321 Gold has a very interesting article up this week by Mr Adam Hamilton titled: "Amazing SPX Complacency". The article deals with the present levels of complacency in US stock markets as measured by what is called the VIX - the S&P 500 Implied Volatility Index. As Mr Hamilton notes, this VIX index has recently reached its lowest levels in almost ten years, implying that fear is almost entirely absent from US stock markets, with the majority of participants of the firm opinion that steadily rising indexes are inevitable.
In the current issue of The Privateer (the Mid September Issue - #510 - published on September 19), we had this to say about the US stock markets: "All the seasoned traders do not expect the political "fix" to be in, they know it's in, they can see it on their trading screens."
Here's another aspect of the same "syndrome". As you probably know, the US government has just "audited" Fannie Mae, the huge mortgage originating "Government Sponsored Enterprise" (GSE). The Office of Federal Housing Enterprise Oversight (OFHEO) has made public their findings along with a letter sent to the principals of Fannie Mae asking them to correct their "pervasive accounting problems".
In the US, the GSEs are the epitome of the borrow short and lend long brigade. They are also the main cornucopia from which the last US investment bubble still standing - the real estate bubble - has sprung. Because of the rather violent gyrations which US interest rates, especially longer-term rates, have undergone over the past few years, the GSEs have developed and put in place quite extraordinary hedging strategies by way of gigantic amounts of derivatives.
It is this "risk", unacknowledged in the accounting practices of the GSEs, which has finally forced the US government's hand and led to this "examination" by the OFHEO. In these accounting practices, especially as they pertain to hedging, the GSEs have assumed that all their derivative strategies are "perfectly effective". You may recall a gentleman named Nick Leeson who worked for Barings Bank in Asia. He had a similar attitude. So did Enron, right up until it collapsed in a heap in the late summer of 1998.
To cut a very long and convoluted story short, the GSEs have been blandly assuming that nothing can "go wrong" for years. Their books reflect this fact, as do their lending practices. This should not be surprising, since it is reflected across the whole gamut of financial institutions and financial practices, not only across the US but across the entire world.
In financial markets which trade in paper instruments, ALL paper instruments, the concept of "risk" is looked upon as an historical oddity. Risk is something which used to have a bearing on decision makers in the old days before everything could be hedged against everything else. The broader economy shows a similar picture. It is almost universally accepted that indebtedness is a fact of life, that no economic progress can come without the taking on of debt, and that anyone who does not borrow to "get ahead" in life is crazy. After all, everybody does it, right?
In the US, it is said to be very important to borrow because only in that way can one achieve one's very own credit rating. The situation has in fact gone even further than that. Nowadays in the US (and across most of the "developed" world), it is the man or woman who doesn't borrow who is seen as a credit risk. Take the story of Mr Howard Bensema. Mr Bensema is a 74 year old American who has not had a mortgage since the 1970s. He pays cash for everything, including his houses and cars. He has been paying his bills on or ahead of time for his entire adult life. He has never had a credit card.
In short, since Mr Bensema doesn't borrow, he hasn't established a credit rating. And that fact is now hampering him in areas which have nothing to do with his history or lack of history of debt repayment. Mr Bensema pays more for his insurance than people who owe money, even though he has never filed a claim and his driving record is spotless. There are even plans afoot where Mr Bensema lives (in Texas) to use credit ratings in setting such things as fees for electricity and water. Should these plans go forward, Mr Bensema will be facing higher charges here too.
You get the picture. Borrow and the world borrows with you. Live within your means and you stand alone, or nearly alone. This is true for those who know - and all financial analysts worthy of the name should KNOW - that debt is the "edifice" upon which the entire financial system stands, or falls. It is even more true for those who don't know it, the proverbial joe and jane six-pack whose paycheck runs out before the week does.
With borrowing and indebtedness so pervasive, with buy now pay later such a way of life at all levels from government on down (or more properly up), it is not surprising that the concept of "risk" has been all but forgotten. Thus in the US we see gigantic levels of debt married to no savings whatsoever, we see complete complacency over the future of US stock markets, and we see accounting practices at all levels which blithely assume that borrowing need never have a limit and repayment need never even be contemplated.
Contrast this with the precious metals markets, the markets where the concept of "risk" is NOT considered passe. Indeed, these are the markets where "risk" is an ever present spectre, just waiting to fall upon those innocents who are old fashioned enough to want to hold the only financial asset left which is NOT someone else's liability.
Read almost any analysis of daily Gold trading, and warnings of "risk" abound. There are rumours that gold miners are starting to increase their hedge books again. The European Central Banks are about to re-affirm the Washington Agreement and start selling more Gold. Any more "confirmation" of the US economic "recovery" is bound to knock $US 10-20 off the Gold price right away. As soon as the $US starts recovering again, Gold is for it. The December Gold contract is "overbought". And so on, And So On, AND SO ON.
It is no "accident" that Gold, the most risk free investment available, is almost the only one which is still subject to any kind of "risk analysis". Look at the situation and it becomes clear. Gold is indeed a HUGE risk, NOT to those who hold it, but to those who prefer to confine their investing to the markets denominated in paper.
All Central Bankers know this. So do all government Treasury departments. So do most national and all multi-national commercial bankers. The gigantic "debt structure" which underpins the US financial system and the world's reserve currency, the US Dollar, is well known to most who will read these pages. It is not so well known to the vast majority of their contemporaries, although there is still some occasional unease about it.
But there isn't much unease, not at present. The vast majority blithely assume that nothing "bad" will be allowed to happen during a Presidential election. After that? Not many have looked beyond November 2. In the final analysis, it is much easier to "go with the flow" and ignore the whole thing. What, us worry? Why should we, risk is something that used to get in the way of reward, but not anymore.
As it has been in all historic instances of the greatest financial imbalances, a complete lack of concern for any future danger prevails. As it has also been in all these historic instances, that is when the danger is most acute. The US might be able to keep all the financial balls in the air until November 2. There is NO chance that they can do so after November 2. It's getting that tight.