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Friday, April 29, 2011

If I'm right and economic conditions are degenerating - Why do things seem okay?

Debt is accumulating in all sovereign nations at a fantastic rate. But so what? We all have enough to eat, and nice places to live, and running water, and heat in the winter (Well, everyone you and I know. anyway.) So why the Chicken Little routine? It gets old fast.

Really, who would read this garbage except for the high price of gold, and the off chance of gleaming a few investment tips?

And, really, if that's your attitude, I'd say this is a great time to sell all your gold and go buy stocks - or real estate, that's really been beaten down.

But still, there's that nagging doubt. Why is George Soros and John Paulsen and a half a dozen other top hedge fund operators still loading up on Bullion? Why are the central banks selling paper for gold? Maybe there's a little something to this. Enough to warrant five or ten minutes of consideration.

The real problem, of course, is one of attention span. I've written before that Disposable Money leads to Disposable culture. And Disposable Culture leads to diminished and ultimately dysfunctional attention spans. Without a developed attention span it's terribly difficult to see things that are clearly developing a little farther out on the horizon.

It's great fun (I suppose, since it's very popular) to watch buffoons like Snooki and Donald Trump and the Housewives of Whereverthehell makes asses of themselves on TV. It's certainly easier than reading War and Peace. I will say, without fear of snobbery, that reading War and Peace (If you have an attention span) is more fun and more thrilling than any other entertainment activity. Anyone who's done it knows this is true.

And it leads to conversations that force you to ponder the horizon, like "How about when Andre is lying wounded on then battlefield and he sees his idol Napoleon and realizes what a little insignificant man he really is..." As opposed to: "Did you see when that bloated self important putz fired that washed up slack jawed moron..."

The difference is simply attention span. And it takes a little work to develop the attention span required to sift through a well reasoned three hundred page book on the history of Credit Crises.

It's far easier to listen to economic analysis by Economic Reality TV Buffoons like Jim Kramer, and Larry Kudlow, and Jim Varney and Neil Cavuto whose entire mission is to convince you that things are basically OKAY - and if you keep watching you'll get some little Info-factoid-Investment-tip, that will help you win the investment lottery.

But the fact is, there are plenty of very serious people writing about the serious nature of this developing crisis. Martin Wolf at the FT. John Mauldin in his new book "End Game," David Stockman who was Reagan's OMB director, Paul Volker who was chairman of the Fed, Professors Reinhart and Rogoff, John Williams at Shadow Stats, the list goes on and on.

The trouble is it takes a lot of concentration to understand what they're saying. Darn it.

And let's add Martin Armstrong who used to be the CEO of Princeton Financial Group to the list. He writes (sorry, this will take some concentration:)

"There is nobody with a balanced budget and nobody who is reducing the national debts. This means that the debt bubble is just going to grow larger and larger. There is no intent to actually balance the budget no less reduce its national debt. Thus, the problem is percolating as we enter this new 8.6 year wave. By the time we reach the end, well we should see the most interesting times separating a fool and his money.

"The statistics on the US National Debt show that the decline in interest rates (From Quantitative Easing) has had a profound effect on buying more time. The lowering of interest rates to virtually zero, and the flight to quality that drove government short-term rates negative, allowed for reducing the debt as a percent of total accumulated interest expenditure. This has been largely overlooked. Money that would have gone to interest went to TARP. Nevertheless, this has purchased more time before the Sovereign Debt Crisis manifests: but it did not cure the problem since the interest expenditures now concern a largest debt historically.

"With the End of QE2: What happens with the rolling debt going forward? If interest rates begin to rise AFTER QE2, will the National Debt then resume its rise as interest expenditure increase as a percent of total national debt? This would mean that all the efforts to reduce spending will be minimalized by the rise in interest expenditure. All the hype now will be just noise....

"The big breakout in GOLD still does not appear to be now. The PHASE TRANSITION to exceptionally high prices will be in the NEXT WAVE, not the conclusion to this wave. We still face the readjustment in the economy and it will take some time just yet for the DEBT crisis to explode that appears 2016-2020."

If you'd like to read the whole thing click here:

The Next Wave MartinArmstrong pdf

Wednesday, April 27, 2011

What's so bad about an orderly decline in the dollar?

Yeah - So what is so bad about an orderly decline in the dollar?

Ben Bernanke reiterated the orderly dollar decline theme today. His defenders point out that the recent lows are just marginally below the lows of 1997 at the peak of the US "Proseperity" before the banking collapse. It doesn't seem to occur to them that the prosperity and the collapse were in any way related. It's as if they were two completely separate events. It's like the guy on cocaine who has tons of energy for a year, then has a heart attack, and his doctor can't see that the energy and heart attack were related.

Here's the actual problem:

It is only through the dollar's reserve status the we are able to resist dramatic inflation and eventual hyper-inflation.

How so?

Because the Reserve status means we can settle our external debts in dollars. And we can print dollars to buy oil and food and other goods internationally.

This allows us to buy CHEAP GOODS from our developing trading partners in China, India, Brazil etc. And they, in turn take our dollars and use them to buy our debt, so that their own currencies don't appreciate. This keeps both prices and rates artificially low in the U. S. And it keeps our partners economies expanding while they develop internal markets. Everyone's a winner. Especially us. (despite the protestations of idiots like Shumer and Donald Trump. Yes, Trump's an idiot, he ran hid Dad's real estate empire into the ground. and now he's a TV reality star - like snooki.)


As the dollar declines the value of our debt declines. As our trading partners accumulate mountains of our debt, the value of selling us cheap goods is offset by their losses - and the inflation that gets exported to their own countries in the form of rising oil and food prices (which are currently settled in dollars).


This is the first step of the Dollar Crisis, when the dollar begins to lose its reserve status.

What then?

