Friday, November 30, 2007
So the books close, the champagne flows and the rest of us can start doing our own accounts. Where are the customers' yachts?, as the naive investor asked.
Karl Denninger looks at E*Trade's difficulties and reckons the 70% mark-down of their home equity lending portfolio implies a loss of $1.5 trillion on HELOCs (home equity line of credit) alone. The bad news hasn't all come out yet.
Perhaps we entering the period of "dawning realisation".
Thursday, November 29, 2007
There is a serious point: is America prepared to refresh its commitment to the principles of the Constitution, which Ron Paul champions; or is it "the old order changeth, yielding place to new"? In which case, when was that decided, and by whom, and with what right?
It's a burning issue for us in the UK, too: here, a thousand years of organic (and often bloody) constitutional development is to be hurriedly reshaped by lawyers and bureaucrats working for the Executive, in the name of vaguely-phrased hurray-words ("justice, rights and democracy" - the last is particularly ironic, since I don't remember voting for this ramshackle assault). Has it become the people's representatives v. the people? Perhaps our "new" Labour government has ignore its Methodist roots and relaxed the laws on drinking, gambling and sexual activity so that we will be distracted from taking an interest in more serious matters.
On a lighter note, it's fun to see that, legal currency or not, such Liberty Dollars as are still out of FBI custody are currently a good investment. Maybe better than the Fed's IOUs, if you believe the bullion-hoarders.
Jacob Shallus might have thought so. The $30 he earned for engrossing the Constitution was the equivalent of 5 weeks' worth of a Philadelphia printer's wages in 1786. What does $30 get you today?
Wednesday, November 28, 2007
It looks to me as if the median price of gold (in 2007 dollars) runs at around $450/oz., but I'd be glad to hear from anyone who can give a better estimate.
And the Contrarian Investor's Journal argues why, even in deflationary times, gold may still be a good choice.
Tuesday, November 27, 2007
Part of his argument is that the money supply is determined not just by how much there is in the economy, but also by how fast it changes hands (its "velocity"). If the heartbeat of economic activity slows, the monetary pressure will reduce.
Denninger shares the growing concern that subprime losses could be of the order of $1 trillion, and believes
... we are literally weeks or a handful of months away from an utter implosion in the equity markets.
I believe we are very, very close to the precipice - and that nothing Bernanke or Paulson can do now will change the outcome. The opportunity to address this and stop it expired a few years ago, with the cumulative damage growing the longer regulators fail to act.
In which case, it's time to hold cash, which on American notes says is good "for all debts".
This reminds me of another quotation I can't source: "Would that I could be so certain of anything as he is of everything." I suspect he may be right on this one; then again, I would, since I've been feeling it in my bones for about a decade, before the official policy became to inflate our way out of all troubles.
Michael Panzner alerts us to an article by Martin Hutchinson in Prudent Bear, which explains how the rotten apples in the banking barrel can affect the others. Here's a grim tidbit or two:
... If as now appears likely the eventual losses in the home mortgage market do not total only $100 billion, but a figure much closer to $1 trillion, then the subprime debacle becomes something much more than a localized meltdown...
Hutchinson suggests that in a bear market, "Level 3" assets may actually be worth as little as 10% of the banks' own declared estimates, and:
This immediately demonstrates the problem. Goldman Sachs, generally regarded as insulated from the subprime mortgage problem, has $72 billion of Level 3 assets; its capital is only $36 billion. If anything like 90% of the Level 3 assets’ value has to be written off, Goldman Sachs is insolvent. [...] Only the bonuses will survive, paid in cash and draining liquidity from the struggling company.
I observed a couple of weeks ago that "the Dow and the FTSE rise towards the end of the year, when traders' annual bonuses are calculated" and guessed that "the Dow will rise until bonus time". Watch for a rally of sorts and a final, determined suckout of bonuses, ahead of a forced, sober reassessment.
Monday, November 26, 2007
That in itself is grounds for worry (nothing to hide, nothing to fear); and the desired result must be achieved by dumping bullion, which can't continue indefinitely. On this thesis, the crisis signal will be when gold stops dancing with the Dow.
