Peter Schiff and Mike Maloney discuss asset classes and the reality of the world economy today.
Archive for the ‘Global Vision’ Category
A Very, Very Interesting Year
Don Coxe, Chairman, Coxe Advisors LLC.
For the past year, we have rarely written on gold, because there were too many other investment opportunities, and the good old S&P was just going up month after month. This was, for most equity investors, Voltaire’s “best of all possible worlds.” The economy was of Goldilockian temperature and moderation, politicians were behaving the way cynics expected and optimists despised, and the Fed was successfully injecting massive doses of “financial heroin” into the US—and global—economy without any signs of ill effects… or any remarkable enthusiasm for risk-taking.
Some of us were disconcerted that an increasing proportion of the work force were leaving it for a life of disability benefits, food stamps, and other confections from the government’s banquet table. Meanwhile, bankers were happily absorbing the financial heroin of zero interest rates and a continuously fattened Fed balance sheet. They loaned, but not in ways that stimulate the economy. They were simply lending back to the Fed at a big markup and levering up their balance sheets with short-term, low-risk paper issued by other institutions.
We couldn’t help noticing the resemblance to the land of the lotus eaters in Homer’s The Odyssey. When Odysseus and his sailors landed among the lotus eaters, they enjoyed their floral diet and drifted into a state of dreamy satisfaction, refusing to return to the risks of “the wine-dark sea”—even though they swore they’d like to go home… sometime. Eventually, Odysseus and his most loyal followers lashed their lassitude-loving shipmates to boards and dragged them back to their ship.
In this dreamy financial world, the need to own gold became increasingly irrelevant. “Give us this day our daily Fed” was the bankers’ prayer, which was answered with monetary injections delivered with near-divine consistency. Why own the best protection against a financial catastrophe when the managers in Washington, London, and Frankfurt had apparently found the magical formula to eliminate risk?
No surprise, then, when The Financial Times disclosed in January that its regular poll of the world’s leading gold investment experts revealed an overwhelming consensus for another grim and ghastly year for gold.
Among the prognosticators were some who predicted that the gold price was headed for just three digits; they only disagreed on whether the front number would be nine or seven. The “must-own” metal of this millennium had lost its urgency and relevance, replaced in what remains of metallic stardom by platinum, which is needed to clean car exhausts. Global warming, says the new consensus, is something real, whereas gold is headed back to “barbarous relic” status.
Some of us who had been sitting on the sidelines decided that the Grecian Chorus of Gloom had overstayed its time on stage. Enough already!
Gold is just as relevant as ever, and the indispensable portfolio protector is on sale at a deep discount. That’s why in January, we sharply boosted gold stock exposures in the commodity equity portfolios we advise.
Some others apparently shared our view, because gold has not traded below its year-end close and is up 10% YTD at this writing. Gold stocks in the GDX are up 24.7%, and the GDXJ junior gold stocks are up an astonishing 41.8%. Chrysophilia could soon be back in vogue, although Paul Krugman and other “progressive” economists would surely label it “financial necrophilia.” (Is this a new age of gold or a dead-cat bounce?)
When Harold Macmillan was UK premier, he once gave a speech to a Tory audience about all the great things the government was doing for the people. The crowd loved it. Then a young man asked, “So what could possibly go wrong that would lead to your government’s defeat?”
“Events, dear boy, events,” the premier replied.
Events will, we suggest, bring gold back to center stage from its two years of languishing backstage. We cannot predict which “events” will trigger the next monster rally, but with all that paper money and all those debts and all those bad bank balance sheets, something will assuredly go wrong sometime.
Gold is that unique element that is priced not just by the interaction of the classic opposites—fear and greed—but by the shifting winds and storms of those emotional and intellectual opposites. Gold was languishing at $275 when a new kind of global war began on 9/11. When the US economy emerged from recession in 2002 and embarked on a real-estate-driven boom, gold soared all the way to the $1,000 level before being sucked into the bank collapse vortex and declining to $716. But while most equities were still plunging, gold and gold stocks entered into a new bull market and soared to $1,911. Two fears drove that golden bull: fear of Fed monetary policies and fear of a collapse of Eurozone banks and economies.
When those fears began to evaporate, gold investors looked down, saw no safety nets—and began bailing out. No inflation? No euro crisis? No reason to hold gold.
We think most investors are missing the point: nearly six years of unprecedented money printing, unprecedented subsidization of big banks with zero-cost money, and massive government intervention into the economy have not delivered even a soupçon of robust, inflation-generating growth.
Heroin was the battlefield anesthetic of choice for severely wounded soldiers. The crucial medical decision was not whether to deliver the heroin: that was easy. The tough part—for doctor and patient—was deciding on and enforcing its withdrawal before the soldier became a hopeless addict.