Well, we're in the process of finding out. The Fed has now become the major buyer of all new US debt (70 percent last quarter.) So far, so good, everything is holding together. But as the dollar drops its Reserve Status becomes compromised as Central Banks rebalance their reserves by selling dollars for Gold. This is happening, See the World Gold Council figures for last quarter (posted below.)

Still, the process is orderly. What could change that?

When US citizens begin to behave like Central Bankers and start selling their dollars for gold -for stocks of food - and for any commodity perceived to have intrinsic value. This is the culmination of a Crisis of Confidence in the dollar. People get scared. Ordinary people don't want to hold dollars. They spend them on stuff as soon as they get them. This creates a negative loop where prices keep rising, and the dollar keeps falling.

What could provoke that? The next economic slump. Salaries and paper assets drop as prices for necessities rise. People get scared and start to turn over dollars for stuff at alarming rates.

When will that happen? Tomorrow. In three months. In a year. Whenever. Recessions always happen. They're part of the natural economic cycle. Only this time it will happen with rates at zero, with a deficit that's already out of control, and on the back of Two massive Quantitative Easing programs and a Multi Trillion dollar Bank bailout. And with the average citizen indebted, jobless (or underemployed), scared, and angry.

And the only available response for the Government is to keep printing money like crazy (QE 3,4,5 etc.)

But what about the Tea Party, they won't allow that, right? The Tea Party will be leading the charge, they'll be begging the Fed to print more money when the next recession hits.

Still, hard to imagine a full blown Crisis of Confidence in the dollar, right? That could never really happen, right? Somehow, we'll just muddle on through.

Yeah, sure. It's hard to imagine any crisis until it occurs. Then it's too late.

If it does happen - and it will - whether it's simply run-away, persistent inflation or hyperinflation - the only thing that will protect your assets is gold.

Gold Bubble News.

  • From the World Gold Council:

  • By the end of Q1, ETFs held a total of 2,110.3 tonnes of gold worth US$97.6 billion, compared with the high of 2,167.4 tonnes at 31 December 2010, or US$97 billion – a modest net outflow in the quarter.

  • Central banks continued to be net buyers of gold in Q1 2011 with emerging market countries, including Russia and Bolivia, being among the key net buyers. As a group, the official sector holds 18% of all above ground stocks of gold.

  • Some Bubble. Central Banks are buying. Speculators are selling. That should tell you something.
  • Tuesday, April 26, 2011

    The Dollar Bubble

    If you look at the chart above it hardly appears as if the dollar is in a bubble. Yet when you consider that all the fundamental conditions (massive debt and deficits) that have caused the dollar to lose 98% of its value are accelerating it's tough not to notice that the dollar is still in bubble territory. To be precise, it is a massive Bubble of Confidence:

    Despite the horrendous performance of the dollar 98 % of Americans still carry 100 % of their wealth in dollar denominated assets.

    Are you one of these? If so think hard about the future of your assets.

    So: How many ounces of gold should a dollar buy?

    The dollar was once worth 1.555 grams of gold. Then it was reduced to .888 grams of gold. Today it is able to purchase .02 grams of gold.

    That it is able to purchase any gold at all is a direct function of confidence. Because as long as there is confidence that somehow the debt problem will be resolved in a way that allows the dollar to remain the world's reserve currency the dollar will still buy some measure of gold.

    Total debt in the US, both public and private, is around $55 trillion. If we add in the government's unfunded liabilities (which definitely apply shear stress to the dollar's lynch pin), that number comes in around $168 trillion. And that is simply the promises to deliver worthless, purely symbolic tokens, at some time in the foreseeable future, emanating from within the United States.

    At the moment, Confidence motivates people to hold dollars and even hoard dollars in the HOPE that this token currency will retain value through to some un-named and as yet unimagined Debt Solution. When that confidence is lost there will be a stampede to convert dollars into tangible commodities, and especially gold. This is the process of hyperinflation. It will happen.

    At that point, how many grams of gold will a dollar ultimately be able to purchase?

    To quote from the brilliant FOFOA blog:

    "Understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

    This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.

    It's not too late to think hard about this. Then buy yourself some gold.

    Monday, April 25, 2011

    More reasons to buy gold - even now

    Gold is valuable in direct proportion to the instability of the sovereign currency.

    How stable is the dollar right now?

    It depends on your perspective. If you're a bank president, or a U S Senator, or a Hollywood star, or a popular radio personality, it probably seems pretty damned stable. Or, at least, you have so many of them in your wallet it's not really an issue: this is the greatest country on God's Green Earth, we have the most innovative people and the deepest markets, and the Dollar is still King, by golly!

    For everybody else, not so much. We all know about the 14 trillion dollar Government deficit, the 75 trillion in unfunded US Government liabilities, the 3 trillion in debt held by China and japan, the trillions in off-balance sheet funding for our three ongoing wars, and the fact that the Fed - which is currently insolvent by any standard used to measure a bank - is currently buying over 70 percent of all newly issued US debt.

    But what about you and me? What about the average guy and gal? After all, what we spend makes up about 70 percent of US GDP.

    There are now about 7.25 million less jobs in America than when the recession began back in 2007.

    Only 45.4% of Americans had a job during 2010. The last time the employment level was that low was back in 1983.

    Only 66.8% of American men had a job last year. That was the lowest level that has ever been recorded in all of U.S. history.

    According to a new report from the AFL-CIO, the average CEO made 343 times more money than the average American did last year.

    U.S. households are now receiving more income from the U.S. government than they are paying to the government in taxes.

    Approximately one out of every four dollars that the U.S. government borrows goes to pay the interest on the national debt.

    Total home mortgage debt in the United States is now about 5 times larger than it was just 20 years ago.

    Total credit card debt in the United States is now more than 8 times larger than it was just 30 years ago.

    Average household debt in the United States has now reached a level of 136% of average household income. In China, average household debt is only 17% of average household income.

    The average American now spends approximately 23 percent of his or her income on food and gas.

