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Don't Be Distracted by the Next Great Government Hoax

By Dan Ferris, editor, Extreme Value
Saturday, August 6, 2011

The Great Debt Ceiling Hoax of 2011 is over. It's a darn good thing. I was tired of hearing about it.
As I told you last month, the whole thing was a dog and pony show. Politicians like Barack Obama and Tim Geithner were telling us that a failure to raise the debt ceiling by August 2 would result in catastrophe.
What they weren't saying is the country would have come through just fine without a deal. (And that's why there was no doubt a deal would pass.) In short, the whole thing was a distraction for investors.
I'm glad it's over. But there's a new distraction on the horizon. If you fell for the Debt Ceiling Hoax, make sure you don't fall for this one. All you need to do is tune out the noise and take a couple simple steps to protect yourself. Let me explain...
Smart investors know the U.S dollar is doomed, as all paper currencies are... What everyone wants to know is when it will finally die.
That's why everyone watched the debt ceiling debate so closely. But now that fiasco has passed. And a new fiasco has taken its place: the anticipated downgrade of U.S. Treasury debt by the major ratings agencies.
This is less of a hoax than the debt ceiling countdown. The government really, truly does not deserve a triple-A credit rating. It deserves a lower rating.
But it's still a phony issue. It's phony because everybody knows the U.S. government has way too much debt. The credit ratings agencies have no credibility after giving their highest ratings to the worst subprime mortgages. And they have nothing meaningful to add to the discussion (as usual).
You see, the ratings agencies are always behind the curve. They don't downgrade any company or country until everybody already knows the company or country is in big, big trouble. For one of the most egregious examples... back in 2001, the ratings agencies waited until six days before Enron declared bankruptcy to downgrade the company below investment grade.
I promise you, Enron was junk long before that. The stock market sure knew it. Enron shares had already fallen from $90 in August 2000 to below $1 by November 28, 2001. Enron filed bankruptcy on December 2.
In short, ratings agencies are like everyone else in the market – their gaze is firmly fixed in the rearview mirror. Their ratings have no predictive value whatsoever. And it's a mistake to look at Moody's and Standard & Poor's as drivers of the world's view of U.S. Treasury debt.
So what will drive the world's perception of Treasury debt? Not the debt ceiling deadline. Not the ratings agencies. Not anything in the control of the government.
The precise manner of the end of the U.S. dollar will be decided in the only real protector and keeper of financial truth in the world: the market itself. One day – and that day grows nearer and nearer – the market will do what markets do when an entity goes bankrupt: stop lending it money.
In the meantime, though, the ratings agencies are going to act like they've got a handle on things. They're going to going to tell you the U.S. has awful credit. We already know that. They're going to say we need to spend less and borrow less. We already know that.
Anyone who knows fifth-grade math knows the numbers just don't add up.
That's why I recommend you own plenty of gold and silver. Don't be distracted by this latest hoax. And don't wait for some ratings agency to tell you to protect yourself.
Good investing,
Dan Ferris

Further Reading:

"Frightened children like Obama, Bernanke, and Geithner see scary monsters everywhere," Dan says. "Adults with vision and experience see opportunities. I promise you those opportunities are real. They exist."
Learn what these opportunities are here: What the Government Will Never Tell You About the Debt Crisis.

Market Notes


This week's chart shows how Warren Buffett is falling even farther behind gold.
Back in April, we noted that despite gold's "real money" attributes... its vital role as "crisis insurance"... and its giant uptrend, the metal still has detractors. One of the highest profile detractors is superinvestor Warren Buffett. Several times over the past few years, Buffett has publicly scoffed at the idea of owning gold.
While we're fans of Buffett's wealth-building abilities, we have to point out how listening to him has been a losing deal over the past eight years... especially considering the performance of his investment company Berkshire Hathaway.
This week's chart displays the performance of Berkshire Hathaway (black line) since stocks bottomed in 2003 versus the performance of gold during the same time (gold line).
When we checked in on "Buffett vs. gold" in April, gold had outperformed Buffett 350% to 75%. The past week has stretched this "gold beats Buffett" ratio even further. Due to its big exposure to financial stocks, derivatives, and economically sensitive businesses, Berkshire plummeted to a new yearly low this week... while gold soared to an all-time high. Buffett vs. gold? No contest!

Buffett vs. gold: No contest!

Stat of the week


Average rate on a 15-year fixed-rate mortgage in the U.S. It's the lowest rate since mortgage firm Fannie Mae began tracking them in 1991.

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