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.

US government--lender or borrower of last resort?

And over at The Financial Times in London, Gillian Tett asks “Will sovereign debt be the next sub-prime?”

Everyone knows what when wrong with sub-prime. When you lend money to people who can’t pay it back, you’re asking for trouble. So, if you’re out of a job and looking for a sub-prime loan to buy a double-wide trailer you’re out of luck. Bankers won’t give you a dime.

But now, the world’s lenders are doing something just as dumb. They’re lending to governments. Imagine you were a banker. And the US government comes to you for a loan.

“Do you have enough income to cover the payments,” you ask.

“Well, no,” comes the answer. “In fact, our revenue has fallen off a little. Because of the recession, you know. Like everyone else.”

“How bad is it?”

“Uh…we spend nearly two dollars for every dollar of income.”

“Oh…and you expect us to lend you money? What do you have for collateral? What is your net worth position?”

“We were hoping you wouldn’t ask. The most recent tally of our obligations comes to $113 trillion.”

“Well, don’t you have assets?”

“We have some buildings in Washington…military bases around the world…things like that. But as a practical matter, you could never foreclose on them.”

“Oh, I see…”

What is interesting is that the world’s investors are beginning to see that the US and many other governments are bad credit risks. This is an extraordinary event. Until now, the US government has been able to finance and refinance its debts at the lowest rates in three generations. Lenders have wanted to lend the feds money, because they believed they were the safest credits in the world.

Bankers can always be counted on to find the worst investments at the worst time. They are at the tail end of the chain of insights that begins with the sharpest, most independent-thinking analysts…runs through the broker/hedge fund community…passes on to the financial journalists and the TV pundits…arrives at the lumpeninvestoriat through the popular media…and finally gets to bankers when they pick up the Wall Street Journal and read about what’s going on.

Now, the bankers are buying sovereign debt – government paper – because they think it offers a “risk free” return. In fact, it is one of the riskiest investments you can make.

The collapse of the Weimar Republic

'The population is ripe,' Joseph Addison wrote home to Alexander Cadogan,* (Later Sir Alexander Cadogan, O.M., Permanent Under-Secretary of State for Foreign Affairs, 1938-1946.) 'to accept any system of firmness or for any man who appears to know what he wants and issues commands in a loud, bold voice.'

Addison had another significant point to make:

Economic distress is leading the people to be much more amenable to authority as representing the only hope of salvation from the present state of affairs. Unemployment is taking the gilt off the gingerbread of democracy, while the working classes realise that striking is useless since nothing would be more welcome to employers.

The "commands in a loud, bold voice" came from none other than Adolf Hitler.

Any historians of Germany want to chime in?

Monday, November 23, 2009

Porter Stansberry on the "role" of government

This rant needs no introduction.

I'd like to make you a business offer. Seriously. This is a real offer. In fact, you really can't turn me down, as you'll come to understand in a moment...

Here's the deal. You're going to start a business or expand the one you've got now. It doesn't really matter what you do or what you're going to do. I'll partner with you no matter what business you're in – as long as it's legal. But I can't give you any capital – you have to come up with that on your own. I won't give you any labor – that's definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you're allowed to operate your business. That's my role in the affair: to tell you what to do.

Now in return for my rules, I'm going to take roughly half of whatever you make in the business, each year. Half seems fair, doesn't it? I think so. Of course, that's half of your profits. You're also going to have to pay me about 12% of whatever you decide to pay your employees because you've got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you're my partner. It's only "fair."

Now... after you've put your hard-earned savings at risk to start this business and after you've worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you'd like to cash out – to finally live the good life.

Whether or not this is "fair" – some people never can afford to retire – is a different argument. As your partner, I'm happy for you to sell whenever you'd like... because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.

I know... I know... you put up all the original capital. You took all the risks. You put in all of the labor. That's all true. But I've done my part, too. I've collected 50% of the profits each year. And I've always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business. Oh... and one more thing...

Even after you've sold the business and paid all of my fees... I'd recommend buying lots of life insurance. You see, even after you've been retired for years, when you die, you'll have to pay me 50% of whatever your estate is worth. After all, I've got lots of partners and not all of them are as successful as you and your family. We don't think it's "fair" for your kids to have such a big advantage. But if you buy enough life insurance, you can finance this expense for your children. All in all, if you're a very successful entrepreneur... if you're one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public... you'll end up paying me more than 75% of your income over your life. Thanks so much.

I'm sure you'll think my offer is reasonable and happily partner with me... but it doesn't really matter how you feel about it because if you ever try to stiff me – or cheat me on any of my fees or rules – I'll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail. That's how civil society is supposed to work, right? This is Amerika, isn't it?

