By Trace Mayer, on April 15th, 2009
ILLUSIONS EVAPORATE
On 4 March 2009 the Armenian Dram went poof, on 6 February 2009 the Kazakhstan Tenge went poof, in October 2008 the Iceland Krona went poof, during 2008 the British Pound went poof and the Continental Dollar went poof prompting the Founding Fathers to craft particular monetary powers and disabilities in the United States Constitution.
Nevertheless, the United States Dollar or Federal Reserve Note Dollar went poof multiple times last century including on 5 April 1933, 4 June, 1963, 24 June 1968 when silver certificate redemption was completely ceased, and 15 August 1971 during the Nixon shock. The current Federal Reserve Note United States Dollar, an illusion issued by an entity engaged in quantitative easing, will eventually go poof as the Treasury Bill bubble bursts.
FIJI DOLLAR ILLUSION EVAPORATES
 On 15 April 2009 Bloomberg reported, “The Reserve Bank of Fiji said today it has devalued the Fiji dollar by 20 percent with immediate effect.”
Currency illusions, like the Fiji Dollar, can be summoned and evaporated by hairless monkeys pounding buttons on a keyboard resulting in someone’s lifetime of savings or pension purchasing 20% less bananas. This theft amounts to immoral taxation without representation being a form of confiscation through inflation and is a taking of property without due process of law.
WHAT IS GOLD AND SILVER
Gold, aurum in Latin, is a chemical element with the symbol Au and atomic number 79. Gold’s melting point is 1,337.33 Kelvin, 1,064.18 °Celsius and 1,947.52 °Fahrenheit.
Silver, argentum in Latin, is a chemical element with the symbol Ag and atomic number 47. Silver’s melting point is 961.78 °C or 1,763.2 °F.
WHAT IS A DOLLAR
The term ‘dollar’ is found in Article 1 Section 9 and the Seventh Amendment. Like the terms ‘day’ or ‘year’ the term dollar has a specific definition.
Dr. Veiera, J.D., the preeminent legal expert on the monetary jurisprudence, addresses the issue What Is A Dollar? Under the Coinage Act of 1792 the definition of a Dollar is found in Section Nine: ”DOLLARS or UNITS - each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.”
GOLD AND SILVER CANNOT EVAPORATE
Water’s boiling point is 99.974 °C or 211.95 °F. The average temperature on the surface of the earth is 15 °C or 59 °F.
Gold’s boiling point is 2,856 °C or 5,173 °F. Silver’s boiling point is 2,162 °C or 3,924 °F. The temperature on the surface of the sun is 5,400 ºC or 9,800 ºF. Additionally, gold is extremely resistant to corrosion and can sit at the bottom of the corrosive ocean for centuries and still retain its luster.
I suppose gold could poof on the surface of the sun but on earth physical gold cannot evaporate when used as a currency in ordinary daily transactions or when hoarded safely in vaults. At all times and in all circumstances gold remains money. You can always trade gold for bread.
On 20 May 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”
ACCOUNTS RECEIVABLES FOR GOLD AND SILVER CAN EVAPORATE
During the 1990’s Mr. Rubin had devised the gold leasing scheme with the intent being elucidated by Dr. Greenspan’s testimony in 1998 that, ”Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”
The Gold Anti-Trust Action Committee, GATA, has alleged that central banks are engaged in a gold price suppression scheme. This scheme may include the COMEX’s participation along with Deutsche Bank, the European Central Bank and many others. Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, asserted in August of 2005 that “Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit.”
GATA alleges that the central banks have less than half the gold claimed. The bullion bank agents like JP Morgan and Goldman Sachs, who is threatening legal action against the owner of investigative financial journalism site GoldmanSachs666.com, may face large amounts of liability from dealing in these types of derivatives.
The recent nine weeks of silver backwardation along with the problematic ETFs GLD and SLV show the feigned value of financial instruments subject to counter-party risk in contrast to tangible assets. Fractional reserve banking, which Murray Rothbard argues is a form of embezzlement in The Case Against The Fed, and other types of Ponzi scams always end causing financial, economic, social and political damage.
GATA’S PRESCIENT WARNING
On 31 January 2008 GATA’s Wall Street Journal full-page advertisement presciently warned, “The objective of this manipulation is to conceal the mismanagement of the U.S. dollar so that it might retain its function as the world’s reserve currency. But to suppress the price of gold is to disable to baromter of the international financial system so that all markets may be more easily manipulated. This manipulation has been the primary cause of the catastrophic excesses in the markets that now threaten the whole world.”
CONSTITUTIONAL PROVISIONS
Not only mere commodities gold and silver are essential checks and balances in the American political machinery.
Article 1 Section 8 Clause 5 states that Congress has the power “To coin money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” Article 1 Section 10 Clause 1 states that ‘No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver a Coin a Tender in Payment of Debts.” The Ninth Amendment states “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retain by the people.” The Tenth Amendment states “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”
While the constitution does not define money it does specify that it is coined rather than printed. What the constitution is silent on is often as important as what it pronounces because every power exercised by government must have a core authorization in the constitution. If an action is not expressly authorized then it is prohibited.
