2011
had been touted as the year that everything would change. Massive paradigm
shifts would rock our world and many a prophecy was made regarding financial
crises, currency crises, wars, rumors of wars, and there was even one fellow
who said the world itself would end, although he later retracted his
predictions, but not before his followers had spent their life savings
putting up billboards. Such hysteria is certainly the hallmark of times such
as these, but we have to keep in mind that just because some of the predicted
events didn’t happen yet, we’re a long, long way from being out
of the woods. There is an old saying that if you do what you’ve always
done; you’re going to get what you’ve always gotten. If we
continue to sow the seeds of false fixes and faulty economics, we’re
going to continue to reap financial and economic crisis. It really is that
simple.
One
needs to look no further than Europe and its ongoing (no it isn’t over)
debt crisis. The factoids have been around for a while now. Italy’s
need to borrow roughly 300 billion Euros just to service its debt in 2012.
The absolute failure of Greece’s austerity programs. And to top it off,
the installation of shady leaders in both of these countries whose intentions
should be questioned from the outset of their tenure simply because they are
clearly establishment technocrats. Many of you have soundly criticized me for
being ‘extremist’ because I suggested several times last year
that what we’re actually seeing are economic coup d’ etats. What else can it be
called when an organization enables a country to get into trouble with debt,
then offers its own solution (more debt), then installs one of its operators
as the country’s leader to make sure the solution is carried out? How
would you feel if you had credit card debt that exceeded your yearly income
and your friendly bank rep called you and said they’d bail you out by
giving you even more credit, then sent a rep to live
with you and control your budget when you balked or didn’t make enough
spending cuts? Sometimes complicated things make sense when put in simple
terms and that is exactly what is going on here.
Austerity
is a cruel joke, and the national riots, strikes, and other discord that have
resulted from attempts at austerity must be given our attention because it is
all coming here. There is no point defined in time when a debt crisis will
blossom. Many will argue that America is immune from a Euro-style debt crisis
because we have a federal reserve that is willing to buy every single bond if
it needs to. They will tell you we are immune because our currency is the
‘gold’ standard (sarcasm mine) of all the world currencies, and
it is backed by the full faith and credit of the USGovt.
If you’re still able to read this with a straight face, then you know
what all this means. It is a paper promise based on
an even shakier perception of ‘trust’ in an institution that
deserves none. While it is true that we may not get the social anxiety and
discord because of austerity, we will certainly get it because of the total
loss of confidence in a currency that really died more than 40 years
ago. In the worst case, we’ll get both.
As
we move into 2012, the European mess has been tabled for the past month so as
not to interfere with the traditions of overconsumption and debt accumulation
that normally accompany Thanksgiving through the New Year. I find it sadly
ironic that the same Bible that speaks of the birth of Christ also speaks of
the consequences of debt and the accumulation thereof. Yet each Christmas we
spend well beyond our means not to shower gifts upon Christ as was done in
the Bible, but on ourselves and then spend the
better part of several months trying to pay it all off. Some never do. This
might seem irrelevant, but when you think about it, this is precisely what
we’ve been doing on a national scale for decades now. Borrow and spend
to fund the current ‘party’, and then push payments well into the
future. As Europe is just beginning to find out, the ‘buy now, pay
later’ paradigm has become a dog that won’t hunt anymore.
A
German Solution?
The
biggest story so far of 2012 is the negative yields on German debt.
Monday’s 3.9 billion Euro auction sported an average yield of -0.0122%
.We had a similar situation here in the US in the fall of 2010 when negative
yields were achieved on 3-month treasury bills for a short period of time.
Obviously, these are not novice investors that are making the decision to pay
a government for the privilege of lending it money. These are financial
institutions: banks, brokerages, and hedge funds that are conducting these
types of transactions. They’re willing to take zero interest, and in
fact, pay a small premium for the ability to park their money somewhere they
feel is ‘safe’. What is interesting is the fact that anyone
considers Germany to be safe. Germany is essentially the Daddy Warbucks of Europe, spreading around the hard work and
savings of the German people to the rest of Europe, which can easily be
described as the biggest welfare state in the history of mankind. Any sane
person would at this point be questioning the continued willingness (forget
for a second the ability) of Germany to continue in its role as the piggy
bank that never runs dry.
So
scared are professional investors that they’re willing to pay someone
else for the privilege of lending money to them. I’ve heard several
analysts comment that these negative yield auctions are merely a social
engineering tool that is being used to condition the rest of us to accept
near-zero interest rates ad infinitum. This may well be accurate, but just in
case it isn’t, we need to consider the naiveté of even pro
investors in terms of selecting ‘riskless’ assets. While it is
true that in absolute terms there is no such thing – as we’re now
learning the hard way, there are certainly better means of lowering your beta
than just piling money into a country that is filling its role on borrowed
time. Yet the same people who dove into subzero rate auctions in Europe are
the same ones who dove into our subzero auctions just over a year ago. Such
folly underscores the need for the re-emergence of hard currencies; meaning
those backed by gold and/or silver. Resource-backed currencies such as that
of Canada aren’t bad, but their value is still at the whim of
policymakers, not nailed down to underlying wealth and the ability to
consistently balance payments in the long run.
The
willingness and even zeal of investors to accept negative rates is a ringing
endorsement of the need for a new gold standard. I am quite sure that
it would end up being perverted over time as all prior
‘standards’ have, but in a time of extreme crisis such as where
are currently situated, having a bit of financial bedrock certainly
wouldn’t be a bad thing. It certainly beats the quicksand we find
ourselves trying to navigate today.
The
Second Biggest Story of 2012
Buried
under the headlines of Presidential politics and ‘who said what about
whom today’ is the fact that the current administration has formally
requested that Congress increase the debt ceiling by another $1.2 Trillion. I
say the following only to point out the acceleration of the debt cycle in the
past several years, not to pin the blame on any politician; they’re all
responsible. In early 2009, the national debt was roughly $10.6 trillion. The
most recent request to take the limit to over $16 Trillion will last the
government less than another year if Congressional Budget Office projections
prove to be accurate. Our actual debt just passed 100% of GDP. Exhausting
this new increase will push it well past the breaking point of the Eurozone.
Does anyone really think there will be no consequences for this flagrantly
irresponsible fiscal behavior?
While
there is no way to pin a date on when the current Keynesian debt paradigm
will end, what we can be 100% sure of is that it will end. Will it be at
100.3% debt/GDP or will it be 200.3%? We don’t know for sure, but at
some point, the weight of the mistakes of the past will be too much for the
future to bear and it will all come crashing down. The system is too big to
fail, yet at the same time it is already too big to save. The actions of
policymakers to date give little reason for optimism as much of the emphasis
is on kicking the can down the road and pushing the inevitable far enough
into the future so that it will be someone else’s problem. What
is particularly disturbing is that most of the election year rhetoric focuses
on attacks rather than on solutions; so much that you can almost hear the
fiddles playing as Rome burns.
Until Next Time,
Andrew W. Sutton, MBA
Chief Market Strategist
Sutton &
Associates, LLC
Interested in what is going on in the markets and
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