How big is a trillion? In US it is written as the number 1 followed by 12 zeros. For most, the size of that number, especially when referring to Dollars is incomprehensible. In the present environment of record deficits, write offs and bailouts. billions and trillions have become almost everyday language. There is a grave risk in allowing these numbers to mask the enormity of what is being done to the US and global economies and the risks that the public purse is being asked to bear. At some stage the sheer enormity of these numbers morph into Matrix like code. Just a slew of digits cascading down the screen.
To keep this simple, let’s reduce the arguments to YOU, your elected officials and the GAO, the US Government Accountability Office, known as “the investigative arm of Congress” and “the Congressional Watchdog”. The head of the GAO is the Comptroller General who is appointed by the President with the advice and consent of the Senate. In practice, a candidate for the position is nominated to the President by a committee comprising, the Speaker of the House of Representatives, the President Pro Tempore of the Senate, the majority and minority leaders of the House of Representatives and the Senate, the Chairman and Ranking Member of the Senate Committee on Homeland Security and Governmental Affairs, and the Chairman and Ranking Member of the House Committee on Oversight and Government Reform. Comptrollers General are appointed for non renewable 15 year terms.
Given the bias and prejudices inherent in any group of politicians, let alone those from both the government and opposition benches, an appointment to this position clearly only falls on those of undoubted bipartisan acceptability and considerable personal and professional stature. The immediate past Comptroller was David Walker, a sober and rational Certified Public Accountant who served as the US Comptroller General from 1998 until his resignation from office in 2008. In this position he had undoubted access and overview of the nation’s finances and what was coming down the track. Better than anyone, Walker understood and voiced his concerns over unsustainable government spending and unfunded programs and had the courage, rare in a public servant, to articulate those concerns publicly.
On February 15, 2008, Walker resigned from his post. The head of the audit and investigative arm of the US Congress announced his resignation Friday, citing "real limitations" on what he could do. Walker, 51, a respected voice on fiscal matters, said he was making an early departure from the US Government Accountability Office (GAO) to head a new public interest foundation.
"As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO's client -- the Congress," Walker said in a statement.
He did not elaborate but Walker last year issued an unusually downbeat assessment of his country's future in a report that drew parallels with the end of the Roman empire.
He had warned that the US government was on a "burning platform" of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action was not taken soon. There were "striking similarities" between America's current situation and the factors that brought down Rome, he had said.
These included "declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government."
In his July 13, NACO speech, Walker made a number of telling points. He asserted:
As the most recent Comptroller General of the United States and our nation's top auditor, I know firsthand that our country's financial condition and fiscal outlook are worse than advertised. Considering all current "off-balance-sheet obligations," the federal government is in a $53 trillion plus financial hole which is growing by $2-$3 trillion a year on auto-pilot. The federal government is also running large and growing deficits that, absent reforms, will get much worse when "boomers" retire in big numbers. Clearly, Washington has not learned the first rule of holes - "When you're in a hole, stop digging!"
We are on an imprudent and unsustainable fiscal path and our financial position is deteriorating with the passage of time. We must take a number of steps soon to defuse our "fiscal time bomb," which is driven largely by out of control health care costs and known demographic trends. These steps include re-imposing tough statutory budget controls and reforming the Social Security system, as well as engaging in comprehensive reform of our tax and health care systems in installments and over time.
A look at the current housing and mortgage related current sub-prime crisis portends a much larger and more disruptive outcome from what I'll call our potential super sub-prime crisis. Namely, the very real risks imposed by our nation's poor financial condition and irresponsible fiscal practices.In fact, the current sub-prime crisis and our nation's fiscal situation share at least four key characteristics. First, both involve a disconnect between those who benefit from current policies and practices and those who will bear the risk and pay the price in the future. Second, both involve inadequate transparency relating to off-balance sheet and other risks. Third, both serve to demonstrate the importance of maintaining lender confidence and adequate cash flow, as well as the limitations of credit rating agencies. Finally, both involve a lack of adequate ongoing oversight, risk management and timely action to prevent a crisis.
By the time of his NACO speech Walker had resigned as CG, but as one appointed by, and holding the trust of Congress for 10 years, one would have thought that his words would have carried weight, to say nothing of the prescience of those remarks. They didn’t. In fact Congress appears to have learnt nothing.
