US Bonds: “Best House” in a “Bad Neighborhood”?

Best House is None Too Good
[courtesy Google Images]

Associated Press

“U.S. stocks tumbled in midday trading Wednesday as investor fears of a global economic slowdown intensified, setting the Dow Jones industrial average on course for its fourth consecutive loss.  The Dow plunged as much as 369 points in the first 10 minutes of trading, following steep declines in Europe . . . .”

Insofar as EU stock markets are also declining, the US markets may be less likely to recover on their own.  So long as declines are seen in both US and EU markets, those declines may be viewed as systemic and based more on fundamentals than some recent news report about Ebola or a mathematical glitch in the stock indices.

“Traders dumped risky assets [stocks] and parked their money in investments seen as relatively safe, such as U.S. government bonds.”

If the “bow” (stocks) of the economic “ship” is sinking, short-sighted people may rush to the “relative safety” of the stern (government bonds).

However, if the bow (stocks) sinks, the stern (bonds) will follow.

Likewise, if the markets continue to decline, the public may increasingly understand that the “bow” (stocks) is composed of fiat dollars and the “stem” (bonds) is also composed of fiat dollars.  If so, the public may increasingly understand that the fundamental problem is not with stocks or bonds, per se, but with our fiat currency.   If that understanding begins to penetrate the national psyche, there’ll be a rush to avoid paper debt-instruments (like stocks and bonds) denominated in fiat dollars, and store people’s wealth in a tangible medium like gold or silver.

Rushing from stocks, to invest in US bonds is “a function of the U.S. being the best house in a bad neighborhood,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management.

But if:  1) the US economy is a “bad neighborhood”; and 2), within that “bad neighborhood,” US bonds are the “best house”—is that relativism sufficient to prove that either the “bad neighborhood” or the “best house” are desirable and safe?

It’s a like living in Chicago in A.D. 1817 when the city burned.  Some houses may have been better than others, but they all burned, just the same.

If your economic “neighborhood” is on fire, it’s not enough to brag that you live in a mansion that’ll be the last to burn. If you want to survive, you’ve got to find a “house” that won’t burn at all.

In today’s economic neighborhood, that’ll be gold or silver.

•  I was pleased to see the Dow fall from above 17,000 to below 16,000.

Not because I’m a gold bug.

Not because I wish bad luck on those who’ve invested in paper-debt-instruments rather than gold.

I know that in the event of an economic collapse, everyone—including me—will be imperiled.

Still, I’m pleased to see the Dow fall because it represents a return towards truth.  In the context of the Dow’s fall, we might catch a glimpse of whatever the Dow is really worth in a free market rather than in the Fed’s manipulated market.

I don’t like our government.  It’s built on lies and eager to destroy our rights while it creates an overt police state able to enforce its lies.

I am so sick of government lies, that any return to truth—no matter how painful—seems like a blessing to me.

If the Dow continues to fall, it will be create danger, even for me.  But I’m willing to risk that danger, if the Dow’s decline exposes government lies and reduces government power.

A falling Dow will diminish public confidence in a government built on lies and abuses of power.  As public confidence falls, the value of the fiat dollar will also fall.

•  Nevertheless, I don’t expect the Federal Reserve will sit by idly as the Dow drops. Given that the Dow has already fallen from over 17,000 to under 16,000, I’ll bet that before the Dow hits the 15,000 level, Janet Yellen will announce that QE3 will not only continue but expand—or even be replaced by a new round of QE4.

The balance of October may be critical.

Will we see a couple more 300 or 400 point drops in the Dow before November 1st?   If we do, I expect Yellen to announce the beginning of QE4.  That could happen any time in the next two weeks.

On the other hand, if the Dow bounces back and the current fall appears to stop around 16,000, I think Yellen will continue to taper off from QE3.

The next two weeks should tell a very important story about the Dow, the markets in general and our economy.