    If that all sounds sustainable, sell your gold and buy dollars. If not, maybe you should sell some dollars and buy gold - and slver. Even at these prices.

    Sunday, April 24, 2011

    Disposable money: Disposable Culture Part 2

    It is always dangerous to compare vastly different historical eras in order to enforce some sort of socio-political point. It is currently popular to compare modern society to Rome, though the overall conceptions of Self, Society, Class, God and Will were so vastly different in classical society, all comparisons that do not take these complex differences into account are hollow.

    However, it is interesting, and perhaps instructive, to look at culture during the first great modern Disposable Money scheme. This occurred in France during the reign of Louis XV, who inherited a country whose coffers had been vastly depleted of Gold by the myriad of unnecessary wars foisted upon the country by Louis XIV - not to mention the expense of the Royal lifestyle at Versailles.

    The young Louis XV fell under the spell of a Scottish Banker, professional gambler (and accused murderer) named John Law who sold the naive King on the benefits of paper money that could be issued and controlled by a Central Bank. Law was set up as the chief executive of the Banque General wherein most of the capital consisted of notes backed by the French Government, making it the de facto Central Bank.

    He then used the Central Bank Credit to purchase all the current Louisiana Territory concessions, roll them into one company and then issue new vast quantities of paper notes backed by shares in the Louisiana Company (which he now owned). This scheme made those closest to the Central Bank enormously (paper) wealthy. And most everybody who could afford shares sold all they had of value to get in on the instant-wealth scheme.

    The entire scheme lasted only about ten years, and though it left the country completely bankrupt when it collapsed, it did manage to introduce the idea of Wealth as divorced from Labor: Wealth produced simply by controlling the issuance and flow of Paper Money.

    This scheme, though discredited at the time - for a time - naturally took hold in the economic consciousness and was recreated at various times in order to prop up sagging economies - all the way to our present era - where it has become wholly accepted as a foundation for our current economy. The founding fathers were aware of it, which is why they decreed in our constiturion that only Gold and Silver could ever be used as money in the United States of America. ('Strict constructionists' where are you?)

    But all this brings me back to the curious cultural phenomena associated with this easy money ideal of 18th Century France. Here, I am out of my depth, (though I studied it a bit in college) - so I present some curious developments in popular entertainment that appear for the first time, in the human repetoire and have flourished ever since.

    18th Century French literature - though rife with brilliant social critiques involving social climbers and easy-wealth seeking devotees, also introduced a genre that can be best classified as Middle Class Porn, in the form of the "Erotic Novel" - such as Les Liasons Dangereuses and the incoherent sexual ramblings of the Marquis De Sade (both still popular today - unsurprisingly). During this period we also find the birth of the Romance Novel - or "Housewife Porn" which explores the Romantic yearnings of middle class heroines (like "Paul and Virginie") swept of their feet by dashing strangers - a genre which was so aptly satirized by Voltaire ("Candide") and Balzac ("Eugenie Grandet") - and is now the mainstay of popular culture in the form of novels, films and television.

    In painting too, we find the introduction of Middle Class Porn in the form of "Sensuous Nudes" in "mythological settings:" Topless bathing Nymphs, Maenads, and Goddesses, many of which still adorn the walls of wistful college students. Also popular right at the height of the Mississippi Bubble were the Fetes Gallants paintings that celebrated nobles involved in feasts in sumptuous settings, rife with erotic undertones.

    Now, I would never argue that it is impossible to point to certain individuals throughout history who embodied the idea of Wealth as divorced from Labor, Honor and Service. (Certain Roman Emperors, like Nero, do come to mind). However, on a vast, popular, societal level it seems that the themes of disposable culture (wealth without labor, happiness based on Romantic and Sexual gratification) are directly related to the introduction of disposable money.

    Friday, April 22, 2011


    Is gold in a bubble?

    To even ask this question you have to understand the nature of currency. Gold is a currency. People are trading dollars for gold right now. They are trading a currency that is rapidly depreciating due to massive printing to service tremendous debt, for a currency that has been stable for 2500 years and has no debt. If that sounds like a bubble to you, then sell gold and buy dollars.

    Since the dollar has no intrinsic value, how can you tell how many dollars it should take to trade for an ounce of gold?

    Mary Meeker, analyst at Morgan Stanley, analyzes it thus: “By the standards of any public corporation, USA Inc.’s financials are discouraging. Cash flow is deep in the red (by almost $1.3 trillion last year, or ~$11,000 per household) and USA Inc.’s net worth is negative and deteriorating."

    Granted, that's just one way of valuing the dollar.

    Another way would be to analyze the balance sheet of the US Federal Reserve Bank - which according to John Mauldin is currently leverage at 50-1 - worse than Bear Stearns balance sheet before it went bust, and since the Fed only holds 2% in capital against all of its liabilities - a tiny 100 basis point rise in rates would wipe out all the Feds' capital.

    Gee, be careful when you sell your gold for dollars.

    In a recent report, economist John Williams of contends a declining U.S. currency is reflected in spiking gas prices. Williams’ said, “. . . the primary problem behind higher oil and gasoline prices is the Fed’s efforts at dollar debasement, but few in the media are willing to blame the Fed . . . Also hitting the dollar, though, are increasing instabilities in and ineffectiveness of political Washington, D.C., as viewed by the rest of the world.”

    Williams says gold and silver are nowhere near their former inflation adjusted highs of 1980. Back then, gold hit $850 per ounce and silver $49.45 per ounce. To truly equal that price in today’s inflated money, gold would have to be “$8,331 per troy ounce” and silver would have to be priced at “$485 per troy ounce,” according to Williams’ recent calculations.

    In a related story, researchers at Bill Gross’s firm, PIMCO - the largest bond fund in the world, estimate that in the last quarter, the Fed purchased 70 percent of all new Treasury debt. This is a disaster in the making. By printing new money to buy debt, the Fed is both holding interest rates artificially low and flooding the world with dollars.

