Hear that sound, dear reader? It’s an explosion. Maybe you didn’t hear it. It was just a little ‘pop’... like the sound made by the pistol that shot Archduke Ferdinand in 1914. About $80 billion worth of government debt blew up yesterday. But don’t worry about it.
If you’re in the UK, read on. You’ve got money to worry about… make sure you check out the news today from our UK team…
To dear American readers, take the day off. Sit down to the table with friends and relatives. Yes, enjoy the day in the warmth and friendship of your own kith and kin... in the bosom of your family... in the gentle embrace of home.
Enjoy Thanksgiving properly, with a bottle of champagne and a nice claret. And maybe a Chateau d’Yquem, with its noble rot, to go with the pumpkin pie.
Nobody speaks of ‘claret’ anymore. Now they call it Bordeaux.
But here at the Daily Reckoning there are things to be reckoned with. So we continue our lonely vigil. Most days, we sit in our London office... beneath our Crash Alert flag – black and blue... with a skull and crossed bones – in the building with the golden balls.
Really.
For some odd reason, our London headquarters is adorned with two enormous golden balls on the roof. They look ridiculous. But no one can mistake the building. It sits along the river like a gaudy children’s toy house; you look for the crank on the side, and wait for the clown to pop up through the roof.
Yes, we are feeling gloomy on this most holy of America’s secular holidays. Elizabeth is in New York with her family and our daughter Maria.
Daughter Sophia is with her grandmother in Maryland. Will, Henry and Jules are all in Buenos Aires. That leaves just your editor and Edward, 16, still in Europe. Far from home and hearth. In self-imposed exile. In absentsia permanensis.
Today, we’re in Paris, where we’ll spend Thanksgiving weekend with Edward. Tonight, we’ll have dinner with friends in Paris. On Saturday, we’ll go out to Normandy and have another feast.
So, don’t feel sorry for us... unless you’re in the Paris area and can make a good pumpkin pie!
Oh yes... the financial world... we almost forgot. And oh yes... remember that $80 billion of public debt that just blew up? Well, there’s another $49.92 trillion still in the powder storeroom. When it blows... well, won’t that be exciting!
But... we’ll get to that in a minute. In the meantime, everyone seems to be jumping on the gold bandwagon. Frankly, it’s getting a little crowded... a little top-heavy. It’s making us feel, well, a little uncomfortable.
Here at the Daily Reckoning we never met a crowd we wanted to join... or a line we wanted to stand in. We don’t even like being on the winning side of a football game – too much boisterous company.
No, give us the lost cause, the diehard and the underdog. We are much more at ease as an outsider... an outcast... an outlier. Not only is there more elbow room, that’s also where the bargains are – where others aren’t looking.
Trouble is, almost everyone is looking where we’re looking now. At gold.
Yesterday, the price of gold shot up another $24 to yet another new record high. An article from Associated Press:
"In what is becoming a nearly daily occurrence, investors backed away from the dollar, helping bolster demand for commodities, led by gold. Many commodities are traded in dollars so when the dollar weakens it makes the price of commodities more attractive for foreign investors…
“The dollar has dropped out of favor with investors as the Federal Reserve continues its policy of keeping interest rates at historical lows in an effort to stimulate the economy."
The dollar fell hard yesterday – down to $1.51 per euro.
Ten years ago, only the gold bugs – those few who were still solvent and still sane – bought gold. Now, the smart fellows are buying it too. People like David Einhorn and John Paulson. Heck, even central banks are buying it. For the first time in a quarter century central banks are buying more gold than they’re selling.
Why? Because the story is so good. So easy to understand. So convincing.
If the recovery is for real, demand will increase, diminishing inventories and turning the Fed’s hot money into consumer price inflation. Investors will turn to gold to protect themselves.
If the recovery falters, the feds will increase their stimulus efforts, setting the stage for even greater inflation later.
If this analysis is correct, gold is a one-way bet. The argument is good. We believe it. But it bothers us that so many others do too.
More news… and another trade that’s not crowded yet… but could be soon… your chance to get in now…
Tom Bulford sent this hurried plea to his readers this afternoon…
Dear Reader,
Please excuse the pressing nature of this note. But it's urgent.