That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs...

Sunday, November 22, 2009

COMEX December gold and silver options

COMEX December gold and silver options expire tomorrow, Monday, November 23, which usually means the commercial shorts will go into overdrive to manipulate the price down. However, given the physical shortage, gold has been gapping up in anticipation of this date. Combined with the backwardation of gold as I blogged last Friday here, the price of gold is increasing this evening (in Asian Monday morning trading).

Should rumors of COMEX defaults on gold and silver actually occur, the exchange may just retroactively invalidate all delivery contracts, and merely slap a fine on short sellers who settle via cash. Physical buyers will be stiffed, despite receiving a cash premium.

To those who believe a COMEX default will never occur, refer to the London Metals Exchange default on nickel in 2006. Buyers did NOT receive the physical inventory, and short sellers merely had to pay a 10% fine above spot price.

Should such a default occur with gold or silver, the price of physical gold and silver will soar, as will paper certificates allegedly backed by the precious metals. There will be huge dislocations in financial markets worldwide should such a default on COMEX occur. Gold bugs ridiculed for their conspiracy theories will have the last laugh.

The CFTC is also reviewing enforcement of position size limits in the energy and precious metals pits, which would force bullion banks to drastically reduce their concentrated permanent short positions. This will also catalyze gold and silver price spikes.

Are precious metals reaching bubble status?

This question has been raised by inflationists and deflationists alike. Most people believe the prices of gold and silver have increased too far, too fast. In my opinion, they are wrong.

Without forecasting specific targets, let's look at facts. The US government national debt has climbed above $12 trillion. The 2009 budget deficit was $1.4 trillion--and rising going forward. Entitlement programs including social security, Medicare, Medicaid, and two ongoing wars bring our unfunded liabilities to over $100 trillion. There are only a few ways to cut the deficits and pay down some of that debt: raising taxes, reducing government spending, increasing productivity and economic growth, and inflating the money supply. We should expect all four. Inflation devalues the USDollar, reducing the burden of those huge debts. But savers and creditors are punished by artificially suppressed interest rates and a debased currency.

To provide personal context, I've been long gold and silver since November 2008--and have been ridiculed the whole way up by almost everyone. For those who believe we are in bubble territory for precious metals, I will offer the following counter arguments.

Many Americans are becoming aware of gold as an asset class, but MOST AMERICANS HAVE NOT ACTED UPON THIS AWARENESS. Furthermore, financial planners don't earn fees when clients buy gold and silver bullion or coins, so they haven't been endorsing owning precious metals as a hedge against inflation and financial crises. Despite foreign governments encouraging citizens to own physical gold and silver, the US government downplays the fact that precious metals prices have soared over the last decade.

Americans have seen Cash4Gold commercials ad nauseum, but these television commercials entice people to SELL grandma's gold jewelry, allowing the general public to gladly pocket an extra few hundred dollars. The problem is they are only getting 50 cents on the dollar--selling into a bull market. In any case, the scrap market is dwindling, as consumers aren't selling as much as in previous rallies.

The smart money is taking the opposite side of the trade: hedge funds led by billionaires John Paulson, Jim Rogers, George Soros, Paul Tudor Jones, and David Einhorn are BUYING gold and gold-related vehicles. So are central banks worldwide, who have been net sellers in the past. They are now buying.

Of course, gold and silver will eventually reach bubble status--every asset experiences peaks and valleys over time. But the secular peaks aren't $1150 or $18 per ounce, respectively. As a reference point, $2400 and $140 represent inflation-adjusted peak values of $850 and $50 in year 1980 for gold and silver, respectively. With the world awash with more trillions of dollars today than in 1980, the true value of gold is $6300, according to French investment bank Societe Generale. Divide that by 15, the historical gold/silver ratio, and one derives a peak value of $420 for silver.

Again, these are not forecasts, but valuation models based on historical precedent. One could argue gold will fall to $250, or silver back to single digits--back to year 2001 levels. No one has a crystal ball, but all we can do is make educated calculations, based on economic fundamentals and previous history. The commodities markets, specifically precious metals, are a very volatile asset class. Equity shares in resource companies producing said commodities can be even more volatile. Hence, the disclaimers. A long bet on commodities is a bet against central banks worldwide, which by extension is a vote of skepticism against sovereign governments' inability to keep their fiscal house in order. Some will accuse these trades to be unpatriotic. I view them as protection against the abuses of central bankers gone wild--a means to preserve the diminishing purchasing power of an impaired currency--the USDollar.

