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We have experienced for the last several years, the markets going up and going down and being explained as either “risk” being put on or off.  When risk is put on, stocks, lower rated bonds, commodities and Gold/Silver are bought.  When risk is taken off, the aforementioned are sold and U.S. (and German) Treasury securities are bought for their perceived “safety”.  My comment is “it ain’t right but that’s the way it is”.  I would also more importantly add, this is not the way it will always be.

It has been drummed into us all of our lives that “Gold is risky”.  We have been taught that Gold is “scary, doesn’t pay dividends, is only for the uncivilized and conspiratorial, and just a plain bad and stupid investment”.  For those of you who positioned themselves at the beginning of this Golden bull market, can you remember having breakfast with friends or going to a cocktail party and actually being embarrassed when the topic of investing came up?  At all costs you didn’t want to bring up Gold because you would get “the looks” and let’s not forget the snickers.  This is an example of how far reality our society had gotten.  We had gotten so far away from real money that anyone even talking about “common sense” was scorned and abhorred.  This by the way, is what ALWAYS happens to anyone going against the herd when bubbles are in process.  Back in the summer of 1929 or late 1999, anyone who was bearish was shouted down as being an idiot…yet they were right.  Back in the late 1990’s, anyone who even mentioned Gold as a good buy was the epitome of this “social outcast” phenomena.

So here we are again, at another point in time where the crowd will shout you down.  Risk on, risk off has become SO ingrained into the global investor’s psyche that no amount of logic or common sense can put a dent in their theory.  The “logic” is quite obvious, Dollars and other fiat currencies are simply inherently worthless and becoming more so each day that sovereign governments go further into debt.  Sovereign governments far and wide are already bankrupt, the current policies are only making them “more bankrupt”.  But don’t tell this to the “risk on and off’ers” because if you want safety then you had better start piling into Treasury securities!

Everything financial, and I do mean EVERYTHING financial (paper) on the planet is based in some way shape or form on U.S. Treasuries.  Treasuries are the “base” for all interest rates, they are the main reserves for all foreign currencies and the collateral for anything and everything from soup to nuts.  Central banks, Commercial and Savings banks, insurance companies, pensions and retirement plans of all sorts (Social Security being the most obvious) are all dependent on U.S. Treasury securities.  All of their values and perceived safety are based on Treasury securities being “as good as Gold”.  They are not as good as Gold, ONLY Gold is as good as Gold.

The U.S. Treasury has now run a deficit for 52 years running, spending more than they take in from taxes each and every year.  Until the last year or two, this was not a problem as “deficits don’t matter” was the mantra because foreigners lent us the money through purchases of Treasuries.  Foreigners are no longer funding our largesse, thus enter the Fed, they are buying better than 2/3rd’s of Treasury auctions because the demand is just not there any longer.  In other words, the Fed is printing money up out of thin air to lend to the Treasury because no one else will.  This is exactly like your buddy who has borrowed from all of his relatives, friends and neighbors who cannot continue his lifestyle without borrowing more.  Is this guy a good credit risk?  Is the U.S. Treasury a good risk?  As “good as Gold”?

No, it’s not, and you know it’s not.  The “shock” that will move everyone off center of the “risk on, risk off paradigm” will ultimately come as some sort of U.S. Treasury problem.  It will only take one little “oops” and a paradigm shift can occur.  This paradigm shift will bring with it a huge change in psychology, what is perceived as safe today, may not be tomorrow.  I can still remember the very first book that I cracked open in college, it was a Keynes book for econ 101.  The two things that really stuck out in my mind (maybe because this was in the year 1980) were as follows:  “we don’t know why The Great Depression happened but we do know that it can never happen again”… and “U.S. Treasuries are the safest investments on the planet and by definition, AAA rated”.  Well…I don’t know about that Mr. Keynes, it still remains to be seen whether or not the Great Depression is eclipsed and maybe someone should have let the rating’s services in on this memo!  THIS, is the very core of the problem yet like Pavlov’s dog, investors still “bite” when they are told that “risk off” entails a rush into the “safety” of Treasuries.  This will change, mark my words!