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.