Below is Fitzwilson’s exclusive piece for KWN:

“We have characterized cash as being a zero-coupon, perpetual Treasury instrument.  It has no inherent coupon nor does it have a maturity date.  We know how cash trades.  It is always issued and remains at par ($1 or 100 cents per dollar).  The quoted price of it will change relative to cash issued by other countries and alternative currencies such as precious metals, but the “price” always remains at $1.  Distinguishing price from value, the latter will also fluctuate over time in terms of purchasing power.  However, the value of the dollar has been in a virtual nosedive for the last 100 years....

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“We decided to look at the actual zero-coupon Treasury (ZCT) securities last week.  On Friday, the 10-Year version of the ZCT was available to buy for roughly 80% of par.  In simple terms, this means that one would pay $.80 per dollar on the purchase.  If held to the maturity date in 2023, the buyer would receive no income from a coupon payment.  While the quoted price will fluctuate over the remaining time to maturity, the price will inexorably rise to par as the maturity date approaches.  The gap between the $.80 paid and the $1.00 received from the Treasury at redemption for par would be the effective interest on the investment.  On Friday, that compound, coupon-equivalent return was about 2.1% before taxes and before inflation.

For the 20-Year and 30-Year ZCTs, the prices as of Friday were $.55 and $.38, respectively.  The yields-to-maturity (the compound interest rate of return) were roughly 3.1% and 3.3%, respectively.  That is all.  Again, that is before any taxes and inflation.

We are told that the inflation rate is running in the 2-3% range in the United States.  Since most of us have to buy things, we also know that the actual rate is running at a much higher level.  Shadowstats suggests the correct rate is in the high single digits or the low double digits when traditional methodologies are utilized.  Outside of the United States in countries that spend more of their money on food and energy, their experience suggests that the inflation rate for consumers is closer to the Shadowstats estimate.

Turning back to the zero-coupon bonds, a buyer on Friday of the 30-Year version was purchasing a contract with a mathematical compound return of about 3% over the next 30 years.  If we project that the current inflation rate of 3% will remain the same for the next 30 years (which we are not), the owner of the contract is locking in a real rate of return of zero.  That is the absolute best that can happen.  It makes the incredible assumption that everything stays the same, yet allows for a zero return on capital.  It gives a new meaning to a ZCT, a zero-return security.

One cannot do retirement planning on the assumption of making zero returns.  A pension plan or an endowment cannot do so either.  Their assumption must be that the employer or the government will contribute more money in lieu of returns on existing funds.  Governments, in particular, are facing very rough budgetary constraints, so one has to question relying on such a solution where money is not available to make up the shortfall.

The disturbing part of our analysis comes when one considers the economics of cash compared to those for the zero-coupon securities.  Cash is debt.  Your dollar bill is really debt.  It says “note” at the top.  It means that somebody, somehow and someday will make good on it.  It is widely accepted throughout the world as a medium of exchange, and is considered to be the best of the debt-based fiat currencies.  However, it still is a perpetual, zero-coupon Treasury trading at par.

How can that be?  In the marketplace, a 30-Year ZCT trades at a discount of 62% at $.38.  Cash trades at par, yet it has no maturity date.  In theory, one should sell the overpriced cash and buy the 30-Year zero by the truckload.  To do so would mean zero returns under the most naïve set of circumstances, but think what that says about cash.  Think what it says about any kind of fixed income.  If assumptions about future inflation and interest rates are kept constant forever, creating a scenario that only Goldilocks would like, nobody makes any money in the cash and debt markets.  The frightening part is that cash and the fixed income markets dwarf the equity markets.  Cash and fixed income are traditionally viewed as safe havens, but they cannot possibly be under any reasonable set of assumptions in today’s world.

It just might be that the price of a 30-Year zero reflects the magnitude of the overvaluation of the currency upon which it is based.  It might also give us a hint of how much fiat currencies are overvalued in general, and the devastating declines in currencies relative to tangible assets that still lies ahead.  The reason it is so critical that investors understand the reality of what is happening in both the cash and securities markets is because whether you have $100 or $100 million, it is imperative that your savings be converted into real assets, particularly gold and silver.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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