Predicting tough times ahead, Michael Panzner, author of Financial Armageddon, recommends that investors buy shares of companies that sell stuff that people need to buy no matter what's going on with the economy. Companies that sell soft drinks, tobacco, prescription drugs and toilet paper, for example.
Investors, he says, should play it safe, loading up on defensive stocks, socking away more cash and moving toward the safety of U.S. Treasury notes and bonds.
Sunday, November 25, 2007
Interesting also that he echoes my "twang money" idea:
Thanksgiving 2007 is special because we are just re-learning the ancient lesson that no banking system can safely operate without gold. You cannot measure the quality and quantity of debt in terms of another, just as you cannot measure the length of an elastic band in terms of another.
An interesting post from Michael Panzner, commenting on the views of derivatives expert Satyajit Das. The latter thinks we're in for a 70s-style inflationary grind, whereas Mr Panzner leans towards a 30s-style deflation.
I am reminded of Borges' short story, "Pierre Menard, Author of the Quixote". In this, a modern author attempts to re-produce the 16th century novel "Don Quixote" by Cervantes: not copying - writing it again exactly, but as though for the first time ever. Since Menard is writing in a different period of history, the same words have quite different meanings, implications and associations. To pen the identical lines today, spontaneously, would involve a monstrous effort. So Borges' tale is a wonderful parable about the near-impossibility of our truly understanding the mindset of the past, and how history can never be quite repeated, because the present includes a knowledge of the past that it takes for its model.
For those reasons, we'll never have the Thirties again, or the Seventies; but we might have a retro revival. And the differences may be as significant as the similarities.
Saturday, November 24, 2007
As you see, mostly it was the nineties, with one instance in 1975 and three times in the sixties. The average rate for the whole series up to December 2006 is 13.47%. So the hand-mill never stops grinding.
But should it? Wikipedia gives an account of recession and the Great American Depression, and notes that during the latter period the money supply contracted by a third. Great for money-holders, bad for the economy and jobs.
This page points out that we tend (wrongly) to think of a period of economic slowdown as a recession, and says that technically, recession is defined as two successive quarters of negative economic growth. By that measure, we haven't had a recession in the UK (unlike Germany) for about 15 years - here's a graph of the last few years (source):And then there's the stockmarket. It doesn't seem to reflect the real state of the economy - until you shift the lines, when for example the S&P 500 turns out to be a fair predictor of changes in GDP, as shown in a graph in a 2005 entry from this blog ("Capital Chronicle", by RJH Adams):
Mind you, looking at Wikipedia's Tobin's Q graph, the median market valuation since 1900 seems to be something like only 70% of the worth of a company's assets. Can that be right? Or should we take the short-sighted view of some accountants and sell off everything that might show a quick profit?
Nevertheless, it still feels to me (yes, "finance with feeling", I'm afraid) as though the markets are over-high, even after taking account of the effects of monetary inflation on the price of shares. And debt has mounted up so far that a cutback by consumers could be what finally makes the economy turn down. Not just American consumers: here is a Daily Telegraph article from August 24th, stating that for the first time, personal borrowing in the UK has exceeded GDP.
The big question, asked so often now, is whether determined grinding-out of money and credit can stave off a vicious contraction like that of the Great Depression. Many commentators point out that although interest rates are declining again, the actual interest charged to the public is not falling - lenders are using the difference to cover what they perceive as increased risk. Maybe further interest rate cuts will be used in the same way and keep the lenders willing to finance the status quo.
Some might say that this perpetuates the financial irresponsibility of governments and consumers, but sometimes it's better to defer the "proper sorting-out" demanded by economic purists and zealots. History suggests it: in the 16th century, if Elizabeth I had listened to one party or another in Parliament, we'd have thrown in our lot with either France or Spain - and been drawn into a major war with the other. We sidestepped the worst effects of the Thirty Years' War, and even benefited from an influx of skilled workers fleeing the chaos on the Continent. If only we could have prevented the clash of authoritarians and rebellious Puritans for long enough, maybe we'd have avoided the Civil War, too.
