In search of real money

                                       

 

“Osborne says iconic red budget box empty ‘for years’, keys lost”

 

-       Bloomberg headline.

 

 

This will be our final Investment Commentary of 2010. We would like to wish all clients, prospective clients and readers a happy and healthy Christmas and a peaceful and prosperous New Year.

 

The authorities continue to try and paper over the cracks, but the mission is futile because the entire superstructure is rotten. Wholesale banking failure is now colliding inexorably with wholesale political failure. In the US, this has led to a messy compromise whereby expiring tax cuts are renewed, and matched by an extension of benefits payments. US equities greeted the news with their usual Pavlovian dinner-bell yelps of thoughtless enthusiasm, but the Treasury market reacted by collapsing. As well it might: America’s soaring national debt outlook just got measurably worse. In the euro zone, by contrast, austerity is winning out against sanity. Ireland has just been forced to accept bail-out loans from its European masters that represent, in effect, stealth support for their own ailing banks. Two systems, two different approaches. One common aspect: if bondholders weren’t already feeling nervous about the outcome, they should be now.

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Comments

[Fabrizio Viola]

Hi Tim, I am a corporate bond asset manager working for an Italian Insurance Company. I was working on structured products and ABS during the violent price action suffered after August 2007 and quarters thereafter. So, I had a privileged observation point on what had happened to financial markets... but it's very difficult to make an independent analysis of the reality when you have to face against redemptions, performances, tick-by-tick quotes etc etc. However, a couple on days ago, I had a sort of intuition, looking at the long term price of gold inflation adjusted (IADMGOLD Index on Bloomberg) in USD terms (monthly observations from the '60, after the end of the gold standard). Then I compared it with the 10 year Treasury and it appeared to me that the Gold inflation adjusted prices anticipates quite well any movement in rates. This relation breaks completely during the 2000-2004 period, due to the accommodative interest rate policy put in place by the FED (the Greenspan put). This policy, having the aim to control US inflation, created the RE bubble, the EM bubble (that we are still living), favoured the massive financial leverage (SIV, conduits, credit derivatives), generated the sub-prime phenomena and finally created the sovereign debt spiral (governments that decided to save the banks creating tons of debt that is putting them in danger... prelude for high taxes, austerity measures and a lot of pain for citizens). The question is, why US policy makers decided to do this.... continuing at the same time to print debt selling it to China (now they are slaves of China) and increasing unemployment day by day. Is it ineptitude or is there a predefined plan behind? In your last paper (I found on Bloomberg) you are quoting Huelsmann and criticise the fiat money system. I found some similarities with my recent thoughts, so I decided to post this comment. By the way… my conclusions were the following, is you are interested: 1. The central banks are in the hands of the private banker's lobby; 2. for this reasons, Central banks will never adopt right decisions to solve this crises because this will mean a massive delevereging on banks, printing money, accounting of losses and maybe some sovereign default; 3. Central banks should be governed by smart politicians, and not by bankers; 4. EURO will nor arrive to 2015. Without a common fiscal policy, a common debt plan (Eurobonds) and a common policy, EMU has no sense at all.
The market, however, has already won, and the gold price (inflation adjusted and not) speaks clearly to all of us!!!

Best wishes.