A week earlier Walker was interviewed by 60 Minutes and had this to say:
"I would argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan but our own fiscal irresponsibility," Walker tells Kroft. David Walker is a prudent man and a highly respected public official. As comptroller general of the United States he runs he Government Accountability Office, the GAO, which audits the government's books and serves as the investigative arm of the U.S. Congress. He has more than 3,000 employees, a budget of a half a billion dollars, and a message he considers urgent.
"I'm going to show you some numbers…they’re all big and they’re all bad,"he says.
So bad, that Walker has given up on elected officials and taken his message directly to taxpayers and opinion makers, hoping to shape the debate in the next presidential election. "You know the American people, I tell you, they are absolutely starved for two things: the truth, and leadership," Walker says. He calls it a fiscal wake up tour, and he is telling civic groups, university forums and newspaper editorial boards that the U.S. has spent, promised, and borrowed itself into such a deep hole it will be unable to climb out if it doesn’t act now. As Walker sees it, the survival of the republic is at stake.
"What’s going on right now is we’re spending more money than we make…we’re charging it to credit card…and expecting our grandchildren to pay for it. And that’s absolutely outrageous."
"If nothing changes, the federal government's not gonna be able to do much more than pay interest on the mounting debt and some entitlement benefits. It won't have money left for anything else – national defense, homeland security, education, you name it," Walker says you could eliminate all waste and fraud and the entire Pentagon budget and the long-range financial problem still wouldn't go away, in what's shaping up as an actuarial nightmare.
Asked why, Walker says, "Well, because we promise way more than we can afford to keep. Eight trillion dollars added to what was already a 15 to $20 trillion under-funding. We're not being realistic. We can't afford the promises we've already made, much less to be able, piling on top of 'em."
With one stroke of the pen, Walker says, the federal government increased existing Medicare obligations nearly 40 percent over the next 75 years. So where's that money going to come from?
"Well it's gonna come from additional taxes, or it's gonna come from restructuring these promises, or it's gonna come from cutting other spending," Walker says. “And if we don't? And if we don't, it could bankrupt America.”
Federal Reserve Chairman Ben Bernanke validated much of Walker's take on the situation at congressional hearings this year, and so did ranking Republicans and Democrats on the Senate Budget Committee. Senator Kent Conrad of North Dakota is the chairman. Conrad acknowledges that most people in Washington are aware how bad the situation is. "They know in large measure here, Republicans and Democrats, that we are on a course that doesn't add up," "Why doesn't somebody do something about it?" Kroft asks. "Because it's always easier not to. 'Cause it's always easier to defer, to kick the can down the road to avoid making choices. You know, you get in trouble in politics when you make choices," Sen. Conrad says.
"If you tell them the truth, if you give them the facts, if you explain this in terms of not just numbers but values and people, they will get it and empower their elected officials to make tough choices,"Walker argues.
That was then; This is Now
In a briefing at the National Press Club on 10 October, Walker, concerned about the $700 billion bailout of the financial sector, sounded an alarm that the federal budget deficit has already exceeded $400 billion. The United States faces a$53 trillionshortfall in the funds needed to coverpromised entitlements, includingMedicare andSocial Security benefits, and neitherCongress nor the presidential candidates are doing anything aboutit,former Comptroller General David Walker warned thisweek.
Worse, if the U.S. isn’t careful, Walker said “increasing entitlement benefits” – with unfunded liabilities of Social Security and Medicare now estimated at $53 trillion--could trigger a tsunami of debt--and whopping tax increases--could drown our economic future.
“The federal government’s finances have been out of control,” Walker, now the president and CEO of the Peter G. Peterson Foundation, told reporters. Neither Congress nor the presidential candidates “are doing anything to address America’s real economic woes,” he said. Even though “good questions” about the nation’s financial situation were asked at the Presidential debate, Walker also said “neither candidate” offered sufficient answers.
Whilst the structural deficits Walker warns of are a way off, they can be ignored momentarily. More immediately, it seems that despite Walkers entreaties, nobody is willing to turn off the government debt creation tap. On the contrary, the Bush administration, led in its policy response by the prime arsonists Paulson and Bernanke continues with its response of hosing every insolvency with public funds. If you were concerned over the magnitude of the TARP farce, think about it this way. You remember Paulson’s appeal for the TARP facility. It had to be big and it had to be immediate. The sky was falling and the world stood on the edge of an abyss. Right?
