Political Risk Is Evaporating Treasuries

By Trace Mayer, on June 2nd, 2009

Political risk is increasing and predictably the Treasury bubble has been bursting.  There are major machinations going on in the bond market which will significantly affect you.

On 3 January 2009 I wrote United States Treasuries Are The Biggest Bubble Of All and on 18 January 2009 followed it up with Why And How The Treasury Bubble Will Burst concluding with “Taking possession [FRN$s] eliminates at least two types of risks.  First, is any potential counter-party risk with whoever is holding the Treasury Bill for you.  Second, ‘political risk’ which is a much larger threat. ”  On 7 May 2009 I wrote about the key ratios moving and have been vindicated.

THE CRACK-UP BOOM

As Ludwig von Mises predicted decades ago in chapter 20 of Human Action, ‘The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. … But then finally the masses wake up. … A breakdown occurs. The crack-up boom appears.’

The crack-up boom is in process and the intensity accelerating.  Everyone knows or should know that the United States government is unable to perform on their debt in regards to purchasing power.  The United States government is a failing counter-party and the FRN$ is doomed.

POLITICAL RISK INCREASES

The Great Writ of Habeas Corpus provides for individuals to challenge their detention.  The United States Constitution decrees in Article 1 Section 9 Clause 2 that “the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it.”  The Sixth Amendment provides:

In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defense.

The Supreme Court struck down the three great American tyrants in their attempt to violate this clause with Ex parte Milligan, Korematsu v. US and Rasul v. Bush.

29 July 1921 Adolf Hitler assumed leadership of the NSDAP and became Der Führer.  During 1923 the Reichmark evaporated and Hitler was released from prison 20 December 1924.  Conditions continued deteriorating and on 28 February 1933 the Law for the Protection of People and State or Reichstag Fire Decree is enacted providing in § 1:

Articles 114, 115, 117, 118, 123, 124 and 153 of the Constitution of the German Reich are suspended until further notice. It is therefore permissible to restrict the rights of personal freedom [habeas corpus], freedom of opinion, including the freedom of the press, the freedom to organize and assemble, the privacy of postal, telegraphic and telephonic communications, and warrants for house searches, orders for confiscations as well as restrictions on property, are also permissible beyond the legal limits otherwise prescribed.

By 14 July 1933 Hitler has declared the success of the Nazi revolution and it became the only party in Germany with all others banned.

OBAMA ANNOUNCES PREVENTIVE DETENTION

On 20 May 2009 the New York Times reported:

President Obama told human rights advocates at the White House on Wednesday that he was mulling the need for a “preventive detention” system that would establish a legal basis for the United States to incarcerate terrorism suspects who are deemed a threat to national security but cannot be tried … Human rights advocates are growing deeply uneasy with Mr. Obama’s stance on these issues … — a concept he criticized bitterly as a presidential candidate. The two participants, outsiders who spoke on the condition of anonymity because the session was intended to be off the record, said they left the meeting dismayed.  They said Mr. Obama told them he was thinking about “the long game” — how to establish a legal system that would endure for future presidents.

This talk about establishing a legal system that will endure for future presidents baffles me.  Why will President Obama not open up a copy of the Constitution and read it?  There already is a legal system that has endured for centuries and is the supreme law of the land.

While the Obama administration is intentionally exacerbating the greater depression; in addition why does President Obama feel compelled to rewrite ad hoc tyrannical procedures that undermine essential principles of free and open societies?  President Obama has accomplished more in his first four months than Hitler did.  This is like the caterwauling of a cougar instead of the screetching tunes of someone learning saxophone for the first time.

GOLD AND POLITICAL RISK

Fiat currencies represent the common stock of nations.  This decade all fiat currencies have been evaporating relative to gold.  Those who did not follow my warnings in the two articles about the Treasury bubble are probably down between 30-50% depending on how their positions were setup.

There have been rumors which I have been unable to verify that United States embassies around the world have been instructed to acquire local currencies.

While reviewing the logs for my site I came across someone who searched Google for “how to buy gold delivery”.  While this is not unusual what is unusual is who it was and how long they spent on my site.

I wonder what briefing or meeting the Department of Homeland Security employee was in that prompted them to search on “how to buy gold delivery” in Google?  It seems as if governments and their officials in their cute little costumes seem to be getting increasingly scared.

I wonder if they were trying to figure out how to buy gold coins or gold bars.  Maybe they were even venturing into the less prominent area but lately more profitable and trying to learn how to buy silver coins or silver bars.

KEY RATIOS MOVING AS PREDICTED

As I wrote about in the key ratios moving, “While the DOW may continue its rally I highly doubt it will breach 11.5 gold ounces before it resumes its downward destiny and reaching 5-6 ounces sometime this year.  Silver will likely continue its upward ascent and return to a more normal ratio with gold around 55.”

Since Obama’s tyrannical declaration regarding preventative detention gold has moved from $920 to $980 or 6.5% while silver has moved from $13.75 to $15.75 or 14.5%.  The gold to silver ratio is currently about 62.5 while the DOW/Gold has moved to 8.9 from 9.32.  The DOW/Gold will likely encounter some volatility because the failures General Motors and Citigroup have been replaced with Cisco Systems, Inc. and The Travelers Companies, Inc.