This is one potential scenario, but one that is becoming increasingly apparent, despite skepticism from our government economists, academia, banks, and the general public. I admittedly swim upstream when it comes to populist Keynesian economics. On the other hand, mainstream financial models haven't exactly worked like clockwork, either. Look at the carnage of collapsed banks and government agencies guaranteeing home mortgages, for instance. And look at equities and real estate. It hasn't been pretty...

Whether one chooses past performance, or money supply vs. above-ground gold supply dynamics, the prices of precious metals appear to be headed higher--much higher. With any bullish trend, it won't run straight up, so the corrections will be painful, but the spikes will be breath-taking--and unpredictable. Trading the tops and bottoms will be difficult to time due to high price volatility. Buying and holding, while averaging in on dips may be prudent. When and if the gold mania kicks in, I'll know it when the headlines are splashed across the major media outlets. I will probably average out at that point. And when bartenders and cab drivers recommend obscure gold mining companies, giving advice on "how to make a killing" on the next hot trading tip, I will be heading for the exits. We are not even close to that mania phase yet.

These are my opinions only, and not specific recommendations. No specific targets or position sizes are implied. Past performance does not guarantee future results. Do your own due diligence. Investing is risky and investors can lose most or all their capital. Holding US dollars could be just as risky.

Disclosure: long gold and silver mining shares.

Saturday, November 21, 2009

The hazards of our huge national debt

Persistent deficits and huge debts eventually make it tough to even pay the interest on that debt. So the government must continue to print more currency.

Friday, November 20, 2009

Gold in backwardation--again

If the title of this blog entry appears redundant, it's because it is. Gold appears to be in backwardation again this Friday evening / Saturday morning, as the spot price exceeds the forward contract--only this time the premium is not a few cents, but $4. Obviously, there's a shortage of the physical inventory overseas.

Gold in Vietnam has persistently been priced at a premium above spot from $20 to as high as $60, a sure sign the black market is thriving.

President Obama regarding China

“I was pleased to note the Chinese commitment, made in past statements, to move toward a more market-oriented exchange rate over time,”
- President Obama during his recent trip to China.

The Chinese must have had a good laugh, given the US government is in the process of abandoning market-oriented exchange rates.

FHA problems looming

"Yesterday's subprime is today's FHA."
- Toll Brothers CEO, Robert Toll.

Toll Brothers is the largest U.S. luxury homes builder. You would think he would spin things positively.

Note: Robert Toll has sold almost 7.5 million insider shares of his company stock in September, 2009 alone. Apparently, he's not just sounding the alarm bells randomly--he's acted upon it.


A few have invested in GDX, the ETF tracking major gold producers, in an effort to gain more leverage and upside for the increasing price of gold. Here's a synopsis of the differences between GDX and GDXJ, the newest entrant in gold mining shares.

Jim Rickards on the weak Dollar and gold

Watch the video to the end on the weak dollar and its implications:

To provide context, I am including again his interview in September on the Dollar, central banks, and the relationship with gold:

In the interview, he makes the following observation:

"When you own gold you're fighting every central bank in the world."

Unemployment Chart

Despite declaration of the end of the recession last summer, unemployment continues to soar. To get the full "color" on the extent of the problem, click on the following chart:

Thursday, November 19, 2009

United Kingdom's fiscal troubles

The UK shares the same fiscal troubles as the United States: high deficits, huge debts, insolvency, high taxation, a low manufacturing base, high regulation, high unemployment, a deep recession, replacement of private sector debt with public debt, and bankrupt entitlement (social) programs.

Their government response has been equally similar: quantitative easing--or creation of money supply. And the results will be identical--a huge default--via inflation or outright default.

Here's an insightful Australian perspective on a British problem.

Societe Generale

Societe Generale is one of France's largest banks with a worldwide presence, so they aren't some fly-by-night operation. For a mainstream investment bank to release this to their clients is astonishing. Investment banks don't make money by pitching gold--they don't earn fees from gold purchases by the investing public (they earn a commission when investors buy gold equities, but that is a disproportionately small sector--which, by the way, works to our advantage when the public rushes in and bids up prices of gold mining shares).

One-by-one, major investment banks will tout gold, driving up prices going forward. Bank of America's Merrill Lynch became a gold bull last week.

I'm waiting to see when Dave Ramsey pumps up gold--that would signal a market top. Until then, I'm going to watch the fireworks in the COMEX precious metals pit.