The Fed has been lulled into the economically perilous belief that capitalism should be stimulated with sustained injections of a potent narcotic long after the patient is out of the emergency ward. Zero-cost money and an underpriced mid-to-long Treasury market most certainly will make the economy rebound, not subside into languid repose.
This mechanistic assumption ignores the guts component of capitalism: hard work and taking risk for reward. The Fed’s long-term recovery is, in effect, based on the unstated premise that risk is a four-letter word that has, like another four-letter word beginning with “f,” little place in genteel company.
Mr. Bernanke must sense this, because nearly a year ago he began to warn that “tapering” was coming and “unconventional monetary policies” would not last forever. For that warning to the addicted patients—the big, bad, bonused bailout banks—he was greeted with screams of anguish and sharp stock market selloffs.
His successor is committed—at least for now—to continuing the tapering. Since the Fed has quadrupled its balance sheet without triggering worrisome inflation, that component of Fed policy should easily survive a gradual return to normalcy.
But the zero interest-rate policy (ZIRP), as our friend John Mauldin recently noted, is having serious effects on the economy and should be scheduled for early abandonment.
Meanwhile, the rest of the world is becoming more restless about President Obama’s apparent “de-risking” of American commitments abroad. Whether it is Syria, Benghazi, Mali, Egypt, Israel, or Iran, he seems to be giving signals that blights will produce merely barks. His secretary of state says that from here on, all American treaties will include commitments on climate behavior, because climate change is as great a risk as starvation, pandemics, or terrorism. (He left out locusts.)
With the increasing tensions between China and its neighbors—notably Japan—any misunderstandings about America’s commitment to its allies could prove disastrous. (Those with an interest in how misunderstandings about commitments to allies can lead to catastrophe should read Margaret MacMillan’s magisterial The War That Ended Peace: The Road to 1914.)
Investors should assume that the awe-inspiring oceans of liquidity already produced by central banks should be enough to avert a recessionary slide—if not to stimulate a heavy flow of capitalist juices.
What can we say of the post-taper Treasury market? Six years of massive support mean that the Fed is—by far—the biggest holder of the national debt. The Fed’s relationship to the Treasury could become an area for other radically new policies in coming years:
Why does the Fed need to hold all the debt it has bought? What would be wrong with shipping lots of it back to the Treasury to reduce the national debt?
What—if any—changes will be made to the Treasury’s policy of ignoring the nation’s hoard of gold while pricing it at Nixonian levels? For that matter, why is the Fed finding it so inconvenient to return Germany’s gold? On the present, somewhat theoretical schedule, the last of the gold will finally reach Frankfurt sometime during President Hillary Clinton’s second term.
The only thing about all of the above of which we can be reasonably certain: long before then, gold is going to be worth much more than $1,300 an ounce.
I agree with others in the arena a basic asset protection, that EVERYONE who wishes to save some of their wealth MUST do so with some of those savings in PRIVATE MONEY.
What is PRIVATE MONEY?
It must be something that qualifies AS MONEY.
About 2000 years ago Aristotle defined the characteristics of a good form of money. They were as follows:
1.) It must be durable. Meaning it must stand the test of time and the elements. Money is a medium of exchange and a store of wealth so whatever form it takes, it must be able to handle the wear and tear of constant trading and transactions.
2.) It must be portable. Meaning it should be practical in the sense that it holds a high amount of ‘worth’ relative to it’s weight and size. In other words, it’s “worth” must be very dense. Imagine if money was in the form of lead bricks, these bricks would be very dense, but it would be a nightmare and near impossible to constantly exchange large amounts. And you can forget about carrying them around in your pockets.
3.) It must be divisible and consistent. Meaning it should be relatively easy to separate and distribute in smaller forms without affecting it’s fundamental characteristics. This concept also works in reverse in that it should be relatively easy to re-combine several divided pieces of the money into a larger, single piece. This makes houses and paintings and cars unpractical as forms of money because taking them apart would affect their fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. Dictionary.com describes fungible as:
“(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”
4.) It must have intrinsic value. This characteristic carries a bit of a subjective quality in that everyone views the world through a different lens and what I view as valuable may not necessarily be valuable to my neighbor, but for the sake of argument let’s just say that there is a consensus of value given to a certain material. The basic understanding behind intrinsic value is that the material carries ‘worth’ in and of itself. It does not derive it’s value from anything else. It just sits there and is valuable. This is why paper currencies with no backing will not stand the test of time. Paper currencies only derive their “value” from what is known as legal tender laws, which are in essence a threat of legal prosecution, and or force, if they are not accepted as money for payment.
