Stanley is right! Let them default while we eat cake!

Quotable

“We all have this vague notion of people who don’t pay taxes but receive money from Uncle Sam in what euphemistically is called a tax refund. That’s what I had, a vague notion, until I was forced to close my business in 2010. I took a seasonal job with the Internal Revenue Service to get some household cash flow going. We ‘Timmy Geithner warriors’ were appalled by what we learned.

“We generally knew that 47 percent of our population pays no income taxes whatsoever. However, we didn’t know, and I suspect that very few of you know, how much of your tax money is actually given to non-taxpayers — in a lump sum, to do with as they please. Over lunch we joked that half the tattoo parlors in America would go under without Uncle Sam’s largesse. Only later I learned that was closer to the truth than a joke.”
                                          Earl Wright
                                          The American Thinker, “Among the Tax Takers”

Commentary & Analysis
Stanley is right! Let them default while we eat cake!

Envoy Hillary was launched on Asian markets yesterday to calm fears about Treasury bond default because her boss doesn’t want to stop spending like a drunken sailor. Spending is power, thus why we get all the obfuscation, double-dealing, and outright lies on a regular basis from our pols. [It is an equal opportunity spending game; former President George Bush could never seem to find his veto pen on spending bills, i.e. he never met a spending program he didn't like either and a country he couldn't "reform"... but I digress ...]

So what if there was a default? For the right reason, it should be a better alternative despite the obfuscation and lies to the contrary.

This from a WSJ interview with Stanley Druckenmiller back on May 14th [Mr. Druckenmiller was fund manager at the Soros fund for years and a man that knows more than the average bear about government bonds and currencies. P.S. he was long bonds before the interview when others were expecting rates to soar, and said he would continue to hold US bonds. ]

"Here are your two options: piece of paper number one–let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.

Then there’s "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one."

I’ll take piece of paper number one…the short-term defaulted paper! So will Mr. Druckenmiller, adding:

Mr. Druckenmiller says that markets know the difference between a default in which a country will not repay its debts and a technical default, in which investors may have to wait a short period for a particular interest payment. Under the second scenario, he doubts that investors such as the Chinese government would sell their Treasury debt and take losses on the way out–"because I’ll guarantee you people like me will buy it immediately."

"My guess is that the bond market would rally as long as it believed the ultimate outcome was going to be genuine entitlement reform–that we wouldn’t even have to find out about a meltdown because it wouldn’t happen. And I have some history on my side here."

US Treasury Bonds Daily: As you look at the bond futures price chart below do you notice prices are going up? Hmmm…not what most commentators expected. Maybe Mr. Druckenmiller was right (and the Bong King has it completely wrong).

Hopefully Hillary brought this chart along with her yesterday. And given the massive amount of reserves China has denominated in US dollars, it seems highly likely Mrs. Clinton forgot to pack the US dollar index chart which shows the all-time low is in striking distance:

US Dollar Index Weekly: The dollar, not Treasury prices, is what is taking on the risk of a house completely out of fiscal order.

…while gold (and the Swiss franc) have taken on the role of safe haven…

Gold, Swiss franc-USD, and US Dollar Index Weekly: Which one of these prices is doing its own thing, which one of these prices are kind of the same?

So what if a deal is struck, one that curtails spending for real, instead of the usual smoke and mirrors and tax-hike nonsense that means more of the same?

Well, just maybe the dollar has a relief rally. If so, maybe Swiss and Gold have a relief decline.

How do we handicap this? I don’t know. And why try when riding this trend — as we all know the trend is your friend. If Stanley is right, and piece of paper number 1 is the winner, the trend may stop being your friend. You may think Stanley is all wet, but keep in mind he didn’t become a billionaire for nothing.

Even a drunken sailor sobers up at some point.

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