Moody’s downgraded US debt.

Now, the rating agencies still haven’t recovered their reputation since the financial crisis. But you should know that they did their homework and minded their Ps and Qs before issuing this downgrade because they remember the consequences of the last one when Tim Geithner screamed at the head of S&P on the phone and then fined it a bunch of money on some trumped-up mortgage complaint. Still, if it isn’t obvious by now, the US is not a very good credit, and we’re not trending in that direction.

Even after all this, even with Trump winning, there is still zero—I mean absolutely zero—desire to control the deficit. I’m old enough to remember when people did care. I worked in the Clinton government when we were being told to do more with less, and Clinton was despised by the senior executive service for his austerity. The good old days. These are the bad new days, when we have a huge opportunity to reverse the spiraling deficits—and we aren’t doing it. In fact, we’re going to make it worse.

I don’t know how Washington works. I do know that people were capable of doing the right thing in the past, so I don’t know why they’re incapable of it now. By the way, this is a general principle of social media—if you don’t know how Washington works, you probably shouldn’t comment on it. There are a lot of nuances that you’re not understanding. Politics looks easy but is actually hard. That snappy neologism or meme or riposte that you just put on Facebook is probably uninformed garbage.

In all honesty, US debt should probably be downgraded even further. We should probably be a single-A credit. There are a lot of intangibles that go into it, though—we still have the strongest military, we have the Constitution, and we still have the dollar, but it’s not inconceivable that this could go up in hyperinflationary smoke if the wrong people got in charge. And yes, I mean above and beyond Trump. There are rumors—rumors—that AOC will run for president. “There’s no chance that she will get elected.” Keep telling yourself that. And buy some gold while you’re at it.

Nuts and Bolts

Do you remember what happened when S&P downgraded the debt in 2012? Bonds rallied for weeks, in the biggest Costanza of all time. So, I don’t know what will happen. Interest rates should go up, but they might not. Ten-year notes are already at 4.5%. If they get out to 5%, there will be some squealing as we get close to 8% mortgage rates. If they get out to 6%, the United States is effectively bankrupt.

Of course, we won’t let that happen—we’ll peg the yield curve. If you don’t know what that means from a practical standpoint, it means the Fed will print an unlimited amount of money to buy bonds in order to peg them at a specific interest rate. Think of it as quantitative easing (QE) on steroids. QE made gold go up. Stocks too. A lot of people, me included, thought it would cause inflation, but it took years for that to happen.

We are dangerously close to this happening. Dangerously close. A hop, skip, and a jump, and we’re there.

Grant Williams spoke at my conference and basically told everyone that they do not own enough gold. Grant owns a lot of gold—I get the impression that substantially all his assets are in gold. I have a lot of gold, but not that much. 

Of course, you could have seen the signs five, 10, or 15 years ago. I have been writing about it like I was demented since I started The Daily Dirtnap in 2008. It was around 2006, at the mid-term elections, that I figured out we were doomed. That was when I noticed a sharp turn left in economic thinking—that was the midterm that Nancy Pelosi became House speaker. 

There were fainting couches everywhere—a San Francisco liberal in charge of Congress! Now, she is considered to be a moderate. Several Republicans are to the left of Pelosi on economics, especially Josh Hawley. We have Republicans in charge who are raising taxes on the rich—and not for deficit reduction reasons but for redistributive ones. It is amazing to watch history unfold before your eyes. By the way, we have come full circle from 1999 when it was fashionable to say that you were “fiscally conservative and socially liberal.” Now, there are a lot of people running around, including Hawley, who are the opposite: socially conservative and fiscally liberal.

How do you save capitalism? You can’t. People have to experiment with these ideas, and they will learn or they won’t. Argentina got to the point of maximum pain. The United States is nowhere near the point of maximum pain. Will we get religion when interests rates and inflation are 10%, 20%, 30%? Let’s hope we do not have to experience that pain, but for now, nothing stops this train. The deficits will get bigger, and the remedies will get worse.

This is the macro backdrop. You can probably get some trades out of this. The last few months, nothing has worked except for gold. It is possible that for the next few years, nothing will work except for gold. This isn’t a gold newsletter, and if the macro backdrop were different, if we were really thinking about cutting the deficit, I wouldn’t be recommending gold. Gold is an option on debt monetization—when the probability of that increases, gold goes up. It is that simple. 

For some reason, it became clear to me that this was going to be the outcome. I’m not sure why it wasn’t clear to anyone else. Maybe I can see the future. The only thing I am surprised about is how long it took. And that is one general principle of markets that you should internalize—your thesis is probably going to take a lot longer to play out than you think. You are going to be early most of the time.

I wish I had better news to report. I am just coming off a writing sabbatical in Mississippi, and I’m all fired up to begin trading again. My time in Mississippi was one of the best weeks of my life—reading, writing, and unplugged from the market. Oh, I was still keeping tabs on things—it’s hard not to if you have a smartphone.

One Favor to Ask

Well, I am not really asking for a favor; I am doing you a favor. My new essay collection, RULE 62: Meditations on Success and Spirituality drops on June 24. The e-book is now available for preorder. Just the e-book. 

I like people to buy the physical book, so I’d prefer that you wait until June 24, but if you’re a dedicated e-book person, go ahead and preorder it now. It’s a better book than The Subtle Art of… by a few miles. So, if you like to rock the Kindle, preorder it now.

Jared Dillian, MFA