09/27/11 Buenos Aires, Argentina – Cash is king.
Ai yi yi…
Last week was the worst for investors in 3 years. Even gold melted down, as we thought it eventually would.
The only things to go up were US Treasury debt and the dollar. As expected, the Great Correction is doing its work.
So far, the stock market has held up as well as it has. But now it seems to be selling off. And gold is selling off too.
Rich people buy gold. They can afford to. They know the end of the dollar is coming — sooner or later. They can wait.
But the middle classes need dollars. Debtors need dollars. Consumers need dollars. Almost everybody needs dollars. In a correction, cash is king. And the king of kings is the dollar. Here’s CNN confirming what Dear Readers already know:
…the data [from the census] gave the first glimpse of what happened to middle-class incomes in the first decade of the millennium. While the earnings of middle-income Americans have barely budged since the mid 1970s, the new data showed that from 2000 to 2010, they actually regressed.
For American households in the middle of the pay scale, income fell to $49,445 last year, when adjusted for inflation, a level not seen since 1996.
And over the 10-year period, their income is down 7%.
“Economists talk about the lost decade in Japan. Well, with these 2010 data, we can confirm the lost decade for the American middle class,” said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities.
Sure, it’s fair to say Americans at all levels of income, from rich to poor, were hit hard in the decade that started with the dot-com boom and bust, and ended with the Great Recession.
But according to the census data, those losses disproportionately hit the lowest 60% of Americans, while the richest 40% actually gained wealth, relative to the entire US economy.
The middle classes need dollars. They want dollars. Because it’s a currency — believe it or not — that you can still trust. No thanks to Bernanke, Obama, et al. Instead, our gratitude goes to the Great Correction itself. It’s doing the work of an honest central bank. It is making the dollar respectable again. Thanks to the Great Correction the greenback can hold its head up. Uncle Sam’s money is Number One.
How so? In a correction, almost everything goes down. And almost everyone gets scared that his investments and his savings (which he put into stocks on the advice of his financial magazine) will go down too.
Your editor says that in the long run gold will be a better place for your money than dollars. But everyone can’t wait for your editor to be proved right. Most people have bills to pay. And you don’t pay bills with gold. You pay them with dollars.
And imagine that you are a European or an Asian investor? What are you going to do with your money? Put it in a French bank or a Greek bond? Nope. You want something safer. You want a US treasury bond.
And as long as the Great Correction is allowed to continue…US Treasury debt will be a good place for your money. The trouble is, we don’t know when the feds might run in…like a bull in a china shop…and break all the teacups. So, here at The Daily Reckoning at least, we’ll stick with our gold through this correction, confident that when we come out the other side the dollar will be among the porcelain shards and gold will still be standing tall.
When we entered this Great Correction we figured the process would take a few years. We felt like a judge had just given us a prison sentence.
“Five to ten,” said your honor.
Now, it looks like it will take longer. We figured the feds wouldn’t be able to finance their deficits for very long. That would force them to hit the panic button and begin dropping dollars from helicopters. But what the market is showing us now is that this Japan-like phase can last a long, long time. Because the correction itself is making the dollar and dollar debt more attractive!
Get this: the yield on 10-year US Treasury debt is now lower than the yield on the S&P. The longer the correction goes on…the deeper it goes…the more people will want the safety of US notes and bonds. And the more they buy Treasury debt…the lower go the yields…
Meanwhile, stocks should go down…pushing up yields. That’s what happens in a correction. That’s what happened in Japan over the last 20 years.
Most likely, we’ll see yields of 5% on the S&P before this is over. That’s because prices will be cut in half.
Meanwhile, we’ll see yields on bonds go down to 1% or so on the 10-year bonds. This correction means business. It appears to be even more powerful than we imagined. It is not merely correcting a bull market and a credit bubble. We don’t know for sure, but it may be correcting an empire, modern government, the dollar-based monetary system…and who knows…maybe an entire civilization.
We’ll just have to wait to see how far it goes.
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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Bill, you explained why people need dollars. Fair enough, that explains the strength in the dollar.
But who needs to lend out money at 10 years for 2% or 30 years for 3% as the buyers of U.S tresuries are doing?
What fools are these?