The solution we were told was to buy toxic mortgages, the banks’ Achilles heel. Were you entitled to expect that such an unprecedented bailout had been given sober and serious thought. Was there a plan?
Yes. The mortgages were to be purchased by Treasury at market prices, set through a transparent auction process. Of course it didn’t happen and could never happen, as I have argued repeatedly in this column. The proposed course of action had only two alternate resolutions. Either Treasury bought the toxic securities for more than they were worth to make the banks whole; or they bought them for what they were really worth and created a true market for these derivatives and that my friends would have let the whole world see what a scandal this chicanery truly is. Lehman’s bonds settled for less than 10c in the dollar, or a 90% default rate. The governments guarantee of 90% of Citigroup’s $306 billion of loans implies the same potential.
So to bring these moments of truth to you in a more personal way, consider that there are about 138 million taxpayers in US, so Paulson’s TARP encumbers each of you with an additional $5072 in debt. Now add the automakers bailout at $38 billion. That’s a paltry $119 per taxpayer. Of course you are already subsidising the auto industry through the tax deductibility of “business” vehicles but Senator Dodd the Chairman of the Senate Banking Committee showed a dash of righteous indignation over the administration’s refusal to use its authority under the $700 billion financial rescue program to forestall the auto industry's collapse. Dodd said Treasury Secretary Henry Paulson, must explain why the car companies, which support one in 10 U.S. jobs, are less deserving of assistance than Wall Street banks and insurance companies.
"If the Federal Reserve and the Treasury Department, under President Bush, can find $30 billion for Bear Stearns, if they can concoct a $150 billion rescue for AIG, if they can commit $250 billion to Fannie Mae and Freddie Mac, and if they can back Citigroup to the tune of more than $300 billion, then there ought to be a way to come up with a far smaller dollar figure to protect this economy from the unintended consequences that would be unleashed by a collapse of the automobile industry," Dodd said.
Apart from the obvious policy questions of why an inefficient producer in an over serviced industry deserves to go on the public teat, the question highlights that you are already on the hook for over $1 trillion just in the names Dodds mentions. That’s another $7270 per US taxpayer.
Now that I have your attention, consider this summary from Creditsights:
According to CreditSights, a research firm in New York and London, the U.S. government before last week had put itself on the hook for some $5.5 trillion in an attempt to arrest a collapse of the financial system. And Washington committed $800 billion more Nov. 25, bringing the total to about $6.3 trillion. The Federal Reserve last week promised an additional $200 billion in loans to purchase new asset-backed securities and $600 billion direct obligations and mortgage-backed securities of government-sponsored entities such as Fannie Mae and Freddie Mac. The Treasury Department is providing $20 billion to help fund the $200 billion pool, but the Treasury's portion is already included in Uncle Sam's tab.
The multitrillion-dollar estimate includes many of the solutions cooked up by Paulson and his counterparts Ben Bernanke at the Federal Reserve and Sheila Bair at the Federal Deposit Insurance Corp. as the credit crisis continues to plague banks and the broader markets.
The Fed has taken on much of that total, including lending a cumulative $1.1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window and making a cumulative $1.9 trillion available through its term auction facility, a series of short-term transactions it began making available twice a month in January. A portion of the funds lent in these programs has been repaid; the totals represent what has been made available.
The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns,and made $60 billion of credit available to American International Group. It is committing $22.5 billion to set up a special-purpose vehicle to manage some of AIG's residential mortgage-backed securities, and it is financing $30 billion of a second fund to hold $70 billion of multisector collateralised debt obligations on which AIG wrote credit default swaps.
And then there is the rescue of Citigroup, which involves an additional $20 billion injection of equity from the Treasury's capital-purchase program, bringing the total since October to $45 billion. The government is guaranteeing up to $306 billion of loans, with Citi accepting the first $29 billion of any losses and paying $7 billion to the government as a fee. Citi will cut its dividend to 1 cent a share.
The government, through the Treasury, the Federal Deposit Insurance Corp. and the Fed, is backing 90% of the guaranteed loans, leaving the rest to Citi to back. The government's exposure to loss is $240 billion, CreditSights says.