So perhaps we shouldn't be quite so unyielding in our criticisms of central bankers who try to fudge their - and our - way out of total disaster.
In July, he looked at historical "awful times to invest", and found that July 2007 fits the same criteria. The 10-year outlook for the US investor is not attractive:
Presently, the probable total return on the S&P 500 over the coming decade ranges between -4% and 5% annually, with the most likely outcome in the low single digits.
More recently (November 12), he's considered many indicators and concluded:
I expect that a U.S. economic recession is immediately ahead.
This week (November 19), he remarks that much of the money apparently being pumped into the economic system is simply a rollover of earlier loans coming to maturity: the net increase is very small compared to the total oustanding, and so the rate of monetary inflation is slowing. He quotes Jan Hatzius of Goldman Sachs as saying (in effect) that if souring subprime debt hits financial institutions directly, they are likely to call in loans in order to preserve the ratio between their lending and their reserves, which in turn will slow the economy further.
What should investors do? He quotes the view of famous investment manager Jack Bogle:
"I would say do nothing – ride it out, if your asset allocation is right. The bonds in your portfolio and the long-term growth of businesses will bail you out. Unfortunately 80% of the market is speculators now, not investors. What would I say to the speculator? I would say I'm nervous and I might even say get out.”
So I guess it's the usual couple of points: are you in for the long term, or trying to make a quick killing? And where are you on the 25:75 Benjamin Graham bond-equity balance?
FT Alphaville (thanks to Michael Panzner for the alert) gives the above graphs to show how much is at stake in the business of mutual guarantees known as "over the counter" (OTC) derivatives: over $500 trillion. That's not all: Wikipedia's article (last link shown) explains that there is also a separate class of Exchange-Traded derivatives.
These sums are quite unimaginable. But we can compare them with other figures: according to FT.com, the total value of the US and European stockmarkets in March this year was a mere $31 trillion. Wikipedia estimates that the total value of all stocks and bonds in the world is less than $100 trillion.
Our daily lives stand on a thin crust over this boiling financial melange. We'd sure better hope that the experts haven't bitten off more than they can chew.
Thursday, November 22, 2007
Frank Barbera points out that Argentina's economy put itself back on track by devaluing the currency. Now,
... the place is booming, crime is way down, and foreign capital has flooded in...
All you had to do was ensure that you weren't the mark in that game:
... someone who was able to place money in precious metals avoided the collapse of the local currency, would now have that previous purchasing power intact, and could have used it in the last few years to buy back many fold depreciated assets in Argentina.
Tuesday, November 20, 2007
(By the way, my comments are not unduly influenced by the fact that he gave up most of his material possessions and moved to western Wales, devoting himself to art and poetry.)
One of the points he makes is that in the USA, the Securities Investor Protection Corporation may have no more than $3.4 billion available to protect depositors' losses, compared with anything up to half a trillion potential losses in the current credit crisis.
Here in the UK, depositors are protected by the government, up to a point; but who knows what the government might do if seriously financially challenged.
Saturday, November 17, 2007
[The research] implies that simply going to cash between May Day and Halloween will have only minor impact on long-term returns while dramatically reducing risk -- a winning combination that would show up in a much improved risk-adjusted performance.
Until everybody does it, of course. But what are the chances of that happening?
Friday, November 16, 2007
Thursday, November 15, 2007
His advice is to get a sense of the underlying trend. I agree, though I'm unhappy about what I'm sensing.
For while Japan and China are selling down their holding of US securities, the UK is gobbling up even more, according to Matt's graphs at Discursive Monologue. Maybe we want to be second in Uncle Sam's hierarchy of foreign creditors, instead of third.
And US employment is holding up, according to the official October figures - but not if you use a different measure, says Chris Puplava.
Is it central bank intervention in the bullion market, or gold forgetting it's a currency and trying to be a commodity, or a temporary slackening in demand because of investment houses having to pony up some cash to cover other positions?
"Danger! Danger!" to quote Robby the Robot from Lost In Space - and next episode, the meteor shower will hit the ground harmlessly.
Wednesday, November 14, 2007
Turkeys should note that Thanksgiving is on November 22 this year.