TENTH AMENDMENT ASSERTIONS
A majority of states have begun formally asserting their Tenth Amendment rights.
For example, Governor Rick Perry issued a press release declaring, “I believe that our federal government has become oppressive in its size, its intrusion into the lives of our citizens, and its interference with the affairs of our state. That is why I am here today to express my unwavering support for efforts all across our country to reaffirm the states’ rights affirmed by the Tenth Amendment to the U.S. Constitution. I believe that returning to the letter and spirit of the U.S. Constitution and its essential 10th Amendment will free our state from undue regulations, and ultimately strengthen our Union.”
An interesting historical and tangential point is that the 1836 Texas Constitution explicitly reserved the right to secession which as Lysander Spooner explained was “a right that was embodied in the American Revolution.”
CRIMINAL ACTION IN PLAIN SIGHT
But these facts are a small subset of a gargantuan truth: the gold price suppression scheme sustains a monetary system that is immoral and in conflict with the foundational law of the United States.
Because there is no root authorization in the constitution for the Federal government to make anything legal tender and because the States are prohibited from making anything but gold and silver legal tender, even some illusion issued by the Federal government or a privately owned Federal Reserve, therefore the FRN$, an illusion, is in conflict with the supreme law of the land.
 Both the French and Founding Fathers of America knew how to deal with this type of treason from criminal gangs costumed in government regalia and their enablers the lying and embezzling bankers.
While the Coinage Act of 1792 has been superceded by additional legislation Section 19 provided, “That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained … shall embezzle any of the metals which shall at any time be committed to their charge … every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.”
CONCLUSION
The immoral and unethical world’s reserve currency, in conflict with the supreme law of the land, is an inherently unstable and unsustainable illusion. The monetary, economic, social and political system built upon this illusion does not collapse but evaporates.
President Obama appoints known tax evaders, such as Treasury Secretary Timothy Geithner, to high tax eater posts to bailout their friends in an attempt to prevent the consequences of basic economic law. On the other hand, today the 15th of April ‘We The People’, the tax eater’s bosses, are threatened with death if we fail and resist paying homage using little irredeemable legal tender tickets.
As the FRN$ political currency illusion continues evaporating there will most likely be a deflationary implosion coupled with a hyper-inflationary explosion. The Great Credit Contraction has begun and is unstoppable as capital, both real and fictitious, either burrows down the liquidity pyramid to safety and liquidity or evaporates.
Disclosures: Long physical gold and silver with no position in US Treasury Bills (TLT), JPM or GS.
By Evelyn Black, on April 14th, 2009
With the recent turnaround in the stock market, happy days are here again, at least for a minute. And yet, if you are very, very still, you will a hear a faint rustling in the background, like something scary sneaking up on a rabbit.
That rustling you hear is everybody sneaking around looking for anybody to blame for our current economic distress. Soon we will witness a free-for-all blamefest.
Let me just get a jump on here that while no one is paying attention.
First of all, I don’t believe that we are witnessing the bursting of an ‘oil bubble.’ What we are seeing now is a combination of 1) an expected drop in prices due to a drop in demand and 2) a reaction to market turbulence that sent the dollar dropping rapidly against the euro. This happy time won’t last. It’s a blip on the screen; a shiny reflection on the water that survivors stranded on a deserted island briefly mistake for a rescue ship.
Calm down. It’s not a rescue ship. We really are doomed.
So let’s get back to naming names and assigning blame. Who caused this mess? Was it Alan Greenspan? Was it day traders and short sellers? Was it oil and commodities speculators? Whom should we string up for this? I think there is plenty of blame to go around, but it doesn’t seem to be settling in the right places. It may never settle there. That doesn’t mean I can’t assign it in my own special way, right here, right now:
Bad CEOs.
Why is it that if I go to the restroom too many times on my shift I get in trouble, but if our CEO loses us billions of dollars by making risky investment decisions that go bad, he gets to retire with a golden parachute of $132 million? Personally, I call that bad management. I mean, I could run our corporation into the ground faster and better and all I would require by way of a parachute is a single million dollars. That’s all I want, not a penny more. You see, right there I could have saved our stockholders $131 million but did anyone ask me? No. I’m not waiting by the phone either.
Dumb voters.
It really is the economy stupid. What did you think the spoiled son of a Texas oilman was going to do for you anyway? What ever made you think for one single second that he even cared? Molly Ivins sounded the alarm about Dubya over and over again, in book after book, and she kept on sounding it right up until her untimely death last year, but did anyone listen? They did not. You know those chickens that will be in every pot? First they have to come home to roost. That’s what’s happening right now. Try and catch one if you can. You’ll be needing the protein.
Consumerism.
