Wednesday, December 15, 2010

Bond Market Tumbles Downhill and Why Bolivia May Avoid The Collateral Damage

12/15/2010 Cochabamba, Bolivia Pop in your mints

A quick look at the markets shows that Bonds are continuing a capitulation that is beginning to border on dramatic.  Market forces will always overpower any government, military, or central bank on the planet.  Never bet against them.  The case against Bonds has been clear for some time now.  The trick is guessing when what is obvious will become common knowledge.  It is at that point that the Market executes its judgment.

The verdict is in:  Bonds are guilty of gross oversupply.

From our perspective here at The Mint, we believe that this dramatic rise in Bond yields is one of the warm up acts to the grand finale which involves high rates of inflation (probably hyperinflation) and the disintegration of the US Dollar system that has dominated the financial world for nearly a century.

Now that we know how the play will end, what will be interesting to see is how the rest of the acts will play out.  But before sitting back to enjoy the fireworks, ensure that you have adequate protection for your assets, meaning a portion of them in real estate or preferably physical Silver and Gold.  A month’s worth of food could come in handy as well.  Once that is taken care of, you truly have little to worry about.  Now help your family, friends, and neighbors do the same.

Rising Interest Rates could mean Rocketing Wage Push Inflation on the Horizon!
We see a report of Bond market collateral damage as rate increases begin to price marginal buyers out of the housing market.  This would not be a problem except for the fact that nearly everyone lives close to the margins economically.  We are always at the point of either making an acquisition or selling something depending upon our surplus or lack of liquidity (money).  No matter how you look at it, higher interest rates are bad news for the housing market.  The only logical way to remedy this situation would be for workers to receive some form of real or nominal wage increase, which the Obama / GOP Tax package will help to do.  This adjustment is necessary to bring housing prices back in line with wages.  If housing were to return to a historical average, its ratio to wages would be for one house to cost roughly three years wages.  The Market will get it there one way or another.  The way things stand now we would bet on it getting there via a dangerous wage push inflation spiral.

Despite the dangers, the FED is pushing forward with QE2 citing unemployment statistics.  Sadly, more cheap money will not mean more widespread employment.  It may increase busy, inefficient, and unproductive work, but the real economy will suffer.  The good news is that the Senate may give the Obama / GOP Tax package to the American public as an early Christmas present.

We continue here in Bolivia passing what has become our annual holiday.  Far away from the hustle and bustle of the USA, Bolivia is a unique place on this planet.  It is located in what would be the heart of South America.  Our lovely wife hails from here and we are here visiting family while enjoying a life of leisure.  The days generally consist of “Comidita” (a social lunch), followed by a siesta and later on a “Técito” (a social tea).  Time to think and clear the mind is a gift on this planet these days and we are quite grateful for it.

The people of Bolivia are extremely friendly and, it is worth noting, that this is a place that appears unaffected by the global financial crisis.  The only thing the collapse of bonds and the printing of trillions of dollars appears to have done to its economy is to stimulate production.  The financial sector is a relatively small part of the Bolivian economy, which tends to focus on a single commodity at a time.  Why is the financial sector so small?  With roughly 27% of non-performing loans as recently as 2002, who would want to loan money?  Better to produce and be paid as you go.  Does this sound a lot like “Neither a borrower nor lender be?”

In a round about way, Bolivia saved itself from the imminent bond market collapse that we are going to experience not by foresight, but rather by letting its banks take their losses when they make bad decisions.  What a novel idea.

To bad over 90% of bank deposits here are held in US Dollars.

Stay Fresh!



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Key Indicators for Wednesday, December 15th, 2010


*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.