Smart money

I keep seeing "bubble talk" on the price of gold, and perhaps we're due for a correction, but the bullish trend in precious metals will continue, imo. I'm not fighting the trend, even tho I took a little off the table.

John Paulson, David Einhorn, Paul Tudor Jones, Jim Rogers, and George Soros are all loading up on gold and gold equities. What's the common element? They're all billionaire hedge fund managers, who put their book where their mouths are.

The suckers in this play are selling grandma's jewelry to "Gold4Cash" outfits for 50 cents on the dollar, thinking they're getting a good deal. Scrap selling will eventually run dry, even as gold prices keep appreciating.

Staying with the supply side part of the equation, gold production peaked in 2000 and has steadily declined since. South Africa, once the world's largest producer (China is now the #1 producer), is now #4, and reserves are vastly over-reported.

Gold increases in price because supply growth is not keeping up with the increase in money supply. Gold's supply grows 2% a year, while the monetary base of dollars is growing at a much faster pace (15+%). The double-edged sword is that monetary easing also debases the USDollar, making gold even more attractive.

Let's be honest: gold and silver compete against the USDollar--and against every other major currency. A bet on gold is a bet against every central bank in the world with the ability to print currency. That's why they hoard it and that's why they hate gold bugs.

The downside of gold is that it doesn't earn interest or pay a dividend--it earns 0% interest. When interest rates are high, the demand for gold is low. But when interest rates are suppressed to near 0%, the flight to gold is justified, as no one wants to hold paper that is not earning a meaningful rate of return. To make matters worth, that same paper is losing value very week.

Do I think we are due for a correction? Perhaps, but the smart money (and more importantly, central banks themselves) are lining up on the long side of the trade, despite higher prices. As long as Congress and Obama continue to spend money they don't have (e.g. healthcare reform), I don't see any other alternative than Bernanke and Geithner stepping up the printing presses.

Just my opinion. See the normal disclaimers in the side bar.

Disclosure: Long gold mining shares.

Warren Buffett on deficit spending

Warren Buffett, of Berkshire Hathaway fame, was recently the Charlie Rose talk show. Here is an exchange:

Charlie Rose: This question is asked frequently: Will at some point the deficit and the debt and the decline of the dollar get to a point that people who hold our debt will no longer want to buy and then we're in a crisis?

Warren Buffett: We cannot keep running fiscal deficits like we are currently without having a lot of consequences over time... If you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.s in effect to the rest of the world, that leaves another trillion. And you know, the domestic savers are not going to come up with a trillion... so these numbers are unsustainable over time, what we're doing. It is true, though, that if you keep flooding the world with your debt and people see your fiscal policies are sort of out of control, they're going to get less and less and less enthused about your debt. And then, one of two things happen. Either you keep paying more and more to roll over that debt or you start monetizing it like crazy...

The Federal Reserve Bank has been monetizing the debt since March, 2009, catalyzing a rally in equities, commodities, and bonds to a lesser extent. It keeps short-term interest rates artificially low, in an attempt to stimulate the economy. As it did in the early 2000's under former Fed Chairman Alan Greenspan, it also created a massive bubble in certain asset classes, namely the housing market and equities.

With government bailouts and buying of collaterized debt securities, toxic assets have been shifted from the private sector (banks) to the public sector (government agency and US Treasury debts). The mortgage problems haven't been solved--it just shifted to the FHA. And when the bubble in government securities bursts, foreign sovereign governments won't be there to pick up the pieces.


Alexander Tyler, a Scottish history professor at the University of Edinburgh, wrote the following about the fall of the Athenian Republic:

A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years.

Tyler published this in the late 1700's.

Tuesday, November 17, 2009

Hackers unite

Richard Wong, venture capitalist with Accel Partners, was in the middle of praising Google's Android and Apple's IPhone on CNBC--while politely questioning RIMM, Nokia and Motorola in the smartphone space, when he was unceremoniously unplugged by a black out in the middle of his commentary. After he came back on-line, he even joked about the "friends from Helsinki" in an opaque dig against Nokia, as the possible perpetrators.

Well done--by both parties.

Central banks stepping up to the gold window

India's central bank purchase of 200 tons of IMF gold grabbed the biggest headlines, but central banks from other countries are also buying gold. More are inevitably considering increasing their gold reserves in diversifying away from the USDollar.

China, now the world's largest gold producer, has been stealthily increasing its gold reserves, doubling its tonnage since 2003.

Of particular interest is this note in the article:

The Royal Bank of Australia has not bought any gold since selling two-thirds of its reserve in 1997.

