Thursday, December 31, 2009

Borrow and print

Short term noise often tends to obscure the longer term realities and the fact is that the US is now firmly on the path to financial decline unless an abrupt, about face occurs in regards to our economic and fiscal policies. I have said it before and will say it again; if all that was necessary to produce lasting prosperity was to ramp up the printing presses and borrow like a banshee, nations of the past would have figured it out long before we did and would have successfully implemented it. That those nations that have attempted to do so are now in the ashbin of history or learned enough to avoid doing so again, is proof enough that it is a foolish, irresponsible and destructive path to take.

- Dan Norcini, December 29, 2009

Warren Buffett on inflation

This author needs no introduction, and his concerns need no preamble.
Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

As much as I agree with Mr. Buffett on the abovementioned scenario, I do disagree with this statement:
Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

Actually, studies have been performed on the thresholds of deficits and debts as precursors to inflation and currency crises. See my previous blog on this topic.

Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has studied all the major cases of hyperinflation since 1980. His conclusion: The tipping point occurs when a government’s deficit exceeds 40% of its expenditures.

Guess what? The U.S. will hit the 40% mark in 2009.

Mr. Buffett may be wrong on the existence of researched hyperinflation data, but he is in agreement that the US is in danger of entering a period of uncontrolled deficit spending and eventual banana republic-style inflation.

Monday, December 28, 2009

The Socialism experiment

We are about to find out how socialism works.

Sunday, December 27, 2009

John Williams of

John Williams, founder of the website, is infamous for publishing true unemployment and underemployment numbers. He is now oft-quoted and cited even among government economists, so his statistics have legitimacy behind them. He is not viewed as a wild-eyed radical extremist, which make his forecasts extremely discomfiting, if not alarming.

2009 Quarter 3 GDP numbers

Officially reported as 3.5%, 2009 Quarter 3 GDP numbers were then revised to 2.8% several weeks later, as our national's gross domestic product did not grow as fast as originally measured. Several weeks later, economic growth was revised downward again to 2.2%, much of the gains coming from inventory replenishment and the one-time Cash-for-Clunkers auto rebate program.

With most recoveries from deep recessions, GDP growth on the other side of the valley approaches a positive 6 to 8%. It will be interesting to see what the current quarter economic growth numbers will be.

Friday, December 25, 2009

Tuesday, December 22, 2009

Christmas in Vegas

After a few days of intermingling with folks in Las Vegas, I've come to the conclusion most Americans are aware of our nation's problems, but they refuse to think much about it, hoping our economy will somehow transform itself and recover. Call it the Santa Claus effect. Well, I hate to be the "Scrooge", but this editorial unfortunately sums up the state of our country accurately and honestly.

Thursday, December 17, 2009

Ben Bernanke

By Olivier Garret, CEO, Casey Research

Ben Bernanke is a dubious choice to be named “Person of the Year” by Time magazine. While Time’s Managing Editor Richard Stengel credits him with recognizing early and reacting appropriately to the ongoing financial crisis, in reality, he was wrong time and again with both his predictions and his remedies. Just remember these gems:

* On July 1, 2005, Bernanke stated without hesitation that we were not experiencing a housing bubble: “I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.”

* November 2005, on derivatives: “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.” And “the Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.”

* February 15, 2006: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

* February 2008: “I expect there will be some failures of smaller banks” (Bear Stearns collapsed a couple of weeks later).

* But then again, I guess in regards to his nomination we are talking about achievements in 2009. That was the year Bernanke said, "Currently, we don’t think [the unemployment rate] will get to 10 percent."

This is the same chairman of the Federal Reserve who told us that Fannie and Freddie were “adequately capitalized” and “in no danger of failing.”

Unfortunately, he has not just been wrong about housing, unemployment, banking, and derivatives – his policies have directly contributed to all of the problems we now face.

High unemployment and the weak dollar threaten to further undermine our economy, yet his policy is to just keep borrowing. The massive debt his policies have foisted on the American taxpayer is weakening the U.S.’s position as global economic leader and hurting already tenuous relations with foreign governments. Bernanke has supported the policies of Greenspan and our current and previous administrations – the very policies that got us into this mess. He has supported the leveraging of the American economy to rescue companies long past saving and the borrowing of billions from foreign governments to line the pockets of corrupt investment bankers.

I could recommend a few alternative names for runner-up, if Time’s criteria are really as dubious as they appear:

* Lloyd Blankfein from Goldman Sachs for robbing taxpayers legally

* Rick Wagoner of GM for taking the world’s largest car maker to bankruptcy in a quarter-century

* Tim Geithner for ensuring that all of our bankers prospered during the worst financial crisis since the ‘30s

* Tiger Woods for providing the nation with great dinner conversations and helping to spur tabloid sales.

Bernanke is insistent on using inflation to make our personal debts seem small, all the while setting the country up for a much larger disaster long term. Bernanke is borrowing from Peter to pay Paul… and robbing taxpayers to pay Peter.

As you may have noticed, the government will not save you from the reverberations of a declining U.S. economy. You’ll have to take matters into your own hands.

Jim Rogers

Legendary billionaire investor and hedge fund manager Jim Rogers gives his summary on asset classes in a CNBC interview. It is instructive to watch the whole video to the end.

Rogers is especially critical of Fed Chairman Bernanke, US Treasury Secretary Geithner, and President Obama for printing too many USDollars, and castigates central banks worldwide for turning on the printing presses.

The only disagreement I have is on owning certain foreign currencies. He suggested the Swiss Franc, Japanese Yen, and Canadian Dollar. The Swiss Franc has traditionally been a stable currency due to their conservative monetary policies, but even Swiss banks have veered away from financial discipline, making bad real estate loans to the Baltic States and eastern Europe. Japan is in worse fiscal shape than the US, as their national debt has grown to monstrous levels relative to gross domestic product. On the other hand, the Canadian Dollar is a safe bet, as they are a resource-rich country which will benefit from the appreciation of hard assets (precious metals, rare earth metals, energy). The Brazilian real, Australian Dollar, and Norwegian Krona are other foreign currencies which should do well going forward, since they are creditor nations with sound fiscal policies and exporters of natural resources.

Disclosure: no position in foreign currencies, long gold and silver mining shares, long natural gas pipeline master limited partnerships.

Wednesday, December 16, 2009

Ben Bernanke, TIME's Person of the Year

In a sign that the end is near, Federal Reserve Bank Chairman Ben Bernanke was voted "Person of the Year" by Time Magazine. This is ironically similar to President Obama winning the Nobel Peace Prize--and then ordering 30,000 more American troops into Afghanistan.,28804,1946375_1947251,00.html

Bernanke, along with former Fed Chairman Alan Greenspan, have done more harm to the US economy than is fathomable. He may have temporarily thwarted a financial meltdown in 2008, but has only kicked the can down the road, creating the greatest financial bubble in the history of mankind--the US Treasury bond market. This bubble will also eventually burst, as the Fed funds rate can't drop below zero. Instead of preventing such a crisis, he is now credited with saving us. Here is a truer picture of his missteps and missed calls:

Person of the year? I don't think so. This guy missed the call on the biggest real estate and stock market bubble in 80 years--destroying trillions of dollars of wealth in the process. Americans and citizens worldwide are jobless as a result, subject to a reduced standard of living. Yet Bernanke is a hero?

Tuesday, December 15, 2009

Al Gore on ice caps

Al Gore, inventor of the internet, and of "An Inconvenient Truth" fame, at some more shoe leather in Copenhagen.

In his speech, Mr Gore told the conference: “These figures are fresh. Some of the models suggest to Dr [Wieslav] Maslowski that there is a 75 per cent chance that the entire north polar ice cap, during the summer months, could be completely ice-free within five to seven years.”

However, the climatologist whose work Mr Gore was relying upon dropped the former Vice-President in the water with an icy blast.

“It’s unclear to me how this figure was arrived at,” Dr Maslowski said. “I would never try to estimate likelihood at anything as exact as this.”

Mr Gore’s office later admitted that the 75 per cent figure was one used by Dr Maslowksi as a “ballpark figure” several years ago in a conversation with Mr Gore.

Global warming?