The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt.
Not included in the total are the Fed's long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators in November, support for the Federal Home Loan Banks and myriad other programs. On Nov. 25, the Fed announced that it will begin buying up to $100 billion in direct obligations of mortgage buyers Fannie Mae, Freddie Mac and the Federal Home Loan Banks. In addition, it will buy up to $500 billion worth of mortgage-backed securities backed by Fannie, Freddie and the Government National Mortgage Association.
So what Dodds should have said is “The US Government has pledged $47,101 on behalf of each individual taxpayer to bail out the banks, insurers and other friends. Why can’t we spend a bit more to help unionized labor?”. That’s what the auto bailout must be. Surely US Treasury is not going to bailout a hedge fund, Cerberus Capital, the owner of Chrysler, are they?
So for the time being you can ignore the $516,000 per household that USA Today claims represents the unfunded liabilities cautioned of by Walker, but the loads being dished out to Wall Street and friends are an immediate problem for you. Mainly because the “loan” component of those funds is not going to be paid back.
David Walker brought his status report up to date yesterday when he stated what we all know but conveniently turn a blind eye to, namely that the US Government, like almost all other Governments, doesn’t have the money to make good on these promises. It has to sell bonds or promissory notes to the creditor nations in order to fund this largess.
Borrowing from China- I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money. Gao Xiqing
You may already know that China has now overtaken Japan as the US’s largest creditor and has financed much of the nation’s public and private debt. During the presidential campaign, Barack Obama and John McCain generally agreed on the peril of borrowing so heavily from this one foreign source. For instance, in their final debate, McCain warned about the “$10 trillion debt we’re giving to our kids, a half a trillion dollars we owe China,” and Obama said, “Nothing is more important than us no longer borrowing $700billion or more from China and sending it to Saudi Arabia.” Their numbers on the debt differed, and both were way low. James Fallow in a little reported interview with Gao Xiqing, president of the China Investment Corporation, which manages “only” about $200billion of the country’s foreign assets but makes most of the high-visibility investments, like buying stakes in Blackstone and Morgan Stanley, as opposed to just holding Treasury notes, tells us that when Barack Obama takes office, the figure will be well over $2 trillion. That’s almost $15,000 each, that you presently owe China.
Perhaps the reason Fallow’s interview received such little coverage is that it raises some unpleasant, even prickly realities for us. These were the main points in the interview with Gao, who is described as fitting no American’s preexisting idea of a Communist Chinese official. He speaks accented but fully colloquial and very high-speed English. He has a law degree from Duke, which he earned in the 1980s after working as a lawyer and professor in China, and he was an associate in Richard Nixon’s former Wall Street law firm. You may not enjoy this interview but it’s like knowing your bank manager’s thinking. Better done before the interview!
Does America wonder who its new Chinese banking overlords might be? This is what one of the very most influential of them had to say about the world financial crisis, what is wrong with Wall Street, whether one still-poor country with tremendous internal needs could continue subsidizing a still-rich one, and how he thought America could adjust to its “realistic” place in the world. My point for the moment is to convey what it is like to hear from such a man, rather than to expand upon, challenge, or agree with his stated views.
About the financial crisis of 2008, which eliminated hundreds of billions of dollars’ worth of savings that the Chinese government had extracted from its people, through deliberately suppressed consumption levels:
The overall financial situation in the U.S. is changing, and that’s what we don’t know about. It’s going to be changed fundamentally in many ways.
Think about the way we’ve been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it’s 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.
People, especially Americans, started believing that they can live on other people’s money. And more and more so. First other people’s money in your own country. And then the savings rate comes down, and you start living on other people’s money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.
We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we’d love to support you guys—if it’s sustainable. But if it’s not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let’s change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the “real economy,” etc.]
About stock market derivatives and their role as source of evil:
If you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullshit. They are crap. They serve to cheat people.
I was predicting this many years ago. In 1999 or 2000, I gave a talk to the State Council [China’s main ruling body], with Premier Zhu Rongji. They wanted me to explain about capital markets and how they worked. These were all ministers and mostly not from a financial background. So I wondered,How do I explain derivatives?, and I used the model of mirrors.
