt as it contributes to society, hopefully. However, taking out a loan to buy a 50” high definition TV is, in my opinion, a terrible reason to add debt to ones balance sheet. The U.S. government borrows money, recently, to hire people and encourage spending, but the government is not creating productive jobs because it creates nothing and it must tax the people in order to pay off the debt for the job it created. The government actually destroys wealth through taxation and wasteful spending. Basically, the government is borrowing money to buy big screen TV’s, bad debt.

The U.S. government does need to carry debt because we are the reserve currency and carry trade deficits. Debt for a government could be a good thing if that country is the reserve currency, but there is a point where too much debt is the ultimate problem. The impact of too much debt over time during strong economic times may not be a major problem because a growing GDP means more tax revenue is being collected and should increase over time as long as conditions are good. However, any economy has cycles where there are good and bad times, we are currently experiencing bad times, and when times get bad that large debt load becomes a problem and is no longer good, Greece is a good example of this, kind of.

Excess debt during poor economic times means tax revenues decline and the government will have to run deficits to pay for its spending, I am way over simplifying this. Generally, a government will spend much more during these bad times to spur the economy, known as the Keynesian Theory, but this spending, in my opinion, is not the way to spur the economy. As the debt builds and the central bank cuts interest rates the debt during these bad times might not seem so bad because the country has artificially lowered the cost of borrowing, again to spur growth. The key word is “artificially” lowered interest rates and the current interest rate may not actually reflect the current economic conditions or the risk of holding said countries government debt. The reason people ignore deficits more during lower interest rate periods is because the cost to carry the debt is so low, like now.

The U.S. currently has over $12T in debt, heading much higher rapidly, but the carrying costs of that debt is about $500B a year. Keep in mind this is because the Fed Funds Rate is at .25% which means yields on the U.S. government debt is very low, artificially low. The government can currently borrow money for 30 years, for those crazy enough to buy it, for less than 5%, not a bad deal, right? However, what happens if the bulls are right and the economy is recovering and rates have to increase? A 1% increase in Fed Funds would mean the aggregate increase on our debt would be roughly .70%, most of our debt matures in less than 10 years, not good I might add. That means our debt servicing costs, the interest we pay, would increase to about $600B a year, still not bad.

The problems start to get real bad when the Fed increases rates to say 3% or so. The cost to borrow on the 30 year treasury would go up dramatically to about 6%, on the conservative side, and even out short-term interest rates on our bills and notes would go substantially, everything is relative, higher. Before I go further you have to remember that debt is a deadly circular beast because the more you borrow the more you have to pay back and during rising interest rates in order to make all of your payments you either have to tax the people or have more deficit spending, guess which will win in the U.S.? If rates go to 3% because of a hot economy the interest on our debt servicing costs will quickly rise to about $800-$900B, depending. It will take no time at all for the interest payments to reach $1T and considering our debt mostly matures 10 years or less you cannot forget the refunding that must take place. The CBO just did an estimate on a lot of this in the past few days, I did not read the report, but I know the final numbers without a lot of obvious assumptions end up close to what I just said.

Karabell makes the argument that the U.S. would use the borrowed money to retrain our workforce and rebuild our infrastructure. That may be the case, but to fully upgrade our infrastructure, not including pie in the sky green energy items, would cost about $2T. I believe the last stimulus only applied a small portion of what is needed, so the infrastructure idea Karabell had does not pan out in my book. Plus, there is no return on infrastructure immediately, over time yes because it makes commerce easier, but that takes time. He also made the case that China and India are flush with cash and building their infrastructure now and, I think, was indicating that since the U.S. is so stable that excess cash will end up here, which is reasonable to assume, for now.

What he failed to address is the fact that the money they are flush with is ours from them exporting goods to us. Because they have such huge exports to the U.S. we have a trade deficit with them and they need to buy our debt to balance it out. It is a case of vendor financing and all vendor financing ends up with someone getting hurt, guess who in our case? The point I am making is that the Chinese and Indians will buy our debt now because treasuries are going up in value, thank you deflation, but how long will that continue for? Not only that, but if China un-pegs their currency from ours it will appreciate and their treasury holding, in RMB terms, will decline. Why would one invest in treasuries if your currency is rising and the country you are loaning money to as a declining currency, you wouldn’t do that.

Essentially, all gravy trains end and there is a limit to how much a country can borrow. Consider the U.S. has implicit guarantees on not only our debt, but also on banks, insurance companies and the mother of all bad investments the GSE’s. Oh, and if you ever expect to see GM pay back the money they got, well, I wouldn’t hold my breath on that one. All of those guarantees are about $23T, not including the national debt and the entitlement guarantees we have. Again, my point is the limit to what the market will allow a country to borrow cannot be far off. At the very least we will need to pay a greater risk premium on our debt which means the interest rates on our government bonds will detach from where the Fed sets them at and go through the roof.

I get what Karabell is saying, but he is speaking in the here and now which is suicide when talking about so much money. You must look forward in order to see the real problems and it is kind of crazy to think that all this borrowing will go towards retraining the people and vastly improving our infrastructure. The government is the worst at spending money efficiently and much of that money goes to wasteful projects like DNA research on bears in Montana, no offense to bears, but I just do not care about their DNA. On top of all that, who knows if we will actually emerge from this downturn, sorry I do not buy an inventory rebuild as a real economic recovery. If we do not exit this thing in the next10 months our problems will be bigger than we think.

On top of all of this there is the whole impact to our currency, which is not good. The more debt we issue the more we dilute our currency and at some point the world will demand some type of other reserve currency, it is being talked about now. If we lose our reserve currency status we are in a heap of trouble, I know that could ‘never happen.’ All of these problems or these potential problems leave me a couple of conclusions, besides the fact that bulls will spin even really dangerous debt problems positively, that; 1) Precious metals are cheap and 2) The Fed will never raise the Funds rate to a reasonable level again.

Subscribe to Annuity IQ's Feed

LS Blogs


Sphere: Related Content