Bill Bell, a Canadian geologist, took out a full page ad in a local Canadian paper:

It is mind boggling that millions of people around the world should get so concerned about a temperature increase of one degree over the past one hundred years that they are prepared to live in poverty if necessary to try to correct it. Why are responsible people not speaking out? Millions could die of economic starvation rather than global warming.

Et tu, Euro?

Many financial pundits have declared the eventual death of the USDollar as the world's reserve currency, as the Fed continues it's currency debasement program (despite claims of a "strong dollar policy"). Some have taken this cue to pile into the Euro, believing it to be a safe haven from USDollar destruction.

No so fast. It seems the southern nations in the EU are having huge debt problems--much like its ally in north America. This includes Greece, Italy, Spain, Portugal, and Ireland (albeit a northern European country). Their sovereign debt has either been downgraded, or in danger of imminent downgrades, exacerbating the debt problems as their borrowing costs increase with each downgrade. These indebted countries want more Euros, but the more fiscally sound EU countries refuse to print more currency, desiring currency stabilization. Hence, the bifurcation and increased tensions among EU countries.

If Greece were to opt out of the Euro in order to resolve their sovereign debt problem (it certainly isn't the correct long-term solution, but it temporarily alleviates their fiscal problems), expect other nations to follow suit, putting the Euro itself in danger of being scuttled.

These are indeed interesting times. So what other currencies are acceptable havens in a world of cascading currency debasement? Countries rich with natural resources should perform relatively well in a global credit contraction. The currencies of Norway, Canada, Australia, and Brazil (how things have turned around--Brazil's real has traditionally been an inflation hot potato) are good candidates.

But the ultimate store of value--real money with no counter party liability, leads us back to gold and silver.

Another doomsday prediction

This forecast is from Matterhorn Asset Management, a Swiss-based wealth management firm. Obviously, Egon von Greyerz ia a proponent of the Austrian School of Economics, and a disciple of Ludwig von Mises.

Monday, December 14, 2009

Energy costs

Currently, these are the approximate costs for the following energy sources (in cent/kilowatt hours):

solar - 18
crude oil - 10
natural gas - 7
wind - 6.5
geothermal - 6.5
coal - 4.5
nuclear - 4.5
hydro - 4.5

Geothermal energy generation is impervious to weather conditions (it doesn't require wind or sunshine) so power generation can occur 24 hours, 7 days a week. Energy loads are more predictable and efficient, and geothermal energy plants require less capital cost. Since geothermal energy is already economically feasible, it doesn't need government subsidies to remain viable. However, our government needs to provided more incentives to tap into this ultimate green energy source.

US financial disaster (part 2)

Porter Stansberry's rant on the US financial disaster (part 2):

Sunday, December 13, 2009

John Paulson's new gold fund

To view this Wall Street Journal article you may need a subscription:

Highlights, for those who can't read the full article:

One of the biggest investors is placing a huge new bet on gold.

John Paulson, who scored about $20 billion of profits between 2007 and early 2009 wagering against the housing market and financial companies, is launching a hedge fund dedicated to buying up shares of gold miners and other bullion-related investments, according to investors.
The affinity for gold represents something of a shift for Mr. Paulson, who gained recent recognition as a contrarian. As the dollar has fallen, investors lately have flocked to gold, which traditionally served as an alternative to paper currencies. As the supply of these currencies has risen lately amid government efforts to stabilize global economies, some investors believe their value will fall, helping gold.
Mr. Paulson at Tuesday's investor meeting countered that the bull run was only beginning for gold.

He noted that central banks around the globe have gone from sellers of gold to buyers, and that the global supply of gold is constrained.

While harmful inflation isn't on the horizon, he said, Mr. Paulson argued that there is a risk of a burst of inflation down the road. That's because in the past there's been a lag between a surge in money supply and higher inflation. Gold often does well when inflation rises.

Mr. Paulson told investors that the Federal Reserve will prove reluctant to raise interest rates, given the weakness in the economy, which also could pave the way for higher inflation, at least at some point, another reason for his growing conviction about gold.

Worth about $6 billion, Mr. Paulson said he was starting the new fund in part to give himself more personal exposure to gold, according to an investor at the meeting.

The embrace of gold is relatively new for Mr. Paulson. The hedge-fund manager, who mostly invested in merger deals until detecting a housing bubble in 2006, had done no gold investing as of a year ago.

US financial disaster (part 1)

Porter Stansberry's rant on the US financial disaster (part 1):

Saturday, December 12, 2009

Recessions and violence

This article is not positive--and not surprising, linking violent crimes with recessions.

Hopefully, citizens keep cooler heads in times of financial crisis.

Senator Harry Reid accuses the Chinese

Senator Harry Reid is accusing the Chinese government of unscrupulous currency manipulation and intellectual property theft. While I can agree on the latter, the currency manipulation accusation seems shallow, considering the Chinese are merely pegging their yuan to the USDollar. Currency manipulation by the US Treasury and the Fed is causing manipulation in the yuan, ex post facto. Reid can't accusing the Chinese of currency manipulation without accusing the US government of doing the same.

Also, it's ill-advised to make blind accusations toward your creditor. They may just stop lending the US government any capital, driving up interest rates in the process. Reid and US Treasury Secretary Tim Geithner should consider changing their accusatory tone to one which is more conciliatory.

US Treasury bills

In his December letter to investors, Bill Gross, manager of the PIMCO, the world's largest bond fund, laments his cash's 0.01% yield. Gross says at that rate of return, it would take 6,932 years to double his money.

Take into account the ravages of inflation (and taxes) over time, and the rate of return is negative. It's equivalent to giving the US government money, so they can hold it for you. To make matters worse, that US government is also bankrupt.

The only consolation is the holding period for Treasury bills is 3 months. But to tie up your money for 30 years, only to have it yield 4.3%, is insane to me. But that's exactly what buyers of 30-year US Treasury bonds were doing several months ago. Inflation alone wipes out bond investors. Even with a weakening economy, if demand for long-dated US bonds remain tepid, yields have to increase to attract demand. We saw that last week.

A weak economy results in low bond yields, but any uptick in economic activity would cause yields and interest rates to rise, causing bond prices to decline. That's the bubble I'm expecting to burst: long-expiring US Treasury bonds.

Friday, December 11, 2009

Servicing debt payments

According to Darryl Robert Schoon:

In the early stages of capitalist systems, interest and principal can be serviced out of the debtor’s cash flow. In the final stage of “mature capitalist systems”, they cannot.

Capitalism’s final stage is what Minsky calls “ponzi-financing”, when debt payments can only be made by additional borrowing. This is what the US, the UK and Japan are doing today, having to borrow against tomorrow in order to pay yesterday’s bills.

Government salaries surging

There's no recession in the Federal government. Just as millions in the private sector are losing jobs, or earning considerably less taking jobs just to make ends meet, government salaries are bulging.

It's befitting to see government officials denounce Wall Street's high salaries and bonuses. Perhaps they should also talk to the mirror.

Wireless power

This is an awesome demonstration of wireless electricity. It's green, it reduces our dependence on foreign energy sources, it reduces our wiring rat's nest, and it will create jobs.

Smoking and obesity

The benefits of the anti-smoking campaign are paying off, as the life expectancy of the average American has increased. However, obesity has surged, and will likely undermine any life-extending benefits we have achieved from smoking cessation.

Studies show that at current rates, 45% of Americans will be obese by 2020. It is time to stop smoking AND stop over-eating.

This will reduce healthcare costs by billions of dollars, extend life expectancy, and improve overall quality of life.

Thursday, December 10, 2009

Doug Casey on the Roman empire

Along with the Greeks, the Romans form the base of Western civilization. We know a lot about Rome now, and they were people exactly like us. And the rise of Rome does in many ways parallel the rise of America. Its rise, its peak - and at this point I think you can even see its decline reflected in the distant mirror of Rome.

We see the same change from a republic to a highly bureaucratized state with tentacles all over the world and great importance placed on the military. The population relying on welfare (after the time of the conquest of Egypt by Caesar, most of the grain and olive oil, the two big commodities of the ancient world, were no longer grown in Italy; they were imported from Africa and given for free, or nearly free, to the people in Rome). Even what went on in the Circus Maximus, the Coliseum, and their many copies in smaller cities, has its parallel in today’s massive football events - not to mention cage fighting and other grisly sports. The big one, of course, is the gradual destruction of the currency.

