The Coming End of the Global Monetary System as We Know It

By John Cassimatis  NOV 17, 2010 1:45 PM

The White House and Congress must function better together to help save the economy.

 


The future is unfortunately becoming clearer -- clearer, ironically, since it will contain so much smoke and ash. Ahhh, there is so much I want to say. Writing is a tricky business, you see, I learned that as I’ve scribbled a book together over the past nine years. A zillion, perhaps slightly less, thoughts smack the writer in the head, and the job is to put at least some of them together enough to make a point worth reading.

Let me tell you a little bit about myself. First, I am an extrapolator. That is, when I see a certain action in its micro form, I aim to see if that very action could be indicative of something larger. I often find myself asking questions to my own very brain, “What does this mean?” It’s no secret now, and a great credit to so many of the writers on this very site who have essentially telegraphed this move for all those smart, curious, cynical, the list goes on, enough to listen. Yes, it’s more widely understood now. Gold and silver have been great investments. As a matter of fact, far less folks will laugh at you when you tell them it’s the only sector you trade. We are now in Phase 2 of the move. Quickly, Phase 2 is supposed to possess the following characteristics (and clearly does):

1. Wider participation from Phase 1, especially at the institutional level.

2. Correspondingly higher open interest in the futures markets.

3. Sharper, longer rallies.

4. Quicker, shorter periods of pain.

5. Less of a daily inverse correlation to the dollar by rule.

There are others, however this list will do, and it's quite clear to me that Phase 1 ended on the night JPMorgan (JPM) acquired Bear Stearns. Phase 2 will be shorter in duration than Phase 1 and the returns will be bigger. Phase 3 will be the shortest and will provided the greatest returns. We're not there yet. Phase 3 can only occur, as I’ve written for years, in tandem with a credit market crisis. There is no other way. Sorry. But Phase 2 is quite nice. I believe we're in the period now where metals markets are essentially pricing in the possibility of a full-blown sovereign debt crisis erupting in the country whose dollars make up the foreign reserves of every nation on Earth. In my opinion, this is where we are at; this handicapping is behind much of the global demand.{FLIKE}Since Phase 1 began, I have been one of its biggest cheerleaders amongst my peers and even the Internet community. I’m a step-by-step kind of guy; it’s the best way to stay focused I think. In the beginning, I wasn’t sure of a US default or anything like that. I just knew the dollar was overvalued, definitely going down, and I want to own its best hedge. Even years later, as the weight of our budget crisis grew, I thought serious trouble was more of a possibility than a definitive reality to be endured in my lifetime. But, this past week has felt different to me. It’s sad really -- what a powerless feeling when the existing power structure does not seem to understand the gravity of the mess.

I guess it all started when I read the response to what I thought was an honest effort from two guys from different political perspectives to divvy up the pain and produce a plan that could begin to steer America away from the Cliff of Fiscal Reckoning (the Cliff of Fiscal Balance was jumped off of almost a decade ago). I read many elements of this non-binding Budget Commission’s multi-focused plan. At quick glance, I found it reasonable, clearly bipartisan, and at least somewhat encouraging that certain individuals given a voice by the "powers that be" get it. I think I was just so happy that someone got it.

After reading the plan, I clicked on “Read Related Articles” with a small sense of hope. Unfortunately, the rigid, partisan response was undeniable. Article after article berated these gentlemen, "No tax hikes whatsoever!," and then the other side, "What about the seniors and the jobless, and the children, and the middle class?" "Simply unacceptable," Nancy Pelosi said. The authors themselves joked they would have to go into the Witness Protection Program, vilified. Neither side could grasp that encompassing change needs to be implemented rather quickly in order to stave off a mathematical certainty.

I told one of my carpenters, “What would you say if I told you that the one thing that could prevent this country from experiencing total loss and despair in the future was laughed, mocked, and punished by our leaders?” ( I like my crew, they listen to me rant.) Our government leaders are incapable of rescuing us here. Likely, they’ll strike something at zero hour, hastily, like all disaster legislation is. Fundamental budget reform is a political impossibility. It will not be a possibility until the crisis arrives. Yes, this was my great breakthrough. That is the macro that my micro gold observation is telling me. Better pay attention. Ineffectual, Pathetic (yes, I am beginning to mean this), Same Old Soap Opera Going Nowhere.

I do believe that the solutions to our problems are not monetary in nature. The tension, this oppositeness, between the developed countries and the BRICs needs to be ameliorated. The US must export more, China must consume more, and capital controls must continue to be implemented in emerging economies. And the US dollar must not completely fail in the process. Will the G-20 be able to avoid the gridlock strapping our domestic politics? I’m perhaps mildly more optimistic there, but that’s largely how tough it is to envision a functioning Congress and White House.

The domestic hurdles are particularly touchy. From Social Security and Medicare reform, tax reform, defense and non-defense spending, there are too many parts of the solution that are "off limits." As traders, we know what hard choices are. As a youngster in the business, we had a method for dealing with the hardest of choices -- it was called Set A Level. Specifically, Set A Level meant that at some point of money losing, doubling down, hedging, all of the tricks, you smack ‘em. No technical analysis, no fundamental considerations, just a sheer protection of capital. No one enjoyed it to be sure. But it was the difference in the guys who survived to fight another day and those who didn’t. Hard choices: Unfortunately any such level our government sets will be too generous to do the trick. We have overpromised; the under-delivering is just beginning.

It still amazes me every time I see people in their red or blue hats and shirts, frantically waving signs with some hopeful politician's name on it. The whole thing just seems so beyond any reasonable hope. As for now, I continue to trade around large core positions in the metals. All the while I keep a watchful eye on the longer end of the yield curve. Rising yields will suggest in part that QE2 is not working as well as anticipated in keeping the long end down. Even if we're successful on that front, it remains optimistic at best to assume that will translate into more demand for credit. Rising yields will ultimately be the catalyst that separates Phase 2 from Phase 3. Gold and silver will likely correct hard as the process begins. Then, as the yields continue past the "reasonable zone," the metals will lose their biggest competitor, US Treasuries. To the moon, Geronimo. Perhaps then, both sides of the aisle will comprehend just how badly they failed the American people in not making the hard decisions that clearly need making.

In the end, the outcome will likely see a reserve asset created that's tied to a basket of commodities. The human discretion involved in running a fiat system will be looked upon as the cause of the system’s collapse. Yet another lesson in greed. It seems one could say greed and charity are the two most prevalent, opposing forces on planet Earth. The clouds will begin to part after this new global monetary system is implemented. Those whose personal future is staked exclusively to the US dollar will lose severely in this transition. Even if the Central Bankers were to foolishly stake the coming new reserve asset to a basket of currencies, the pain for those holding dollars will be crippling.


No positions in stocks mentioned.

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