8-16-2011 Downgrade - FinancialFoghorn.com

8-16-2011 TUESDAY AFTER LUNCH MONEY MEMO
By the Financial Foghorn
DEBT CEILING CRISIS REPLACED BY DOWNGRADE CRISIS
"You can ignore reality, but you cannot ignore the consequences of ignoring
reality." Ayn Rand
1.
RE the debt ceiling crisis, Turbo Tax Timmy Geithner said, "We're running
out of runway." For once he
got something right. But on
Tuesday August 2nd, true to
form, Congress found some
more runway, and kicked the
debt ceiling can down it. Past
the 2012 election even.
Everybody rejoiced. Back
slaps and high fives abounded.
These guys really do make
Congressional Intelligence
truly oxymoronic, don't they?
2. On Friday, August 5th, the
Standard and Poor's people, to
make amends for their bone-headed calls on subprime mortgages, bitch slapped the
credit rating of the U.S. from AAA to AA+. They muttered something about the
Congress not really being serious about balancing the budget. And S&P waited
until Friday night after markets were closed. They whispered the downgrade to a
couple of janitors in their building in NYC. Then they snuck away hoping nobody
would notice or get too upset about it.
Didn't happen. Mr. Geithner, reinstated on his soap box, proclaimed on
numerous weekend political talk shows that S&P had engaged in bad mathematics.
And indeed S&P may have overstated by a couple of measly trillion. Doesn't
matter, the U.S. won't and can never repay its mega trillion debt.
Another worthy shill, Mr. Warren Buffett, announced that the US ought to
be given a AAAA credit rating...something like his beloved Gorat restaurant in
Omaha that gets a 4 forks rating for good eating. And this was after many years of
Mr. Buffett's analysis that the U.S. was like a farm that was selling off acreage
every year and would some day wind up being spanked in a woodshed it didn't
own. Somehow Mr. B's previous farm analogy was forgotten when the drones in
DC needed him to rally the dispirited financial troops.
Hint: arguing with a credit rating agency is like arguing with that big Guido
guy who's repossessing your car at midnight. Too little, too late. But the good
news is that there's more than one credit rating agency! The Moody's people and
the Fitch people have, for unexplained reasons, continued to affirm that America is
a triple A credit risk. And for historical reasons, Moody's is considered the
predominant bond credit rating agency, so for a number of U.S. credit owners,
that's enough to allow them to continue to hold Treasury bonds, shaky as they may
be. For now, there won't be a wholesale flight to elsewhere, T-Bond-wise.
But, there were other ramifications of the debt ceiling issue. Mr. Market had
a truly ugly week. On Thursday, August 4th, The Dow fell 512 points, possibly on
leaky information about the coming credit slap. Then on Monday, August 8, the
Dow truly began to vibrate, was down 63 points. It was up 429 on Tuesday, down
519 on Wednesday, and up 423 on
Thursday. Some people would call this
kind of week...volatile.
And gold bullion moved from a
COMEX close of $1652 on the Thursday
August 4,to beyond $1817, and settled at
$1748 on Thursday the 11th. And they
keep telling me that gold is a barbarous
relic.
But the real news was the gold
shares. Many of the major gold producers
stopped trading as equities, and started
trading as representatives of gold bullion,
which of course they always were.
Specifically, on Wednesday August 10,
when the Dow was off 519 points, the American Stock Exchange Gold and Silver
Miners Index, the ^GDM, was UP 52 points to 1652. That's the first time in
memory that equities went down and the big 30 stock gold and silver miners failed
to follow. Now either the Da Boyz were unable to collapse gold shares with naked
selling in Canada they way they have been, or the buying volume was just too huge
to be stopped. I'll take both answers, thank you.
I don't know if this sort of intelligent buying for gold shares continues, but it
does speak well for what's undoubtedly ahead. It's doubtful that the Mr. Retail
Investor, Joe Sixpack, stepped up to buy gold shares on Wednesday. As Stewart
Thompson said in a post at 321gold, "Forget about the pipedream of the public
buying gold stocks to send them vertical. The public is likely going to the
breadline, and they’ve just finished selling their gold to the pawnshop man, for a
bag of peanuts and a roll of toilet paper. Institutional money managers are going
to pump your gold stocks upside in a way that seems “beyond impossible” now.
Don’t waste time now worrying about gold stocks, in hopes of avoiding some “preparabola hit” on them. Gold stocks are what this stage of the crisis is all about,
and the only question is, are you onside?" Got gold stocks?
http://www.321gold.com/editorials/thomson_s/thomson_s_081611.html
3.
And finally, let's not forget the special anniversary that was yesterday. 40
years ago, Tricky Dick Nixon "closed the gold window," meaning he destroyed the
last remnant of Bretton Woods, invalidated various international treaties, and
imposed unworkable wage and price controls. And I believe he announced this in
the middle of Bonanza, American's favorite Sunday evening cowboy TV show at
the time. http://news.goldseek.com/GoldSeek/1313416800.php Nixon's speech is
full of little erroneous platitudes about defending the dollar...by taking it off of
gold backing...that then destroys it with fiat certainty. (As in, we had to destroy
the town to save it.) Oh, and we were buying Hondas and oil back then too.
Anyway, we're still paying for Nixon's unwillingness to pay for the Vietnam
war, or Lyndon Johnson's Great Society, or any of the other blowhard government
spending programs that have so rotted our government's ability to behave
responsibly. Sigh. Hang on to your gold stocks, kids, the institutions are a-comin'
to make us rich. Take another look at GDXJ or SIL.
Financial Foghorn is pretty much disgusted with political types these days. He
regrets even being elected to student government in law school. It only
encouraged the other students. He owns GDXJ and SIL at lower prices.
Michael McGowan,
The Financial Foghorn, and author of
"Financial Foghorn's Guide to Gold-Get Rich, Get Happy, and Get to Heaven¨ with Monetary Metals."
www.FinancialFoghorn.com
© 2006-2012 Michael McGowan