Quite interesting to me is that in the days of the republic, Roman coins portrayed mythical figures, like gods and goddesses, and ideal concepts. They changed to portraits of the emperor after Caesar.

In the U.S., 1913 - which was a pretty bad year overall, with the initiation of the income tax - was the year the first coin with a dead president’s head on it was introduced, the Lincoln penny. Before then, we only had things like Liberty, Indians, buffaloes, etc. on our coins. Since then, all our coins have had dead emperors on them. We started out with semi-mythic figures like Washington and Jefferson. But now we do the recently dead - Roosevelt, Kennedy, Eisenhower.

It’s simply wrong to put the features of your rulers on the coinage. And the Romans, before Augustus, agreed. And, of course, gold was taken out of daily circulation in 1933, silver in 1965, and copper from the penny in 1982.

Nothing new.

-Doug Casey

A contrarian's dilemma

From Tocqueville's John Hathaway, on the topic of gold:

Read the appendix to gain historical perspective.

Jim Cramer--trouble brewing?

We all know Jon Stewart called Jim Cramer out on the carpet on his comedy show. But things are getting serious at Cramer's They've already been removed from the Russell Index of microcap companies, as the market capitalization was below minimum threshold levels. And they are delinquent on their 10-Qc regulatory filings for 6/30/09 and 9/30/09.

Also, note the mass exodus of key executives and directors:

Caveat emptor.

Wednesday, December 9, 2009

BioCryst revisited

Shares of BioCryst Pharmaceuticals (BCRX) have declined over 40% from its peak as fears of the complicated H1N1 pandemic flu virus have waned, but recent developments may be bullish for the investigational drug company.

According to this article, the CDC is receiving a request for the antiviral Peramivir at a rate of one per minute, under the FDA's Emergency Use Authorization (EUA). It's a convoluted way of ordering Peramivir, but for now, it's the only method for doctors to obtain the life-saving drug for critically ill patients.

Green Cross, a marketing partner for BCRX's Peramivir, recently received an EUA for South Korea.

Former CEO and Chairman of Glaxo and former Vice Chairman of Squibb Charles Sanders was elected to BCRX's Board of Directors. This could signal a buyout from a big pharmaceutical company.

BCRX partner Shionogi has received fast-track review designation in their quest for regulatory approval in Japan. This gives Peramivir at least a year head start in Japan, as Peramivir is still undergoing Phase III clinical trials in the US. Approval in Japan for Peramivir should occur in the first half of 2010.

Disclosure: long BCRX shares.

Currency revaluation in North Korea

In North Korea's case, a currency revaluation means a complete currency collapse. Iceland learned this last year, and many more countries could in the near future.

This is what happens when a financial system and the masses rely on a decrepit paper currency.

Socialism and Czars

According to Casey's Daily Report, here are 3 profiles on our "Czars":

Carol Browner – “Climate Czar”

Carol Browner's official title is “Assistant to the President for Energy and Climate Change.” She formerly served as Environmental Protection Agency administrator during the Clinton administration and was Florida secretary of the environment.

Browner was a member of the Commission for a Sustainable World Society at Socialist International, a group that Discover the Networks reports is the "umbrella for 170 'social democratic, socialist and labor parties' in 55 countries."

The Washington Times explained Browner's group called for "global governance" and asserts rich countries must shrink their economies to address climate change.

Cass Sunstein – “Regulatory Czar”

According to Cass Sunstein, administrator of the White House Office of Information and Regulatory Affairs, global climate change is primarily the fault of U.S. environmental behavior and can, therefore, be used as a mechanism to redistribute the country's wealth.

In a recent paper penned by the Obama czar, he advocated that U.S. wealth should be redistributed to poorer nations. (Doesn’t the U.S. government already do this to a substantial degree?) He also wrote, “It is even possible that desirable redistribution is more likely to occur through climate-change policy than otherwise, or to be accomplished more effectively through climate policy than through direct foreign aid.”

Furthermore, in his 2004 book The Second Bill of Rights, Sunstein used the precedent of the Great Depression to point out that historic economic crises "provided the most promising conditions for the emergence of socialism in the U.S."

John Holdren – “Science Czar”

A longtime climate-change alarmist who has advocated ideas such as enforcing limits on world population growth, Holdren's official titles are: Director of the White House Office of Science and Technology Policy; Assistant to the President for Science and Technology; and Co-Chair of the President's Council of Advisors on Science and Technology.

Apparently, Holdren's name was in the e-mails hacked from the Climatic Research Unit at East Anglia University in the U.K., which show that some climate researchers declined to share their data with fellow scientists, conspired to rig data, and sought to keep researchers with dissenting views from publishing in leading scientific journals. noted Holdren has endorsed a “surrender of sovereignty” to “a comprehensive Planetary Regime” that would control all the world’s resources, direct global redistribution of wealth, oversee the “de-development” of the West, control a World Army and taxation regime, and enforce world population limits.

Tuesday, December 8, 2009

Greece downgraded

Greek equities and bonds tanked as their government debt was downgraded by credit ratings agencies, as fears of a default were raised. I predicted that after Iceland's economy collapsed, other countries would follow suit. Other countries at risk of default include Dubai, Ireland, Latvia, Hungary, Argentina, Venezuela, Lithuania, Ukraine, Japan, Spain, Italy, the UK, and believe it or not, the US, as all these countries are technically insolvent, burdened with too much debt. The cascading dominoes have only begun to fall...

The USDollar will eventually share the same fate as the Drachma, as do all fiat currencies.

Monday, December 7, 2009

Climate-gate in Copenhagen

Luminaries, climatology pundits, government leaders, celebrities and paparazzi (er, journalists) are gathering in Copenhagen to discuss the hazards of carbon dioxide, and how we're all going to choke on ourselves. Which means sovereign governments (and banks) will need to legislate and commercialize carbon credits to regulate said carbon emissions. Never mind such actions will guarantee financial doom first (ed. note).

Meanwhile, 140 personal jets are descending upon Copenhagen's airport. Since Copenhagen doesn't have enough limousines to chauffer around the Anthropogenic Warming intelligentsia, 1200 more limos will need to be driven in from Sweden and Germany--hundreds of miles each way. Apparently, Dr.'s Leonardo DiCaprio, Daryl Hannah, Helena Christensen, and Prince Charles can't share a cab. Besides, what celebrity would be caught dead exiting a taxi in a red carpet moment?

All told, 41,000 tons of carbon dioxide will be released during the Copenhagen Climate Summit. How's that for a green carbon footprint?

USDollar debasement

James Grant, editor of Grant's Interest Rate Observer, is widely followed by financial professionals on and off Wall Street alike, for his keen insight and witty historical references.

This Wall Street Journal op-ed clearly and succinctly maps out the history and fates of paper currencies (you may need a subscription to read the whole article):

This excerpt is particularly poignant:
Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money.

Japanese real estate bust

According to the Case-Shiller Index, which tracks real estate in the US, home prices have declined more than 30% since their peak, and more than 60% in some neighborhoods.

By contrast, since the peak in 1990, Japanese residential prices have dropped more than 90%, while commercial real estate prices--including Class A office space in Tokyo, have dropped more than 99%!

Friday, December 4, 2009

Ben Bernanke's re-nomination

US Senator Jim DeMint (R-South Carolina) grills Ben Bernanke in testimony for the Fed Chairman's re-appointment.

"Under Mr. Bernanke's leadership, the Fed has lent several trillion dollars to failing financial institutions that should have been held accountable by market forces. The total amount of these bailouts exceeds the entire annual budget of the United States. Yet the public has not been given adequate information about these bailouts. In fact, Mr. Bernanke has the led the fight against bipartisan legislation in the House and the Senate to require a full audit of the Fed so Americans know what has taken place and what mistakes have been made.

"Mr. Bernanke's failures extend beyond what critics like me of an overly powerful Fed have cited. He's even failed his own standards. During his first confirmation hearing before the Senate in 2005, Mr. Bernanke outlined what he believed were the responsibilities of the Fed. On virtually every one, whether is was containing systemic risk, promoting the soundness of our banking system, or conducting monetary policy in a way that maximized employment, Mr. Bernanke has failed. We've seen systemic risk in our financial system like never before, the soundness of our banking system has been shaken to its core, and unemployment is now over ten percent," said Senator DeMint.