...gold's great bull market will be the harbinger of a major global recession or, more probably, a depression brought on by a sequence of massive defensive interest rate rises required to support the dollar in its pre-eminent position as a global currency, with all the benefits, political and economic, that this brings to the USA.
To what extent can one sensibly make predictions from the line alone, instead of interpreting it in the light of theorized underlying causes?
He also directs us to a useful blog ("The Slosh Report") on Fed Reserve liquidity operations, and the Fed's own funds site, which you can find here.
Denninger is rightly outraged at the cynical abuses of the financial system, and quite emphatic that US real estate will have to devalue by 30% - 50%. He has set up a petition, sadly limited by its nature to US citizens.
And a video, though I find the use of nuclear explosion imagery counter-productive (I've momentarily forgotten the psychological term for this, but it's a "never happen, Cap'n" response to terrible imaginings).
Tuesday, November 13, 2007
Wifred Hahn (SafeHaven) gives his reasons for thinking that, post-bubble-burst, American fundamentals will improve, at least for a while.
Is the US going through a bit of slow-down ... a bit of currency trashing? Yes, of course. It is deserved. But economic adjustments will now occur, feeding through to other world economies. Gradually, the trade (non-energy) deficit will shrink. Once foreign equity markets begin declining significantly in anticipation of a slowing global economy and the USD has put in a bottom, it is possible that a torrent of foreign-invested portfolio capital will return to the US. Some estimates put the value of this foreign investment at over $1.5 trillion (and rising as the US dollar falls.)
From our perch in Canada, the next few months likely present the lowest risk buying opportunity of US dollars in at least a century. US "large-cap" companies with significant overseas operations are also attractive on a relative global basis as these are best able to weather an economic slowdown. America will survive for a few years longer.
With any routine, selfish habits creep in: the consumer pays, but the service revolves around the provider. Even in the coldest weather, the driver, shut in his heated cab, would leave the passenger door open at each stop, including the long pauses at clock stages; this saved him having to punch the control for the door if a new fare should arrive. If the driver got hungry, he might pull up outside a fish and chip shop and get a hot meal to eat off his dashboard as he drove. On the 16 route, there was an green-painted cast-iron Victorian public urinal just off the Soho road, where the driver would stop off when he felt the need - leaving the bus door open, as usual.
"As above, so below", the alchemists said; and vice versa. I read a long time ago how British elections tend to be timed around economic boomlets; and more recently, how the American economy revives every four years to fit the fixed-term Presidential elections. Among stockbrokers, it used to be said "Sell in May, and go away", so the market suited the requirement for gentlemen to relax in summer; and see how even now, the Dow and the FTSE rise towards the end of the year, when traders' annual bonuses are calculated - the Tech boom of 2000 being an excellent example.
The doomsters don't tend to set timetables - maybe they've learned that from the Jehovah's Witnesses (I don't know how often The Watchtower showed us that the end was possibly going to come very soon - a favourite image was a runaway train heading downhill to a bridgeless chasm). So I'll my neck out instead and make a prediction: the Dow will rise until bonus time, then flutter nervously until the 2008 Chinese Olympics; then there's the US Presidential election to get through; then we'll have the reckoning. A new president will be able to say, "I've had a look at the books, gentlemen, and I hadn't realised how badly the company was managed." And at last, the corrective process will really begin.
That's my chance to join the ranks of the comprehensively wrong. Place your bets.
George Kleinman addresses this problem and suggests a relativistic approach: compare the historical price ratios of different asset types. He admits that you can play this game forever, but it's not his fault that governments have corrupted our traditional yardstick. All you can hope for is some sense of trend, which is what all this rune-reading is for, anyway.
His conclusions: gold looks undervalued against oil, and not overvalued against either the Dow or silver. His trend feeling: a coming economic and stockmarket downturn.
Financial Sense may be run by investment advisers, but I feel their commitment to public education goes well beyond self-interest. It's a sort of University of the Air.
Monday, November 12, 2007
BCA Research in Montreal thinks that "sovereign wealth funds" owned by Asian and Arabian governments will control some $13 trillion by 2017 – "an amount equivalent to the current market value of the S&P500 companies."