Who ever heard of an economy that could sustain itself simply by buying tons of cheap crap from China? Which economic theory lays that possibility out in a way that makes even marginal sense? I used to like to troll the bargain end-caps at Target as much as the next woman, but no more. Even if it means the terrorists win, my pocketbook has forced me back to ‘use it up, wear it out, make it do’. I have been forced to ’stretch’ meat with noodles and mashed potatoes. Next I’ll be making Depression Cake. We should have known this all along, but, flush with cash, many Americans overspent while the housing boom was booming, and now that it’s bust, the party is over. Expect the next waive of credit defaults to be unsecured.
Congress.
Investment banks should not be allowed to chop up bad in debt and package it in ways that make it untraceable, then trade it in insane ways that bring down entire retail institutions. That is the sort of high risk gambit that regulation was invented to address, but no one in Congress got around to passing any regulation. Could it be because they themselves were making too much money while things were going well? No, that’s too cynical. Still, they have been less than effective. The current legislation meant to help out the five million homeowners expected to lose their homes this year to foreclosure, if passed, will help about 400,000 people, if the banks agree to work with them. It leaves the decision up to the banks. But it hasn’t been passed yet. There’s talk of a veto. God help us, because Congress won’t. You can count on that.
That’s my short list for today. I’d like to see a parade of CEOs held accountable for horrible decisions and unfathomable losses. I dream about that.
I may as well dream. You know what happens when we let dreams die.
By Trace Mayer, on April 14th, 2009
PARTY IN THAILAND
Londoners recently had a party for the G-20 meeting. But they are not alone as it seems everyone is partying these days with civil unrest in Greece, China, Iceland, Ireland, Canada, and even the United States is having tea parties. The Association for Southeast Asian Nations, ASEAN, scheduled a summit on 12 April 2009 in Bangkok and Pattaya Thailand.
There are deep problems in Thai politics at the moment and protesters stormed the hotel causing the ASEAN summit to be canceled and leaders to be evacuated via helicopter. Later the Thai prime minister Abhisit Vejjajiva was chased out of a government building by a rogue who snatched a security guard’s gun.
Thailand has long been a prime tourist destination in East Asia. But the Thai police force is flaccid and the military was brought in to deal with protestors leaving at least 77 wounded. Unfortunately, beautiful Bangkok may become a destination to be avoided and the geo-political implications of this instability should not be understated.
THE THERMOMETER OF NATIONS
Because currencies are now merely illusions they function like the common stock of nations. Their performance, relative to gold, portends their future. Has the gold price been sending out the invitation for these latest parties?
 As unemployment mounts with world leaders exacerbating the greater depression the confidence in the system begins to wane. But what happens as belief in the system fades? There is some psychological point, arrived at through either erosion or mass capitulation, where the middle class Atlas shrugs and retreats from the increasingly arduous task of bailing out the violent State and Plutocracy. The Matrix requires highly dedicated, educated and motivated livestock to operate and oil its gears. When that livestock loses faith and belief in the system the machine simply grinds to a halt.
The reaction to global quantitative easing is resulting in an increased flow of gold out of central banks through their bullion banks as evidenced by the ECB and Deutsche Bank’s actions to prevent a COMEX failure to deliver in March. The gold price suppression scheme is failing, the derivative illusion is evaporating and tax revolts are coming.
REFLECTION
Think back over the last five years. The Thai, British and American political temperatures have been steadily rising as measured by gold. Over the past year belief has begun fading fast with real unemployment around 20%. The national temperament is simmering as the price of gold bubbles around all time highs and refuses to cool. And gold is not a portfolio asset; everything else is.
As discussed in The Great Credit Contraction Book these consequences have happened repeatedly throughout history. The system does not collapse but evaporates. When people have lost everything and have nothing else to lose then they lose it. Do not be collateral damage. There are ways to prepare and protect yourself, your family and your assets with extra food and physical gold and silver playing a vital role.
Disclosure: Long physical gold and silver with no position in GLD, SLV, TLT or other Treasury instruments of either the US, Britain or Thailand.
By Winton Bates, on April 13th, 2009
“Conventional economic theories exclude the changing thought patterns and modes of doing business that bring on a crisis. They even exclude the loss of trust and confidence. They exclude the sense of fairness that inhibits the wage and price flexibility that could possibly stabilize an economy. They exclude the role of corruption and the sale of bad products in booms, and the role of their revelation when the bubbles burst. They also exclude the role of stories that interpret the economy. All of these exclusions from conventional explanations of how the economy behaves were responsible for the suspension of disbelief that led up to the current crisis” (George Akerlof and Robert Shiller, “Animal Spirits”, 2009, p 167).
I don’t have many problems with the argument of Akerlof and Shiller (A & S) that animal spirits play an important role in economic crises. I think they attempt to carry their argument too far; it seems to me that the economic system tends to be self-equilibrating despite notions of fairness and money illusion. But I accept that when there is high leverage in the system (i.e. high levels of debt relative to equity) it is a lot more vulnerable to economic crises than when there is low leverage. I also accept that changes in confidence help explain why leverage fluctuates. Stories that interpret the economy seem to have a big role in determining confidence. A few years ago it was common to hear the story that the risks involved in lending on housing were minimal – even “as safe as houses”. Now the story we hear is that investment in government-backed securities offers “a safe harbour”.