Australia is a huge exporter of natural resources, including gold. It would not surprise me if they keep more of their output for domestic use going forward. Selling gold in the latest 90's was classic selling at the bottom, much like Great Britain's Gordon Brown did.

In an amusing sequence of press releases, the Russia State Depository announced they would sell 50 tons of gold on the open market. A day iater, the Russian central bank denounced the planned gold sale (in light of gold's rising prices). The day after that, the State Depository announced any gold sales would end up in Russia's central bank. One has to appreciate totalitarianism.

Net purchasing--instead of selling, by central bankers worldwide infers gold's surge in price won't end any time soon.

President Nixon was a crook--and a liar

In this classic video, President Richard Nixon lies on almost every point regarding removing the gold standard. Note that since 1971, the USDollar has lost 97% of its purchasing power relative to the price of gold.

Sunday, November 15, 2009

Gold in backwardation--again

I noticed gold went into backwardation against late Friday, signalling another run up in price in Asian trading this morning (it's Sunday night in the US right now). I've written several blogs on backwardation (please do a search for details), and what it infers. In normally functioning commodities markets, a contango exists where the spot price is lower than forward contracts, to account for storage, insurance, and security costs. This is normal in assets like crude oil or precious metals.

But when there is a physical shortage, and when buyers of forward delivery contracts demand physical delivery, in lieu of cash settlement, sellers have to scramble to find said inventory. This causes prices on the physical market to be bid up, which signals price bullishness.

Sure enough, gold and silver prices are trading up in Asian markets this morning. The huge short positions by the bullion banks will either cause a sharp pullback, or they are about to be stampeded by the long speculative funds and central bank gold buyers.


Zimbabwe has been the butt of many callous financial jokes, the poster child of runaway hyperinflation and its tragic consequences. As a result, President Roger Mugabe and his thugs were printing 100 hundred trillion dollar bills. Hence, citizens either starved or migrated to neighboring countries as grocery markets couldn't stock shelves due to government mandated price controls, even as their cost of goods spiraled out of control.

After the abandonment and collapse of the Zimbabwe dollar in February 2009--a reset of the currency essentially, the Zimbabwe economy has actually recovered robustly, albeit from very low levels. Unshackled by price controls and foreign currency regulations, free markets are returning in Zimbabwe, despite continued strict credit financing. The Zimbabwe case study may provide a micro illustrative portend of what is and could be occurring in the United States.

Let's hope the USDollar doesn't become the butt of currency jokes.

Friday, November 13, 2009

Lloyd's Prayer

After Goldman Sachs Chairman Lloyd Blankfein glibly said his firm was "doing God's work" during an interview (a remark which he later dismissed as a joke), the jokesters on Wall Street had a field day. Among the more clever:

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally's Come. God's Work Be Done
On Earth, As There's No Fear Of Correction.

Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman And Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate,
Forever And Ever.


Given taxpayers bailed banks out last year after horrendous losses, and given these same taxpayers are either furloughed or unemployed today, and given Wall Street is now patting themselves on the back for the recent liquidity-induced market rally, and given Wall Street is about to pay itself $30 billion in bonuses, "Lord" Blankfein should choose his words more carefully next time.

Wednesday, November 11, 2009

Jim Cramer jumping on the gold bandwagon

Jim Cramer of CNBC's Mad Money was praising gold's all-time new highs today, as well as a couple gold mining ETF's. Which caused me to pause, as he's been bashing the shiny metal for a while. To his credit, I believe his trust fund owns Agnico, a gold miner.

Could this about-face be the death knell for gold's ascent? Perhaps a correction is in order, and I did take a little profit off the table yesterday. Cramer has been a good contrarian indicator, as I believe most of his calls are wrong-way bets (sorry, Jim, but your track record is questionable), but that doesn't mean gold will stop climbing in price. A correction is expected after recent surges, but the secular bull market for gold since 2001 is still intact, in my opinion. In which case, I'm with Cramer on this one. Booyah!

As long as central bankers worldwide are accomodative with low interest rates and stimulative monetary policies, gold has nowhere to go but up.

I started buying gold and silver coins and mining shares last November, gradually adding to my holdings ever since on dips. With the exception of one, all the mining shares have appreciated triple digits since then, yet Cramer is only now touting the yellow metal. Curious, but predictable.

Does this mean I will exit all my precious metals holdings? After all, as a contrarian, you want to bet against the extreme majority. When sentiment gets too exuberant, you sell. Likewise, when there's blood in the streets, you buy. In other words, has the trade become too crowded? Absolutely not. Because even though some people are now understanding the logic behind holding precious metals as an inflation hedge and as a reliable store of value, very few have acted on this knowledge. I would argue most people don't understand the value of gold--or just have a distaste for the yellow metal. Most won't jump aboard until the mania phase kicks in at much higher prices, when everyone and their brother will be recommending gold as a speculative bet, without understanding its intrinsic role as a means of preserving purchasing power.