    More crazy billionaires buying bullion:

    The University of Texas Investment Management Co. recently announced it bought almost $1 billion in gold bullion. According to a Bloomberg story this week, “The decision to turn the fund’s investment into gold bars was influenced by Kyle Bass, a Dallas hedge fund manager and member of the endowment’s board . . . ‘Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,’ Bass said yesterday in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

    But, don't despair, in case you think the debt problem is unsolvable:

    Wednesday, April 20, 2011

    Disposable money: Disposable culture

    In Ancient Greece money was a form of art. Money was created by artists who carved beautiful images into precious metals - like the Gold Stater of Kroisos pictured above. These artists were commissioned by Kings, Tyrants and Civic Councils. And persons of wealth and position collected the money as artworks, as well as a medium of exchange.

    The Greek word for Art is Techne - from which we get the word "Technician." These days, a Technician - a person of great technical skill - is a pejorative term for an Artist. To call an artist a technician is to imply they somehow lack "creativity and vision." To an Ancient Greek this distinction would have been meaningless.

    Is it that we are now so sophisticated that we can make distinctions that simple naive Greeks like Plato, Parmenides and Heraclitus could not?

    Or is it that technical excellence is the substance of a permanence that we no longer value?

    Our money is perhaps emblematic of our culture. It is created - like all of our commodities - to have the most value when used up and turned over in the shortest possible span of time. Like a car, or a computer, or a McMansion, or a movie, or a television program, or the latest Concept Art Phenomenon, it is has the most value at the moment it is manufactured and foisted off on a somnolent and unsuspecting public. Within a few short years it will have lost a substantial portion of this value. Within the span of a lifetime it will become substantially valueless.

    Compare this to the creations of Greek culture which have infinitely more value now than they did when created. Of course it could be argued that some of this value is due simply to a fascination with the past. But I doubt this fascination would exist if this particular past had not been created by excellent technicians.

    Tuesday, April 19, 2011

    Is the Federal Reserve Bank of the United States solvent?

    Is the Fed solvent?

    Read this (several times), quoted verbatim from John Mauldin:

    "As a side note, it's probably worth noting that the Federal Reserve has already pushed its balance sheet to a point where it is leveraged 50-to-1 against its capital ($2.65 trillion / $52.6 billion in capital as reported the Fed's consolidated balance sheet ). This is a greater leverage ratio than Bear Stearns or Fannie Mae, with similar interest rate risk but less default risk. The Fed holds roughly $1.3 trillion in Treasury debt, $937 billion in mortgage securities by Fannie and Freddie, $132 billion of direct obligations of Fannie, Freddie and the FHLB, and nearly $80 billion in TIPS and T-bills. The maturity distribution of these assets works out to an average duration of about 6 years, which implies that the Fed would lose roughly 6% in value for every 100 basis points higher in long-term interest rates. Given that the Fed only holds 2% in capital against these assets, a 35-basis point increase in long-term yields would effectively wipe out the Fed's capital. "

    How, under these circumstances, can the Fed ever tighten without massive sales of assets that would force the economy into a depression? Answer me that.

    What could stop gold?

    What could stop gold?

    The only thing on earth that could stop the rise of gold is if you see Newt Gingrich, John Boehner, Nancy Pelosi, Barak Obama, Eric Cantor, and Chuck Shumer appear on a stage all together holding hands and saying:

    "We are all so very sorry for the way we've been behaving. It's shameful. We've been acting like ugly petulant selfish mean-spirited children. But we understand now that we are not more important than this country. We've decided to come together and do the following:

    "First we are going to audit the Fed and end the absurd practice of printing money to give to the banks so that they can gamble it in the risk markets and award themselves huge bonuses thereby destroying the value of the dollar for everybody else.

    "Second we'll close down the 178 military bases we can not afford. End the three pointless wars as of today. That alone will put the country solidly back in the black. Sorry, but you can't be an empire when you're bankrupt.

    "Third we'll raise the Social Security retirement age to 78. If you can't work that long, change your damned lifestyle.

    "Fourth we'll drastically overhaul the bankrupt portion of medicaire and medicaid. Many people will suffer. For that we're sorry, but then many people always suffer.

    "Fifth, we'll add a value added tax on all luxury purchases. If you can afford a damned yacht you can afford the tax on it.

    "Some people won't like some or all of these things. Tough. Vote us out. But not before we save the country. Thanks, and good night."

    Until you hear that, keep buying gold.

    Why the debt will never be addressed by this congress:

    Democrats, Republicans See Clashing Views Helped by S&P Revision

    federal debt as a percent of GDP:
    Debt May Surpass U.S. GDP in 2020 With Rising Rates

    If government borrowing costs were 1 to 3 percentage points higher than forecast during the next decade, debt would rise to 92.5 to 109.5 percent of GDP. Photo Illustration: Bloomberg

    The divide between Republicans and Democrats in Congress over combating the nation’s debt was spotlighted by Standard & Poor’s lowering of the U.S. credit outlook to “negative,” with each side saying the change bolstered their competing arguments.

    Democrats said the revision issued yesterday by New York- based S&P helps make the case for a broad agreement based on the debt-cutting plan President Barack Obama outlined last week. Republicans said the ratings firm’s report reinforces their call for deeper spending cuts than the president and other Democrats have been willing to consider.


    ‘Wake-up Call’

    Congress is facing a vote as early as next month on raising the government’s $14.29 trillion legal debt limit. The Treasury Department projects that it will hit the cap on May 16, though it could use emergency measures to avoid default until about July 8.

    Obama and members of his economic team have said that failure to approve an increase could have catastrophic consequences for the U.S. economy and financial markets.


    Representative Jeb Hensarling of Texas, head of the House Republican Conference, said confidence in the U.S. economy is “sure to dwindle” when Obama “chooses to treat our national debt as campaign fodder and insists on more spending and more taxes.”