First of all, you have this book to sell. [He picks up a leather-bound book.] This is worth something, because of all the labor and so on you put in it. But then someone says, “I don’t have to sell the book itself! I have a mirror, and I can sell the mirror image of the book!” Okay. That’s a stock certificate. And then someone else says, “I have another mirror—I can sell a mirror image of that mirror.” Derivatives. That’s fine too, for a while. Then you have 10,000 mirrors, and the image is almost perfect. People start to believe that these mirrors are almost the real thing. But at some point, the image is interrupted. And all the rest will go.
When I told the State Council about the mirrors, they all started laughing. “How can you sell a mirror image! Won’t there be distortion?” But this is what happened with the American economy, and it will be a long and painful process to come down.
I think we should do an overhaul and say, “Let’s get rid of 90 percent of the derivatives.” Of course, that’s going to be very unpopular, because many people will lose jobs.
About Wall Street jobs, wealth, and the cultural distortion of America:
I have to say it: you have to do something about pay in the financial system. People in this field have way too much money. And this is not right.
When I graduated from Duke [in 1986], as a first-year lawyer, I got $60,000. I thought it was astronomical! I was making somewhere a bit more than $80,000 when I came back to China in 1988. And that first month’s salary I got in China, on a little slip of paper, was 59 yuan. A few dollars! With a few yuan deducted for my rent and my water bill. I laughed when I saw it: 59 yuan!
The thing is, we are working as hard as, if not harder than, those people. And we’re not stupid. Today those people fresh out of law school would get $130,000, or $150,000. It doesn’t sound right.
Individually, everyone needs to be compensated. But collectively, this directs the resources of the country. It distorts the talents of the country. The best and brightest minds go to lawyering, go to M.B.A.s. And that affects our country, too! Many of the brightest youngsters come to me and say, “Okay, I want to go to the U.S. and get into business school, or law school.” I say, “Why? Why not science and engineering?” They say, “Look at some of my primary-school classmates. Their IQ is half of mine, but they’re in finance and now they’re making all this money.” So you have all these clever people going into financial engineering, where they come up with all these complicated products to sell to people.
About the $700 billion U.S. financial-rescue plan enacted in October:
Finally, after months and months of struggling with your own ideology, with your own pride, your self-righteousness … finally [the U.S. applied] one of the great gifts of Americans, which is that you’re pragmatic. Now our people are joking that we look at the U.S. and see “socialism with American characteristics.” [The Chinese term for its mainly capitalist market-opening of the last 30 years is “socialism with Chinese characteristics.”]
Itisjoking, and many people are saying: “No, Americans still believe in free capitalism and they think this is just a hiccup.” This is like our great leader Deng Xiaoping, who said that it doesn’t matter if the cat is white or black, as long as it catches the mouse. It doesn’t matter what we call this. It’s pragmatic.
With so much of China’s money at stake, did U.S. officials consult the Chinese about the rescue plan?
Not directly. We were talking to people there, and they were hoping that we would be supportive by not pulling out our money. We know that by pulling out money, we’re not serving anyone’s good. Including ourselves. [This is the famous modern “balance of financial terror.” If Chinese officials started pulling assets out of the U.S. and touched off a run on the dollar, their vast remaining dollar holdings would plummet in value.] So we’re trying to help, at least by not aggravating the problem.
But I think at the end of the day, the American government needs to talk with people and say: “Why don’t we get together and think about this? If China has $2 trillion, Japan has almost $2 trillion, and Russia has some, and all the others, then—let’s throw away the ideological differences and think about what’s good for everyone.” We can get all the relevant people together and think up what people are calling a second Bretton Woods system, like the first Bretton Woods convention did.
On what might make the Chinese government start taking its dollars out of America (I began the question by saying that China would hurt itself by pulling out dollar assets—at which he interjected, “in the short term”—and then asked about the long-term view):
Today when we look at all the markets, the U.S. still is probably the most viable, the most predictable. I was trained as a lawyer, and predictability is always very important for me. We have a PR department, which collects all the comments about us, from Chinese newspapers and the Web. Every night, I try to pick a time when I’m in a relatively good mood to read it, because most of the comments are very critical of us. Recently we increased our holdings in Blackstone a little bit. Now we’re increasing a little bit our holdings in Morgan Stanley, so as not to be diluted by the Japanese. People herehateit. They come out and say, “Why the hell are you trying to save those people? You are the representative of the poor people eating porridge, and you’re saving people eating shark fins!” It’s always that sort of thing.