I see no explanation of why investors are buying (with both hands) that debt at such low yields. Japan and China can hold short-term U.s. debt why would they hold this long stuff? Much less keep buying?
Reckon on that, Bill.
Bill, did ya all forget that your trade of the decade (this decade)was to sell long bonds and buy Japanese stocks?
Shawn, I need your sage advice.
There is nothing – nothing out there that I want to buy, other than buying my own shares back.
So I ask your help: what should I invest in other than myself?
cash is king, depression is here for very long to stay; finally you said much longer than 10 years
deflation is now and will be long into future…
however, gold is a great bubble and ready to joint stocks into deep South!
the only safe heaven and guarantee you’ll see your money are US treasuries, bonds etc. will not be defaulted; this is a main reason smart money goes there
I thought George W. Bush (aka “The Chimperator) did more to kill the dollar with his foreign wars and wild borrowing than anything Obama or Clinton did.
Warren,
Please don’t feed the troll!
-BB
Bush ain’t President any more, yet the borrowing increases at exponential rates. I guess no one wants to be considered second best.
Its a gamble. No one knows anything. Everyone is grouping in the dark like some horny teenager, hoping for the best. If you hold on to this or that it is a gamble. You certainly cannot trust the market, or the government, or those manipulating commodities. Trust in your selves and be alert. Most importantly watch a sunset once in awhile.
Tax the poor.
Feed the rich.
Read Roman Empire. History repeats. Little change. But his English is better.
Tax the rich.
Let Uncle Sam pay your bills.
James Grant said the bond vigilantes have all retired and moved to Boca. The people in now are a lot of short term traders more interested in the difference between short/long yields..or some such.
Dollar is just a currency therefore it is doomed from the moment it was created.
“Rich people buy gold. They can afford to.” you don’t need to be rich to invest in gold. All you have to do is, instead of wasting your money putting it on a savings account or buying a new useless gizmo, buy gold and silver bullion.
With interest rates going lower and lower gold is more attractive as a store of value. Why save dollars that will definitely purchase less in ten years than today? Spend them today and enjoy yourself. Alternatively, store their purchasing power in gold. Bernanke has more than trippled the monetary base in three years. This is severe inflation and no Fed has ever printed dollars like this before. The dollar strength seen now will melt like the snow in the spring.
Call me naive to be so sanguine, but I highly doubt its the end of civilization. That already occured about 100 years ago when Cubism made its debut. Or so everyone said at thet time. Could be they were right, a hundred years is, afterall, a short period to fully judge the impact of some event.
When Bill called the gold fall, I disagreed. Well he was right. I guess that’s why he’s the professional. Mish thinks the private sector credit contraction will overpower the Fed’s printing press. Banks are scared to lend, no one is expanding or borrowing, so banks sit on the cash, as we go through a deflationary decline. Also he thinks Europe is in even worse shape, if that’s possible.
Bill. You are consistent…
And you are also correct…
Thanks for everything.
“but I highly doubt its the end of civilization. That already occured about 100 years ago when Cubism made its debut.”
You call this civilization? Me I call it the dark ages of idiocy.
Thanks, Bill. I was surprised by the decline in gold and silver, but you weren’t. Excellent call. Love your writing. Have all your books.
When the Euro dies, and a bunch of nations default on their debts in Europe, money will run to safey, and the US dollar. I know it makes no long term sense, but it makes relative sense, and that’s what counts in the short term.
TRADE OF THE DECADE
Bill likes to pretend his trade of the decade for THIS decade was still to buy gold, sell stocks. But that was from last decade.
His new trade of the decade is
Sell U.S. Treasuries, Buy Japanese stocks.
Here is where he announced it:
So there is our Trade of the Decade:
Sell US Treasury debt/Buy Japanese stocks.
Read more: Our NEW Trade of the Decade! http://dailyreckoning.com/our-new-trade-of-the-decade/#ixzz1ZGk240H4
So far, so bad…
But I think it will ultimately be a good trade, especially from here as U.S. treasuries are even more in a bubble now than at the start of this decade.
Indeed…
” Gold will remain in our core holdings, but not in our Trade of the Decade for the next 10 years. Why? Because we think the US economy is going the way of Japan. ”
Shawn bores his own dog.
Bill,
Don’t feed the troll!
-JB