    House Democratic Whip Steny Hoyer of Maryland said the S&P’s decision “shows the urgent, bipartisan action needed to put our nation on a serious path to reduce deficits.” It “demonstrates that Republicans cannot hold the debt limit hostage over partisan, divisive issues,” he said.

    If you think these BOZOS are going to get together to tackle the problem, now's a good time to sell your gold. If not... well, you know what I think.

    Monday, April 18, 2011

    The end game begins:

    S&P cuts U.S. rating outlook to negative

    Moody’s says latest budget plans a turning point

    By MarketWatch

    NEW YORK (MarketWatch) — Standard & Poor’s cut its ratings outlook on the U.S. to negative from stable on Monday, lighting a fire under Washington’s deficit-reduction debate and sending stock markets sharply lower.


    Stocks tumble as S&P cuts U.S. outlook: Standard & Poor's cuts its credit outlook on U.S. to negative, increasing likelihood of a downgrade from its triple-A rating — and stocks pay the price early Monday.

    S&P cuts U.S. rating outlook
    Citing budget deficits and the federal debt, S&P lowers its ratings outlook on the U.S. to negative.

    Finland, Greece spark new Europe debt fears
    Rising debt forces Newcastle airport sale
    China sovereign fund shops in Europe
    G-20 agrees on yardstick for imbalances
    /conga/story/2011/04/sovereign_debt.html 141160

    The rating agency effectively gave Washington a two-year deadline to enact meaningful change, just days after House Budget Committee Chairman Paul Ryan and President Barack Obama each outlined their plans for slashing debt. S&P nonetheless kept its highest rating, AAA, on the U.S.

    Relative to Triple-A-rated peers, the U.S. has very large budget deficits and rising government indebtedness, and the path to addressing those issues is unclear, S&P analysts said.

    They noted an increasing gap between a lack of action by U.S. fiscal policy makers and steps taken by its AAA-rated peers, even after the Republicans and Obama administration released their 2012 budget proposals.

    “The fiscal profile of the U.S. is increasingly diverging from that of its AAA peers,” said David Beers, an S&P analyst, on a conference call. “This was the time to update our opinion.”

    Sunday, April 17, 2011

    Gold: is it too late to buy?

    It's tough to buy into something that's already moved 500 percent over the last ten years. Seems like you're buying at the top. Seems like it's very expensive. It must be in the middle of a speculative bubble. Right?

    The answer is that you have to know why you're buying it. You really should know exactly why you buy anything. If you're going to get an air conditioner or a car or a blender you probably research it pretty thoroughly.

    Yet with investments most people have no real idea why they hold what they hold. The best they can do is repeat the idiot's mantra: Asset allocation and portfolio re-balancing. Asset allocation means you have no understanding at all of what you're doing so just get a little of everything. This is a sure way to lose all your money over time in an economy that is deleveraging.

    Is our economy deleveraging?

    Deleveraging means repairing its balance sheet from having too much debt. Does this sound like our economy? If not, then by all means, buy lots of stocks and bonds and balance and rebalance them to your heats content. And laugh at the idiots buying gold.

    If you do believe the economy has too much debt and must find a solution soon then you do believe that we are in a period of deleveraging: a period when governments, consumers, corporations, must reign in spending and pay down debts.

    In this environment all assets prices must fall over time. Real Unemployment must continue to rise. The housing bust continues as credit gets tighter and tighter and massive inventories liquidate very slowly.

    If you see these conditions then you ask: What will the government do about it?

    A) Will they reign in spending, pay down debt, and let assets fall to whatever low price they naturally reach?

    B) Will they ramp up paper money creation to fuel spending, service debt, and prop up asset prices?

    In the history of paper money, no country with access to a printing press, has ever chosen choice A. They all choose choice B.

    This is the meaning of Quantitative easing. The world has been on this path for two solid years now. This is why gold is rising.

    Will governments suddenly change path?

    How you answer that question tells you whether this is a good time to buy gold.

    Saturday, April 16, 2011

    Gold breaks out again

    Here on the weekly gold chart you can see a clear breakout from an inverse head and shoulder pattern. These type of technical patterns suggest tremendous strength.

    There is no doubt that over time gold is going much much higher. This technical pattern is confirmation rather than cause. The cause is the mind boggling debt load of the US government and the US consumer. Europe is also drowning in debt. Japan is on the verge of implosion. And even China, the current engine of world growth, is sitting on top of a debt fueled construction bubble that dwarfs the construction bubbles of Japan and the US.

    The only possible governmental response to all this debt is massive paper money creation.

    At some point, however, there will be another frightening round of deleveraging. It could start tomorrow. It could start in a year. When it does the paper price of gold may well temporarily collapse with everything else. That is when the bullion price and the paper price will decouple.

    Even over the past two years the price for a ton of physical gold - for those who purchase in that type of quantity - has stopped responding to fluctuations in the futures price.

    When distrust of paper reaches a certain threshold, this will become true for the price of an ounce of gold.

    It's great to trade gold in this environment if you can do it. But get a little bullion - gold and /or silver. In the end, bullion will outperform futures, stocks, tracking stocks and all forms of paper gold and silver.

    Wednesday, April 13, 2011

    Households are in debt too....

    Much is made of the fabulous debt burdens of the US federal and state governments. However, the US consumer's balance sheet is equally as debt burdened.

    In 1975 total household debt—including mortgages, credit cards, auto loans and bingo wagers—was about $730 billion or 45% of GDP

    During the 1980’s, however, this long-standing household leverage ratio began a parabolic climb, and never looked back. By the bubble peak in Q4 2007, total household debt had reached $13.8 trillion and was 96% of GDP.

    Yet after 36 months of the Great Recession wring-out, the dial has hardly moved: household debt outstanding in Q4 2010 was still $13.4 trillion, meaning that it has shrunk by the grand sum or 3% (entirely due to defaults) and still remains at 90% of GDP.

