Warning. Another long post.
In a deflationary primary trend with the incumbent risks of serial major financial failures, no longer see the prudence of leaving all near cash assets in the custody of financial intermediaries (banks, brokers, etc).
Giving thought to historical precedent and current developments have decided physical gold should - for practical purposes - be reclassified as a "near cash" asset.
Until several years ago, conventional post WWII financial thinking was correct to consider "good" quality commercial paper, bankers acceptances, and non-treasury government ST obligations in the very safe <near cash> category.
However, we have to remember the risk profile of ST (less than 1 yr) non-treasury paper (as well as longer duration debt) changes significantly, as we move into a secular deflation. Smaller individual and business defaults baloon across the credit spectrum increasing the frequency of large financial and non-financial corporate failures.
Though it's not happened quite yet. We're getting a lot closer to seeing relatively conservative fixed income investors,
AND...
General Purpose Money Market Mutual Funds (heavy holders of such paper AWA repos and DERIVATIVES) taking some serious capital losses. In other words, MMF net asset value drops well below $1/share and stays there, prompting a massive public exodus from those funds. A real nasty scene, for sure.
With Enron, and numerous major failures since, we've repeatedly seen the credit rating agencies act too late to protect ST, IT and LT fixed income investors AWA stock holders. Regulators have YET to give adequate attention to possible conflicts of interest at those agencies IMO.
Bottom line folks, is it pays to THINK and ACT proactively.
Hence physical gold is in as a <near cash> asset and non-treasury debt paper...is OUT as far as my money is concerned.
Physical gold holders will benefit from a more secure position as the debt implosion picks up speed. Meanwhile, gen purpose money market mutual funds will more and more impacted as large corp failures increase in frequency. THEN, it will be too late for individual investors to prevent capital loss in what was supposed to be a safe parking place for cash.
My own near cash reserves have been in Treasury only MMFs for quite a while. And early last summer shifted a fraction of that into physical gold - NOT in the custody of a financial institution.
Concern about gen purpose MMFs, which hold an overwhelming majority of their assets in non-treasury ST debt came up on this thread (and antecedent, Strictly Drilling) from time to during the past several years.
Don't recall it being emphasized here for quite some time. So here's a couple of quick questions:
1. How many threadsters have moved all you MMF cash reserves to Treasury only MMFs?!
2. How many are holding at least some of your own physical gold?
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<Russell is beating on that deflation theme hard>
FWIW, my first major deflation post (late Sept 01') is copied below. No chest pounding intended. But anyone who wants to take the time to read it will it brings up competitive devaluations AWA other issues that have since surfaced in the work of well known and/or highly promoted economists and financial analysts.
Message 16418826
<IMO a deflationary war scenario has changed everything.
Vast over extension of credit during the Clinton/Rubin/Greenpump bubble created an unstable house of cards economy built on too much debt. We know the contraction to correct of those distortions and misallocation of capital was already taking us into a cyclical recession.
But the colossal hammer blow of 9/11 changed everything. Let's take a look inside FDR's classic insight, "The only thing we have to fear is....fear itself."
What was looking like a somewhat more severe than average post WWII global recession has suffered a huge injection of fear and the impact IMO will be economically devastating. Fear is the catalyst that's accelerating a normal recession ala 1981-1 or 1973-74 into a classic deflation, more akin to the 1930s.
Up until 9/11 I was willing to give the benefit of the doubt to inflation. But that has all changed now.
Fear of flying. Fear of job loss. The list goes on and on.
Fear, as FDR clearly understood, immobilizes people and the economy along with it. This the catalyst that has transformed a stiff but normal cyclical recession into a K-wave bringing our debt ridden house of cards economy crashing down as travelers stop flying, consumers stop buying and industry after industry shows a quantum leap in layoffs.
Sure there WILL be a bounce back and some good market rallies during the next year. But IMO we are in a LT global slow growth environment as huge amounts of capital that would otherwise go into productive economic growth must instead be deployed to protect what we have and more importantly our lives.
Responding to this terror is going to be a huge LT drain as we funnel 100s of billions of $ into domestic security measures for our cities, airlines, power plants, reservoirs, pipelines, refineries, storage tank farms, yada yada.....
In other words the cost of protecting our physical plant, infrastructure and population centers will be the economic growth that's characterized the post WWII period. Hence my conclusion that we face, at best, years of slow global growth.
Gold is the strongest beneficiary of the kind of deflation that IMO has now taken control.
Greenpumpster is aggressively debasing the dollar and other major CBs will follow in a desperate attempt to fight these deflationary conditions. So what we get is a repeat of the competitive devaluations that characterized the 1930s with gold increasing relative to all major currencies.
Other than the sm part of portfolio in energy to hedge against the eventuality of a ME supply cut off, am
staying away from all other commodities till the market is finished discounting this new deflationary environment that's been thrust upon us. It's not even close to doing that yet, IMHO.
Elvis Rules<g>
Isopatch>
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I'm gone. Cya'll tomorrow.
Iso |