GE's balance sheet

Look at General Electric's debt--$518 billion. That should scare any bean counter. They've lost their AAA credit rating, yet the government gives them cheap loans, keeping their borrowing cost at 3.3%. Even at that low borrowing rate, they have trouble covering their expenses. For reference, GM's debt was $82 billion at one point. I'm not even sure how GE Capital accounts for their bad loans and toxic assets, since the government allowed for mark-to-fantasy accounting instead of GAAP mark-to-market accounting standards.

No wonder they are selling assets like NBC Universal. Gotta keep the lights on.

Gold bull market: a bubble?

Skeptics claim the decade-long bull market in gold is a bubble waiting burst. The reasoning is that the rally in gold lacks fundamentals. Here is a counter argument given by Jim Willie.

One must suppose that skyrocketing gold investment demand and rush to diversify out of a collapsing dollar do not qualify as fundamental. And the absence of metals exchange gold inventory also does not qualify as fundamental. And the Chinese pledge to lift their gold reserves 10-fold to 10 thousand metric tonnes in eight to ten years, that is not fundamental either. And the G-20 pledges to formally move toward an IMF basket of currencies, known as the Special Drawing Rights, and away from the USDollar, that is not fundamental either. And the Saudi announcement of a phase-out of sales for crude oil in US$ terms over the next few years, neither is that a fundamental. And the grossly insolvent banks in the Untied States, England, and Europe, which are simultaneously struggling, unable to extend loans, desperately suckling from government teats, that is not fundamental either. Burnedstein plainly fails to recognize that the entire world is grasping for something tangible within the global monetary system overrun by toxic paper, and that anchor reached for is gold.

Raymond James on gold

According to the Casey's Daily Dispatch, Raymond James had the following in their report on gold:

Central Banks Banking on Gold

The major paradigm shift we have seen evolve recently is the transition of central banks from net sellers of gold to net buyers. Given the inelasticity of mine supply, this shift has significant implications for gold’s supply/demand equation over the medium term. Furthermore, the symbolic implications of central banks buying gold (i.e., indicating a lack of confidence in the U.S. dollar) should underpin healthy retail investment demand as well. We believe this lack of confidence may not be restored for several years given the extent money supply has increased in the U.S. and the extravagant levels of U.S. public debt that will be further encumbered by the building burden of an aging population and health care inflation.

We continue to believe the equities are roughly 30% undervalued versus the gold price, and as a result we recommend investors add to their precious metal equities positions. We also suggest, based on historic valuation metrics, that the Junior/Mid‐tier producers offer better upside at current levels.


Since the end of the third quarter gold and silver prices are up 16% and 9%, respectively. In absolute terms gold is up $163/oz, an impressive result; however, we would argue this is just the beginning of a longer‐term period of strong precious metal prices based on:

1. Investment demand continues to be extraordinarily strong (and we see no reason for this to change) given the loss of confidence in both the financial system and policy makers and as investors prioritize capital preservation over capital appreciation, increasing portfolio allocation to more creditworthy or “safe haven” investments, i.e., precious metals. Regaining this loss of confidence in the financial system and policy makers, in our view, will take a considerable amount of time, earning precious metals a permanent place in any prudent portfolio and underpinning prices over the longer term.

2. The specter of future inflation is building. Recall it is the fear of inflation that tends to drive the metal prices higher.

3. Declining supply – central banks have moved from net sellers to net buyers. This is a significant structural change in the gold market as central banks have been net sellers for two decades. Central banks looking to diversify their reserves in light of the rampant currency debasement have very few options available, and we would argue gold is the most attractive. It is also important to note new mine supply has essentially just been replacing aging mines. Given the long lead time between finding a deposit and actually moving it through to production is on average around 10 years, new mine supply remains largely inelastic. Adding further pressure on the supply side of the equation is the dearth of new discoveries and the increasingly challenging mine development environment.

4. All‐in costs remain high – aging mines are experiencing declining grades, and new projects tend to be of lower quality, requiring higher and higher metal prices in economic studies, which are still returning IRRs in the mid to high teens.

5. Very low/negative real rates – lowers the opportunity cost of holding hard assets. Most major countries (including the U.S.) continue to support a low interest rate environment; we suspect this will be the case for some time to come as increasing rates may derail recoveries.

Thursday, December 3, 2009


I'm one of the most un-handy people around, so this next observation is not a slam on anyone who is all thumbs when it comes to being mechanically proficient. If it involves anything more than a hammer or a screwdriver, I'm using the yellow pages to call in the help.

That aside, an occurrence this morning at my hotel breakfast bar floored me. I was in the process of buttering up my waffles next to the waffle-maker, when an Indian gentleman sauntered up next to me. He was looking at the syrup bottle wondering what to do with it. He then asked me what to do, and I briefly explained to him to pour the batter into the waffle-maker.

He didn't know how to close the top handle, and I had to flip the waffle-maker for him as well, as he had no clue. Him being Indian, I joked to him, asking him if he was an engineer. He replied "yes." Which caused me to do a double-take before gathering myself, looking to remove the slight uneasiness. I tried another joke, in order to relieve the awkwardness (at least in my mind).

Unfortunately, I proceeded to put my foot in my mouth again, asking if he was a "mechanical engineer." To which he replied with a resounding "yes" again.

Another gentleman a couple tables over let out a hearty laugh. He had heard our brief conversation, and he was an aerospace engineer. At one time, I was an electrical and computer engineer who happened to work in the aerospace industry, designing airborne radar systems for fighter jets. So the aerospace engineer and I later hit it off, comparing war stories from back in the day.

But the subject of amusement resided in the fact that here was this first gentleman who was a highly-trained mechanical engineer, yet didn't know how to operate a waffle-maker, a simple mechanical instrument (all he had to do was close the handle and turn it upside down). By the way, he also over-filled the waffle-maker with too much batter, but that's a demerit that was excusable.

Sometimes education and knowledge are mutually exclusive--as is common sense.

Wednesday, December 2, 2009

Morgan Stanley warns of UK default

Investment bank Morgan Stanley issued a report warning of a possible default on United Kingdom sovereign debt sometime in 2010, due to unsustainable deficits.

I would debate you can replace the initials UK with US, and the same could be true further down the road. Both governments are saddled with huge debts and unfunded liabilities. Losing their AAA credit rating would be cataclysmic to financial markets globally.

Hierarchy of creditors and equity holders

Just so investors of equities understand the inherent risks of owning stock in a company, here is the hierarchy on who gets paid first in the event of liquidation.

1) Secured creditors get paid when the pledged property is sold or refinanced, then
2) Unpaid wages, then
3) Taxes, then
4) Trade creditors, then
5) Unsecured debtholders, then
6) Subordinated unsecured debtholders, then
7) Preferred stockholders, and finally, after all these other claims are met,
8) Common stockholders get whatever is left.

I'm a cockroach

Erin Burnett of CNBC just called all gold bugs cockroaches, inferring they've only recently come forth in this melt-up rally of precious metals. This is more evidence of the anti-gold sentiment on Wall Street, Main Street, the government, the banking cartel, and mainstream media outlets. Prognosticators who completely missed the decade-long bull market in precious metals are now declaring a "bubble." Look at their track record: they missed the meltdown in equities and real estate, and missed the bull market in precious metals. Now we're going to trust them to call a bubble?

I guess us cockroaches should remind her that gold has appreciated almost five-fold since 2000, and in that same time span, equities have declined. In other words, it's not just a one-month phenomenon. An investment in gold-related investments is a cynical bet agsinst crooked bankers and free-spending, corrupt governments. In retrospect, it's not that hard of a trade.

Monday, November 30, 2009

Emerging market central banks

Where are sovereign central banks of emerging market countries investing their reserves? Traditionally, it's been US Treasuries. They are now diversifying away from USDollar-denominated assets.

With central banks from India, Sri Lanka, and Mauritius already purchasing gold from the IMF, other sovereign central banks are also rumored to be stepping up to the gold window. This includes China, Germany, and Russia.

A foreign perspective of the global credit crisis

It includes opinions on bail outs, currency debasement, and central bank intervention.

Precious metals as an asset class

Relative to other asset classes, the gold and silver sectors are minuscule. If and when precious metals and resource mining companies become popular, the rush into these tiny sectors will drive up prices, as supply won't be able to keep up with demand.