Sunday, November 11, 2007
Ancestral voices prophesying war!
There is a kind of thrill in contemplating destruction - it's a whorl in the grain of human nature. Jeffrey Nyquist indulges this tendency in a piece about Robert Prechter Jnr's views on mass psychology and the markets, and our facing possibly the biggest economic depression since the founding of the American Republic.
You know how everything seems so bright when you get out of the cinema?
As Japanese currency is getting out of risky investments and heading home, Brady Willett lists the factors putting the dollar under downward pressure:
In recent weeks the markets have speculated that the Saudis may drop their peg, that other Gulf states and sovereign wealth funds in the area are lightening their exposure to the dollar, and that OPEC continues to eye settling in Euros instead of dollars. Also recently China and Japan dumped a combined $33 billion in U.S. Treasuries (in August), and Chinese officials have continued to discuss reducing exposure to the dollar. Suffice to say, that against an already uncertain backdrop U.S. dollar holders are coming forward threatening to fan the flames and talk of the dollar era being over is running hot is hardly encouraging. Less encouraging still is the fact that those who previously cheered the dollar’s decline are turning scared.
He wonders whether we may see an emergency support plan for the dollar.
Saturday, November 10, 2007
Pearce Financial (Financial Sense, yesterday), like Marc Faber, believes that the East is dangerously overheated and deflation could hit commodities as well as shares; also, the dollar could rise again, and the Japanese yen might break free from its moorings.
I'd like some help with understanding this last, as tides of returning dollars and yen would seem to argue inflation in their home countries.
Karl Denninger (Market Ticker, yesterday) explains it as a relativistic effect:
Our problems are bad. The problems that will be faced overseas are FAR WORSE. Overseas economies are dependant on us, not the other way around. When this sinks in the other currencies against which the DX is measured will collapse; this will appear to raise the dollar, but in fact it is the sinking of other currencies.
"Tom the cabin boy smiled, and said nothing."
Friday, November 09, 2007
The Mogambo Guru vents his muscular spleen on inflation-capping for pensions in Britain. Quite right. The old are spending the kids' inheritance royally. There's so much talk of the selfishness of the young, but the oldies really knock the lights out in that competition.
... real estate is not like buying 100 shares of Cisco in early 2000 and watching it drop 80% - everyone loses the same amount, very unlike the real estate market. The point – the real estate market is not like the stock market bubble and will take a much longer time to work out – our best guess is an initial bottom is likely in 2009 and we won’t see a meaningful turn higher in overall real estate prices until sometime 2011-2012.
Similarly, there is opportunity for people to cut back on energy consumption in response to higher oil prices.
He expects a bit of a pullback in commodities and precious metals, and currently tends to prefer bonds to stocks.
He thinks it's not too late for the US to recover its economic base. I hope the same for my country.
Thursday, November 08, 2007
... There has been a lot of discussion among gold investors on gold manipulation by central banks... I am not quite into the old conspiracy story, but financially I see incentives and benefits for central banks to lease and loan gold to bullion banks during gold's bear market... However if gold is on [an] explosive move like right now, bullion banks will suffer heavy losses when they buy back gold in the open market. Whether this act can be called manipulation and conspiracy? Maybe, but it was probably more financial interest driven, and suppressing gold as secondary goal.
... in May 1999, the then Chancellor Gordon Brown (now Prime Minister) of Britain sold 415 tonnes of gold, almost 60% of its total reserves, leaving Britain with only 300 tonnes. 11 days earlier, Brown had requested the IMF to sell $10 billion of its gold on the open market too. So far no real reason has been officially offered for selling gold in such a hurry... According to Mr. Schoon, it is rumored that British was acting probably in a joined effort with US Fed to save a large Wall St bullion bank which had a 1,000 tonne short gold position loaned by the US government. And it was at the brink of disaster when gold took an unexpected rise at that time in 1999 and the tide was turning against them. If true, this bailout is no different than LTCM and the current subprime bailouts, except the US government had absolutely no choice in this case since it had to rescue the bank and get its gold back.
