Step Away From the Fiat

S&P just gave US Government Debt a Negative outlook.

I would have never imagined a ratings agency adding to hyper-inflationary pressured, but here we are.

Gold jumped $10, Silver jumped $0.70, S&P dropped 10 pts. The long end of the curve dropped over a point in price terms.

Good-bye RFR. Good-bye world reserve currency. Time to re-write all discounted cashflow models.

I have no idea what happends, when institutions with mandates to only hold government paper because they are AAA, are forced to sell it, simply because S&P says it’s only AA now.

This will give buyer-of-last-resort, bag-holder, TBTF-criminal-bank, Bernanke, the green light for QE3.

UPDATE: From the Q&A Session with the agency:

Which AAA-rated peers have a better fiscal position than the US?
UK, France, Germany and Canada, all of which are rated AAA, and have stable outlooks. UK had negative outlook in 2009, but since then S&P believes UK has implement a fiscal consolidation plan which the rating agency believes is credible. “The US has yet to agree on a plan.” Canada has the best fiscal position of the group.

The yield on a loan to the Government of Canada for 10 years? 2.96%
The yield on a loan to the Government of the United States for 10 years? 3.41%
The Annualized CPI for Canada as of February 2011? 2.2%
The Annualized CPI for US as of March 2011? 2.7%
Fraction of Canadian Debt sold to actual Investors? 100%
Fraction of American Debt sold to actual Investors? No Idea, but it’s way less than 100%.

Can you name which country’s fiat is in in the most trouble? I’ll give you a hint, it’s not Canada.

I have a client, 100% invested in the S&P TSX/60 via the ETF, XIU. As a money manager, you might think, that doesn’t leave me much flexibility. That’s where you would be wrong. Through derivatives, without trading the underlying, below is a chart of the number of shares the client owns (multiplied by an arbitrary constant) of XIU. The graph has been adjusted for deposits, by excluding purchases from deposits, and not counting gains made ontop of deposits (or gains on gains, either).

Real Gains

One can see that real-wealth appreciation is being generated, via the number of shares owned. Doesn’t matter what the fiat is worth, or where the multipliers are, my client owns about 8.8% more of the TSX than he did just 4 months ago, without counting deposits.

It’s one or the other.

The only catalyst I see for period of deflation ahead, would be a contraction in multipliers starting anytime this year or next, kick-ed off by any possible combination of headline risk and psychology. This problem will of course, be finite, with a feed-back loop that could put North America back into a 2008-like job-shedding race. However, I don’t see it being permanent in the long run. I actually see the masses voting for completely socialist policies which would push the last job-creating innovation-driving capatalist, over the edge. It would be a litteral race to the bottom, and probably a top in the RATE of money printing, for probably a couple decades.

Energy will add to the feed-back loop problem.

The scenario I just conjectured is just one of many 5 to 10 year outlooks. The alternatives, are all just a question of how much devaluation, and how much growth, will we see. Both of these, bode well for commodities, stocks, and real-estate in the long run, like they have for the last century. If North America could switch to a cheaper energy source, before market forces, force their hand, this would become a competitive advantage. That’s happening in Ontario, right now. That has me very excited, to see the competitive advantage being grown, right in my back-yard.

Treasurys can’t keep a natural bid excluding the fed.

Nobody has commodities on the offer.

Welcome to the Weimar Republic.

An old note, to remember, from Gonzalo Lira:

The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

Just for fun:

The debate between defaltion and hyperinflation, online, is heating up…again.