Disclosure: long gold and silver mining shares.

Dr. Doom gets even gloomier

Here is Dr. Marc Faber's latest forecast. Hide the wife and kids.

The $1.8 trillion question

Quick--what does the acronym "ABCPMMFLF" stand for? In a banking world gone mad, when opaqueness trumps clarity, and complexity usurps simplicity, deception becomes masked by confusion.

By the way, so there's no misunderstanding, it stands for: "Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility." Here is proof from the Fed's own website:

Government agencies have a real love affair with the alphabet soup when they want to confuse the public--or hide the fact that they are buying toxic bank assets on behalf of the American taxpayer.

Sunday, November 29, 2009

Iran goes nuclear

With Iran upping the ante on nuclear weapons, all bets are off on equities--maybe this is the event that triggers end-of-year selling, as mutual fund managers lock in profits to pad their bonuses. With the likelihood of Congress accelerating the repeal of the Bush tax cuts in 2010 instead of waiting for 2011, investors may do the same profit-taking as well, choosing to pay capital gains taxes of 15% instead of 28%.

In other words, the expected annual Santa Claus rally may end up an ugly rout instead. I don't know--I don't have a crystal ball on the stock market overall, and I would posit most people don't either--on the timing or direction. Some may get the direction right--but go broke waiting for the reversal. And very few people can time the markets in the first place.

If Ahmadinejad's regime continues to flout sanctions and conflict breaks out in Iran, Pakistan, and/or India, the shock to oil and eventually gold will make last year's run up seem tame in comparison. Equities worldwide will plummet, as Russia and China have many trade ties with Iran. Wall Street does not appreciate uncertainty.

Any dire consequences will be bullish on oil and gold, even if the initial shock may tank all assets, except the rush to safety toward the USDollar and US Treasuries. Longer-term, this flight to safety will prove wrong-headed, because another military conflict means the Fed has to print even more dollars, debasing the currency further.

Iran is a major oil producer, so any shocks to supply will also drive up the price of oil and precious metals. Let's hope Iran is barking and not biting.

Saturday, November 28, 2009

James Turk on the "bubble" in gold

According to James Turk, we are entering the 2nd phase of gold's bull market. The mania-driven third phase has not come close to arriving yet.

Banks and currency

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

- Thomas Jefferson, 1802

Bill Bonner from the Daily Reckoning

Debt, debt, and more debt...

John Doerr on Cleantech

Why is John Doerr's opinion important? His firm made prescient bets on biotechnology and the internet. And they are placing bets on cleantech. See the benefits and challenges going forward. Editor's note: I agree with the virtues of clean technology, but I am not convinced cap and trade legislation is prudent. We'll have to wait and see on energy policy.

John Doerr's Take on Cleantech

By Nick Hodge
Tuesday, November 24th, 2009

I spent last week in Silicon Valley, literally bumping elbows with some of the smartest people in the finance business.

I heard from Vinod Khosla and Steve Westly, pioneers of Sun Microsystems and eBay, respectively.

And I personally spoke to John Doerr, who was in on the venture level of companies like Compaq,, Intuit, and Google.

Now that the Internet is maturing — and these men have walked away with billions — they're turning to cleantech.

You see, all these billionaires know that clean energy is the next great profit frontier. And they aren't ashamed of it. They know a fortune can be made while doing something that benefits humanity and the planet.

Over the next few weeks, I'll share some of the insights I gained by listening to what they had to say. Today, we'll start with a recap of John Doerr's thoughts on the cleantech industry.

"It's More Clear Every Day"

That's what Doerr had to say about this statement: Cleantech is the largest economic opportunity of the 21st century.

And here's how he backed it up...

The billionaire venture capitalist likens cleantech to the Internet. Only, he says, the Internet is a $1 trillion industry serving 1.2 billion people... while energy is a $6 trillion industry serving 4 billion people.

So cleantech has the chance to be at least 4 times bigger than the Internet.

The Last Great Network

Think of it like this: Clean energy really has the chance to be the last great network.

Railroads were first, followed by the highway system. Then came phone, cable, and electricity transmission networks. All followed by the Internet.

But cleantech — through the smart grid — is becoming the next great network. Homes and neighborhoods will be linked together through smart networks and devices... all talking to the utility... providing real-time data allowing for the easier introduction of renewably-produced resources.

And fortunes will be made as it happens. That's why these mega-investors are foaming at the mouth.

Thing is, there are still a few hurdles remaining. Doerr did his best to identify them and provide ideas for how to overcome them.

An Environment that Fosters Innovation

According to Doerr, the main hurdle facing cleantech is its capital intensity.

He said it took $25 million and 3 years to bring Google to an initial public offering (IPO).

Compare that to Bloom Energy, a Doerr-backed fuel cell company. Bloom has already gobbled up $250 million and seven years. Doerr said it'll be nine years before they think about an IPO, even though it has "substantial revenues and orders."

According to Doerr, there is simply more "capital required to grow a great green company." And that's what has delayed major investment — both public and private — thus far.

The intense need for capital has created an equally intense lack of investment will. And, at least in the U.S., Federal policy hasn't really done much to help.

Technology-specific subsidies and lobbyist-inspired energy policies have left us far behind our European and many Asian counterparts.

Instead of subsidizing the lobbyists' favorite technologies... we need to create a policy environment that fosters innovation, namely by putting a price on carbon either through a tax or cap-and-trade.

Again, Doerr turns to the Internet for an analogy.

When the Internet emerged from military application into the public realm, it wasn't Congress deciding the way forward. Could you imagine if they subsidized dial-up while stymieing DSL or cable? We'd all still be stuck with modems.

Similarly, energy policy needs to evolve. Winners need not be chosen by politicians, but by economics.

And failing to do that is one of the main reasons the U.S. remains a laggard in clean technology.

Think about the year 1996. Where were the top Internet companies based or founded? All in the U.S.

Now think about the top solar, wind, and battery companies... Mostly European and Asian locales come to mind.

It's not only sad for our country — it's dangerous, with respect to both energy and economic security.

Doerr's Last Words

This lack of political steadfastness has led to "woeful underinvestment" in clean energy. And that's part of the reason we're now giving stimulus dollars to overseas firms for wind turbines and other clean technologies.

Europe is literally 10 years ahead of us. Early adoption is the reason the tiny country of Denmark exports billions of dollars worth of wind turbines annually.

Doerr was hopeful, though. He's going to keep investing because he sees an upside to multiple bottom lines.

And while he doesn't favor subsidies for any one sector, he did have three policy suggestions:

"Put a price on carbon. Put a price on carbon. And put a price on carbon."

Only when businesses don't have the right to treat the atmosphere like an open sewer will there be meaningful migration away from fossil fuels.

That's what Europe did. And look who we're now paying for wind turbines.

IT infrastructure investments

Information technology (IT) infrastructure investments by Wall Street investment firms are approaching $3.6 billion annually. By contrast, the U.S. Commodities Future Trading Commission (CFTC) has an annual IT budget of $23 million--which makes it difficult for them to monitor and regulate derivatives trading. Their servers, bandwidth pipes, storage, and overall IT infrastructures are slow, old, inadequate, and obsolete.

It's analogous to highway patrol squad cars having a top speed of 160 mph, rendering them impotent to catch speeders averaging 1000 mph. The software algorithms and quantitative analysis investment firms perform are fast enough (and getting faster) to stay ahead of the watchdogs.

Financial derivatives are useful in hedging strategies and increasing potential returns on investment, but they can also be weapons of massive financial destruction when leverage is abused. And algorithms can spin out of control when asset bubbles burst. The race to be ahead of everyone else sometimes causes the mutual destruction of algorithms gone bad, as self-fulfilling negative outcomes beget other larger losses.

The regulatory path has become increasingly futile as Wall Street computing capabilities increase geometrically with Moore's Law.

Free market proponents epouse minimum regulation, with a mantra of caveat emptor, but cases of fraud and market manipulation should be regulated and prosecuted to the full extent of the law. Rigged markets and lack of transparency hurt markets long-term, as investor distrust of manipulated markets cause participants to stop trading. Without investors, markets disappear.