This fourth point brings up the point of scarcity, which is in essence a matter of intrinsic value. Paper currencies in circulation today, such as the dollar, euro, yen, swiss francs, zimbabwe dollars, etc… they are all now purely fiat instruments. (by fiat, I mean that their use is declared by decree and usually by threat of force. Definition of fiat.) The governments that sponsor them have essentially unlimited power in their ability to create new supplies. Because of technology, it is now simply a matter of typing something into a computer and the amounts are instantly credited somewhere. So in theory the supply of dollars for instance is infinite, and it seems like lately the wizards in Washington are trying to see whether this theoretical limit can be reached. Take Zimbabwe as a practical real world example. It now takes trillions of Zimbabwe dollars to buy a roll of toilet paper.
In this video you will hear the detail about why GOLD & SILVER will increase in VALUE.
#1 Fear will Increase
#4 Weakening Dollar
#5 Overall Demand
#7 Gold is Money
#8 German Repatriation
#9 Product Simplification
#10 Probability of Collapse
The entire LIBOR issue, which is confounding to many readers IS a central issue to the general advice to get out of the markets.
The game is entirely rigged, just like a blackjack table or Roulette wheel – where the house always wins. Now read Banks for House and you have the picture.
The party is over and it is time to get out of the pool before the stink really starts to rise.
Gold for the industrial and commercial interests that can afford it and silver for everyone else. Keep your wealth in as little currency and bank accounts as you possibly can, as the MF Global case proved – you cannot count on anything you cannot OWN 100% and in your own possession. When you need currency to participate in the other parts of the economy then convert your gold or silver to currency and conduct your transaction, otherwise hold on to it.
Beyond precious metals there are a number of classes of hard assets, the main view to keep here is to NOT LEVERAGE anything to own them. If you have real estate with mortgages on it that you cannot pay out when the banks demand their note, you will end up owning nothing.
A quote from Karl Polanyi’s book, “The Great Transformation”
The self-regulating market was a threat to them all, and for essentially similar reasons. And if factory legislation and social laws were required to protect industrial man from the implications of the commodity fiction in regard to labor power, if land laws and agrarian tariffs were called into being by the necessity of protecting natural resources and the culture of the countryside against the implications of the commodity fiction in respect to them, it was equally true that central banking and the management of the monetary system were needed to keep manufactures and other productive enterprises safe from the harm involved in the commodity fiction as applied to money. Paradoxically enough, not human beings and natural resources only but also the organization of capitalistic production itself had to be sheltered from the devastating effects of a self-regulating market.
The markets are in a state of flux right now with the commodity “currency” now coming into disrepute.
One must start to question how much longer this can continue before the ‘real’ commodities such as oil, food, water and gold are put back into a majority position?
The economic conditions are shifting rapidly in China.
More so than is commonly written about I suspect.
This report from the Real News gets into some of the reasons behind these shifts.
Note please the lack of demand for all the housing and other construction that was done in the past decade.
There is a real-estate bubble in China that will make the North American one look like a bubble gum popping were it to continue to overheat and explode.
Governments On Both Sides of the Atlantic Try to Put Lipstick on a Pig
We noted yesterday that the big banks have criminally conspired since 2005 to rig $800 trillion dollar Libor-based market.
Barclay’s chairman says that the Bank of England gave explicit approval for the manipulation.
A former Barclay’s executive – who was close to the Libor-setting manipulation – told the Daily Mail that Barclay’s manipulated Libor to make the bank look healthier than it really was, and , and the cover-up led to a slow policy response which prolonged the financial crisis.
This appears to be very similar to what happened in America. As I noted last year:
The Tarp Inspector General has said that [then-Secretary of the Treasury Hank] Paulson misrepresented the big banks’ health in the run-up to passage of TARP. This is no small matter, as the American public would have not been very excited about giving money to insolvent institutions.
(Paulson also threatened martial law if Tarp was not passed.)
As we reported last year:
[All of the big banks were] insolvent in the 1980s, but the government made a concerted decision to cover that up.
Nouriel Roubini noted in January 2009 that the entire U.S. banking system is “bankrupt” and “effectively insolvent”:
“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion.”
“The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”
Indeed, the American government’s zero interest rate policy is very much like the British Libor manipulation scandal … it’s nothing but an attempt to breathe life back into the insolvent banks, at the expense of the taxpayer. And see this.
And the “financial reform” laws passed in the wake of the crisis have, in some ways, actually weakened regulations of the financial markets, allowed the big banks to get a lot bigger, and have intentionally allowed fraudulent accounting (and see this).
Likewise, the “stress tests” in both Europe and America have been a total scam … a naked attempt to put lipstick on a pig to cover up the fact that the big banks are insolvent.
By choosing the big banks over the little guy – and failing to rein in the fraud which caused the crisis in the first place – the governments on both sides of that Atlantic are dooming both the financial system and the people to failure.
Essentially they are offering to keep your currency from vanishing … like any of the fiat currencies have any hope of NOT doing a disappearing trick in the next decade.
Indeed the story has elements that say the coming bond issue will include NEGATIVE real returns, just imagine, we promise to loose less than you will anywhere else!
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