Hey now, all you sinners
Put your lights on, put your lights on
Hey now, all you children
Leave your lights on, you better leave your lights on
Because there's a monster living under my bed
Whispering in my ear
There's an angel, with a hand on my head
She say's I've got nothing to fear
Put your lights on, put your lights on
Hey now, all you children
Leave your lights on, you better leave your lights on
Because there's a monster living under my bed
Whispering in my ear
There's an angel, with a hand on my head
She say's I've got nothing to fear
"Put Your Lights On" by Santana
I worry about monsters. My job is to worry. I even worry about things that I have no control over. Some say I should chill (chillax, my daughters say ) , but its just not in my nature.
I believe that as investment managers we should worry about everything, things that we can control and things that we can't control, even those that we can't imagine.
We need to "Put Our Light's On" and keep them on, for only by shedding light on potential monsters can we hope to protect ourselves.
The monster whispering in my ear of late is very scary. So scary that both Dennis Blair, Head of US Intelligence, and Admiral Mullen, Chairman of the Joint Chiefs of Staff, agree that it is the biggest single threat to our national security.
What is this monster that strikes fear in the hearts of our military? Is it Iran, the Taliban, North Korea, or Hezbollah? No, this monster is our National Debt. I know what you are saying, "How can something as soft and fuzzy as a debt monster scare the leaders of the worlds most powerful military?" Well, as Admiral Mullen says, "our national debt has grown to such a level that by 2013 the annual interest alone will be $600 billion, which is more than Pentagon spending."
While this monster is huge, its size is not really the scary part. No, the scary part is the insidious makeup of this monster, and who controls it.
You see, of the total $8.3 trillion in national debt more than 60% of it ($5.2 trillion) comes due in the next three years. The current weighted average cost of this short-term debt is 1.21%, but with ten year treasuries now yielding 2.77%, we could be faced with an additional interest rate expense of $133 billion annually. While the sheer magnitude of the numbers and the refinancing risk are pretty scary, what really keeps our military leaders awake at night is who controls this monster.
In the United States we have placed our continuing political solvency in the hands of the Federal Reserve, and we have greatly increased their power of late. This in and of itself is not the risk, the risk arises from the fact that the Fed has exposed itself to an incredible degree of vulnerability by telegraphing its positions and asset support mechanisms. In the cut-throat world of international finance, showing your opponent all of your cards is usually a very quick way to insolvency. What worries our leaders is that if you take down the Fed, you take down the USA! Every Treasury auction brings with it the fear that buyers may not show up. Is it hard to imagine a day when the Chinese or the Russians decide not to participate in our Treasury auctions? It wasn't all that long ago that we bankrupted the Russian economy by outspending them in the Cold War. Now of course naysayers (angels) are quick to point out that since the Chinese and Russians own huge amounts of our dollar denominated paper they would never consciously seek to bring down the US via a failed auction. That our economies are so intertwined, that a depression in the US would cause them as much or more pain at home. "There's an angel, with a hand on my head, she say's I've got nothing to fear."
Now that's all well and good, but forgive me if I agree with our military leaders in not totally trusting everyone; especially those who have developed missiles and lasers to attack satellites, and are constantly launching cyber attacks on our internet infrastructure. The risk is very real, we are strung-out debt junkies, reliant on the kindness of our foreign pushers to keep stringing us along. Not the strongest position for a nation to be in.
As US based investors, how do we protect our wealth from this risk? Not easily. First, as US citizens we can try to elect politicians that understand the nature of this threat, and who have the nerve to take the harsh steps necessary to wean us off the debt drug.
Second, we need to think globally with our portfolios. Owning stocks, bonds, and real estate outside of the US. Owning gold, and even foreign currencies like the Chinese Yuan.
Diversification and tactical asset allocation can help, but they only mitigate the potential damage. No, the only cure is to banish the debt monster, and remove the threat forever. "Leave your lights on, you better leave your lights on."
Speaking of Debt Monsters and Debt Junkies
The attached is a great article by Michael Lewis for Vanity Fair titled "Beware Of Greeks Bearing Bonds", enjoy:
A Meal To Die For
I love America, and our willingness to flaunt conventional wisdom in order to embrace our personal freedoms.
A great example of Americans embracing their personal freedom is Bill Geist's visit to the Heart Attack Grill, truly enjoyable:
Be careful out there, and keep the light's on,
Chris Wiles
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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