The prudent strategy is to sell into that mania--not buy into it. The parabolic rise in gold and silver prices probably won't occur for a few more years, the normal lag time behind an increase in the money supply. Inflation usually doesn't kick in until these massive liquidity injections eventually flow through the economy via bank lending. But then again, we are in uncharted territory. This is a monetary experiment run by mad scientists at the Fed and US Treasury. No country has ever printed so many trillions of dollars so quickly.

An orderly decline of the dollar will cause a steady climb in gold and silver. But should there be a run on the dollar in a currency crisis, the mania phase in hard assets will go into high gear almost overnight.

See disclaimers on the sidebar.

Disclosure: long gold and silver, and long gold mining shares.

Currency crisis

People challenge my assertions that a weak currency is ultimately bad for a country. They will argue that an artificially cheapened dollar stimulates exports and dampens imports, as exporters become more competitive in the global marketplace. This is true in the short-term, as exports are cheaper relative to exports from other countries. This leads to economic and job growth.

However, longer-term ramifications are insidious: currency debasement, inflation (diminished consumer purchasing power), asset bubbles, and higher interest rates down the road. If monetary easing is too exorbitant, it could give way to hyperinflation and ultimately, a currency crisis.

A currency collapse has eventually occurred to every paper currency known to mankind. It recently happened in Iceland and Argentina--twice. Many other countries are on the brink. The US is at risk over the next several years, due to rampant increases in the money supply.

Depicted is the aftermath of such a currency crisis, during Iceland's economic implosion last year:

The decline of the krona, which has lost half of its value since the start of 2008, has resulted in rampant inflation, which is now over 20 percent. Many people are seeing costs skyrocket, particularly on imported goods. Due to the high interest rates in Iceland, many people took out loans in foreign currencies where interest was lower. For them, costs have doubled

The economy is set to suffer a severe contraction in the coming year. Lars Christensen, an economist from Dansk bank commented, "Given the base now, GDP will then fall at least 10 percent, or even 15 to 20 percent."

Ironically, this information came from the World Socialist Website (see the whole article on Iceland):

These are the unintended consequences of excessive government spending and public debt.


You thought the US had unemployment problems. The official unemployment rate in the US is 10.2%, but according to, the unofficial rate is 17.5%, if you include people who stopped looking for work, and no longer receiving unemployment benefits (i.e. they are still unemployed) and workers at an undesirable position earning less than what they previously earned. These numbers are admittedly horrible by everyone, the worst since the early 1980's by some measures, or the worst since the Great Depression by others.

But Spain has it even worse. Their official unemployment rate is 19.3%, but their unofficial rate is 34%! Latvia's official unemployment rate is 19.7%. Folks, that's no recession--that is an outright depression.

The alleged silver lining is unemployment figures are a lagging indicator, meaning the economy recovers before employment does. This is true, but this Great Recession has been so deep, and the economy has been so severely impaired, that it may take much longer before cash-strapped and credit-starved companies start hiring again.

If the American consumer is broke and jobless, they won't be consuming.

Hence, the "jobless recovery" may not be a recovery at all.

von Mises vs. Keynes

John Maynard Keynes has more followers (inside the US government and its banking cartel), and has an economic theory named after him. Ludwig von Mises is largely forgotten by the mainstream financial press, even though his track record of predictions has been much better. A disciple of the Austrian School of Economics, von Mises was a libertarian who predicted in the 1920's that government intervention created distortions in credit and financial markets, causing asset bubbles that would eventually burst. Does that sound familiar?

In any case, his prediction came true in 1929, yet he was marginalized yet again with the emergence of Keynes in 1936, who espoused printing currency and running deficits in order to escape the throes of a Great Depression. Again, does that sound familiar?

Many from the intelligentsia mistakenly believe we are in the midst of a war of ideaologies, i.e., GOP vs. Democrats, conservatives vs. liberals, etc. In regards to financial policies, it's partially true, but not completely, because Administrations and legislators from both sides of the aisle have run up enormous budget deficits, while resorting to printing currency to fund the deficits. They have borrowed trillions from foreign sovereign funds, and contributed to the insolvency of entitlement programs such as Social Security and Medicare. We are simply a country that spends money we don't have.

