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As debt ceiling deadlock brings back
memories of 2008, the long-term winner is gold.
As I write to you on Friday -- for
publication Monday as usual -- another roller-coaster weekend is at hand.
Will there be an emergency meeting of Republicans and Democrats? Will a
last-second compromise save the day?
It is hard to know what markets will
do as we approach the Aug. 2 debt ceiling deadline, because it is
very hard to know what Washington will do.
For quite some time investors have
ignored the debt ceiling issue, assuming that "something" would get
done. It has only been in the final stretch that concerns have mounted. And
even Friday, as I write these words, Treasury bond prices are breaking out to
new highs (rather than heading lower as one might expect).
There is a sense of attitude shift in
the air, even if a deal is struck. The "full faith and credit" of
the United States government has been tarnished by this episode -- a measure
of psychological currency permanently lost. And the ratings agencies, which
have been downgrading sovereigns left and right as of late, may soon take a
notch off the United States.
As far as actual default consequences
go, opinions cover a very wide range. Some argue that fears of financial
catastrophe are overblown, and see default as a tempest in a teacup. Others
are much more concerned, with President Obama, Treasury Secretary Geithner
and others warning of fiscal Armageddon.
In light of the unknowns, a CNN video
has been going around the web. The video is a flashback to Sept. 29, 2008,
with coverage of the Dow's biggest point drop in history on
the House's failure to approve $700 billion in bailout spending.
As the commentator notes on the
September '08 flashback,
All that is to say, Rick, the markets
are not in fact the story here today. The stock market can continue to make
money, trade up or down (we're back in that minus 700 territory
now). The issue here is that credit markets are frozen. And credit markets
are where the companies that you work for get their short-term money in order
to meet operating expenses, including rent and in some cases payroll. (We are
now at the highest point there, 724 [on the Dow], that is the biggest loss
we've seen today, we are now in historic territory.)
When credit markets [freeze] up, some
companies may not be able to make their payroll. They may have to shut down a
shift at a plant. That means people will lose their jobs, more people will
lose their homes, people will have difficulty getting loans -- so honestly,
Rick, from a financial perspective, this is not a day to dig in on
principles, it is reflective of a fundamental lack of understanding on
Congress about financial markets. And I understand that, and I understand why
there would be a fundamental lack of understanding amongst Americans because
we've never had to deal with this before. We've never understood how
financial markets work and how credit markets work. But I cannot underscore
just how serious an issue this is.
On Sept. 29, 2008, the day of that
live coverage, the S&P fell more than 8% in one day -- an amount that
would be considered a respectable full year's return in a low interest rate
environment. A repeat performance from Congress could bring about some new variation
on that theme.
Odds are the credit machine won't gum
up today like it did back then. Market participants have had a lot more time
to prepare this time around. What one might call the "Y2K effect"
is in play -- the reason the Y2K (year 2000) date rollover disaster did not
happen is because so many institutions were afraid it would happen, and took
aggressive action.
Regardless, though, the debt debacle
looks bullish for gold (and quite possibly
gold stocks):
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If the debt ceiling is raised, that
means more spending, an even greater debt burden for future generations, and
another step closer to a true debt-laden crisis of confidence in the
overburdened Western financial system.
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If the debt ceiling is not
raised -- if we get a default -- that means huge uncertainty and a major
anxiety spike in the outlook for paper currencies, along with various
"Armageddon" possibilities some have whispered of.
Nor were matters helped by Friday's
awful GDP revision, as the WSJ reports:
The U.S. economy expanded at a slower
pace than expected in the spring as consumers cut back on spending, while
revisions showed the slowdown since the beginning of the year was much more
drastic than previously thought.
The Commerce Department on Friday said
gross domestic product rose at an annualized seasonally adjusted rate of 1.3%
in April through June, while first-quarter growth was revised down sharply to
a 0.4% rate from the earlier estimated 1.9% gain. A big reason behind the
downward revision in first-quarter growth was that the inventory buildup by companies was less than initially estimated,
while outlays by the federal government and consumers were also revised down.
Bad news on the economic front
increases the odds that the Federal Reserve will once again throw caution to
the wind, stepping into the breach with some form of QE3.
And if that
effort fails to bring down unemployment, much as QE2 did, it will only become
more apparent to the world that the powers that be are "pushing on a
string"... and furthermore that, with the possible exception of the
Swiss franc, the only neutral currency is gold.
Justice
Litle
Taipan
Publishing Group
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