Gold is currently 1.14x and silver is 1.31x their 200dma.  These trends will likely remain in place until the price of gold is about 1.3x its 200dma while the price of silver is about 1.5x its 200dma.

For those who do not own the precious metals yet, even though a good portion of this latest up-leg has passed, now is a good time to consider how to buy gold or silver.  A useful third-party service is GoldMoney which allows for physical delivery at any time as opposed to the problematic GLD or SLV ETFs.

Meanwhile the Treasury bubble has burst and the USD index is now below 80.

CONCLUSION

Gold and silver and not mere barbaric commodities but essential checks and balances in the political machinery.  This is why they are in the United States Constitution.

Obama is outdoing Hitler regarding the acquisition of tyrannical power.  Like the American tyrants Abraham Lincoln, Franklin Delano Roosevelt and George W. Bush; President Obama’s administration is like a bad nightmare.

Gold, silver, oil and stocks are moving predictably while the Treasury bubble is bursting as the FRN$ is breaking down.  The bottom line:  political risk is increasing and gold is moving.  Hopefully you have a 72 hour kit, have learned how to buy gold or silver coins or bars and are prepared because  The Great Credit Contraction has only begun.

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Risk aversion: what’s going on in world markets?

By Cheryl Grey, on April 9th, 2009

The rout—at the time, a welcome one—began in commodities, where historic high prices drove up inflation around the world. As prices for crude oil, copper, gold, and multiple foodstuffs began falling in mid-July, consumers as far apart as China and Chattanooga breathed sighs of relief.

Unfortunately, commodities were followed by global stock markets. As the summer gave way to autumn, consumers and investors watched in shock as the Hang Seng Index on the Hong Kong exchange plunged as much as 59% from its most recent high, the Dow Jones Stoxx 600 of Europe collapsed 46%, and the Icelandic ICEX rolled off the table, losing 77% of its value in one day on October 14 and 93% by the end of that week. In the U.S., the S&P 500 lost 44% and Nasdaq 45%, much of it bitten from retirement accounts and small traders. All told, estimates of the amount of wealth chopped from global equities are currently around US $31 trillion.

Seasoned traders who withstood the crash of 1987 have admitted they’ve never seen anything like this. The worldwide collapse of commodities, stocks, currencies, and just about every other investment vehicle out there has brought uncomfortable images of 1929 to the forefront of everybody’s minds.

Is it really that bad?

It’s a truism that investment markets are driven by two emotions: fear and greed. However, since the Lehman bankruptcy that’s been changed to fear and terror.

As investors realized no vehicle was immune to the downturn, they panicked, yanking their capital from anything riskier than a mattress and repatriating funds to the safe havens of Japan and the U.S. Interestingly, this flight to quality has not generally included Switzerland, the other traditional port in financial storms, perhaps because of Swiss banks’ exposure to emerging economies, the ones currently being supported by the World Bank and International Monetary Fund.

Official Treasury International Capital (TIC) data shows that US $143.4 billion flowed into the U.S. for indirect investment in September 2008 alone, and this is even more interesting when placed in context. International investors had been limiting or removing their funds from the U.S. on fear of a domestic downturn, only to reverse course dramatically when the recession turned global, as shown below:

month

TIC (in U.S. billions of dollars)

June 2008

13.3

July 2008

−25.1

August 2008

21.4

September 2008

143.4

The demand for U.S. Treasuries, considered the safest of all safe havens, has been so high among investors both domestic and foreign that the yield has fallen to 0.01% on a three-month note. Right now, nobody cares about earning a profit; investors just want to keep what they already have.

The Volatility Index (VIX), which measures fear in the markets, averaged below 20 between its inception in 1993 and September 2008. Since then, it’s climbed as high as 89.53, with average readings consistently two to four times above normal.

We get the picture

That said, there are tentative signs of a bottom forming both in markets and the economy. Credit remains ferociously tight in consumer and commercial markets, but thawing has appeared at least between banks and should trickle down the wholesale-retail pipeline in time. The VIX remains high, but there are no signs of it climbing higher, although that could change overnight with another shock to the system, such as a bankruptcy for one of the auto makers or another major financial institution needing a bailout.

As central banks around the world slash interest rates with machetes, and governments initiate economic stimulus packages and loosen fiscal policies, the current call for the U.S. economy is a continued decline in gross domestic product through the first six months of next year. The fourth quarter of 2008 is expected to register the poorest performance, with a contraction of around −5% in comparison with the third quarter. If this call is correct, for the U.S. the worst is now, and the turn of the year may see economic indicators slowly climbing out of the basement.

Because other central banks, including the Bank of England and the European Central Bank, were behind the curve in initiating interest rate cuts (as late as June 2008, the ECB was still raising rates), the economic recovery will probably be slower on that side of the Atlantic. Canada and Australia may escape a technical recession, but the specter of deflation still hovers over Japan.

It’s not a pretty picture. But it’s still a far cry from 1929.



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