The announcement that Dubai is going to push its bond payment forward to next Spring (default on the interest payment) sent shock waves through the financial world this past week. If rich Arabs who build indoor snow slopes to ski in the desert cannot be trusted to repay their loans, well then - who can we trust? With States and municipalities hurting from reduced tax revenues, their bonds are being looked at with skepticism, as well. The deflation crowd has scared bond interest rates to an all time low. The Federal Reserve has painted itself into a corner. If they keep rates this low for much longer, then foreign investors will pull their funds out of the US, since inflation seems to be much higher than interest rates. If they raise rates to attract foreign investment to purchase our debt, it just might throw the fragile US economy into a tailspin. Their only choice is "quantitive easing," which is just a nice phrase for monetizing the debt, which is highly inflationary. They can just keep the interest rates low, run the foreign capital away and buy the debt themselves with newly printed money (they just use fresh digits now, no need for all that messy ink and paper expense). After all, with most of our debt converted to short-term debt, a rise in interest rates would quickly send our deficits soaring (soaring even higher that is) just to pay the extra interest expense. So, it seems that quantitive easing is just what the monetary doctor ordered. Who is hurt after all? EVERYONE who holds US dollars is hurt, as their dollars are diluted. Anyone who saw the SNL skit a week ago, with the Chinese official and President Obama, not only got a good laugh but also got a perspective from the Chinese side.
The total US government debt including the off budget items (unfunded promises to pay) is around 80 TRILLION dollars. If you divide that by the 308 million citizens, you come up with a little over ¼ million dollars for every man, woman and child in the USA. That means that my little family of four is on the hook for a little over 1 million dollars of US debt. When you add the on and off budget yearly deficit you will find this number is growing at about another 8 trillion dollars per year, with NO end in sight and no plan to stop its growth. If anything the growth is accelerating. Let's not even talk about the possibility of paying it down. These numbers can only end one way - DEFAULT. The creditors of the world are starting to get worried. Default can come in many different forms, but they all mean the same thing. The promise to pay will be broken. Social Security and other government recipients will not be paid, will be paid in worthless dollars, will be paid at a later age, will be paid after means testing, will have their health care rationed, etc. The end result is those who are counting on government promises will find themselves poorer for having done so. The great masses of citizens (and creditors) will not be happy.
The US Mint curtailed the sale of gold eagles and silver eagles last week after record sales this Fall. Gold is rising in all currencies, not just in US dollars. This is a vote of no confidence in governmental fiat money throughout the world. Premiums shot upward on Friday, as gold and silver supplies tightened up. I have a feeling they will continue to rise on Monday. I only hope that gold and silver will continue to be available at any price as investors slowly realize that a little gold in their portfolio is prudent. (They may also want to lighten up on government promises or bonds.)
Remember there are seven asset classes to invest in: stocks, bonds, commodities, cash, precious metals, income-producing real estate and collectables. Spread your assets out. Make sure you are invested in all seven classes. There are still bargains in the stock market in emerging markets, energy, agriculture and mining stocks. Make up your list and buy a little on pullbacks.
Throughout history whenever governments break their promises, things can get a little messy. Check your bank out at www.bankrate.com. Make sure you have your funds at a 4 or 5 star rated bank or credit union. If your bank fails to measure up, then move your funds to a safer bank. Move your stop losses up on your stocks and consider taking profits on some of your positions. Be aware that most of the market increase for the past ten years can be attributed to inflation or the shrinking dollar. The dollar we measure stocks with today is certainly not the same one we used 10 years ago. Put some of your cash in stronger foreign currencies of resource rich countries, such as, Brazil, Australia or Canada. This is easy to do now with ETFs or at www.everbank.com. If you choose to hold bonds, try to hold short bonds and look carefully at the bondholder's ability to pay. Just because they are guaranteed by the US government, you should still be wary. A rise in interest rates will not hurt as bad if you are in shorter term bonds. Long bonds at the present low interest rate simply make no sense to me today. They are simply too dangerous as the exposure to rising rates could be catastrophic.
Remember to keep your debt low, save all you can and invest carefully in these markets. Most importantly, do not to forget your precious metals, as this is your financial lifeboat. Always pray that you will never need your lifeboat, however, always make sure you have the best most seaworthy one you can afford close at hand. Buy some today and sleep better tonight.
Larry LaBorde
Silver Trading Company, LLC
November 30, 2009