... No matter what happened then, today it seems: 1) Rise of gold is a nightmare for all CBs since they have been the net sellers; 2) All CBs have less gold than they claim to have, and will run out of ammunition to suppress gold and eventually be defenseless to protect their paper currencies; 3) At the end all CBs will have to turn themselves into net gold buyers from sellers.
But why doesn't the pound buy even more dollars? After all, look how gold has soared against the buck. The answer is that most currencies are competing in a devaluation race, as Chris Puplava shows here. The UK is ramping up its money supply at a similar rate to the USA's, but we don't hear so much about it on this side of the water - I think middle-income Americans are generally more clued-up on finance and... is it fair to suggest that they're more patriotic?
For a long time, we've been buying from poor people around the world. They've been storing up the money - you do, when you know how hard you've worked for it and don't want your children to go back to the fields - and now they're not quite so poor. Unemployment is on the rise here, but our trading partners aren't going to pay the Social Security bill for us.
So it's more taxes, or printing more money. The difference between taxation and inflation is the difference between robbery and theft. Theft is less confrontational.
Ron Paul was talking about digital gold currencies five years ago - now watch for the progress of the gold dinar.
During discussion by the Senate of a serious piece of legislationconcerning the psychology profession last week, Sen. Duncan Scott,R-Albuquerque, proposed an amendment. It says:
"When a psychologist or psychiatrist testifies during a defendant's competency hearing, the psychologist or psychiatrist shall wear a cone-shaped hat that is not less than 2 feet tall. The surface of the hat shall be imprinted with stars and lightning bolts.
"Additionally, a psychologist or psychiatrist shall be required to don a white beard that is not less than 18 inches in length, and shall punctuate crucial elements of his testimony by stabbing the air with a wand. Whenever a psychologist or psychiatrist provides expert testimony regarding the defendant's competency, the bailiff shall contemporaneously dim the courtroom lights and administer two strikes to a Chinese gong."
Usually, anything proposed by Scott - whose hard-core conservatism is like cod liver oil for the Senate's Democratic majority - goes nowhere. But his wizard-hat amendment was warmly received and passed by a voice vote. It is now part of Sen. Richard Romero's psychologist bill, as the measure moves to the House.
Jokes this good usually come with a rider. It was subsequently reported:
The bill, with the wizard amendment, passed the Senate by voice vote and cleared the house by 46-14. Unfortunately, Gov. Gary Johnson vetoed the legislation.
It's extra fun when the authorities play along for a while.
That reminds me... Back in the 1970s, a couple of Oxford undergraduates proposed the building of a full-sized pyramid in one of the University's parks, as a monument to themselves. It went to the University's Hebdomadal Council and the proposal was narrowly defeated (5-4, they say).
Wednesday, November 07, 2007
To put it another way, the Dow has stood still and gold has risen 29% (or 112% p.a. annualised) over the last 123 days.
Tuesday, November 06, 2007
But what use are the charts? The wiggly lines on them don't show the full context: the wild monetary inflation and cumulative trade and budget deficits of the past few years, which (if we believe the analysts) are unprecedented.
Instead of drawing conclusions from the graphs, we should be asking questions - especially, why hasn't gold zoomed more and earlier? After all, governments must feel that gold is at least a vestigial or potential measure of the worth of their currency; otherwise, they wouldn't be storing thousands of tons of the unproductive stuff in expensive facilities. So, why hasn't gold acted as the thermometer of this financial fever of the last, oh, seven years?
One answer is that the world gold market is small enough to be deliberately distorted. Frank Veneroso could be right: central banks may have been secretly drip-releasing portions of their bullion reserves. That would be to reassure us - or rather, kid us - that everything's under control. Since the gold price matters, it becomes important for officials to manipulate it, and so (according to this theory) the charts will actually tell us nothing.
Until the reserves get so low that the game can't continue. Central banks will suddenly get vertigo and freeze-cling to what they have left, and the gold market will explode, as confidence in the currency starts to collapse.
And Veneroso cottoned on early, simply because the scam worked too well. The smile was too bright, the walk a little too confident. If he's right - and I more than half suspect he is - we needn't bother with the past price data, or with worries about short-term corrections.