    Wall Street stock pushers have noted that the ratio of debt to disposable personal income (DPI) has dropped materially, and that this proves the household sector has been healed financially and is ready to borrow again. This ratio has fallen to 116% from a peak of 130% in late 2007.

    Yet, this is almost entirely due to an enormous increase in government transfer payments. Even still, the ratio is atrocious.

    A better gauge, however, is Household debt to private wage and salary income which amounted to 255% of at the peak of the credit boom in late 2007, and was still 251% in Q4 2010.

    Meanwhile, consumer spending as a percentage of GDP - which stayed in a range of 61% to 64% from 1960 until 1980 - has ballooned to 70% of GDP.

    Charles McKay summed up this debt madness of the last 30 years in two quotes from his book Extraordinary Delusions and the Madness of Crowds, written in 1841.

    “Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”

    “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

    So now, the Boomers are turning 50 years old at a rate of 10,000 per day. A staggering 38% of workers between the ages of 45-54 have less than $10,000 of retirement savings and a mind boggling 29% of workers over 55 have less than ten grand in their retirement savings.

    It doesn't take a genius to imagine what will happen to real GDP over the next several years as consumer spending contracts. Anybody who can't see that this must happen is blind, hopelessly partisan, or both.

    The only issue is: what will be the Government's response?

    If you believe politicians in both parties will come together to selflessly work in the interest of the nation to reign in spending, cut their own salaries in half, fire all non-essential workers, close our 180 military bases around the world, end the three pointless wars, defund the insolvent portion of medicaire, raise the social security retirement age, and raise tax rates on the wealthiest one percent, while sponsoring infrastructure work programs to help the 20 percent of the population that has become structurally unemployed, and most of all: raise rates at the expense of the banking cartel to reward savers - then you should probably hoard dollars, work hard and get your own savings rate up.

    If you believe the government will desperately keep printing money (which means issuing new debt) to keep the illusion of well being alive as long as humanly possible, you better buy as much gold and silver as you can afford, because it is the only thing that will keep you solvent.

    Tuesday, April 12, 2011


    I've been harping on the idea of trust - or confidence - in the markets. It can not be stressed enough that our entire financial system is built on trust. Every single financial transaction, no matter how banal involves a tremendous amount of trust:

    Trust that whatever is being purchased is as described and fairly represented.

    Trust that both sides of any transaction intend to fulfill the transaction and not somehow use the transaction, or information gained through the transaction to harm, use, or abuse the other party.

    Trust that the terms of ongoing transactions will be honored.

    Trust that the money used in the transaction is legal tender. Trust that the money used in the transaction - even if legal tender - will serve as a fair store of value over a reasonable amount of time.

    These are all things completely taken for granted. At the point that some or all of these things must be questioned before any and every purchase, the entire financial system breaks down, no matter how vast and sophisticated the system may appear to be.

    Right now the banks in collusion with the politicians are sorely trying the trust or confidence of the American citizens. Over the last three years Three trillion dollars have been directly confiscated (By George Bush and Paulsen) from the American public and given to the banks. Trillions more have been confiscated by the dilution of dollars through quantitative easing. And trillions more have been confiscated through the knowing issuance of rotten debt instruments. And trillions more though legal schemes such as high frequency trading.

    This constitutes the greatest transfer of wealth in the history of humanity.

    Roman emperors used to confiscate estates to augment their personal wealth. They couldn't touch the audacity of modern US bankers.

    The bankers - and politicians owned by them - are extremely fortunate that the incipient anger of a tremendously undereducated population can be directed - temporarily - against the age old bugaboos of SOCIALISTS and FOREIGNERS.

    When people understand that a CENTRAL BANK is the main lever of socialism - that socialism is an economic system the benefits the Central Bank and its member banks through the issuance and control of the flow and cost and value of money - and that for socialism to exist the politicians of all parties must kowtow to the central bank - they will begin to direct their anger not at the foreigners (and the foreigners within), but at the bankers.

    And when that happens you will be wanting to own a little gold.

    Monday, April 11, 2011

    Chinese Gold update

    This 1996 Chinese gold Unicorn - 1 OZ coin, with a purported mintage of 858 pieces sold on ebay last night for $13,600. One year ago it could have been purchased on ebay for about $1800. This is not a fluke, as a half ounce unicorn 1995, MS69 with a mintage of 2000 sold a few days before for $5,700, while a 1995 set with a half ounce and a quarter ounce bi-metallic sold ungraded for $8,100 the week before (already a bargain?).

    Jim Chanos has been trumpeting the idea that China is in the midst of a fantastic housing bubble. It's easy to find youtube videos of entire Chinese Ghost Cities, which are still being constructed in order that China meets it GDP targets. Meanwhile, vast swathes of the Chinese public, who can not afford these empty luxury condos, still live in hovels.

    So are these prices for Chinese Gold coins sustainable?

    The easy knee-jerk answer would be: No, of course not.

    Yet, even if the Chinese economy temporarily collapses - along with the rest of the world economy, there are still an enormous number of extremely wealthy Chinese now who need to put their paper money somewhere. And if not into inflated bubble real estate projects, then much if it will still flow into gold. In fact, as we see confidence in all paper investments wane, the we could well see the flow into gold accelerate.

    Saturday, April 9, 2011

    confidence and hyperinflation.

    The origin of the term Confidence Man (con-man), or Confidence Scheme or Con, comes from a scam played by a well-healed, good looking hustler in the 1920's who would approach genteel marks in NY's upper crust neighborhoods, pretend to know them, engage them in lively conversation, and then say: "Do you have the Confidence to loan me your watch until tomorrow?"

    Often his marks would indeed loan their watch, and never have it returned.

    The Banks play many similar games every day with their "Customers."

    For example, when you "deposit" money with a bank, you are in fact loaning them your money, for which they should pay you some return or interest. The banks now however refuse to pay you any interest at all. Rather, they take your money, and gamble twelve times the amount in the risk markets, driving up all commodity prices, making everything more expensive for you.

