Throwing Mama from the Train

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“When a government is dependent upon bankers for money they, and not the leaders of the government, control the situation, since the hand that gives is superior to the hand that takes."

Napoleon Bonaparte

These days, whenever investors gets even a glimpse of something awful that might be happening in the financial world, they run home to Mama.

When even the mightiest of investors get just a whiff of what might be considered failure or lack of resolve in political leaders in Europe, they too, run home to Mama.

And who, exactly, is “Mama?”

Mama’s T-bills

Mama is the US Treasury bond market, of course.  Mama is a very popular gal these days, warts and all.  By the way, how is Mama looking these days?

Like her best days are behind her, to say the least.  But hey, when you’re the only gal at the dance without wooden legs, you’re going to be the most popular, aren’t you?

Mama, you see, is dead broke…but she is, at least by perception, less dead broke than the other major economies of the world…

Here’s what I mean…

Typically, a government’s bonds are only as good as that government’s ability to pay on the bonds.  That is, the ability to pay, or the creditworthiness, is based upon the health of the economy backing the bonds.  And the economy, in case you hadn’t noticed, is nowhere large enough or strong enough to make good on all the debt it owes in T-bills.

The Chines know this of course, but are somewhat over a barrel since they hold over $1.2 trillion of US bonds.

So although the US economy backing the T-bills is still the largest in the world…it is also the economy with the largest debt load in the world.

So how’s Mama really looking?  Haggard and spent; with both haggard and spent being the operative words here…

The economy is haggard in that a growing proportion of GDP is being provided by government stimulus and entitlement payments, not by organic economic activity of the private sector.  Furthermore, with a growing percentage of the economy being taken over or dependent upon government spending, market efficiencies are being squeezed out in favor of political favors…

Efficient businesses are losing out to politically connected business entities that may or may not be viable businesses by themselves…

And of course, the bond market is spent as in the federal budget deficits have already spent every dollar possible today and every dollar that we and our children can possibly earn into the foreseeable future…

So Mama, we must conclude, ain’t what she used to be.

And yet, when push comes to shove, when the euro hits the fan so to speak, where do investors, sovereign funds, and hedge funds put their cash?

That’s right; they run to Mama and buy trillions of dollars’ worth of US Treasury bills.

US economy in depression

You see, even though the US economy is in near-depression status, the economies of much of Europe and Japan are much worse, and nobody trusts China—who has plenty of money, or Russia, who has plenty of oil, as far as they could toss either of them.

That's because neither China nor Russia has a legal system even worth spitting at; the Chinese will simply steal your assets and you’ll never have a day in court, while the Russians will steal your assets and kill you along the way for good measure.

So even though the US is in what really amounts to a depression, the world knows that their money is at least safe(r) in the US than anywhere else…Jon Corzine and MF Global notwithstanding.

And believe me, the US economy is at depression levels.   What else would you call an economy where almost 50% of the households don’t earn enough to pay federal income taxes and at least 1 in 7 people receive food stamps?

But, instead of food lines like in the old Great Depression photos of the 1930’s, we have government food debit cards being used at the cash register.   It certainly takes the drama out of it, and nobody knows any better, but the fact remains as it is nonetheless.

Just to be clear, it is not economic strength and a healthy balance sheet that is driving the world to invest in T-bills, it is the lack of an alternative.

For most of the world, there is simply no safer place to put money.

Even gold, as you can see from it’s subdued value, is no competition for T-bills because there isn’t enough gold in the world to go around, and the gold market certainly doesn’t have the liquidity that the world requires of it, the way the US bond market does.

That is the situation today.  But how long do you think it will last?

Throw Mama from the Train

You have heard the phrase, “nature abhors a vacuum?”  Well, the same holds true for the market.

And that’s just what we have in the market today, a value vacuum.  The world is looking for value in a market bereft of it.  Fear cannot be the basis for a reserve currency for very long.

Rather, confidence is what a reserve currency ought to carry with it, backed by tangible, verifiable value.  The dollar is strong today because it has “legal value” in that the US financial system has, although hard as it may be to believe, more legal integrity than any other.  And again,  it is backed by the largest economy in the world.  But the economy is not large enough to justify the currency’s status, nor the bond market’s rally.  Both are supported by global fear.

In essence, the entire world is floating on a T-bill bubble, and all bubbles eventually pop.

What will cause the T-bill bubble to pop?

Simple, a competing currency with a store of value behind it…say gold, or oil, or both.

The Chinese, the Russian, and the Iranians all know this; do we?

And those are…The Gorrie Details.

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