Thursday, July 28, 2011

The USA is Lehman 2.0 times a thousand

Gold © fintag

News comments:
The Gold Rolex.

It is a hideous beast. Bling and Hasselhoff mostly. But a great investment.

The Russian currency of choice, the Rolex is on par with a 500 Euro note (stored in suitcases and passed around like a pre 2011 T-Bill). The Rolex brand is enough to give these timepieces currency status but with the US debt debacle, the Gold element is starting to overtake the Rolex value.

In the Westfield shopping mall, West London, you can buy grams of Gold. They come out of an ATM. And popular it is too. Gold is the new risk free investment and walking around with a few nuggets in your pants makes you feel good. The governor of the Bank of England may promise to pay the bearer of a crispy 5 pound note but that is hollow if the Governor is bust. The UK used to have lots of gold as collateral to back up its promise but Gordon "fck the rich" Brown sold it off for peanuts years ago.

So that gram of gold has value. It can be felt, smelt and seen and has been used for thousands of years as a currency. I am not so convinced that the green inky piece of paper in my wallet is worth anything but as long as people accept it in shops and amongst themselves then the game of charades can continue. But it seems this game is coming to an end.

Economics is about assumptions and theories. One key assumption is that US debt (10 yr T-Bills) is risk free. There is a yield and you will get this paid and your capital back on maturity. It has always been this way. Today this assumption is being challenged. The attack on the banks after Lehmans and the implicit guarantees by near bankrupt sovereign states is why we are here today. Banks should have gone bust. Capitalism should have had its way. It didn't. The liberal socialists interferred and this is where we are now.

Take Nokia. It used to be the only cell phone to be seen with. Now it isn't and has been downgraded. Whereas companies can come and go, most countries have been with us a long time.

Greece and Italy and Spain and Ireland have all contributed to the way we live now. Each had its time and like Cyrpus, their time isn't today. Empires are brutal. They never last.

In our lifetimes the US has reigned supreme. Like the collapse of Rome, it elected ineffectual liberal leaders who wanted the people to love them and gave them things he thought they wanted. Just like Obama.

August 2 is a milestone. It will be remembered like 9/11. The day America had to look at itself and work out what had gone wrong.

Of course nothing much will happen on this date but the damage is already done. The sort of debt the US has will take decades to erradicate. Noone really knows how much it is anyway. So tax revenues only cover 60% of all government expenditure?

There is only one option. The USA must nationalise the S&P 500. As a socialist I am sure Obama has thought about this. Before this happens I expect to see the FBI in the offices of Moodys and Poor forcing them to downgrade anything in Europe in an attempt to destroy the USD's main rival the EUR. It is happening but not fast enough. America will start taxing imports and closing itself off from the rest of the world. Global capitalism only works if there is a Big Daddy. That Big Daddy is dead.

In the meantime, all that collateral held as US T-Bills, all that insurance against US defaulting, ooof, the unwind would be painful. Think credit post Lehman credit freeze multiplied by a thousand. Starvation. Riots. Dirty finger nails.

As much as I hate to say but the new collateral will be prime residential and commercial property. Manhattan, London, Berlin, et al will just become investors playgrounds. It is happening in London and will continue. GBP5m plus properties. Like the art world where USD100m paintings are becoming the norm, real estate will become the new art. Gold will and is becoming the new currency which is not good as taxing physically held assets is difficult. Don't forget this is what happened to Germany post World War 1.

All sounds grim. The good news is this grimness is nothing to the grimness in 2 years time. So go out there and party in that London condo stashed with gold bars and a life time supply of water and vitamin pills.

Today's shorts:
USA - the new sick man of the world (telegraph)

Today's longs:
More interns needed at Credit Suisse (bloomberg)

Goldfinger to be remade for USD 2 trillion.


Anonymous said...

Fintag you are gloomy these days. More than usual.

Anonymous said...

Spot on fintag. People say capitalism destroyed the world but it is socialism, i.e. government interference that led us into this situation. When it comes to business markets should be free and banks should have been allowed to go bust. And yes real estate will be the investment of choice going forward because what is the most vital think we need after food : a roof. Brace yourself for the big one!

Anonymous said...

How many rooves are we going to need and be able to afford?