I've flagged this incredible oil play a couple of times to you in the past two weeks, but I've not heard from you.
I really wouldn't wait any longer on this. Things are starting to happen.
On Monday the BBC reported that there's an exploration rig heading out to this proven oil-rich region. That means the most significant British oil discovery of the last 37 years could be one step closer to coming "on tap".
Of course, the BBC doesn't tell you how to play it. But I've got a great idea for you – a chance to make stunning gains. I show you word for word how to set this up in my time-sensitive report below.
Please be quick – as you'll see in my report, if you want in, you need to act by 30 November.
Continue reading Tom’s report here.
And more thoughts...
*** The recovery is a phantom. Besides, even if the recession is over; the depression is not. And it has a long way to go before its work is complete.
Yesterday’s headlines brought a mix of confusing noise...
Consumer spending was rising more than expected, said one report. But durable sales were down more than expected too.
Jobless claims were falling, said one news item. Prices are up in 20 cities... for the 4 th month in a row. And sales of new houses are at their highest level since 2008.
But mortgage applications are down.
Confusing noise; that’s what you get in a depression. The economy is changing shape. Nobody knows exactly what things are worth... or what shape the new economy will take.
Typically, the noise is punctuated by some loud explosions. There was one yesterday:
“Dubai’s debt request shock,” is the big headline on today’s Financial Times cover.
To make a long story short, Dubai borrowed a fortune during the boom years – intent on becoming the go-go finance capital of the Near East. It was still borrowing yesterday; it announced a $5 billion loan from two Abu Dhabi banks. Just a few hours later, it said it wasn’t going to be able to make its interest payments on $80 billion of debt, owed by Dubai World, “the government’s flagship holding company.”
The story got front-page treatment in the Financial Times. The FT knows that something is up... something big. Over in the International Herald Tribune, the editors saw it as almost a footnote. Dubai’s debt goes bad? So what? Who cares? What’s $80 billion – peanuts!
Well, as we said above, there’s a lot more where that came from. The horror story of the Bubble Epoque was the huge increase in private debt – particularly in the US and Britain. That bubble blew up in ’07-’08. Since then, the horror story has been the huge increase in public debt. Since 2007, government debt worldwide has grown 45%. Now, there’s about $50 trillion worth of it. And it’s growing like... well... like Dubai!
You can buy Dubai debt today and get a very good yield. That is, if Dubai pays. But property prices have been cut in half. Major showcase projects – such as the world’s tallest tower – have had to be cancelled. Office and apartment projects that weren’t cancelled in time are said to be “see through” buildings today, with no tenants.
In other words, everything is happening as it should. Dubai over-spent and over-borrowed. Now it is suffering a depression. With luck, the depression will hit hard and fast... and then the nation can get back to work. Heck, when property has lost 90% of its value, we might be tempted to buy something there ourselves.
But dear readers may wonder why we bother about Dubai at all. It’s a long way away. Most of us couldn’t find it on a map. And no one we know buys Dubai wine or goes in for Dubai cuisine. So what do we care what happens there? Well, we don’t, really...
... but we suspect that what is happening in Dubai now may soon be happening in London and New York soon. Buyers protect themselves against government debt defaults by buying insurance. The cost of insuring $10 million worth of Dubai bonds rose to $460,000 annually. But the cost of insuring the bonds of all the major economies is rising too. Today, it seems impossible that Britain or America could default on its debt. But Britain barely escaped default in the ‘70s. And if investors become wary of too much government debt, they could stop lending to the US. Then, America could default too. Impossible? Don’t count on it.
David Einhorn got very rich by shorting the leading holders of mortgage derivatives. Someone will get very rich shorting the leading holders of government bonds.
Until tomorrow,
Bill Bonner
For The Daily Reckoning
Editor’s note: You read about Tom Bulford’s oil idea above… but to get the real detail of this opportunity… and how you could make money from it, you should take a look at his report.
Click below to read it right now…
How YOU could make a cool £11,700 from Britain ’s best kept secret!
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