|Weekly chart of the Gold:Silver ratio. Click here for a larger live and updating version.|
I think that's what's in store for the USA... the budget goes over the cliff. Equities get slammed and probably hard and fast. The dollar soars due to increased confidence overseas that maybe there is some fiscal sanity left in the USA after all. So even though the mighty Thorin Bernankenbeard is going to print trillions more dollars, he's going to need them in order to continue buying up bonds... bonds that are likely to become even more expensive thanks to the fact that the entire global population will have earned a new respect for bonds as a proxy for slightly more fiscally responsible dollars. If we go over the cliff, the following trades could pay off handsomely; long TLT, short gold and silver, especially silver, long the dollar and short equities.
|The alternative to going over the cliff|
To me the views expressed above make the most sense "as long as we go over the cliff", which is what I think is going to happen. If that's what happens, then this article by Bill Patalon, executive editor of Monday Morning would go a long way toward explaining 'why' I could be right about all this. I admit that I couldn't possibly quote the actual numbers like Mr. Patalon did so I wouldn't have been able to explain in defined terms why I hold the views I do... only in general logical terms such as "it makes sense that your household debt will become more manageable if you stop spending like a drunken sailor".
So don't fear the cliff my friends... embrace it. Rejoice and short the hell out of equities for a while. Not yet though, we have to wait until some time closer to the announcement that a deal has not been reached, that it's too late and that we're going over the cliff. I'd fully expect equities to keep soaring almost until the last moment, based on hype, lies and spin stating that the likely outcome will be "Yay, we've all been saved! Yay, we're not going over the cliff, we're going to go hopelessly further into debt. Yay! We're all saved! Santa has arrived. See, stocks are soaring. Everything is great because we're stupid! Yay!" Horsepuckies... the cliff would be the best thing to happen to America in two decades. But not for equities, at least not at first.
|Merry Christmas from Alberta, Canada to friends of this blog from all over the world.|