    Meanwhile the Fed is simultaneously producing ever more money which dilutes the money you've loaned the bank.

    By the time you get your money back it is worth much less than the amount you loaned the bank. That is a Confidence Game.

    Further, if you're lucky enough to have enough money, a fresh faced account executive will take you aside and sell you on the idea that by buying certain risk products (always advertised falsely as risk-free, or low-risk) you will get a tiny tiny amount of interest, while the bank takes a management cut. Meanwhile, the bank's investment banking side will likely be shorting the same products to make more money off your naivety.

    Funny right?

    Yeah, sure, it's funny until enough people realize what's happening. While it's true the average US citizen takes a very dim view of Wall Street, the banking system, and the Congress that overseas it all, still, in general they have CONFIDENCE that the US is still the greatest country on earth, the overall System generally works.

    Thank God.

    Because when that changes, when doubt creeps in about the efficacy, probity, transparency, of the SYSTEM, the insidious result is that people lose CONFIDENCE in the MONEY generated and used by the System.

    When that happens they seek to convert that money into goods - as quickly as possible.

    Right now, people are scared. And though they have little confidence in the Bankers, the Financiers and the Politicians, they have CONFIDENCE in the system. So they are hoarding their dollars. This causes the deflationary pressures we're experiencing as money doesn't turn over.

    But Confidence is a strangely tenuous human emotion. Nobody knows what can trigger the loss of Confidence in something as amorphous as THE SYSTEM.

    But when that happens, people lose confidence in the system's money. They seek to exchange it as quickly as possible for real goods. The money quickly loses all value. That is hyperinflation.

    Do you think that could never happen here? Thank God. Because even believing it could happen, in the first step in the loss of confidence.

    Thursday, April 7, 2011

    Why billionaires are buying gold: Confidence

    By now we should all know that traders like Soros, Paulsen and Einhorn are piling into gold while the talking heads on CNBC, FOX NEWS, and Talk radio are all warning of a bubble.

    What do the billionaires understand that the professional spokesmodels don't get?

    Well, let billionaire Tom Kaplan explain why he's rushing into gold. Kaplan’s family office, Tigris Financial Group, has close to $2 billion in gold assets. Kaplan, an Oxford-trained historian, believes gold is going to revert to being the world’s currency as it was for 5,000 years.

    Why? Kaplan explains:

    "People make the wrong assumptions about gold. People will tell you that gold is an inflation hedge because of the 1970s, but Gold performs even better in deflationary periods. The power of gold is that it acts as a hedge when people lose faith in their public institutions. Gold performs great in both inflation and deflation, when people lose confidence in governments and central banks.”

    The thing that these guys understand is that confidence props up the entire financial system. Confidence that financial institutions mean what they say and say what they mean. Confidence that financial institutions will do what they say they will do. Confidence that financial institutions are run with a certain amount of probity, honor, and transparency.

    People who work on Wall Street will cheerfully admit that the anything an investment pro tells you is meant to confuse you and obfuscate his real intentions. This is a big joke as long as only they know it. Ironically, those who are best at the art of dissembling are those that are now protecting themselves from the results of this practice.

    But when this becomes common knowledge - which incredibly is not yet the case - but as the investing public begins to realize they're being perpetually and systematically duped, confidence will be shattered. And once this happens it will take a very long time for confidence to be restored.

    Think of it this way: If you can't take it for granted that there are Corn Flakes in that box of Corn Flakes - if you have to open every damn box and inspect the contents for yourself before you purchase any, well, you're just not going to buy anything from Kelloggs anymore.

    Wednesday, April 6, 2011


    This is what a breakout looks like on the Daily Chart. Where do we go from here? Generally speaking we go up a few more days to draw in those who have been waiting patiently for a correction and are now ready to throw in the towel and buy at any price. Then we correct. But so what? Don't try to time a gold bull. This is not - I REPEAT NOT - a speculative blowout. This is normal, measured bull market action.

    When it does correct every talking head in the world will nod sagely and bloviate about speculation and bubbles and blah blah blah - throwing in the requisite number of "if you wills", and "If I mays". Don't listen. If they knew anything at all about the markets they'd be trading - not advising others on how to trade.

    The Gold bull has years to run. When we finally do correct, it will probably go longer with many false starts and sharp down days to frustrate the bulls and make them lose their core positions. Then, one day, when it makes no sense at all, for no discernible reason gold will go up fifty bucks and everyone who's out or timing will miss it.

    Leave the timing to the pros. A few can do it. But rest assured, George Soros is not timing this bull. He's accumulating until he senses it's really over, then he'll dump his entire position. But believe me, we're not anywhere near there yet.

    Tuesday, April 5, 2011

    Gold breaks to new highs: The Bubble nobody owns

    Gold bubble? Consider this: the red pie is all assets of a typical pension fund. The tiny black sliver is the percentage of gold and gold stocks in that fund.
    Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Spr
    ott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.

    Sprott estimates that the actual amount of new investment into gold since 2000 is about $250 billion. Compare that to the roughly $98 trillion of new capital that flowed into other financial assets over the same time period.

    Greek Gold: The New Normal

    Mohammed El Erian of Pimco coined the phrase "the New Normal" to describe the economic environment that will likely persist for quite some time. This is an environment of very low to minimal real economic growth, very high persisting structural deficits, high structural unemployment, and tremendous money creation by central governments to fight the debt overhang.

    While most serious economists debate whether this will end in a bout of deflation or hyperinflation I believe that at the moment we are experiencing a new style of stagflation.

    What is that? Stagflation is traditionally an environment of high interest rates and low economic growth. What we have now is an environment of rapidly rising commodity prices (which acts as the same sort of tax on personal and corporate finances) and low economic growth. (I know, the government has been able to coax out a 3 percent growth rate figure with a variety of accounting tricks that would land you in jail if you used them in your private business.)

