Monday, March 15, 2010

China’s Bear Call Spread on the United States
Our elected swindlers have reached a major milestone this year or I should say millstone (around our necks)। As noted in an AP column today, for more than two decades, Social Security collected billions more in payroll taxes than it paid out in benefits but not anymore. This year the program is projected to pay out near $29 billion more in benefits than it collects in taxes.
AP writer STEPHEN OHLEMACHER pointed out that although US Treasury Bonds are normally issued only in electronic from, THESE congressional IOU’s came with actual paper certificates! I found that amusing, as though they now have more intrinsic value because our prodigal government took the trouble to have the $2।5 TRILLION in bonds printed! Hey, Confederate dollars were printed. How did that help? When you have $2.5 trillion of something, there won’t be much antique value.

This is the legacy that people like Ted Kennedy and John Murtha left behind for us. They were here to live through the plaudits of the leftist media. Now they are gone and we are stuck with the consequences.The government purportedly borrowed the money from the Social Security “trust fund” because they didn’t want to borrow from foreign creditors. If we take that claim at face value, it is ironic that Social Security is now dependent upon the Communist Chinese of all possible foreign creditors. China had us in a compromising position –before- but now think of the implications! Just picture what will happen when China decides to –stop- buying our debt and suddenly the Federal government cannot borrow the money necessary to pay out the current benefits.

I wrote a lengthy column on this subject titled The Most Deadly Platitude of the 20th Century in which I enlarged upon the deadly platitude that “China would never do that to us because they would hurt themselves as much as they would hurt us.” People who say that usually have little understanding of advanced financial strategies. They do not understand that you can actually be long on an investment and simultaneously profit by its obliteration. One common strategy is called a “Bear Call Spread” where you play both sides of a stock (or underlying investment vehicle) –but- your bias is toward the downside when you purchase at an out-of-the-money Call option while selling an at the money Call option.

There are other ways of accomplishing the goal but the objective is to play both sides of the market with the large profit occuring as the underlying investment plummets. That is where China is heading in order to win this game. They may not be any more devious than our elected scoundrels but they have had significantly more practice so the advantage goes to them.Just like any other major attack that has succeeded against America, the warning signs were everywhere but the enemy succeeded because of our propensity to live in denial that it couldn’t happen.

They cannot get themselves to think that a powerful communist country with the largest population on Earth could ever intend to dominate the world with the communist economic and belief system. Never mind that when communism fails the communists contend that it simply “wasn’t done right” and that world uniformity is absolutely necessary for communism to properly work.

This is for all the chips. They are gradually cornering the market in valuable commodities and when they are ready, they will pull the plug. You will see the panic ensue as the US government cannot get enough buyers at the Treasury auction to make those Social Security payments. That is when the printing presses will go into a gear the heights of which nobody has ever witnessed. The inflationary result will be at a level not seen since Soylent Green (rhyme intended). Communism is brutal and they will have no compunction about what may befall the US and even their own citizenry as their strategic state owned positions will make them the premier global power.

America will have to go crawling to them like George Bailey did to Mr. Potter after Uncle Billy lost the deposit and the Bank Examiner was closing in. Unfortunately, there will not be any Sam Wainwrights to bail us out in the end because that has always been –our- role. The countries that fair best will be the world’s dictatorships. You will have the oil rich dictatorships in the Arabic world and the commodity rich communist dictatorships of China (and Russia, also commodity rich will revert back to communism). Not coincidentally, these countries have long been aligned against the west.

Hmmm, Communism as an economic system and Islam as a ruling religion (Sharia law), what an intriguing hybrid. It just so happens that our occupant at 1600 seems to be the personification of the two world views.


I really don’t have any delusions that anyone is going to listen to me on this matter and I really don’t have any doubt I will be right about China. It feels like it is an academic exercise, just like the exercises you will see (by clicking the “My Track Record” tab on your left) that I made when I warned about this economic disaster on August, 2001, before the world went to hell-in-a hand basket, a time when terrorists and Jihad were the furthest things from our minds. You will see the warnings about General Motors 8-9 years ago when GM was at all-time highs. You will see early warnings about the AOL-Time Warner and other famous debacles all time-stamped from independent, 3rd party sites where I posted my columns when written so that there would be no question as to when they were written. Most financial writers claim to have warned about every past disaster known to man but they do not show you the proof, which is why I document them here. Here is the value: You cannot stop these lemmings from running over a cliff but you –can- at least position yourself for what is inevitable.Sources:
AP article February 10, 2010 The Most Deadly Platitude of the 21st Century by MrArbitrage

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