8/8/2011 Portland, Oregon - Pop in your mints…
Oh my. Two words, four meager characters, made famous by Jesse “The Body” Ventura during his ringside blow by blow commentary in the glory days of the WWF (circa 1986). These words, which so eloquently summed up the effects of a pile driver, seem strangely appropriate to describe what is occurring in equity markets around the globe during their first chance to “react” to the S&P downgrade of the US Government’s sovereign debt rating.
As we write, the Dow is down 5%, ditto for Oil. Gold is up over 4% and the downgraded bonds of the US Government of the 10 year variety are up (in other words, yields have fallen) approximately 4%.
Still guessing? We won’t keep you in suspense. This downgrade, whether deserved or not, early or late, is wreaking havoc with mutual fund investment policies which call for excess funds to be held in AAA rated debt. There are not enough German bunds or UK gilts in circulation to pick up the excess funds gushing out of Treasuries.
The obvious implication is that USD bank deposits should rise.
More deposits that it can’t lend at a profit would tank behemoths like B of A, and Uncle Sam may have trouble saving it. That, and B of A is being sued for fraud, again.
Enough of B of A, back to the money flying out of US Government obligations by investment policy edict. Where will this money go? That is what is currently being sorted out in the markets. And at the moment it is UGLY for equities on a global scale. Don’t worry, by late next week, so much money will be pumped into the system that equities will have no choice but to rise.
We can’t help but think back to this chart (BELOW) showing the proliferation of AAA debt in the world. It seemed as if it was everywhere, like pine trees in a forest. Now, with one simple action, those who trust S&P’s judgment (which history has show is at one’s own peril) find themselves with at least $14 Trillion less AAA issues to choose from. More, if you count the implied downgrades of government agency and other government guaranteed debt.
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| An abundance of AAA Debt! |
Stepping away from the technicalities of investment policies and looking at the downgrade in a philosophical sense, it is like a minor earthquake that triggers a tsunami that the financial world is now helplessly watching roll ashore, or like a giant snowball has been pushed downhill and threatens to start an avalanche.
The Central Banks of the World!!! Not exactly knights in shining armor, if you ask us. We might be more comfortable if Pee-wee Herman were on the case. At least he could provide entertainment as the demise unfolds!
The downgrade is another chink in the armor of the world’s largest knight in shining armor, the United States of America. Every day, more people are coming to grips with the fact that the US of A cannot provide security and social benefits at such low rates. Bill Bonner of the Daily Reckoning regularly explores this decline of the American Empire.
As we touched on the other day, what man calls nations today are, for purposes of analysis, simply competing security agencies which have a man-made geographical monopoly. The problem, as any businessman will tell you, is that nowadays the agency’s customers can’t take the price hikes. Neither can they easily choose to move their business to a competitor. Expatriating is not cheap and involves a host of logistical problems.
The book of Isaiah, chapter 40, God refers to the nations as a “drop in the bucket” and “dust on the scales.” The obvious implication is that nations do not last, and in extreme cases, dealing with a government may feel like one is dealing with the Mafia. The need to preserve a geographical monopoly can make an analysis of the actions of a government or a mafia eerily similar.
Seem through this lens, S&P is like the snitch who broke Omerta and tells everyone that the Mafia boss can’t pay on his contracts. Now the boss will likely face an increase in the vig on what he owes the loanshark.
How long before the rat gets whacked?
Don’t forget to keep your eye on events in the Middle East, especially Palestine. Something bigger than we image is brewing there and our guess is that the eyes of the world will soon be focused there.
Stay Fresh!
Email: davidminteconomics@gmail.com
P.S. For more ideas and commentary please check out The Mint at http://www.davidmint.com/
Gold Price Per Ounce: $1,718 PERMANENT UNCERTAINTY
MINT Perceived Target Rate*: 2.00%
Unemployment Rate: 9.1%
Inflation Rate (CPI): -0.2%!!! PULL OUT THE HELICOPTERS!!!
Dow Jones Industrial Average: 10,899 TO THE MOON!!!
Unemployment Rate: 9.1%
Inflation Rate (CPI): -0.2%!!! PULL OUT THE HELICOPTERS!!!
Dow Jones Industrial Average: 10,899 TO THE MOON!!!
M1 Monetary Base: $2,012,200,000,000 RED ALERT!!!
M2 Monetary Base: $9,226,100,000,000 YIKES!!!!!!!
M2 Monetary Base: $9,226,100,000,000 YIKES!!!!!!!