The main problem I have with this book is its failure to recognize that animal spirits also play a role in politics. In fact, as Arnold Kling and Clive Crook have pointed out, A & S fail to mention public choice theory. Instead, their model of government is what Kling describes as the “shockingly naive metaphor of a parent”. In their preface, A & S write:
“The proper role of the government, like the proper role of the advice-book parent, is to…give full rein to the creativity of capitalism. But it should also countervail the excesses that occur because of our animal spirits.”
Crook writes: “This is an unappealing analogy. I would sooner take up arms against a government that saw me as a child than vote for it.”
It seems to me that the most important animal spirit that Akerlof and Shiller fail to mention is the anti-market bias, stemming from an excessive desire for security and stability, which comes to the surface whenever a financial crisis threatens to occur. Rather than allowing the normal process of liquidation to occur when large financial institutions fail, the animal spirits that rule the political domain say that everything must be done to “keep the first domino from falling” (as A & S advocate on page 85).
When viewed in isolation, the bail-out of each institution seems like cheap insurance to government policy advisors. The problem is that a series of bail-outs tends to generate excessive confidence in central banks and governments. If you are lending money to a company that you expect to be backed by government, then you are not going to be too worried if the salary packages of the executives of that company give them incentives to take excessive risks. Creditors might not be surprised if the company gets into financial difficulty, but they will be shocked if it isn’t rescued by government.
From the A & S perspective the current crisis occurred not because parents encouraged the kids to act unwisely by incurring gambling debts , but because the parents decided to let one of their wayward children file for bankruptcy. That unsettled the creditors, so the parents lost their nerve and decided to pay all the kids’ debts. At this stage the lesson that the parents seem to have learned from this is that the kids need more parental supervision to make sure that their animal spirits don’t ever get out of control again. How will the kids respond? Will they leave home to get away from this parental supervision? Or will their animal spirits lead them to pretend to be good for a while in order to re-establish cosy relationships with their parents?
By Trace Mayer, on April 13th, 2009
Technology keeps thrusting forward at an ever increasing rate as the Information Age transforms the world at a rapid pace. Business is happening at the speed of thought as companies are beginning to morph into digital entities in a physical world. Fortunes have already been made in supply chain management and product distribution as evidenced with Toyota and WalMart. With top lines under constant pressure as the credit contraction grinds on increased efficiency is being eked out of every possible source.
Man’s financial progress is a function of effort times tools. Business has, is and will be the primary tool to generate wealth. The ‘job’, a relic of the Industrial Age, is rapidly being replaced with outsourced freelancers. Millions of Americans have lost their jobs in recent months.
This vast pool of usually skilled workers are now navigating a brave new world. While hundreds apply for a single job; an exponentially expanding web invites the adventurous and rewards the productive. Never in the history of the world has there been such powerful Internet marketing tools available to the lone entrepreneur to leverage their productivity.
THE OLD ORDER
Creative destruction is taking place in almost every aspect of the the economy from the exciting realm of newspapers and journalism to the mundane of postal and package delivery. The United States Postal Service enjoys a substantial monopoly imposed by Federal law. Predictably this system has catered to special interests with their army of lobbyists. That is the reason most receive tons of dirty and annoying advertising SPAM in the mailboxes that waste their time and like most governmental policies harm the environment.
Bloomberg reports that “The U.S. Postal Service said it will offer early retirement to about 150,000 workers … In the past year the service has taken ‘very aggressive cost-cutting actions,’ including a nationwide hiring freeze and halting construction of new postal facilities, according to the statement. Potter [Postmaster General] asked Congress in January to let the Postal Service reduce its six-days-a-week delivery schedule by one day to save money.”
Why does postal mail, the vast majority of it SPAM, need to be physically delivered even once a week? Why does an address in north Alaska cost the same to deliver to as one in Los Angeles? Legislative interferences in the marketplace to prop up failing institutions lead to expensive moral hazard, inefficient systems, poor customer service and a lower quality of product. Is the use of violence to perpetuate this failing system moral?
THE NEW ORDER
With the advent of the Internet the delivery of postal mail and packages can be accomplished with greater efficiency. Through innovative Internet-powered CMRAs (Commercial Mail Receiving Agency), customers can view images of their envelopes in email or online and have their mail securely scanned into a PDF, recycled, shredded, or forwarded. For the privacy minded, like victims of spousal abuse, etc. the ability to vanish using this type of ghost address is extremely valuable.
As the Center on Budget and Policy Priorities reports, “States are facing a great fiscal crisis. At least 47 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well. Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion.”
Many individuals have their own budget with policy priorities and given all the Tea Parties, I highly doubt it involves paying more taxes than legally required. For example, customers can easily have the ability to receive packages in states like Oregon where there is no sales tax, forward the package using Fedex or the United Postal Service (UPS), and the savings would likely be greater than the cost of an entire year of the service. This may slightly perturb some States, which are breaking into safety deposit boxes and auctioning the contents on Ebay, resulting in greater enforcement of sales and use tax laws but that will likely be very difficult.
