Friday, June 4, 2010

U.S. Has Already Defaulted

The U.S. Treasury has already defaulted although many believe the opposite -- that the U.S. will be the last to default after a series of sovereign defaults by Greece and other European countries. This contrarian idea and some interesting facts about the world's primary currency -- gold -- will be presented. But first, let's see how much money Independent has put in your pocket, regarding suggested positions.

GOLD
In these times of market volatility and economic uncertainty, Independent has recommended a large cash position. By far, the best, safest form of cash is gold, the universal currency.
March 28, Spot Gold per oz: 1105.50
June 4, Spot Gold per oz: $1220.00
10.5 percent gain
The best cash in the world -- gold, has increased in US dollar price while dollar-denominated assets such as general stocks have fallen. In brief, people are selling stocks and holding cash -- in the only trustworthy cash currency available -- gold.

For many analysts, "cash" means paper, fiat money, but readers here know that gold is the one and only cash currency by which all others are to be judged and that one should take physical possession of this cash. More on gold below.

FAZ
The bet against big banks by the Independent using the FAZ ETF, "The Little Engine That Could", is also doing well.
May 3-4, FAZ: $12.00
June 4, FAZ: 16.53
37 percent gain
Not bad for one month, but this is only the start. Remember the true value of "too big to fail" banks is close to zero, if not much less than zero.

SDS
Finally, some analysts expect a "crash" in general stocks, as represented by the DJIA and S&P500 indexes. One might suspect that there will be some big down down days (3-6 percent) and big up days, with the result being a slower, more orderly decline, a sort of death by one thousand cuts. If the bear market proceeds more rapidly, as the crash forecasters predict, the same profit is made, just more quickly.

The Independent position now stands here:
May 10-13, SDS, 30.84
June 4, SDS, 35.75
15.9 percent gain
Notice that 10 percent of 30 is 3 and of 35 is 3.5. So the shorting instruments of FAZ above and SDS, as their base price increases, show greater point gains (that's cash money) for the same percent changes in the underlying instruments.

Please keep in mind that the SDS and FAZ positions both "short the market", the first more generally (SDS) and the second, specifically, the banking sector with the indexed stocks being among the biggest banks. Thus, SDS and FAZ are correlated. When the underlying markets rally, SDS and FAZ equity will decrease. As the temporary results above show, when the expected longer-term trends materialize, the above short positions (by being long SDS and FAZ) increase equity.

The results above, including gold, represent a somewhat new pattern, since for about one year previously, gold and S&P500 were correlated positively. That is, when the gold (or gold stocks) positions gained, the SDS position lost (because general stocks also gained). For the author, this was a kind of arbitrage, where dips and peaks in either leg (gold or stocks) could be bought and sold respectively, basically to increase account equity, which more concretely means reducing average purchase prices, over time.

Now and specifically today also, we see both legs gaining simultaneously, that is, gold up and S&P500 down (SDS and FAZ up). This seems to reflect an increasing sentiment that gold is the go-to safe-haven, the preferred form of cash to hold in uncertain times.

The other permutation is the worst of all worlds for the suggested positions -- gold down and general stocks up. For this pattern to persist, all problems must be solved, all debt manageable, no more loses for banks, an outbreak of happiness of totally miraculous proportions and a man in sandals touching the waters of the Gulf of Mexico with his staff and instantly removing all the oil pollution. Stuff like that.

Probably the above miraculous cleansing of all that is impure is unlikely, and therefore, our long-term positioning will have a big pay day. With the S&P500 closing the week at 1065, we have some 115 points more to drop to the initial target of 950 or lower.

TBT
U.S. long-term Treasury bonds (usually called just "U.S. long bonds") are also wrongly considered to be a "safe-haven" by money managers and other investors. Thus, today, with general stocks down a notch, the gold safe-haven was up as mentioned. In addition, the proxy for long bonds that I follow, the TLT ETF was also up.

Yesterday, I sold my initial TBT position, mentioned previously but not suggested for readers, at 40.93, for a small profit, thinking that my entry price on May 6 was not that good (too high). And none too soon, since today, TLT was up by some 2.69 percent to close at 97.79, much closer to the target of above 100 that readers were suggested to look for to start to build a core short of long bonds (by buying TBT).

Today TBT closed at 38.73, more than two points below my sale price yesterday. One never knows, but it makes sense that long bonds will rally more as general stock prices fall in the "safe-haven" effect. Therefore, one hopes to build a short position by purchase of TBT lots (multiples of 100 shares) at even lower prices. Independent is prepared, as described in a previous article, to suggest readers consider starting a short position with TBT (or long bond futures) in long bonds as TLT trades above 100.

Back to the article title: "U.S. Has Already Defaulted". U.S. long bonds remain a "safe-haven" asset for many because the propaganda is that the U.S. is OK for now because all the action is presently in Europe. In addition, U.S. Treasuries are debt backed by the "full faith and credit" of the U.S.government. Further, a number of defaults in Europe and elsewhere will happen first in some domino fashion before we have to worry much in the U.S.

However, the truth according to the Independent is that the U.S. Treasury has already defaulted. That is, the implied order of events above is not applicable. Why? Honest payment of an obligation such as a loan to the U.S. government is required else you have failure to honor the obligation. However, the U.S. government has expressly debased its currency so the fixed amounts due to creditors to pay interest or principal are not honest payment, but are in fact less that what is due to creditors. For this reason, the U.S. has already defaulted.

The basis of our anticipated short position is that the long-term trend for U.S. long bonds is zero -- that they will be worth exactly nothing. For this reason, we look to establish a healthy short position in this mother of all bubbles via TBT (or futures) at a hopefully convenient time. Watch the TLT indicator (above 100) above, and make your move step-by-step toward a core TBT position.

What gold buys
The propaganda to support fiat, paper money has been that prices will slowly rise over time -- that a "low" level of inflation defined as price increases is normal.

However, in an interesting June 3, 2010, article by Michael O'Brian, "The Relationship between Real Money and Real Prices", we find:
When that economic idiot Nixon took us off the gold standard on the advice of "genius" Milton (closet inflationist) Friedman in 1971:

1 ounce of silver bought about 3.5 gallons of gas; it takes just 0.48 of a silver ounce to get the same amount of gas today.

87 ounces of gold would get you a basic new car; it takes just 10-15 gold ounces to buy a simple new car today.

1 ounce of silver would buy you 17 1st class stamps; it takes just 0.48 ounces of silver to buy 17 1st class stamps now.

3.67 ounces of gold would rent you an average apartment; it takes just 1 ounce of gold to rent an average place today.

1 ounce of silver would buy a movie house ticket; it takes just 0.65 ounces of silver to see a flick now.

1 ounce of gold would buy 163 basic loaves of bread; it takes just 0.19 ounces of gold to get those loaves now.

1 ounce of silver would buy you a gallon of organic farm milk; it takes just 0.50 ounces of silver to buy organic now.

1 ounce of gold would buy 416 lbs of potatoes; it takes just 0.10 ounces of gold to get the same tubers now.

1 ounce of silver would buy you 5.5 dozen eggs; it takes just 0.60 ounces of silver to get those eggs now.

I could go on for days with endless examples of how, over the long term, prices of nearly all real goods are falling when measured in the real money of gold and silver.

The reality is brutally simple:

REAL PRICES DON’T GO UP - IT’S THE VALUE OF YOUR PAPER MONEY THAT GOES DOWN.
As readers here know, most savings should be denominated in the real universal currency, gold, to survive and prosper in coming years. Get gold and take physical possession.
© 2010 James J Keene

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