Monday, April 18, 2011

Monday Mixer

One week to go until vacation! Boston Marathon was today and the traffic was super light which makes for a nice ride in and out of work. The guy that won ran 26 miles in 2 hours and 3 minutes!!?? That is just amazing.

Ratings Agency S&P Downgrades US Debt Outlook to Negative
Rating agency S&P decided last week to downgrade the US debt outlook to "negative". This is NOT the same as downgrading the US debt which is still rated AAA (and will always be so, right until the end). What this amounts to is S&P saying they have doubts the US will do anything constructive about the deficit issues anytime soon. I know, shocking news.

To be fair, S&P does not have what I would call a stellar record in their rating calls. I am pretty sure all those toxic subprime notes were all Triple A rated well into their crash, so there is that disclaimer. Moody's reaffirmed their positive outlook on US debt by the way.

As Zero Hedge reported, the US major players were alerted to this move last week and I am sure no word of it leaked out to the big banks. That would be both criminal and craven so there is NO WAY that happened.

So what does this all mean? A couple of things. First off I tend to take note when once in a lifetime things happen, they are usually important though it may not be clear if you are looking at it too close. From the question and answer session today:
2. Has the US ever had a negative outlook? Answer: no.

This sort of thing may be the outside influence that starts reining in the free money policies used by the US money system.

The second point, and this is far more important in the near term is how this will affect the "story" going forward. Long time readers know that I usually formulate a story that I believe HAS TO happen and then tweak various events into fitting that story. Today's downgrade serves to make a large change to how my story will have to play out.

Short version is that I believe very strongly that the US FED will have to do QE 3. I just do not see it any other way. With the pressure from Congress about debt limits and other crap I figured a stock market drop of 5-8% was going to be needed to give the FED cover for another round of QE. That just got ratcheted up, a lot.

For the FED to initiate QE 3 I now think the stock market will have to drop 10-20% to get enough fear out there that "saving the system" gets back in vogue. I will split the difference and go with 15%. This is not a technical call; there are no charts or Fibonacci lines; there is no math behind this. It is how my story will have to play out if I am correct. I may not be.

Silver Thread and Golden Needles
That is a country song BTW.

I have been impressed how fast all the consternation over "Is Gold a Bubble?" quickly moved to "Silver Is a Bubble" discussions. I am a admitted moronic, tin foil hat (here is how to make one), metal bug who refuses to see the error of my ways. I am long physical gold and silver so you know that up front. I did not get on this train in the last year.

I have a bunch of random thoughts on the bubble angle, some favor it, others are against is. Here they are in no particular order:

-The financial sphere thinks EVERYONE is in on the metals trade. They could not be, not in any size. And still not one person I know in real life has any exposure to metals, but I know regular people while you may only know MOMO traders.

-If the metals are an inflation hedge, it is either going to have to happen very soon or that is just a wrong line of thinking. Same for deflation hedging.

-In the battle between the "crazies" (metal bugs) and the "tradies" (short term trend holders) the crazies have metals in size at FAR lower prices. This is important as big drops will be met with accumulation by the crazies and taking it away from the tradies.

-As a metals lover, I really wanted to have seen a big pullback back in late January for the metals; Silver at $22.50 and Gold at $1250 which would have calmed things down a bit.

-If the metals are a balance for insane monetary policy, what could be a top? Really?

-If metals are a holding against the idea of notional money than how is talk of sovereign debt restructuring (hair cuts), expanding bailouts to no end (Euro crap), QE 3 going to hurt metals? Only a return to burn it up economic growth, and I mean like this week, can fix the serious debt issues facing the developed world.

-If metals become just 3% of an average person's investment portfolio, geez I cannot even do the math.

-If the stock market craters again (remember I think it must for QE 3 to happen and I feel it must) the metals are going to get seriously messed up to the downside.

-10 years is a LONG bull market, but we have had 10 years of serious bullshit from the power players so sometimes things keep going.

-You can't eat gold or silver. You can't eat a NFLX share. Last I heard you could exchange either one for cash and get some chicken nuggets so stop using that ridiculous line. Get some fries too.

-When everyone goes for the exits in metals not everyone can get out, just like any asset you may own.

-The metals cannot be priced by normal metrics so they are only worth what the next guy will pay. Just like every other asset you own.

-In the event of a Zombie Apocalypse you may be able to brain a few zombies with your silver bars, while electronic stock certificates will not help you. Added bonus, some coins have ladies on them!:

For two opposed but well written essays on all of this, allow me a couple of links.

Market Anthropology is a newer blog getting all kinds of reads, for good reason:
Y2K = QE2

As always, Jesse offers the kind of write up I wish I could do:
How Far Can the Fed Go in Manipulating Markets Before It Becomes a Private Banking Fraud?

Have a good night.


getyourselfconnected said...

"You're gonna drive me to drinking if you don't stop driving that hot rod Lincoln":

getyourselfconnected said...

From the last thread, I did play tennis all through high school. Not great but I did make the local paper a few times. One team we played from the town of Lawrence, Mass had chain link fences for the nets, I kid you not! Yeah, it was interesting.

scharfy said...

Excellent thoughtful post.

The fed will have to hope China cools. These high commodity prices will stop QE3 cold.

S&p downgraded Japan in 2002. Yields went to 1%. I don't think we're Japan though.

FUN times. 10 years notes finished higher on the day.

getyourselfconnected said...

Hey scharfy! So great to see you again!

watchtower said...

I actually get to hear that song on our 'oldies' station every now and then but I think that they play the Commander Cody version.

Cool song!

Jennifer Hillier said...

Your zombie apocalypse line cracked me up.

Yay for vacation in one week! So jealous.

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