Ebay and Amazon are simply digital flea markets and the digital nomad can finish all their work at a Fedex Office. The Internet entrepreneur relies on package tracking to ensure their products and sold on the digital flea markets are delivered. And so it happens that business goes offline to online and online to offline.
DIGITAL BEHEMOTHS
Most people think of Ebay, Amazon and Google as the digital behemoths. But Fedex CEO Frederick Smith understood the future with his long-held mantra that “The information about a package is as important as the package itself.” Fedex and UPS are as much information management companies as they are shipping companies. They have large, deep and formidable moats that will prevent competitors from siphoning market share.
Their charts are likewise similar:
 While Fedex has recently laid off 1,000 of its 223,400 employees both it and UPS, which is expanding door-to-door service in Mexico, will be around generating profits for a long time. But the current administration is exacerbating the greater depression which will drag down their earnings. So when will UPS and Fedex shares be a good value? Gold is the most reliable instrument for calculating value and is being re-enthroned as a currency in ordinary daily transactions.
| gg = gold gram |
FEDEX |
UPS |
| Share Price |
$51 or 1.786gg |
$53.50 or 1.852gg |
| Market Capitalization |
$16B |
$53B |
| EPS |
$2.35 |
$2.94 |
| Target Price |
1.100gg |
1.250gg |
CONCLUSION
 Creative destruction is taking place at a rapid pace during the Information Age. Many Internet marketing tools are available for the entrepreneur. Services like Earth Class Mail, which exist through voluntary relationships, will rise. The old State sponsored monopolies enforced through violence will fall. Fedex and UPS are digital behemoths which will play a critical role in the new online to offline and offline to online economy.
As the great credit contraction continues the top lines of firms will be under extreme pressure and will most likely affect Fedex and UPS while the FRN$ will continue its wild fluctuations in purchasing power. Therefore, while Fedex and UPS are solid companies with a bright future they should get materially cheaper, at 1.1gg and 1.25gg per share respectively, before they become a good value. They will most likely be back there again.
Disclosures: Long physical gold and silver with no position in UPS, FDX, or the other firms mentioned.
By Cheryl Grey, on April 9th, 2009
The rout—at the time, a welcome one—began in commodities, where historic high prices drove up inflation around the world. As prices for crude oil, copper, gold, and multiple foodstuffs began falling in mid-July, consumers as far apart as China and Chattanooga breathed sighs of relief.
Unfortunately, commodities were followed by global stock markets. As the summer gave way to autumn, consumers and investors watched in shock as the Hang Seng Index on the Hong Kong exchange plunged as much as 59% from its most recent high, the Dow Jones Stoxx 600 of Europe collapsed 46%, and the Icelandic ICEX rolled off the table, losing 77% of its value in one day on October 14 and 93% by the end of that week. In the U.S., the S&P 500 lost 44% and Nasdaq 45%, much of it bitten from retirement accounts and small traders. All told, estimates of the amount of wealth chopped from global equities are currently around US $31 trillion.
Seasoned traders who withstood the crash of 1987 have admitted they’ve never seen anything like this. The worldwide collapse of commodities, stocks, currencies, and just about every other investment vehicle out there has brought uncomfortable images of 1929 to the forefront of everybody’s minds.
Is it really that bad?
It’s a truism that investment markets are driven by two emotions: fear and greed. However, since the Lehman bankruptcy that’s been changed to fear and terror.
As investors realized no vehicle was immune to the downturn, they panicked, yanking their capital from anything riskier than a mattress and repatriating funds to the safe havens of Japan and the U.S. Interestingly, this flight to quality has not generally included Switzerland, the other traditional port in financial storms, perhaps because of Swiss banks’ exposure to emerging economies, the ones currently being supported by the World Bank and International Monetary Fund.
Official Treasury International Capital (TIC) data shows that US $143.4 billion flowed into the U.S. for indirect investment in September 2008 alone, and this is even more interesting when placed in context. International investors had been limiting or removing their funds from the U.S. on fear of a domestic downturn, only to reverse course dramatically when the recession turned global, as shown below:
|
month
|
TIC (in U.S. billions of dollars)
|
|
June 2008
|
13.3
|
|
July 2008
|
−25.1
|
|
August 2008
|
21.4
|
|
September 2008
|
143.4
|
The demand for U.S. Treasuries, considered the safest of all safe havens, has been so high among investors both domestic and foreign that the yield has fallen to 0.01% on a three-month note. Right now, nobody cares about earning a profit; investors just want to keep what they already have.
The Volatility Index (VIX), which measures fear in the markets, averaged below 20 between its inception in 1993 and September 2008. Since then, it’s climbed as high as 89.53, with average readings consistently two to four times above normal.
We get the picture
That said, there are tentative signs of a bottom forming both in markets and the economy. Credit remains ferociously tight in consumer and commercial markets, but thawing has appeared at least between banks and should trickle down the wholesale-retail pipeline in time. The VIX remains high, but there are no signs of it climbing higher, although that could change overnight with another shock to the system, such as a bankruptcy for one of the auto makers or another major financial institution needing a bailout.