Friday, November 27, 2009

Estate planning

With families huddled together, many memorable moments are being shared. Among the laughs and pleasant recollections, the topic of family estate and legacy planning may inevitably come up. It shouldn't be unpleasant or neglected--all families go through transition, and it's best to address these issues honestly and coherently. Here are a few FAQs on estate planning.

1) Why is an estate plan important?
Your estate could potentially dissipate due to taxes and other transfer costs. An effective estate plan reduces estate taxes and probate costs, and enables you to leave a legacy to those important to you.

2) What are the benefits of an effective estate plan?
- Competent asset management in the event of disability.
- Efficient distribution of estate to beneficiaries.
- Reduction of transfer costs and probate costs.
- Asset preservation.
- Maximize tax exemptions.
- Gifting.

3) What transfer costs will your heirs incur?
- Estate tax.
- Gift tax.
- Inheritance tax.
- Income taxes on annuities and qualified retirement accounts.
- Generation-skipping transfer tax.
- Probate costs.
- Professional legal and accounting fees.

4) What are the components of a basic estate plan?
- Unlimited marital deduction.
- Will.
- Credit shelter trust (exclusion amount).
- Living will.
- Durable power of attorney.

5) What can be done to reduce an estate tax liability?
A lifetime gifting program can reduce the size of your estate.

6) What is an ILIT, and what are the benefits?
An irrevocable living insurance trust is created to establish ownership of a life insurance policy such that the proceeds received by the trust are not subject to estate or income taxes upon death of the insured. An ILIT takes advantage of the gifting exclusion and generation-skipping transfer tax exemption, and provides the beneficiaries protection from creditors.

7) What is a Dynasty Trust?
A dynasty trust is an ILIT that can provide protection from estate, gift, and generation-skipping transfer taxes when children and grandchildren die.

8) What other types of ILITs are there?
Spousal ILIT, Single-life spousal ILIT, Survivorship spousal ILIT, Sale to a grantor trust.

9) What options do you have for charitable giving?
Gifts to charity, a charitable remainder trust, wealth replacement trust, charitable lead trust, private foundation.

10) What options are there for estate planning for a family business?
A limited partnership and limited liability company can be integrated into an estate plan to reduce gift and estate taxes, while enabling a successful transition to the next generation. A grantor retained annuity trust can be used to transfer stock, while a qualified personal residence trust can be used to transfer a home into the trust.

11) Who should be part of your team of advisors for effective estate planning?
- Estate attorney
- CPA accountant
- Financial advisor
- Life insurance agent
- Trust officer

Please consult with your team of professional advisors when setting up an estate plan.

Buying the dip

As expected, equities and commodities got pounded over Thanksgiving as word of Dubai's default spread worldwide. I bought the dip, this time a silver mining company in China. See disclaimers in the side bar.

Disclosure: long SVM shares

Thursday, November 26, 2009

Bernanke's dilemma

Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner are walking a tightrope. Keep interest rates low and keep the printing presses humming along are stimulative to the economy and help exporters remain competitive. But it also induces asset bubbles and devalues the USDollar.

Raise interest rates and tighten monetary policy, and equities and bond markets will tank, roiling any chance of an economic recovery.

The 800-pound gorilla is the huge debt--and servicing that debt, which increases the deficit--which forces debt monetization again. And round and round we go...

Dubai defaults

Dubai is attempting to renegotiate its debt with its creditors, which is essentially a default. Equity markets worldwide tanked, as did commodities, while the USDollar rallied in a flight to safety.

NBC for sale?

General Electric, parent of NBC Universal (with properties MSNBC, CNBC, etc.), is apparently looking to sell its network media asset. A potential suitor is Comcast, with GE CEO Jeffrey Immelt negotiating with Vivendi on a fair valuation and exit strategy.

Perhaps GE Financial Network--er...CNBC will now have a more neutral, balanced view on markets.

The larger question is how GE will remain solvent as it is forced to unload valuable assets. NBC is not the problem--the toxic mortgage loan portfolios on its book are.

Dennis Gartman on CNBC

Dennis Gartman, the respected commodities expert who pens the widely read "The Gartman Letter", and who can been seen on CNBC every day, called a top on gold at $930. When gold surged to $1050, he said he was still bearish on gold, yet he had reversed course on his own trade, and had gone long due to technical momentum (presumably after losing a ton of money shorting gold at $930). He also declared gold was in a "bubble"--even as he confessed he had gone long--and that he just didn't understand why gold had rallied so high and so fast. Today, in overseas trading, while America gluttons on turkey and dressing, gold is threatening $1200.

So this is a guy who can barely admit he was totally wrong on gold, costing followers millions of dollars, and now he can glibly declare gold is in "bubble" status--without even looking at the fundamentals of not just the recent rally, but of a DECADE-LONG BULL MARKET IN GOLD?

What about US Treasury bonds? The trillions of IOU's being issued by an insolvent government will come due at some point, and that is not a bubble? What if the creditors of that debt reject taking on that risk at yields of 3%, and demand 15% before even considering buying more Treasuries? What about that bubble? Rising interest rates will tank bond values, much like they did in the early 80's when inflation and deficit spending were out of control. Deficits are much worse today--in the trillions, with a "t".

And what if the US government itself defaults on its borrowings, unable to fund even the interest on that debt? What will happen to the asset values of hard commodities? How high could gold or oil climb in dollars?

Yes, the Fed's quantitative easing will yet again create asset bubbles. But as usual, the investing public will get fleeced again because the bankers are pointing at the wrong "bubble."

Dubai defaults on its debt

Dubai, once the poster child of excess in the Middle East, is defaulting on its debt. Equities and bond markets worldwide were rocked on the news. Unfortunately, this won't be an isolated case going forward, as many emerging and developed countries are on the brink (including the US).

Happy Thanksgiving.

Wednesday, November 25, 2009

Apropros quotes from Albert Einstein

"We can't solve problems by using the same kind of thinking we used when we created them."
- Albert Einstein

"The hardest thing in the world to understand is the income tax."
- Albert Einstein

You can never solve a problem on the level on which it was created.
- Albert Einstein

This should be part of the government's playbook in solving our economic problems.

Solving a debt crisis with more debt is not a viable solution.

Emerging markets stepping up to the gold window

Foreign central banks are snapping up gold bullion for their reserves for several reasons. Foremost is their diversification away from the USDollar, as too much exposure to the sinking dollar has caused their asset values in reserves to decline. Their economies are stronger relative to developed countries, so they need to boost their gold reserves accordingly to reflect their newfound economic health. In other words, their strong currencies need to be backed by gold vs. the USDollar.

In the past, central banks could sell their gold holdings, in order to suppress the price of gold, as low gold prices enable sovereign governments to borrow at low interest rates. This support allows governments to run perpetual deficits and reduces their debt obligations in the form of low-yielding bond issuance.

But with mounting fears that governments worldwide are reckless in their deficit spending--debasing ALL currencies in the process, gold as re-emerged as a safe haven for monetary store of value.

In another article, the Reserve Bank of India hinted at buying the balance of the IMF's planned 403.3 tons of gold, of which 201.3 tons remain. India purchased 200 tons two weeks ago in a surprise move, as most observers expected China to buy the bulk of the planned sale. However, purchase of the IMF gold by ANY central bank is bullish for the yellow metal, as it further validates central bank net buying--not net selling.

Supply side of gold

There has been much focus on the fundamentals of the rally in gold prices, mostly on increasing demand for nonmonetary (jewelry, art, industrial) and monetary (investment) reasons. Gold has a consistent record of having store of value over centuries, and has been a useful hedge against inflation, financial crises, and currency debasement.

But the supply side of the equation hasn't been addressed by the mainstream financial media. The bullish case on the supply side is equally compelling. Gold production peaked in 2001 and is in steady decline, despite much higher prices. Higher demand and lower supply can only have one long-term outcome.

Gold missing in Canadian mint

Back in June, after an audit by Deloitte & Touche discovered $15 million of missing gold bullion, the Canadian Mint called in the Royal Canadian Mounted Police for an investigation. It turns out mint official "double-counted" gold sales by mistake.

I'm not buying it, as central banks are notorious for performing gold swaps, and leasing out the same gold ounce multiple times to each other, in a surreptitious gold and silver price suppression scheme (scam).