In short, our government's fiscal and monetary policies have been reckless and irresponsible. President Obama and Congress are following the wrong playbook. (you may need a subscription to read this article)

Tuesday, November 10, 2009

Another gem by Greenspan

Alan Greenspan did a complete 180 degree turn from his free market youthful days to a Keynesian, market-manipulating Federal Reserve Chairman. I presume that's how one climbs pay-grade levels within the Fed.

In this expose on how Gordon Brown sold the UK's gold reserves at the absolute bottom, plundering the country's wealth in the process, we learn several things:

1) Germany's gold reserves aren't in Germany at all. They are stored in New York.
2) Gordon Brown is a terrible market timer.
3) Greenspan's warning to Brown to not sell his country's gold needs no explanation: "Germany in 1944 could buy materials during the war ONLY with gold. Fiat money paper, in extremis, is accepted by NOBODY. Gold is always accepted." - Alan Greenspan, 1999

He should have added Germany lost World War II.

Spot price vs. street price

I stopped by a local reputable coin dealer yesterday, to pick up some gold and silver coins, and happened to see a sign on one of their displays: "We pay higher than spot prices for gold bullion." Remember: coin dealers have to mark up whatever they pay for their gold purchases, so why would they pay higher for gold bullion from a retail seller--when they could just buy a contract at the COMEX for a lower price? Could it be there is a physical shortage at the COMEX also?

In the local Vietnamese gold market, the premium on the street price for gold above the worldwide spot price reached as high as $59.37. Clearly, there is a worldwide shortage of physical inventory, as premiums firm up above spot prices.

Think about it: why would the spot price, established by the COMEX in New York, or the London Metals Exchange, be so much lower than the true market price? Could it be further evidence that bullion banks are using naked shorting of paper contracts to artificially suppress exchange prices? Furtheremore, could these lower COMEX prices not be reflective of the true price of gold?

Despite setting new all-time highs in nominal prices, gold seems to be setting new support levels--and not new resistance levels, as two central banks (from India and Sri Lanka) stockpile gold, instead of selling their inventory. Other central banks are looking to bid for the remaining IMF inventory for sale, after India swooped in and purchased half of the original 403 tons. China, Russia, and Brazil are looking to shore up their gold reserves. They are coming to the realization that holding USDollars in their reserves is a riskier proposition than holding gold.

Monday, November 9, 2009

Is a correction coming?

Shorts have been torched since the March lows, betting on a market correction as traders climb the wall of worry, waiting for the next shoe to drop. The problem is the Fed has flooded the market with liquidity, lending to banks at zero interest rates, encouraging the carry trade as these banks invest in equities, bonds, and commodities. Hence, the elevation in these assets, despite a lousy economy.

In essence, a cheapened dollar is bullish for other asset vehicles. The Fed, and now the G-20 countries, have declared easy money policies will be extended to at least mid-2010, when they may take the punch bowl away.

Having said that, I expect a correction in both equities and gold soon, albeit temporary, as the short dollar trade is getting really crowded. When a a consensus builds, it's usually prudent to take the opposing side--at least until sentiment becomes less lopsided. Additionally, as the dollar keeps getting trashed, foreign governments are becoming increasingly concerned at their stronger currencies vis-a-vis the dollar, making their exporting industries less competitive (although their consumers enjoy the weak dollar when they travel as tourists to the US).

So I believe their central banks will intervene in unison in buying dollars and selling their own currencies. It'll be a death race to the bottom---to see which countries can devalue their currencies the most, in order to stimulate their own domestic economies.

This (temporary) strength in the dollar will tank gold, commodities and stocks, in my opinion. This is what happened in Quarter 4 2008, although the dip won't be as pronounced this time around, as there are many more buyers to stem the decline, including big hedge funds and foreign central banks. The bullion shorts have more formidable opponents with deeper pockets now.

Obviously, President Obama, the Fed and US Treasury don't want a repeat of 2008, so they will keep printing dollars. After the correction, the dollar will resume its downward trajectory. The only question is WHEN this correction will occur.

I'm not selling everything, especially if I'm waiting for a biotech event, but I sold a small portion of my gold positions today. I will look to add to my gold position on any pullback. If it doesn't occur, I won't beat myself up. It's been a good run with the yellow and white metals already, up triple digits in the mining stocks. But when I see Bank of America forecasting $1500/ounce gold, and mainstream pundits predicting $3,000 gold, I get nervous.

Where were these analysts last year when gold was $675, and some of these mining shares were penny stocks? The answer was they were still in the major equities indices--and subsequently got hammered in the financial meltdown.

