The situation in Japan is bad and getting worse. What the press will not tell you is that the Japanese bond market has been a giant bubble waiting to burst for 20yrs. Shorting this market has earned the moniker "The Widow Maker" trade. The size of this market is approaching a quadrillion yen. What you read in the papers about this situation is useless. Here are the facts:
- The population is aging and needs income
- The society is becoming top-heavy
- Japan is the 3rd largest holder of US Treasuries
- The great deflation is no longer able to hide behind reckless money printing
- GDP will slow to an unacceptable level only worsened by the current disaster
- Interest expense on Japanese bonds is approaching 50% of treasury revenue before any increase in rates
What will happen to US treasury rates if the 3rd largest holder begins selling to create liquidity needed for survival? Oh, thats right, the US central bank will create more money from thin air and purchase the bonds. Good plan.
There is limited time to discuss this so we must keep moving.
The guys at your local Starbucks collecting their 125th week of unemployment benefits and working on their still unfinished novel have enjoyed arguing about the situation in Wisconsin. In the interest of time we will jump straight to the facts. This is a trimmer, a shot across the bow or a warning siren. The federal, state and local government entities in the US are bankrupt. Their obligations outweigh their resources. This is not sustainable. The society has slipped into a hyper-regulated, over-leveraged sloth-like condition. While the citizens watch who will win the Oscar for best supporting actress, China buys up the world's resources using dollars that Americans borrowed in order to finance their consumption. The congress begged the Federal Reserve to finance this binge in order for them to selfishly preserve power. The payoff for the privately owned Federal Reserve is the ability to privatize profits and socialize losses. This is pure madness and it you don't like it go read something else, we suggest People Magazine. If you are smart you will order Rosetta Stone software and learn Mandarin so that you can have decent dialog with your new boss.
We are not done, now moving on to the Middle East. The "Youthquake" has struck. We borrowed that phrase from a trusted advisor because no more appropriately descriptive term was available. Look for French Revolution style revolts throughout the region combined with Iranian sponsored uprisings. We don't need to predict every detail. Here is the summary:
- Higher oil prices
- Less stable energy supply infrastructure
- Less respect and control in the region for the US
- Abandonment of the petrodollar as a base for exchange
Get ready to serve your new master. The US society is going to get a wake up call that it will not be ready for. The snooze button is not available. Get up and work or get left behind. The problem is there are not enough jobs for all working age members of the society. We have no solution for this problem. Like a sick alcoholic, counseling and rehab will not work, only smashing into the telephone poll and being put on the 6:00 news will cause the essential cathartic change to occur.
The SPX failed to hold support of 1280 on my chart and was destined to continue the fall. There appears to be much more air between here and solid ground. The Federal Reserve has been operating in the markets purchasing equity, options and futures on major indexes for many months now and appears to be out of the market at this time allowing it to trade freely. Gravity has resumed control.
In closing, we are on the precipice of the greatest wealth transfer event that any living person can imagine. As over-leveraged societies break down under the weight of their own obligations, real assets will be the only life raft for capital. Entire paper fortunes face great peril. We face the eventual economic reset that will be unavoidable. Suggested positions include, physical precious metals, mining stocks, food commodity investments when possible, unleveraged real estate, farm land and any other asset that has tangible value. Bonds, currencies, leverage and paper assets should be avoided.
We feel that $50/oz silver and $1,600/oz gold are inevitable during 2011, drastically higher prices will follow.