The Canadian mint has now agreed to an independent audit of their precious metals inventory every three months--which is a big change of policy and one that contrasts sharply with the US Federal Reserve Bank. The Fed's gold reserves haven't been independently audited since 1953, which means no one has any idea how much gold is in the vaults of Ft. Knox, Kentucky and the Federal Reserve Bank of New York.

Tuesday, November 24, 2009

FDIC is broke

The FDIC isn't almost broke--it IS broke.
The number of institutions on the FDIC's "Problem List" rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the "Problem List," up from 416 on June 30. This is the largest number of "problem" institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of "problem" institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

As projected in September, the FDIC's Deposit Insurance Fund (DIF) balance – or the net worth of the fund – fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September...

First India, now Russia

The Indian central bank shocked the financial community when they snapped up 200 tons of gold from the IMF's planned sale of 403 tons, as many observers believed the Chinese central bank would be the largest buyer. A few other central banks have since purchased gold on the open market, or from the IMF.

Russia's central also has been accumulating gold into their reserves, as has China's central bank, which has doubled its gold reserves since 2003.

HSBC kicking out retail customers holding gold

According to the Wall Street Journal:

Fleets of armored trucks piled with gold bars and coins have been streaming out of midtown Manhattan in one unexpected consequence of the gold craze.

Amid gold's rise -- it has gained 32% this year and reached a record on Monday -- investors have been loading up on bullion and coins. One big problem now is where to store it. The solution from HSBC, owner of one of the biggest vaults in the U.S.: somewhere else.

HSBC has told retail clients to remove their small holdings from its fortress beneath its tower on New York City's Fifth Avenue.

HSBC and other banks don't earn fees from clients buying physical gold and silver. I guess that's why they kicked clients out of their safety deposit boxes.

Robert Landis on government, central banks, and gold

Viva la Restoration

Remarks of Robert K. Landis Gold Conference

Zurich, Switzerland, November 17, 2009

"It is an honor and a pleasure to be here among so many good friends and great minds.

I feel a special affinity for Zurich. It was the home of my friend and inspiration Ferdi Lips. It is the home of other friends like Tony Deden.

It was also the ancestral home of the Landis family.

In fact, this ancestral tie makes me a little nervous at the prospect of a question and answer session. The last time a Landis preaching a dissident message was questioned in Zurich, it was while he was stretched out on the rack. His answers irritated his questioners. So they cut off his head.

Hans Landis was a radical Protestant who denied the authority of the Pope and preached strict fundamentalism. In the passions of the early 1600’s, that was like being a gold bug who denies the legitimacy of the central bank and preaches sound money.

And so, as I stand before you this evening, I sincerely hope that over the course of the last four hundred years, Zurich has mellowed out.

Tonight I’m going to approach the subject of gold from a somewhat oblique angle. Please bear with me as I circle in on it.

Just over a year ago, the United States underwent a seemingly radical change, seemingly overnight. Its financial system had been revealed as insolvent under the weight of huge liabilities and worthless assets. The government refused to allow all the bankrupt institutions to fail, and thus permit the market to do its job of purging the rot from the system.

Instead, the authorities saved their favorites, effectively merging bank with state. They did so under cover of a witches’ brew of subsidies, guarantees and quasi-nationalizations bearing bizarre acronyms like TARP; PDCF; TAF; TSLF; and my personal favorite, the ABCPMMFLF, otherwise known as the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility.

And those were just the visible programs. The Fed, our central bank, dropped interest rates to zero and monetized additional trillions of dollars worth of problem assets, away from prying eyes. The nature and source of these assets remain matters of speculation, because the Fed to this day refuses to tell us what it bought and from whom.

When the smoke cleared, we Americans found ourselves the subjects of a gangster state, in thrall to a clutch of greedy, corrupt and incompetent banks which only days before had failed. We were now the guarantors of trillions of dollars in worthless assets that had generated billions in profits for those same banks in recent years. Their gains remained their gains; but their losses were now our losses. Our money, the reserve currency of the world, was now backed by toxic waste.

The events of last fall were, to all appearances, a bloodless coup, taking us from freedom to fascism virtually overnight. And all without a shot fired, or even, with few exceptions, an authoritative voice raised in protest.

How was such a thing possible in the United States, the supposed bastion of free market capitalism? The nation that had led the free world in the defeat of fascism some sixty years earlier, and in the defeat of Marxism-Leninism less than 20 years earlier?

And more importantly, how do we get out of this mess?

To understand how we got here, we must first understand that what seemed like major change, was actually just the illumination of existing reality. Bank and state had been a unitary phenomenon for many years. And what seemed abrupt, was actually the outcome of a gradual, accretive process.

Ideas have consequences, and bad ideas have bad consequences. What happened last fall can be seen as the aftermath of a war of ideas fought long ago, in which the wrong side won, decisively.

The vanquished were the heirs of a noble intellectual tradition, the English empiricist philosophers who developed in the modern era the concepts of private property and voluntary exchange. This tradition, which informed, among other things, the United States Constitution, was reinvigorated in the late nineteenth century by a remarkable succession of economists originally based in Vienna, hence the term “Austrian School” of economics. The Austrians, whose greatest exponent was Ludwig von Mises, and whose American voice was Murray Rothbard, developed a theory of economics based entirely on individual choice.

The victors were the heirs of a far less noble tradition, a long line of intellectual quacks and panderers to power. The line began with a Scotsman, John Law, reached a vigorous maturity in an Englishman, John Maynard Keynes, and entered a final, flamboyant decrepitude in the policies, if not the public posturing, of former Fed Chairman Alan Greenspan. In this tradition, the relevant analytic units are aggregates, broad abstractions. The individual scarcely warrants mention. Public power, not private property, is the heart of this tradition.

Keynesian economics is just a modern mutation of inflationism, a stealth tax levied by powerful insiders on ordinary people who can’t see it happening until it is too late. It is music to the ears of interventionist governments, because it ratifies what, if unchecked, they will do anyway, and it preys on the greed and gullibility of its victims, who are more than willing to believe you can get something for nothing.

Now I must concede, as a matter of historical fact, I’ve overdrawn the point. It wasn’t much of a fight, much less a war. The quacks had the field to themselves. They told powerful people what they wanted to hear, validating the intervention and deficit spending that was already occurring. They also had a head start of some 20 years, since it was not until relatively late in the day when the Austrians’ theories were even translated into English.

Nevertheless, I believe the events of last fall, and the road ahead, can best be understood in terms of the interplay between these two schools of economic thought.

Now, a detailed comparison of the two schools is just a bit beyond us this evening. But there are two contrasting theories that I’d like to mention briefly.

The first such contrast is the theory of depressions. In Austrian teaching, so-called business cycles are caused by official interference with money and credit creation. This interference – for example, setting interest rates below market – fools individual actors into overproducing, creating supply that exceeds actual demand. A depression is merely the process of clearing the resulting imbalance. It is inevitable, and it is necessary. Left to itself, the market will clear the excess of supply over demand through price adjustments. Government at this point has no role to play; it has done quite enough already.

In Keynesian teaching, by contrast, government is blameless in the business cycle, which just occurs naturally. In a depression, markets can’t be trusted to clear themselves through price adjustment. The government must step in and stimulate additional demand by means of deficit spending, more money creation, and more credit expansion.

The policy responses of last fall illustrate perfectly Keynesian doctrine in action. Our authorities refused to let the markets clear. Instead, they panicked, and attempted to prop up prices, reignite the credit expansion, and stimulate demand. All this is obvious to anyone who follows the news.

What is less obvious is how the crisis came about. Keynesians treat it like an act of God. Virtually no one in authority saw it coming. Applying Austrian theory, we see that the crisis was caused by Government intervention, decades of relentless credit expansion. It was entirely predictable. And, indeed, it was predicted. The nature and timing of the inevitable crash were endlessly debated for years all over the Internet by ordinary people unburdened by false doctrine.

A more important question, however, is why we tolerate unaccountable power in government. Why do we find it acceptable that government has the power to intervene so massively in the market that it can cause such a crisis in the first place? And why do we now tolerate more of the same, a putative cure that is doing even more damage?

This brings us to the other contrasting theory, the concept of money itself.

In Austrian teaching, money originates in the market: …all money has originated, and must originate, in a useful commodity chosen by the free market as a medium of exchange. The unit of money is basically just a unit of weight of the monetary commodity – usually a metal, such as gold or silver. Government has no role in the definition or selection of money, let alone its creation, price or quantity. That is the market’s function.

