The Grand Canyon is...closed?

Indignities of indignities, the Grand Canyon is closed? How is this possible? Resources are being spent to arrest "trespassers" (i.e. U.S. Citizens) hiking in their own National Parks? Yikes! What is a financial farmer to do?

Well for one, we can take a historical look at the other 17 shutdowns for some clue to what has happened in the past. Typically after several days, a compromise is reached and we go back to business as usual.

My major concern is the possibility of escalation. What I mean by escalation is that the government shutdown leads to a default which triggers several possible butterfly effects; but rather than the soft beating wings of a pretty butterfly causing ripple effects in the slightest of air currents, we see a cataclysmic pulse wave.

The way I can best relate to this is with a stock trade gone bad; at first the volume to exit the trade is low, and then everyone wants to get out; the probably being by that time there is no counter-party buyer. If you haven't had a chance yet to read The Crisis of 1837, now would be a good time to check it out.

A default would gravely affect the global financial system. The fact that the largest mutual fund company in the world, Fidelity Investments, has liquidated ALL of their short-term U.S. Government debt is very telling. These are smart people. What is the lowly financial farmer to do? Long-term holdings of the oft-discussed "boring" equities should wait out the storm; inevitably just when things look the worst, there is a recovery. Nonetheless, given my current prediction of a 50/50 chance of the U.S. defaulting, the fact that the National Parks are closed to U.S. Citizens, and other weird behavior on behalf of our government, rounding up some cash is a good idea. Will there be value in that cash? At least initially there should be as it is the de facto standard for conducting trade.

I see several outcomes if we default on the debt, none of them are good. Interest rates will undoubtedly spike (who wants to lend to a deadbeat?), the electronic funds transfer systems may lock up, and probably the most damaging and sustained effect will be a reputation hit to the United States. If things get bad enough, i.e. no Social Security payments, Medicare, etc. I see the situation quickly devolving.

Although we have been given a drop date of Oct. 17th, the reality is probably November 1st, as that will be when a majority of payments will come due. The first chink in the armor was on October 1st, the next test will be on the 17th, and if we don't have some type of resolution by the 1st of November, watch out. As it stands now, considerable political damage has been done to both sides of the aisle, and we're about a week away from triggering some very unpleasant consequences.

PS--A new Chair of the Federal Reserve was announced today; Dr. Janet Louise Yellen. She will be replacing Dr. Ben Shalom Bernanke whose appointment expires in January (assuming we still have a functional government in 2014!)

The Case for Gold

The Case for Gold

The farmers I know, and this is coming from an avowed city slicker, are hearty, resolute, and self-reliant. As a financial farmer, I think we can all learn a lot from that temperament. I particularly wanted to focus on self-reliance today because all this talk of a government shutdown got me thinking; what if, on this the potential 18th time of a government shutdown since 1976, we didn’t reopen? Although I peg the possibility of a sustained government shutdown at 0%, just for a mental exercise, a la Lumosity, let’s play this out along a possible outcome.

Depending on the severity and length, I suspect there would be a gradual worsening of the overall societal situation. Initially, I think there would be little to no effect, a small crack in the social order. There even may be a short-term boost in productivity, but as more and more governmental organizations cease to function, in particular those that support infrastructure and the rule of law, I can’t help but believe our society is adversely impacted. That small initial crack now spiders. 

Many elements that we take for granted; from defense, social programs, and medical services begin to fracture. Over time, logistics like food supply, fuel, and delivery of basic services like water degrade. By definition of the law of supply and demand, the demand for these services remains constant or may even increase while the supply falls, making them more and more scare (and expensive in real dollar terms.) On a sliding scale, I would argue there would be a noticeable and sustained movement towards a “gold, ammunition, and canned goods” portfolio and away from one of equities, bonds, real estate, art, and paper currency. Gradually, then all of a sudden, portable wealth and power become more important. The last two elements of the “crisis portfolio,” namely ammunition and canned goods, I don’t know too much about to make educated comments. But gold on the other hand, I think I know enough to build a plausible theory of what could happen next.

If you haven’t had a chance yet to read the Crisis of 1837, please do. It is a very real example of what happened when our economy collapsed and the ensuing rush to obtain gold coins, then termed “specie,” occurred. Although over 175 years have passed, I think the game plan remains the same, as gold would replace paper currency for many transactions and “Pay at time of service” becomes the norm. Rather than the 1 oz. Gold Eagles we typically see for sale, I suspect smaller denominations like 1/10 oz. Gold Eagles become the most common unit of currency because they can purchase basically a portable amount of food, fuel, and basic supplies. The $5 face value U.S. Gold Eagle represent a value that is understandable and quick to trade on; and gold’s timeless value has been built on the simple fact that gold equals toil. Toil in mines, toil in processing, toil in manufacturing, toil in storage, and toil in safety; gold equals portable, almost impossible to replicate toil. 

The $5 face value 1/10 oz. U.S. Gold Eagle become the true “bit” coin; I find it hard to believe that our entire computer system will be functioning perfectly, that merchants will accept electronic money over physical gold. Bitcoins? I don’t think so. Diamonds? Possible, but too few people know how to adequately value them, and there is just too much value in some to purchase small quantities of necessities. Art? Maybe, but at what value and to whom? The end game is physical goods for physical goods. I think nothing captures that trade-off better than gold.

Could the U.S. Government close down for a week? Two weeks? A month? Maybe, but as mentioned above, I think there is a 0% chance of a sustained U.S. government shutdown in the foreseeable future. Too many indicators point to continued prosperity; from the housing recovery, decrease in unemployment, and most importantly the loose monetary policy.  In my view, the bullish case is just too strong. What we’re seeing now is political posturing at its worst, with U.S. citizens held captive to this Washington drama. Nonetheless, I think it behooves the financial farmer, indeed any investor, to think about a worse case scenario that may occur some time in the future. 

A prudent farmer has a grain silo and is rarely without capital in its many forms; I think $5 face value, 1/10th ounce U.S. Gold Eagles are a good choice. The closer you can obtain them to the true spot price of gold the better. They’re portable, useful in small bulk purchases, and challenging to replicate. They don’t rust and aren’t vulnerable electronic corruption. There’s a reason why gold has been so dear over thousands of years; new “currencies” may emerge, but until alchemy finds a way to turn lead to gold, it still has the best luster.