    So what does this all have to do with Greek Gold coins?

    The coin pictured above, a Distater (double weight stater) of Alexander the Great in excellent condition (though I think some tooling is evident in the hair) just sold at the NAC auction yesterday for 100,000 dollars. The same coin two years ago sold routinely for 20,000 dollars. This coin, though rare, like all top quality Greek gold, is what used to be considered "generic Greek gold," in that it is readily available at most major auctions. The same coin with a few minor defects has been selling routinely for 30,000 dollars.

    What I'm seeing here is that whereas most casual observers of both the economy at large as well as the economy for high end art-commodities are waiting for the artificial boom to end in order to get in. Meanwhile market pros who are driving both markets are realizing that the prevailing conditions are exactly those that are likely to persist much farther into the future than most would like to believe.

    These seemingly extraordinary conditions have become the New Normal. If you want to play in these markets you have to get used to them.

    Sunday, April 3, 2011

    Let's be clear: It's the Banks

    Gold-Stater comment: Let's be clear: It's the banks.

    There is one central problem with our economy: it's the banks.

    Yeah, sure, we have 75 trillion of unfunded liabilities; that's a problem. Okay so neither the Republicans nor the Democrats, nor the Tea Party want to have a grown up discussion about Social Security, Medicaire and Medicaid which comprise this 75 trillion dollar hole. Yeah, sure, we're now engaged in three pointless wars that have already cost over 3 trillion dollars - most of which is hidden in off-budget sham accounting practices. Okay, our whole national conversation right now is focused on the 10 percent of the 14 trillion dollar budget that is termed domestic discretionary spending - which all but assures nothing will be done about the real problems.

    But even if all that were solved tomorrow - even then - the real problem that nobody wants to even begin to discuss is centered at the heart of our capitalist system: the Banks.

    So what is this problem? I'm glad you asked. It's this: the Banks are supposed to be responsible for the EFFICIENT ALLOCATION OF CAPITAL. That is their purpose. They get FREE MONEY from the government. Their whole job is to figure how to lend this money in a responsible manner so that the economy can grow. If they do their job they make a spread between the FREE money, and the interest they charge on the loans. It's easy work. Anybody with a basic college education should be able to do it. And for that they used to make a decent but modest wage commensurate with this easy job.

    But then something horrible happened. The banks became jealous of the outsized earnings of their friends at the Investment Banks. So they lobbied (read paid) the government to get the rules changed so that they could take this FREE MONEY and gamble it in the risk markets. And since they're gambling such huge positions, when they lose it threatens the entire economy - so when they lose the bad bets are taken onto the Fed's balance sheet and charged off to the taxpayer. But when they win they keep their winnings. Nice work if you can get it.

    The Investment banks decided to join the party: They might as well become regular Banks too and get the FREE MONEY so they could gamble it too, risk free.

    Now the purpose of the banks is to suck productive capital out of the market and into their own pocket. It is the absolute reverse of what their role should be. And the more they gamble, the more debt is being created. Because when the Government creates money to give to the banks they do this by issuing DEBT to the banks, which the banks sell to the FED. So the system is flooded with unproductive cash/debt, that the banks are compulsively gambling. As long as this is the case, no fix to any of the other problems in the economy will make any difference.

    And nobody is even discussing this problem. So how can it be fixed? That's right. So protect yourself and purchase insurance against this insidious and growing problem. Buy the one asset the banks can't suck right out of the economy. Buy gold.

    Friday, April 1, 2011

    Greek Gold Coin Report

    Gold-Stater: Greek Gold Coin Report

    It's auction time. From now though May all the major auction houses have their spring auctions. And this spring there are precious few fine Greek gold coins being offered. Above is pictured a very rare gold stater of the Parthian Satrap Andragoras, who is proclaiming his dominion over Parthia now that Alexander the Great has died. This is one of the very few true rarities in top condition of the season. The estimate is at 90,000 Swiss Francs (100,000 US dollars). As per ususual Numismatic Ars Classica, and Nomos, both of Switzerland have the most interesting quality selection. The above NAC stater is matched in rarity and preservation by a Stater of Seleukos I, which has an unfortunately-off centered reverse.


    Nomos offers the above rarity, an electrum stater from Ionia/Lydia estimated at 200,000 swiss francs. They also have a rare Boetian hemidrachm for 90,000:

    along with a very nice lampsakos stater, and pergamon stater.

    Gemini has a nice run of walwel trites, (as do NAC and Nomos) which come from a recent horde out of Turkey. I've pictured these in several past posts. There's very little (shockingly) in the CNG, (or the Peus, the Rauch, Nomisma etc.)

    There are of course the usual run of Alexander staters, multiples and fractions, Philip staters, a very few nice Carthaginian pieces, and few other Lampsakos staters, as well as some nice Hektes.

    But no very high quality Syracuse, Tarentine, Celtic, Kyzikos, or Persian gold! (though a few interesting pieces of decent quality from some of these.)

    And no EF medieval gold coins in any of these auctions!

    To say that there is shockingly little on the market is an understatement.

    What is going on?

    The obvious answer is that collector/investors are well aware of the extreme competitive devaluation of all paper currencies that is going on. With Quantitative Easing in full force in the United States, Great Britain, and Japan, and a full fledged solvency crisis in much of Europe, the world is being flooded with paper money. All commodities are booming. But there is what can almost be called a hyper-inflation hitting areas of true commodity rarity like Greek Gold.

    So few collector/investors are selling.

    Because as more collector/investors become aware of this area, it is fast becoming evident how little exists on the market. And with few new hordes excepting those from Turkey, and with the new stringent export/import laws covering "national treasure" the market is tighter than ever.

    I've always though that Ancient Gold is a leading indicator for bullion. It attracts exactly the same type of investor but to a much tighter market. It will be interesting to see what happens to the bullion price in the coming months.