As central banks around the world slash interest rates with machetes, and governments initiate economic stimulus packages and loosen fiscal policies, the current call for the U.S. economy is a continued decline in gross domestic product through the first six months of next year. The fourth quarter of 2008 is expected to register the poorest performance, with a contraction of around −5% in comparison with the third quarter. If this call is correct, for the U.S. the worst is now, and the turn of the year may see economic indicators slowly climbing out of the basement.
Because other central banks, including the Bank of England and the European Central Bank, were behind the curve in initiating interest rate cuts (as late as June 2008, the ECB was still raising rates), the economic recovery will probably be slower on that side of the Atlantic. Canada and Australia may escape a technical recession, but the specter of deflation still hovers over Japan.
It’s not a pretty picture. But it’s still a far cry from 1929.
By Thersites, on April 9th, 2009
Regulators
We regulate any stealing of his property
And we damn good too
But you cant be any geek off the street,
Gotta be handy with the steel if you know what I mean, earn your keep!
Regulators!!! mount up!
The epic words of Warren G in many respects seem to sum up our government’s regulatory regime. Guys like Barney and Timmy clearly are “handy with the steel,” in their ability to influence businesses. They also in many respects do regulate stealing, ultimately robbing investors and businessmen in creating moral hazard for the bond and shareholders and all sorts of barriers to entry for the firms.
Yet recently amidst the market fallout there have been calls left and right for some sort of even more powerful “super-regulator.” After all, given that our regulatory architecture seems to have failed us this time, why not create an even bigger and stronger one to prevent the crisis next time?
Just like all government attempts to stop future crises, be it in healthcare or food and drugs, regulation always perpetuates the problems, creating greater ones down the road. In the financial system, we see perhaps the greatest case AGAINST regulation. Let us examine my seemingly counterintuitive claim.
The first and most obvious reason against regulation is that it creates a significant amount of moral hazard. If one has the SEC there to ensure that financial institutions are seemingly playing by the rules, or the FDIC there to ensure that even if a bank is insolvent, one will be able to receive his deposits (up to a point), then this encourages one to take far greater incremental risks than they otherwise would. After all, with the seal of approval of a government institution, why would you ever get your hands dirty in analyzing the institutions in which you entrust your money?
This problem is especially pervasive when it comes to the credit ratings agencies, namely Moody’s, S&P and Fitch, who are designated “Nationally Recognized Statistical Rating Organizations” by the SEC. Individual investors and institutional investors alike had become reliant on these agencies to gauge the risk of default of individual companies and securities, only for many of these companies and securities to blow up in their faces during this crisis. Had people actually gone in and done the risk analysis themselves, as opposed to relying on ratings assigned to companies largely by government decree, I would argue that people would have taken far more prudent positions with their capital.
Further, without this pseudo-cartel of agencies, I would imagine there would grow hundreds if not thousands of competing private firms to do independent analysis, greatly benefitting the investor without the time or knowledge to do financial analysis. Sure some of these companies might partake in fraudulent activities themselves, but they would either lose credibility and have to fix up their act to compete, or be prosecuted for the fraud they perpetrated. I admit that in this case, you do need a police force to enforce the law when it comes to fraud, but it is far more likely (given all of the times that private companies for example had uncovered the Madoff scheme before the regulators ever did anything) that the authorities would be able to react were market participants able to signal fraud to them. Still, at the very least the consumer would have far more choice in determining which analysis was best.
This brings us to another problem with government regulation – the fact that it is done by government monopoly. Government officials just like businessmen are prone to error. Unlike businessmen however, they lack a profit motive to work efficiently and prudently. To this end, if we see how ineffectual the DMV is, why should the SEC or FDIC or SIPC or any of these other alphabet-soup agencies be any more trusted? Sure, many of the people that work for these agencies previously worked in private industry, but remember that this in itself creates many a conflict of interest. Madoff himself had ties to the SEC, which may have helped him keep his Ponzi scheme alive for so many years.
Government regulators also create problems in that they make costly work for businesses and investors. SARBOX and other forms of compliance cost businesses small and large millions each year, while the regulators’ decisions to allow off-balance-sheet financing in many ways incentivized companies to hide the risks that should have been plain as day to investors. All of this is bad for transparency and efficiency, two things regulators are supposed to encourage.
On the other hand, there is the crazy idea of letting the market serve as the regulator. I would argue that discerning, self-interested investors have the best judgment when it comes to the valuation because they are responsible for their money. For it is the market that assigns a price to securities – riskier ones command a higher risk premium. Companies that make mistakes, be it through poor compensation standards that reward incompetence, poor investment projects, etc will face prohibitive borrowing costs and lower stock prices, and ultimately if the market so chooses be taken under. It is this playing field that ensures regulation. The mercy of the market will hold people accountable. Government regulators, government-empowered ratings agencies and others merely create the moral hazard that stop this system from functioning properly.
