I am getting awfully close to shorting U.S. government bonds. The debt crisis in Europe is heating up, and I foresee a domino effect globally. I still believe the U.S. crisis will hit last, but this doesn’t mean Treasuries have to rally the entire time. Sooner rather than later, there will be a tradeable long-term top in U.S. government bonds.
I don’t think people understand how grave the situation in America is (I will go over in greater detail in my newsletter, which you can sign up for on the right sidebar). All eyes are now on Greece as if they are the only country with a debt problem. What about Spain? What about Japan? What about the U.S.? We are all going down the same path and the riots you see in Greece simply reflect human nature. Trust me, we are no better than Greeks; when people lose their retirements in America, they will react the same way.
Yes it’s true that the U.S. is much bigger than Greece, but that just means our problems are bigger. Is Greece conducting never-ending wars around the world that cost over $1 trillion? We have massive obligations, including implicit guarantees, that aren’t included in the $14 trillion national debt number that gets bandied around. Our structural problems are way bigger than the average person realizes.
The biggest fear our there is a contagion effect in markets. When the crisis in American hit in 2008, no country was left unscathed. This time around I think it will be much of the same when Greece defaults on its debt. That the European authorities continue to promote austerity and higher taxes on Greece shows they have no idea what the hell they are doing. It’s such a simple-minded solution: “Geez, we have a huge budget deficit, so if we raise taxes, we’ll raise revenue. Furthermore, if we cut spending, we’ll close the budget gap even more.” No one asks what the composition of the workforce is and what austerity will do to unemployment. No one asks if the real problem is the rising currency that is increasing the real value of debt in Greece. It’s so foolish to celebrate a theoretical 5% reduction in the deficit when the currency rises 20%. The only way out of this crisis for Greece is to get out of the Euro so they can decrease the real value of their debt by inflating away.
If you follow the markets day by day, you realize how schizophrenic people are. One day Greece is headed towards default and markets fall, the next day the Greece crisis is solved and markets rally. They can bail out Greece all they want- nothing will change. In the same vein, we can talk all day about how the U.S. can’t technically default on its debt. This is just rubbish. Gold can be trading at $10,000, the 30-year bond can be trading at 20%, and inflation can be running at 30%, but people will still be stubborn and say we have not “technically” default since we are still repaying our debt in dollars. Let them get lost in their own theoretical musings; I’m more concerned about investing correctly.
I think a long term top in Treasuries is very near. Once Treasuries are exposed as an investment just as risky as other Western government debt, all eyes will be locked in on gold. This is when gold will truly be untethered. I’ve already explained what the “fair value” of gold is. As usually happens in markets, gold will reach its fair value rather violently.Follow