And how should Americans feel about the growing Chinese presence in their economy? Isn’t it natural for them to worry that China will keep increasing its stake in American debt and assets—or that China won’t, essentially cutting America off?
I can understand why Americans might feel that way. But, talking with my lawyer head once again, it’s not relevant to discuss how Americans “should” think. We should discuss how Americansmightthink.
This concern is not really about China itself. It could be any country. It could be Japan, or Germany. This generation of Americans is so used to your supremacy. Your being treated nicely by everyone. It hurts to think,Okay, now we have to be on equal footing to other people. “On equal footing” would necessarily mean that sometimes you have to stoop to appear to be humble to other people.
But over the years, I believe I learned to be humble. To treat other people nicely. I learned that, from a social point of view, no matter how lowly statured a person you are talking to, as a person, they are the same human being as you are. You have to respect them. You have to apologize if you inadvertently hurt them. And often you have to go out of your way to be nice to them, because they will not like you simply because of the difference in social structure.
Americans are not sensitive in that regard. I mean, as a whole. The simple truth today is that your economy is built on the global economy. And it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t saykowtow[with a laugh], but at least,be niceto the countries that lend you money.
Talk to the Chinese! Talk to the Middle Easterners! And pull your troops back! Take the troops back, demobilize many of the troops, so that you can save some money rather than spending $2 billion every day on them. And then tell your people that you need to save, and come out with a long-term, sustainable financial policy.
I have great admiration of American people. Creative, hard-working, trusting, and freedom-loving. But you have to have someone to tell you the truth. And then, start realizing it. And if you do it, just like what you did in the Second World War, then you’ll be great again!
If that happens, then of course—American power would still be there for at least as long as I am living. But many people are betting on the other side.
Dollars and Bonds
Gao and others think the US Dollar will crash and burn. There is no evidence of that in today’s chart where DX continues to hold a strong position. 90.22 represents the famous Danielcode black line. The last level of resistance in the November 2005 swing.
The US T Bond chart is in blowoff mode, showing the same vertical ascent as DX but in this case it is assaulting the 1998 highs at 135^07. It is at present right at one of its long term DC numbers near 134^15.5.
Gold continues to hold a strong position on the monthly chart and although it is down 25.5% from its March high, it is well off its 681 low made in October. As you see from the following chart, Gold’s 2008 low was made at its Danielcode retracement target which was only a correction of the minor swing from 2006. On the monthly chart Gold is consolidating between its Daniel sequence retracements and seems not to have noticed the Comex settlement failure (it didn’t happen), hoped for, and hyped by the Gold perma bulls.
The Gold bulls are in despair that the Gold price has not met their forecasts of going into orbit and like a good few novice pilots before them have resorted to the most specious of arguments namely “The instruments are wrong”. If, as they assert, Comex Gold gives an entirely false price for this commodity, (bank suppression, naked shorts, the Cartel et al), why not simply arbitrage the futures plus delivery into the supposed 80% premium of the physical market? Of course it doesn’t work like that, but that’s a story for another day.
Given the disasters unraveling in the global fiscal scene and recognising that supply in US Bonds is going to be huge, it seems counter intuitive for Bonds to be bullish and Gold quite neutral.
Through it all, Gold, T Bonds and all other markets have continued to follow their Danielcode numbers with precision, as they must. That’s what makes trading vastly less stressful than wrestling with the vagaries and conflicts of international finance.
If you have got this far, I trust that I have given you some food for thought. All that has happened has been foretold in the Danielcode reports for Financial Sense. Little is surprising or unforeseen. What is surprising is that so many who have an obligation to listen, have failed to absorb David Walker’s warnings. Now we have a prominent China spokesman saying the same thing. Australia banked on the “China will save us” mantra and were wrong. Let’s hope America’s faith is not similarly misplaced.
The tyranny of numbers is unavoidable. They rule our present intentions and future hopes but the secret law of numbers is that absent a government bailout, creditors must be paid. With Obama’s reconstruction plans and a big spending Congress still awaiting us, Gao Xiqing’s patience will be tested still further.
Pro 1:32 For the turning away of the simple shall slay them, and the prosperity of fools shall destroy them.
Copyright © 2008 John Needham