When government regulators set a precedent of bailing people out for bad behavior under the guise that a company is “too big to fail,” you further destroy the regulation of the market. You encourage excessive risk-taking; you encourage striving for short-term gains at the cost of long-term sustained profitability. You hurt the investors who are trying to signal through bond and share prices that a firm is in bad shape, and ultimately hurt taxpayers if you make the private problems of some investors into the public problems of all Americans. To let bureuacrats go in and say that a company is stable, often disingenously, as opposed to letting investors speak with their money is as arbitrary as it is abominable.
The fact of the matter is that government doesn’t want to let the market work as it did in blowing up companies with worthless assets (even if it was the moral hazard built into system and intervention that caused creation and investment in these assets), because it will destroy the interests that prop the elected officials up, destroy their own wealth, undermine their power (wouldn’t want to waste a crisis) and further cause unrest amongst the populace.
But the short-term dislocation versus the long-run fiscal and moral decay of the country is incomparable. The former will lead to an economy and a nation made stronger; the ladder to tyranny. The problem in our system is that if you are a politician and trying to get reelected, you make this calculation and hope that things don’t collapse at the wrong time, namely under your watch. Interestingly, this sacrifice of long-term sustainability for short-term gain is just the calculation made by many at the banks who played with essentially free house money (courtesy of the Fed), leading us to the crisis today. But let these same government officials who in large part mucked things up the first time around gain even greater control over the economy. I dare you.
By Trace Mayer, on April 9th, 2009
Quantitative easing appears to be the new fad among central bankers including the Bank of England, Japan, Switzerland and the Federal Reserve. Quantitative easing is a tool of monetary policy. The effect is an increase in the quantity of currency without regard to maintaining its quality.
CANADIAN QUANTITATIVE EASING
Bloomberg has reported that the Bank of Canada Governor ”Carney has pledged to lay out a plan that would flood banks with cash to halt the hoarding of capital and expand lending.” Consequently, the Loonie has been sliding against gold.
GLOBAL QUANTITATIVE EASING
Out of the G-20 meeting came the joint cooperation for global quantitative easing. Here are a few key points: ”To treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs (multilateral development banks), to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries.”
This creation of an additional $250B of SDR illusions to form the foundational capital for lending will only hasten the evaporation of the current system because the SDR has only limited liquidity and no intrinsic value. This is classic inflation by increasing the illusion supply. Because the SDR is a composite asset, a basket composed of the FRN$, Euros, Pounds and Yen, the effect is simply more chicanery of no economic substance. The IMF gold sales will be like a single piece of sushi appetizer to a starving dragon. The market’s reaction will be: ”That was nice. Seconds please.” But who will these measures help?
MAJOR BANKS AND THEIR VASSAL POLITICIANS
Bloomberg has reported that the Single Digit Midget Bank of America, with a market capitalization of $45B, needs $36.6B in capital to bring it in line with peers. If Bank of America cannot use the new FASB mark-to-market changes as creatively as its peers that enable fair-value lying to poof an extra $36.6B of fake capital onto its balance sheet then it must have serious intrinsic problems. There are places for worthless corporations like these: bankruptcy court.
How many other worthless, or worse than worthless, banks are having trouble conjuring capital onto their balance sheets? How long will it take other banks like Wells Fargo, US Bancorp or Credit Suisse Group with their approximately $14.90, $14.40 and $31.40 share price respectively and below $63B, $25B and $36.5B market cap to report earnings? The Treasury is delaying the reporting of the results of the federal report stress tests until Q1 earnings have been reported. Hopefully it shows up on Wikileaks like a recent whistleblower leak about JP Morgan’s insider trading program.
While fair-value lying may help the stock prices in the short term; the fundamentals are horrific for value investors. Most likely the longer the information is delayed and the less details the Treasury provides then the worse the true results are regardless of the faux official numbers.
The new FASB changes may enable profitability for a quarter, or even a few, but those profits are bogus. What purpose do these FASB changes and bailouts serve? To funnel bailout money through AIG to Goldman Sachs, JP Morgan, and European banks like Deutsche Bank. After all, Deutsche Bank, assisted by the ECB, has most likely been extremely helpful in perpetuating the gold price suppression scheme.
Why else would the ECB sell 35M ounces of gold the exact same day Deutsche Bank had to deliver 850,000 ounces of gold or risk a failure-to-deliver on the COMEX (Part 1 and Part 2)? The gold and silver markets, along with their shadow of the interest-rate market, are enveloped by the thickest part of the derivative illusion. As securities attorney Avery Goodman observed, “But, simply put, you cannot legitimately or legally hedge against another hedge, which is what the derivatives dealers appear to be doing, and which CFTC seems to be allowing them to do.”
The sociopaths manipulating interest rates, which according to Austrian business cycle theory regulate production over time, has caused and will yet cause catastrophic damage to the world economy and result in tremendous human suffering.
WORLD RESERVE CURRENCY
The world already has a world reserve currency of last resort: gold. Gold has a definition under the periodic table and is not the same as paper gold, derivative gold, problematic ETF GLD gold, or other forms of fools gold. Unlike SDRs and other illusions like the FRN$, Euro, Pound, Yen, etc. gold is a tangible asset, no-one’s liability and not subject to counter-party risk.