I'm not selling all my current positions in gold, because 5 years from now--or less, we could see $2500 gold. Trading in and out of positions is seldom rewarding. I'm just taking profits, only because I can, without running for the exits.

It's similar to when I sold some BCRX at $6.70 price per share (pps), after buying in the $2's and $3's after the initial swine flu outbreak earlier this summer. Do I regret it now that it's at $11? Yes, but after being honest about it, it was the right thing to do. I won't get rich on this one trade, but I'll be around to play another day. I still have house money on the table, and even added a little today on the dip, so I'm still in the game.

I'm not trying to optimize my returns--I'm trying to play the probabilities, and hedge my longs. Since the short dollar / long gold trade is too crowded, I'm stepping back from the cliff, but I'm not leaving the beach.

See disclaimers on the sidebar. Do your own due diligence. These are not specific recommendations on assets or positions. Good luck.

Disclosure: I am long gold and silver mining stocks, and long BCRX shares. But obviously, I am expecting pullbacks in both asset classes.

My Facebook post on deficit spending

Kathleen, not to single you out, as I do agree with you on the benefits of hope, but when the hopes are built on a false foundation, the house will crumble. Ask Shawna, as I'm sure she is aware of my thoughts--and investment theses. It's built on mistrust of government fiscal and monetary policies. It's got nothing to do with Dems vs. GOP, or conservative vs. liberal, etc. Obama and Pelosi just happen to take it to unprecedented extremes, as our nation's currency--and hence, our sovereignty are now at risk of being irrelevant.

Long story short, you could quite possibly be holding confetti, built on false promises from the Fed and US Treasury, with the complicity of our banking industry, who Congress conveniently bailed out, while they appropriate all this deficit spending. The US is running a massive Ponzi scheme, taking in taxes on social security and other unfunded entitlement programs--knowing full well payers will never see a dime back.

I'm in the business of risk management, not in the business of forming ideaological judgments, and unfortunately, the average American is an unwilling participant in the huge casino of the world's financial system. It includes citizens who pay taxes, have home mortgages, credit cards, retirement savings, or merely hold the USDollar. In other words, every single American.

The financial implications go well beyond whether Congress enacts healthcare reform, cap and trade, or any other bill. The crux of it comes down to you can't keep spending money you don't have. Because in our case, the foreign creditors who have been lending us this money, will eventually say "Enough!", and then the music will stop.

The US government has been bailing out failing industries, and foreign sovereign funds have been buying Treasury bills to fund our debts, but when they realize the US government itself is already bankrupt, they won't be bailing us out.

Sorry to take the punchbowl away, but the G-20 countries have already pissed in it.

Saturday, November 7, 2009

FDIC is broke

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250,000, and this is why it is broke:

This list of failed banks will grow longer as residential foreclosures continue, and commercial real estate loan defaults accelerate.

Friday, November 6, 2009

FOMC press release

In the November 4, 2009 Federal Open Market Committee (FOMC) press release:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

My take: great, as the average worker is losing their job--or has their salary cut, and their home value is further eroding, and they can't get a loan, they're managing to spend more money.

Anything wrong with that picture?

Sprott Management on the big con

I'm starting to like this guy John Embry. He's a gold bug, but he makes a lot of sense, and has a track record to back it up.

GLD vs. physical gold

The Exchange-Traded Fund (ETF) GLD has been a popular vehicle for investors interested in participating in gold price appreciation--and as a hedge against inflation and financial crisis. But there is a potential downside, as previous mentioned. According to James Turk:

“For now, gold is marching to a different drummer,” says Mr Turk. “We are seeing a scramble for physical metal, and that demand is driving gold higher. Buyers are opting for physical gold, not paper gold.”

He points out that when gold was trading at $870 an ounce back in early April, the SPDR Gold Trust – the world’s largest gold exchange-traded fund – recorded ownership of 1,127 tonnes of the metal. Since then, SPDR’s holding has shrunk by 20 tonnes, but gold has climbed by more than $200. “It is a clear example that buyers want physical gold and not paper gold. They are opting for the real thing, not a substitute.

“Why? Because risk aversion has returned to centre stage as worries about bank solvency have resurfaced. It is possible we have been in the eye of the hurricane. Physical gold does not have counterparty risk, which makes it the safest haven of all.”

With a shortage of physical gold, many doubt the gold paper certificates are actually backed by physical inventory, with matching serial numbers.

Of course, there are disadvantages of owning physical gold--especially with bullion, including safe storage and security. But in times of extreme financial crisis, claiming that physical gold may be difficult--if it doesn't exist.