Black Swans Coming

As of Saturday, August 6, Apmex, the world's largest trader in precious metals, suspended the checkout counter until 7 pm EST Sunday, waiting for Asian markets to open.  The implication was that the new prices would be more than a smidge different than Friday's closing.  Turns out that was true: gold has increased by roughly $50 per ounce as of this writing.

Large financial changes none of us control seem to be coalescing worldwide.  Unique occurrences damaging markets are colloquially called "Black Swans" by finance hipsters -- unanticipated events causing large drops in value.

But Black Swans are not always unanticipated, even if the markets prefer to ignore data and not build foreseeable disruptions into pricing.  The more savvy investors think about them quite a bit, relying on publicly available information like this (graph created by Lee Adler):

 

Mr. Adler concludes, from published federal data showing how 1.5% of Americans are falling into poverty every year--six percent as of today -- that the S&P is far too high in relation to this reality. He believes the market is deluding itself. (N.B.: The downward line for food stamps represents more people on that program, not fewer.)

Eight months ago, Moody's announced that the U.S. credit rating would be reduced by 2012.  S&P turned out to have the courage of Moody's convictions, lowering America's debt rating a notch, and warning of more to come.  Now comes Moody's again, almost out of embarrassment, to lower Fannie Mae and Freddie Mac, the federally-managed banks bankrupt since 2008.

State debt is being re-evaluated, and the dullest of investments, municipal bonds, are also on the table .  That would be city debt.  National to State, and State to City: this whole downgrade phenomenon seems to be getting a lot more local, a lot closer to you and your family, doesn't it?  Do you suppose we had anything to do with it?

It always seems like these issues are far away from us.  But they're not.  For all intents and purposes, they're right next door.  Germany declined on Friday to guarantee the E.U.'s debt, quibbling about how it represented more than they produce every year.  So Germany won't, and France can't.  Who does that leave?  China?  The IMF?  You?

I said a few days back that American debt was not merely a political issue, but a question of who would agree to lend the money to service American debt.  The problem, if it's possible, is even worse than that: What money?  Whose currency?

Treasuries are on their way to "non-investment grade" not because they will never be paid back, but because they will be paid back with junk money.  As Alan Greenspan noted on Meet the Press last weekend, America "can pay any debt it has because we can always print money."

But can we?  Here's another interesting graphic that is a year-old assessment of where the world is in accepting Timmy Geithner's fiat dollars--or the Euro or Yen, or others. The "We Are Here" indicator has clicked a bit further as of today:

You may want (instead of contemplating where we are now on this graph) to visit your local mega-mall and gaze wistfully at the "You Are Here" button at one of the nine entrance maps before someone gets around to penciling in "You WERE Here" as a cruel joke.

Things are unfolding fast.  Not just one Black Swan is coming, but a whole wedge--and all of their cygnets.

As of Saturday, August 6, Apmex, the world's largest trader in precious metals, suspended the checkout counter until 7 pm EST Sunday, waiting for Asian markets to open.  The implication was that the new prices would be more than a smidge different than Friday's closing.  Turns out that was true: gold has increased by roughly $50 per ounce as of this writing.

Large financial changes none of us control seem to be coalescing worldwide.  Unique occurrences damaging markets are colloquially called "Black Swans" by finance hipsters -- unanticipated events causing large drops in value.

But Black Swans are not always unanticipated, even if the markets prefer to ignore data and not build foreseeable disruptions into pricing.  The more savvy investors think about them quite a bit, relying on publicly available information like this (graph created by Lee Adler):

 

Mr. Adler concludes, from published federal data showing how 1.5% of Americans are falling into poverty every year--six percent as of today -- that the S&P is far too high in relation to this reality. He believes the market is deluding itself. (N.B.: The downward line for food stamps represents more people on that program, not fewer.)

Eight months ago, Moody's announced that the U.S. credit rating would be reduced by 2012.  S&P turned out to have the courage of Moody's convictions, lowering America's debt rating a notch, and warning of more to come.  Now comes Moody's again, almost out of embarrassment, to lower Fannie Mae and Freddie Mac, the federally-managed banks bankrupt since 2008.

State debt is being re-evaluated, and the dullest of investments, municipal bonds, are also on the table .  That would be city debt.  National to State, and State to City: this whole downgrade phenomenon seems to be getting a lot more local, a lot closer to you and your family, doesn't it?  Do you suppose we had anything to do with it?

It always seems like these issues are far away from us.  But they're not.  For all intents and purposes, they're right next door.  Germany declined on Friday to guarantee the E.U.'s debt, quibbling about how it represented more than they produce every year.  So Germany won't, and France can't.  Who does that leave?  China?  The IMF?  You?

I said a few days back that American debt was not merely a political issue, but a question of who would agree to lend the money to service American debt.  The problem, if it's possible, is even worse than that: What money?  Whose currency?

Treasuries are on their way to "non-investment grade" not because they will never be paid back, but because they will be paid back with junk money.  As Alan Greenspan noted on Meet the Press last weekend, America "can pay any debt it has because we can always print money."

But can we?  Here's another interesting graphic that is a year-old assessment of where the world is in accepting Timmy Geithner's fiat dollars--or the Euro or Yen, or others. The "We Are Here" indicator has clicked a bit further as of today:

You may want (instead of contemplating where we are now on this graph) to visit your local mega-mall and gaze wistfully at the "You Are Here" button at one of the nine entrance maps before someone gets around to penciling in "You WERE Here" as a cruel joke.

Things are unfolding fast.  Not just one Black Swan is coming, but a whole wedge--and all of their cygnets.

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