The next round of derivative shocks may come from a bankruptcy of the condemned General Motors triggering massive credit default swap payments. This will likely be a very stressful event for the banks and may result in tremendous solvency pressure.
Investors are becoming increasingly aware of risk and as the system continues evaporating the importance of seeking the safest and most liquid assets, with physical gold and silver at the tip, becomes increasingly desirable. While the price of gold and silver fluctuates their value does not and both gold and silver will still be there for the next credit expansion. That assertion cannot be made for the Z$, Bear Stearns or GM stock, money market accounts, the SDR or FRN$ and other places where capital was or is allocated. Carney and his fellow miscreants will not succeed in trying to force capital up the liquidity pyramid because the great credit contraction has begun.
Disclosures: Long physical gold and silver with no position in WFC, BAC, C, USB, GM, GLD, SLV, GS, JPM and CS.
By Bron Suchecki, on April 9th, 2009
Tom Szabo of silveraxis.com has followed up on my post yesterday with some further detailed comments and a new category – Pool Allocated. he is right to split my Segregated Allocated into Allocated and Pool Allocated, as this can be important in some countries as to whether the “foreign account” is reportable to tax authorities. I interpret what Tom is saying as essential that in both the gold is physically put aside in a vault and title is with the holders (ie it is not on the balance sheet of the custodian), the difference being in whether this gold is then further separated by client.
I think it be best be thought of with the example of a person A buying 10 x 1oz coins and 10 x 10oz bars and person B buying 5 x 10z coins, both of them storing with the same custodian. In Tom’s “Allocated”, the custodian puts person A’s coins and bars together in a pile/box with their name of it and then a separate pile/box for person B’s coins.
In “Pool Allocated”, the custodian has a pile of 15 x 1oz coins and a spearate pile of 10 x 10oz bars and has a ledger indicating that person A has 10 of the 15 coins and person B owns the remaining 5 and that all of the 10 bars belong to person A. As Tom points out, this can only be done with products that are the same, and not with 400oz bars or 1000oz bars, or indeed with 1oz legal tenders coins as they have different years on them (but can be done withing each year, to further confuse).
Most will see little difference between the two, as the key thing is that everything is 1:1 backed and not in the assets of the custodian. As Tom notes, Pool Allocated is more operationally efficient so should have lower costs (there is no difference in insurance cost for the custodian). It can matter, however, in how some tax laws define a reportable account. Some may be very specific that any “mixing” as in Pool Allocated makes it an account. Other may simply require the physical and title separation from the custodian’s other business (if any).
With this further categorisation clarification, Tom also asks what the Perth Mint’s “Allocated” is? For the most part it is Pool Allocated. I should point out that in respect of our legal tender coins, the segregation is by year. This means that if you buy 10 coins in 2005 and 10 in 2007, we have those years in storage because we make the coin in that year and put it in the allocated vault. Once put in, it stays there. But it is pooled in that if there are 10 clients with 10 2005 coins each, there is a pile of 100 2005 coins.
It gets a bit messy with numbered bars and the LBMA bars, because Tom says that “pool allocated accounts aren’t possible with good delivery bars”. When you buy a numbered bar (whether consistent ounces like kilo bars or odd weight like LBMA bars), we put that specific numbered bar into the vault and allocate that number to you. But again, for practical storage purposes, the numbered bars are stored together. For example we will have a 1 tonne pallet of 80 x 400oz bars of varying weights, but even though they are together, if you pulled a specific bar out we know exactly who owns it.
Once we’ve worked all these variations out, maybe we need some agreed industry storage taxonomy so investors know exactly what they are getting. Marketing can sometimes get in the way of strict legal definition.
By D H Smith, on April 8th, 2009
I just spent an hour today going through American International Group’s last twenty years of Annual Reports, finding out how much tax AIG has paid over the last 20 years, working out estimates of how much tax its employees have paid on their incomes and how much has been remitted to the Treasury on dividends paid by AIG to shareholders on previously-taxed income.
The numbers I come up with are $35 billion of income taxes paid until the company tumbled into loss for its 2008 fiscal year. Taxes on salaries and dividends through 2008 I estimate at another $20 billion, for a total tax rake-off of around $55 billion.
What I cannot work out as easily is how much tax has been paid by service providers, lessors and so many others who prospered when AIG prospered. It would also take study to quantify the other economic benefits conferred on the cities and towns in which AIG operates, and the contributions AIG made to all the good causes it has supported so generously down the years.
As black as the company is now painted by career-making politicians, including some who now advise AIG personnel to commit suicide out of shame, one must try to remember that there were many benefits of AIG’s rise and rise and rise. Far from being a criminal enterprise or a ship of fools, AIG was one of the greatest American companies, right up until it was wrecked by the incompetents brought in after that great man of the people, Eliot Spitzer, made it his special project to destroy Hank Greenberg and the company he built.
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