06/15/11 Baltimore, Maryland – After 6 straight weeks of losses, it looks like the US stock market is ready for a winning week. The Dow rose 123 points. Oil stayed below $100. But the yield on the 10-year T-note rose above 300 basis points.
And here’s the latest from The Financial Times:
“S&P cuts Greece’s rating one step closer to default.”
Want to earn a nice yield on your money? Buy a Greek 10-year bond. It will pay you 17% interest. For a while.
But wait. You say you can’t trust the Greeks? You say they’re not good for the money?
“The Greek political landscape is ingrained with vested interests, endemic kleptocracy and bribery,” writes John Sfakianakis, chief economist of Banque Saudi Fransi.
Unemployment is around 20%. People dodge taxes. Government workers don’t show up for work. Households spend too much. And the government is going into debt so deeply and so rapidly it can’t possibly get out.
Hey… It’s just like the US! No, the US is worse, says Bill Gross. CNBC:
When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco’s Bill Gross told CNBC Monday. Much of the public focus is on the nation’s public debt, which is $14.3 trillion. But that doesn’t include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.
The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.
Taken together, Gross puts the total at “nearly $100 trillion,” that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won’t find a solution overnight.
“To think that we can reduce that within the space of a year or two is not a realistic assumption,” Gross said in a live interview. “That’s much more than Greece, that’s much more than almost any other developed country. We’ve got a problem and we have to get after it quickly.”
How do you like that? He didn’t even mention the fact that Americans can’t sell their houses to Germans or turn their country into a retirement home for sun-deprived Scandinavians.
But wait, if the US debt situation is as bad or worse than Greece’s, how come the yield on US 10-year notes isn’t 17% too?
Therein may lay an even bigger opportunity. What if Mr. Market were making a mistake?
Everybody knows that Greece always defaults on its debt. It’s been in default, one way or another, for about half of its life – ever since it gained independence in 1828.
But the USA? If you can’t trust the US to pay up, who can you trust?
So, investors may feel secure lending money to the US…even though the fundamentals are little different from those of Greece. They may think: “the US never defaults.”
And yet, if there’s one thing we can learn from financial history it is that nobody is immune from financial errors. Everyone gets greedy and stupid from time to time. And no paper currency lives forever.
Right now, you can earn 17% on Greek debt or 3% or US debt. We’ll make a prediction that you can take to the bank: that spread will narrow.
The inflation rate in America is a matter of debate. But even the US government’s own number crunchers put it at about 5% for the first quarter of this year. That makes the real return on US 10-year notes a MINUS 2%.
How long will investors content themselves with a negative return? Maybe for a while. But not forever. They usually want a real return of about 3%, with no threat of default. A safe return, in other words.
And when they realize that the inflation rate in the US is really 5%…and that the return on US debt is NOT safe…they’re going to want a higher interest yield.
Say 5%. Or 7%. Or 10%.
Then, all hell is going to break loose.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Won’t happen. The US pledges the labor of its citizens as collaterol. When a US person is born, the government issues a bond on their birth certificate. That’s why on government documents people are always identified in all caps, LIKE THIS, whereas in actual grammar, a proper name is only capitalized on the first letters Like This. All caps indicates your corporate identity as distinct from the person.
I think most of Washington is more concerned with keeping the money spigot open than long-term interest rates or the solvency of the nation.
A better question would be, what are they going to call QE-3 aka Quanitative Easing-III? Usually any sequel is a shadow of the original, there being few exceptions over the years. One exception would have to be the second Star Trek movie “The Rath of Khan” which was vastly superior to the original movie. Now that I think of it, that’s the only squel I can think of that was better than the original. I guess a special mention is in order for the 3rd “Raiders of A Lost Arch” movie, which while not better than the original, was vastly superior to the second movie.
Long and the short of it, I don’t think they will call it QE-3 because like any highly addictive substance, it would take so much more than the 800 billion spent in QE-2 to make any difference in the markets, and frankly the will to do that is politically not there. I say that realizing the Fed is indeed an independent institution, answerable to no one except Jamie Dimon and the general mood of the country. So what will they call it?
My guess is there are tenured professors in the halls of acadamia right now, trying to dream up the next new moniker for running the printing presses. Will have to be something that will make for a catchy acronym. Something like “Bilateral Liquidity Operation Working Monetary Expansion” or simply BLOWME for short.
In any case, it should be a real doozy whatever they come up with. My own expectation? They will mail out more checks much like George Bush did on several occassions. That way, when the Republicans protest, the Democrats can rightfully tell them to shove it. George Jr. started the whole fiscal insanity, there’s no reason the Democrats can’t copy him. The only question is how big a check I will get, and whether it will be delivered by the mailman or dropped from a helicopter flown by Ben Bernanke.
“If you can’t trust the US to pay up, who can you trust?”
Hey, that’s easy. Just look at the obverse of any dollar bill: it says “IN GOD WE TRUST”
My only criticism of Mr. Bonner on this one is his use of the word “liklihood” in the title. “Inevitability” would have been a better choice.
100 trillion? Mr. Biden must have to taken off both shoes to count that high.
You end your article with “Then, all hell is going to break loose.”
How about detailing what you mean by that. Seems you avoided the very information that we as readers were looking for.
God will not save USA. USA is still suffering from the phobia of constant success since the Great War because other nations were fighting. All the education did not help America from becoming inefficient. Things became worst with China growing and reaching such heights of productivity which is nothing but dream for them more so USA do not know how to produce at a cost which would make things salable. USA is sliding to the level of low level trader who purchases goods to be sold to its own public at low margin .Jobs left USA leading to lower purchasing power and capacity. USA must go back to manufacturing creating jobs for local citizens. Reduce import find methods of cost reduction without slashing wages of workers but senior jobs may carry lower salary and perks.
Write off all personal debts and encourage people to go for education and take up jobs what ever is available. Government instead of giving dole to the companies should start spending on infrastructure and long term capital projects which will create more work in the nation. Wealth creation is the need of the time and not going for war. Stop funding abroad for activities which do not yield income. USA will serve the world better by improving there own economy than doling funds.
Aloke Chakravartty