In Keynesian theory, by contrast, money originates in the state. Government has a total monopoly on money, starting with its very definition. It is not chosen in free exchange, it is imposed by force.

Keynes got his idea for state control of the means of exchange in the writings of a Prussian academic named Friedrich Knapp. Herr Knapp was the author of a book entitled the State Theory of Money, published in 1905.

According to Knapp’s theory, money is a creature of law, of state power. Money is whatever the state is willing to accept as payment for its taxes. It derives its value exclusively from the state.

Keynes was so delighted with the State Theory of Money that in 1924 he sponsored its first translation into English. In 1930, he adopted it explicitly in his Treatise on Money.

Now, it is a measure of the success of the Keynesian indoctrination to which we have all been subjected that this insidious theory strikes most people, even some who fancy themselves free market in orientation, as unobjectionable. They prefer to concentrate on other fallacies of Keynesian doctrine. Many of us are so used to hearing that the state properly has a monopoly on money that we have come to think it natural.

In fact, the State Theory was already defunct long before Keynes appropriated it. It had been demolished in theory as early as 1912 by Mises in his classic Theory of Money and Credit. It had been discredited in practice by its association with the German hyperinflation of the 1920’s. But inconvenient truth did not deter Lord Keynes. The State Theory was quietly incorporated into Keynesian dogma without further ado.

And there it sits, to this day, malignant and unexamined, a false theoretical postulate at the foundation of the entire corrupt edifice of inflationist theory and practice.

So why is this bit of intellectual history relevant?

Because bad ideas have bad consequences.

The State Theory of money, the obscure foundation of modern inflationism, left us intellectually defenseless against our government’s incremental shift to fiat money and away from any practical limitations on its power.

It left us defenseless against the depredations of our central bank, whose grotesque mispricing of money and credit over the years led in a straight line to the catastrophic serial bubbles in assets and credit whose threatened collapse triggered the open interventions of last fall.

And, unless we drag it out into the open and drive a stake through its heart, the State Theory will leave us defenseless still as we grope for a way out. If our assumptions are so flawed that we cannot properly articulate the conceptual problem, we will never understand, let alone fix, the institutional and behavioral problems.

Or, more to the point, defend ourselves against the next wave of monetary swindles by powerful insiders.

And so we come to the second question: how do we get out of this mess?

The short answer is, we don’t. There is no saving the dollar or the monetary system now based upon it.

Not that we should want to. Absolute power, Lord Acton famously observed, corrupts absolutely. The power to print a reserve currency out of thin air is the greatest power on Earth. Its very existence attracts and empowers people who wish to control other people. It corrupts all who enjoy it.

You have had direct exposure to the truth of this observation. Consider the relentless attacks on your gold by our authorities, and the relentless attacks on your bank secrecy laws by nearly everybody. The very same laws, ironically, that were developed in the 1930’s for the express purpose of protecting clients who were nationals of fascist states.

I believe it fair to say that as a society, we Americans have reached a dead end. We are bankrupt, and not just financially. Our leading institutions are corrupt and discredited. Our leadership class has betrayed its trust, openly and repeatedly.

Our financial and economic crisis will in due course lead to an intellectual and cultural crisis. We may yet avoid the fury and violence that have attended other paradigm shifts, other imperial collapses. But we will need to be very lucky indeed. That’s because on the one hand, this is about power which will not be voluntarily relinquished, and on the other, there is no reasoning with an angry mob.

So I believe it is a waste of time to talk about reform of the existing monetary system. There is no historical precedent for a fiat money surviving more than a brief span of years; and, in any event, the experience of the Soviet Union teaches that an economic system built upon a false dogma cannot survive.

We should instead focus on regeneration, the task of rebuilding out of the wreckage on the other side of that final monetary collapse. At that time, and not before, we will have the opportunity, however brief, to drive out these disastrous ideas along with those who used them to control and impoverish us. Only then will we have an opportunity, however long the odds, to restore our Constitutional republic.

In the meantime, what keeps the current system going?

You do.

You, meaning foreign investors, still lend us your savings. This just enables us to prolong the process, defer the resolution, and increase its ultimate cost.

When will it end?

Whenever you cut us off.

At some point, foreign holders will sell our debt in earnest, and buy gold with a conviction resembling panic.

And so, finally, I come to gold. This is, after all, a gold conference. Why then do I talk so much about politics?

Because I think it’s impossible to understand gold without understanding its political dimension. Gold is permanent, natural money, the antithesis of money made from nothing, money backed by force alone. It is a potent symbol of private property; of voluntary exchange taking place outside the control of the state; of limits on state power; and of resistance to the runaway state.

Left to its own devices, gold is the ultimate barometer of public confidence in government. It is also the ultimate means for ordinary citizens to opt-out of an oppressive, fraudulent system.

That is why gangsters who wield power in the name of the “people” always make ownership of gold a crime. So it was in France during the Revolution, in Germany during the Nazi era, in Russia during the Soviet era, in China during Mao’s rule, and in the United States from 1933 through 1974. It is why, even during periods when the ownership of gold is not outlawed, its price is ‘governed’, as one commentator puts it, or officially manipulated, as others of us put it.

It’s often hard for practical men of affairs to understand the vehemence of those of us who assert, seemingly ad nauseam, that gold is money. The truth is, our passion has more to do with the concept of liberty than with that of money. We know from history and experience that once the free market has lost control over the definition and creation of money, individuals have lost their liberty.

That’s why neither a central bank nor fiat money find support in the Constitution of the United States, and why our monetary system, which has these two elements as its very foundation, is unconstitutional on its face.

It’s also why, as we rebuild our institutions from the wreckage of the final monetary collapse, control over money must at all costs be kept away from government. It is not enough that gold return as money; government must keep its hands off.

Money must be real, tangible, circulating. As Mises wrote when considering the subject of monetary reform back in the 1950’s, “Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store.” And I’m sure he would have added an approving reference to digital gold had the technology then existed.

Now, just to be clear, people must be free to choose whatever they want to use as money. We believe they will choose gold, given a chance, simply because people have already done so over thousands of years, and for very good reasons.

But creating the conditions within which an informed choice can be made, even – or perhaps especially - after the collapse of the system and the discrediting of its false ideology, will be extremely difficult.

We are beset by propaganda, falsehood and spin from all sides. Truth is of no consequence; the Fed has bought and paid for virtually the entire economics profession in the United States.

Our universities are riddled with apparatchiks who at the very least must toe the party line to advance in their careers, and in many cases are directly dependent on Fed largesse.

The financial press, now concentrated in ever fewer hands, is captive to the same false dogma, and is little more than an apologist for the current monetary regime.

We desperately need credible new sources of information on money if we are going to have any shot at a sustainable regeneration.

In this connection, I have reason to hope that from the talent assembled here this evening, we will see a new initiative in the very near future. Stay tuned.

Thank you."

CNBC exposes gold suppression by the Fed

I almost choked on my juice this morning when I saw this segment on CNBC, when Rick Santelli blurts out that Lawrence Summers, former Treasury Secretary and current National Economic Policy director, published a paper on the suppression of gold prices by central banks. Watch the whole 10 minute segment:

In fact, Summers' white paper was coined (pun intended) "Gibson's Paradox and the Gold Standard", and is available here:

The willingness to hold the stock of gold depends on the rate of return available on alternative assets. We assume that the alternative assets are physical capital and bonds, both earning a real rate of return r.

The economic mechanism is clear. Increases in real interest rates raise the carrying cost of nonmonetary gold , reducing the demand for it. They also reduce the demand for monetary gold as long as money demand is interest elastic. The resulting reduction in the real price of gold is equivalent to an increase in the general price level.

Santelli basically validates to mainstream financial TV audiences what gold bug conspiracy theorists have been clamoring about for at least a decade--that it's in the central banks' best interests to keep a lid on the price of gold, in order to keep interest rates low. Low interest rates allow central banks to fund deficits at a lower cost.

The guest speakers in the segment speculate that gold, once unshackled by central bank suppression schemes, will eventually be re-priced to its natural price, somewhere north of $11,000, based on supply and demand fundamentals.

Now THAT sounds crazy, but given the USDollar's demise, it is no longer unthinkable.