Monday, November 05, 2007
Sunday, November 04, 2007
It’s almost like everyone is holding their breath to see what happens next.
As we know, Marc Faber recently suggested we might wish to stand on the platform rather than board any of the asset trains.
Stocks will tend to fall in anticipation of higher interest rates to combat rising inflation. The price of long term bonds will fall as investors will demand higher yields in an inflationary environment.
Yee says that the investor may be forced to consider choices that would normally be regarded as rather risky or sophisticated: commodities, precious metals and shares in foreign (less inflation-prone) countries. This is the paradox: taking a risk may be the best form of playing safe.
But before that, perhaps we could increase our holdings of government-backed inflation-linked savings bonds, something Yee doesn't mention. A lot depends on how the government defines inflation for the purpose of calculating our returns, but it should be fairly reasonable, one would hope.
The writer points out a final irony: low interest rates and high inflation support real estate prices.
Saturday, November 03, 2007
... The manipulation of gold prices was first noticed in the 1990s by Frank AJ Veneroso, one of the world’s top investment strategists. As more gold bullion came onto the market depressing the price of gold, Veneroso believed the central banks were its source.
When queried, central banks denied Veneroso’s assertions. Central bank records, in fact, showed their gold reserves to be stable. But Veneroso was right and the central banks were lying. The gold moving onto the markets was indeed coming from central banks via their co-conspirators in capping gold, the investment banks.
Investment banks were borrowing central bank gold at 1 %, selling it thereby depressing gold’s price and investing the proceeds in higher yielding government debt; and, as long as the price of gold moved lower, the profits of investment banks increased (see The Manipulation of the Gold Market, http://www.gata.org/node/11).
The International Monetary Fund was complicit in this deceit as IMF regulations allowed central banks to count gold “swapped” or “loaned” as still being on deposit in their vaults. Veneroso now believes that up to 50 % of gold reserves claimed by central banks have already been sold—a fact that will be instrumental in our collective bet against central banks in their house of cards...
... Veneroso believes central banks sold 10,000–15,000 tons, equal to 320,000,000 to 500,000,000 ounces of gold over the last 20 years. Just imagine how high the price of gold would be if the central banks had not sold this staggering amount.
Today’s $800/oz. gold is a bargain—as is $2,000/oz. or $3,000 oz. gold—a bargain that exists only because central banks literally sold thousands of tons of our gold onto the market in their attempts to prove gold a poorer alternative to debt-based paper currencies.
Over a year ago, Veneroso estimated central banks had less than three years supply left to cap gold’s price. He also predicted the central banks would capitulate before then, keeping what little gold they had left. When this happens, the central bank subsidy of gold will end and the price of gold will skyrocket.
On the same site, Adrian Ash (November 2) looks at gold's disadvantages and decides that it is best defined not as a commodity, but as a currency:
Given that gold doesn't pay you anything in yield, interest or dividends – and that it does not have any real industrial value – the "investment motive" for gold can only be explained as desire to quit other assets. Or at least, to hold an asset entirely free from what drives other asset markets up and down.
... perhaps the gold market says investors are looking for protection against falling bond, real estate and equity values – as well as a falling US Dollar and slumping US economy.
So they are buying protection ahead of time. And to do that, they're buying gold – a wholly different asset from everything else.
One for the speculators. Meanwhile, perhaps the non-rich among us should take the precaution of paying off overdrafts, credit card debts and any other loans that can be called in at short notice.
Doug Noland at Prudent Bear (November 2) agrees that bigger bangs are coming:
... as an analyst I must contemplate the likelihood we have entered a uniquely unstable monetary environment. In short, the backdrop exists where incredible dollar liquidity flows could be released (from myriad sources) upon key things (notably energy, food, metals and commodities) already in severe supply and demand imbalance. Again, how much are the Chinese willing to pay for energy? The Russians for food? The Indians for commodities? How much will investors be willing to pay for precious metals as a store of value? How aggressively will the speculators "front run" all of them? Can the Fed afford to fuel this bonfire?
