US government--lender or borrower of last resort?

http://dailyreckoning.com/the-golden-years/

And over at The Financial Times in London, Gillian Tett asks “Will sovereign debt be the next sub-prime?”

Everyone knows what when wrong with sub-prime. When you lend money to people who can’t pay it back, you’re asking for trouble. So, if you’re out of a job and looking for a sub-prime loan to buy a double-wide trailer you’re out of luck. Bankers won’t give you a dime.

But now, the world’s lenders are doing something just as dumb. They’re lending to governments. Imagine you were a banker. And the US government comes to you for a loan.

“Do you have enough income to cover the payments,” you ask.

“Well, no,” comes the answer. “In fact, our revenue has fallen off a little. Because of the recession, you know. Like everyone else.”

“How bad is it?”

“Uh…we spend nearly two dollars for every dollar of income.”

“Oh…and you expect us to lend you money? What do you have for collateral? What is your net worth position?”

“We were hoping you wouldn’t ask. The most recent tally of our obligations comes to $113 trillion.”

“Well, don’t you have assets?”

“We have some buildings in Washington…military bases around the world…things like that. But as a practical matter, you could never foreclose on them.”

“Oh, I see…”

What is interesting is that the world’s investors are beginning to see that the US and many other governments are bad credit risks. This is an extraordinary event. Until now, the US government has been able to finance and refinance its debts at the lowest rates in three generations. Lenders have wanted to lend the feds money, because they believed they were the safest credits in the world.

Bankers can always be counted on to find the worst investments at the worst time. They are at the tail end of the chain of insights that begins with the sharpest, most independent-thinking analysts…runs through the broker/hedge fund community…passes on to the financial journalists and the TV pundits…arrives at the lumpeninvestoriat through the popular media…and finally gets to bankers when they pick up the Wall Street Journal and read about what’s going on.

Now, the bankers are buying sovereign debt – government paper – because they think it offers a “risk free” return. In fact, it is one of the riskiest investments you can make.

FHA problems looming

http://www.bloomberg.com/apps/news?pid=20601087&sid=arqAG5n7wEVw&pos=3

"Yesterday's subprime is today's FHA."

- Toll Brothers CEO, Robert Toll.

Toll Brothers is the largest U.S. luxury homes builder. You would think he would spin things positively.

Note: Robert Toll has sold almost 7.5 million insider shares of his company stock in September, 2009 alone. Apparently, he's not just sounding the alarm bells randomly--he's acted upon it.

More Unthinkables

The proverbial "other shoe" is dropping. Citigroup shares dipped below $2 and Bank of America shares are headed toward $3 amongst fears of bank nationalization, which completely wipes out shareholders (instead of just essentially wiping out shareholders). As financials are leading indicators, this does not bode well for the broader averages. The Dow Jones Industrial Average dipped and closed below November 20, 2008 lows, which means that support level now serves as resistance. The charts are basically breaking down toward their 2002 levels, as the technicals are deteriorating faster than you can say "Ponzi".

Gold touched above $1000 an ounce for the 2nd time in history since last spring, before retreating. Gold mining shares have essentially doubled since their November lows and still surging. I've been expecting pullbacks, looking for opportunities to add to my current positions, but the market just hasn't allowed me to. I'll just hold on and see if we penetrate the $1030 all-time high. If that occurs, then all bets are off and we could see a buying mania which would signal an opportunity to take some profits off the table. Long-term, the chart for gold still looks bullish, but locking in some profits just seems prudent to me, considering last year's stunning rise and subsequent collapse in gold.

Eastern European defaults are a huge concern, which would cascade toward western European banks with heavy exposure to the emerging countries in the Baltics. And with European banks even more leveraged than their US counterparts, this is analogous to the US subprime mortgage crisis--only worse and much larger in scope.

Unemployment is soaring with no end in sight, corporate earnings eroding, and consumer confidence shattered, markets are braced for the next shock, with the realization that this is not your garden-variety recession--this is an outright worldwide Depression, with no country spared.

The Dow/Gold ratio is at 7.5 and dropping, and that ratio usually dips below 5 and all the way to 2 at extreme recessionary lows. Hypothetically, gold at $1200 an ounce, and the Dow Jones Industrials at 6000 would yield a DJIA/gold ratio of 5. This is another indicator which has scary implications going forward.

The Volatility Index is climbing once again above 50, so hold on to your hat.

The latest outsourcing business to hit the US...

The US Treasury is busy printing so many US Dollars that they have outsourced it to printers in Switzerland. That's right--our government is so intent on printing trillions of dollars that they are wearing out their printing presses, and have had to resort to offshoring the printing process. Hence, the ultimate conundrum: "Helicopter" Bern Bernanke and fellow cohort Hank "Machine Gun" Paulson have repeatedly preached about a strong US Dollar. Yet, their actions for months have been completely undermining the strength of our currency.

This indiscriminate and unconscionable monetary easing dwarfs any on record--it is essentially criminal.

Meanwhile, my long gold and long yen positions are playing out as predicted, so my portfolio is profiting handsomely. But it is bittersweet, as we will experience the second act of post-1990 Japan. Japan's Nikkei stock market index stood at 39,000 in 1990. In 2008, it stands at 9,000.

The next bubble to burst are Treasury Bonds. The 30-year maturities are yielding 2.6%. Investors by the droves are basically saying, "Mr. U.S. Government, I know your currency is tanking by the day, I know you are printing dollars like there is no tomorrow, I know your solvency is at risk, I know your balance sheet is deteriorating with trillions of debt, and I know you have to chase good money after bad money (the bailout mantra), and yeah, I know you've been beaten down. But can you please hold on to my money for 30 years, and pay me 2.6%, for the privilege?"

Once investors wake up to the reality that their allegedly "safe" investments aren't so credit-worthy anymore, they will demand higher rates of return in exchange for taking on the additional risk. And when that happens, the Treasury Bond bubble will burst, just like the residential sub-prime mortgage bubble burst. The Fed eased too much, creating a real estate bubble after the tech bubble burst. They then raised rates 17 times, bursting the real estate market. Now they are easing rates to 0%, creating another bubble--this time US Treasuries.

Is anybody seeing a pattern here?