Trading The Truth

I use to trade emerging markets debt for a living.

What's wrong

Every morning traders and salesman were given the economic data for the countries that we traded. We would get the latest economic numbers from countries like Brazil and then, we would evaluate how the news would affect the debt. Put simply, if the numbers were better, showing more growth in the country, the bond prices would rise signaling that the country had a better chance of paying off its debt.

Any decent finance professional can read the data and give you his or her take on the probable financial outcomes for country and the movement of  debt prices. For example, if a country started to spend too much on certain projects that would hamper the country’s ability to pay, the bonds would trade lower.

What always fascinated me were the end of the day conversations that would inevitably  center around back to the U.S. political system and its policies. Given that I worked with many left-leaning and left-of-center political Progressives, they were always happy to see Obama’s expansion of government programs such as Obamacare. These same business professionals, who hours earlier, would be slamming Brazil for spending or wasting too much money on bloated government programs, would cheer and applaud these same programs when implemented here in the U.S.

It always struck me as odd because their analysis would be so prescient when it came to the analysis of foreign countries; but, when it came to applying the same standard here in the U.S, they were incapable of doing so. Given that the U.S. is such a wealthy country, there is this belief having more money than other countries obliges us to spend more on social programs.

I spent large parts of my childhood in Ecuador. I grew up seeing first-hand the tragedies that result from failed economic policies. Whenever I see the move to more Socialist programs here in the U.S., I always connect it to the devastation and tragedy that befell Ecuador when it tried Socialist measures.

In general, I have found that immigrants who fled from  Communist countries such as Russia, Cuba and Ecuador are acutely aware of politicians’ intentions well ahead of their American brethren because they have already seen these same promises and their failed, and oftentimes deadly, results.

When President Obama called for medical reform, it seemed he had significant support to do so. On the surface, saying that you will reform medical deficiencies and inequities by providing coverage “to all” sounds like a worthy undertaking. However, if the government had really wanted to improve the medical system, it should have allowed insurance companies to sell their policies across state lines. That would have immediately added a lot more options for consumers.  But it wasn’t even a consideration because the real aim of Obamacare, like all government programs, was more control of the economy. One-sixth of the economy…to be exact.

As I said earlier, this looked eerily familiar to immigrants from Communist countries. They knew, all along, what the unstated goal of Obamacare was even if most Americans did not. Control. Control. Control….not improved or more inclusive healthcare.

The premise of Obamacare is that we had the economic ability to help those not covered. That premise is a lie. The U.S. is a debtor nation with over twenty trillion debt!!!… and roughly another forty-five trillion!!!! in unfunded liabilities. The promises made by the federal government regarding healthcare will never be realized. We will default on our debt and, at some point, all of the promises made will go up in smoke.

No country in history has ever been as indebted as we are.

The reason that the U.S has been able to pull this charade of financial solvency longer than any other country is that the U.S. dollar is the reserve currency for the world. Because the U.S. dollar is always in demand, our currency has an underlying strength which most countries don’t enjoy. Another reason the dollar remains strong is that all commodities (think oil) in the world trade in U.S. dollars .

For example, whenever France has to buy billions of dollars of oil to fuel its economy, it has to trade euros for dollars to fund the transaction. The sheer fact that it settles in U.S. dollars creates a tremendous demand for those dollars.  Further,  these excess dollars end up in our treasury market creating natural buyers of U.S. treasuries.

Because of this demand for U.S. dollars and treasury bonds, these financial instruments are artificially inflated. This has given our politicians the false confidence to enact policies and embark on spending programs that other countries don’t have the ability implement.

When Zimbabwe’s economy began to crater, it enacted many of the same monetary policies of the United States. The rationale seemed logical…copy the economic policies from the strongest country in the world. The results were disastrous. The economy tanked, the country defaulted and the currency is worthless. Zimbabwe failed to realize that there never was any demand for their currency. In light of this, Zimbabwe decided to inflate their money and the markets penalized them for it.

The United States isn’t the only country hellbent on defying the laws of economics. The list of countries committing economic suicide are too numerous to mention; but they’re all racing to fix their economies by adding more debt to them.

Currently, there are $11.7 trillion bonds globally with negative-yield sovereign debt. Jim Grant posed a tongue-in-cheek question: “If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 BC?”

Just as U.S. traders could not, or would not, see that Obamacare was never going to have sufficient financing, central banks have failed to realize, or ignored the fact, that what happened in Zimbabwe can happen anywhere. Now, the elites are scared because they designed and perpetuate this mess. They know there is no way of fixing it. Yet, as unfathomable as it may seem, both candidates for the U.S. Presidency are clamoring for more government intervention.

What’s wrong with this picture?