... The least bad course for the Federal Reserve at this point would have a primary focus on supporting the dollar and global financial stability.
Whereas the big banks and investment houses can hide behind tier three and pray for a market recovery, the investing community cannot. Pension funds, institutions and money market funds, have fiduciary investment covenants which direct them to sell securities which are below certain ratings levels. Once an investment falls into the lower rungs on the investment scales they are bound by their own investing rules to divest the assets.
Tens of billions of dollars of securities have been downgraded since the beginning of October and this will require that they be sold in a timely manner. Once those securities hit the markets we will know their true value, and it won’t be pretty. The super SIV will quickly become an exercise in wishful thinking as their “high quality” paper becomes junk in the maelstrom of liquidation which increases every time a security is downgraded. The super SIV’s whole reason for being was to prevent fire sales and price discovery.
I overheard a classroom assistant talking about her monster mortgage and how it's gone up another £300 a month - just as the Council is planning to cut the pay of thousands of workers in order to tackle its huge budget deficit. Should she sell? Just as everybody else is considering the same course of action?
We look at our situation and grumble that we're stuffed, but Dr Housing Bubble (Financial Sense, yesterday) demonstrates how we're force fed with credit and high prices at the front end, too.
The figures will differ from one person to another. Do your own math, and work out what you should do - soon.
... says Genesis (Karl Denninger) on his site, Market Ticker yesterday. He has already organised a petition, and is now calling for a shatteringly large class-action suit against American banks.
November 2: Dow at 13,595.10, gold $806 per ounce. Since July 6, Dow has appeared to hold its ground, but the "gold-priced Dow" has dropped to 10,925.83 - a fall of over 49% annualised. And at this rate, gold will have doubled in dollar terms by July 2008.
Robert Gottliebsen in Australia's Business Spectator (Thursday) gives thanks for Ben Bernanke's inflationary rescue of the banking system, but points out that the flight from devaluing US securities is driving demand for assets elsewhere. And there are longer-term consequences to face:
Before the latest US crisis developed my friends in China told me that many Chinese manufacturing businesses would try to raise prices by 10 per cent in 2008 -- probably after the Olympics. That determination will now be intensified because the manufacturers are not only receiving lower returns but are being forced to pay more for oil and commodities. Those seeking shelter from the US dollar will drive up prices.
Bernanke’s actions, even though they are justified, are going to inflame US inflationary pressures. So later in 2008 and in 2009 he will need to reverse the current process and increase interest rates. That will not be good for stock markets or commodities because it will reverse the current forces. But just how serious it will be for the US will depend on whether the current Bernanke medicine worked and the banking breakdown was repaired.
I think there is a chance it will work because rising stock markets are a powerful drug. But no one can be certain, and this is a very dangerous period.
Friday, November 02, 2007
Fiat currency can be expanded at will, but in a credit crunch can contract as easily, so I've previously nicknamed it "twang money". But it turns out there actually once was a medium of exchange known as "twang money" - the Hungarian pengo. It ended up as the worst case of inflation in history: someone writes in to today's Daily Mail (page 77) to say that by 1946, all the Hungarian banknotes in circulation, taken together, were worth one-thousandth of a US cent.
However, consider the potential uses of many tons of durable paper with run-resistant colours: wallpaper, sweet wrappers, firelighters... So for me, the story is about the buying opportunity when pessimism ignores intrinsic value.
It's said that the Chinese pictogram for "crisis" combines the ideas of "threat" and "opportunity". Hutchinson offers ideas for those who want to take advantage: invest in...
- natural resources
- Canadian oil
- - and a Korean bank.
Thursday, November 01, 2007
The results are almost exactly divided: 8 at the top end for equities, 8 at the bottom for bonds, 7 voting for a 50:50 split, and one for 65% equities/35% bonds.
... From my perspective, almost all the items above slightly favor the reflation trade over gloom-and-doom. However, the edge is small enough to remain diversified while keeping a close eye on the stock market's 50 and 200-day moving averages.
This would chime with Jim Puplava's assessment that "more of the same" will buy us a little more time until the system is exhausted, which he expects to happen around 2009 onwards.