What is Saving?

By David Barr, on May 7th, 2009

I have been thinking a lot about the meaning of saving money. Which brings me to what I call the fundamental question of finance: How does forgoing consumption today translate to increased consumption in the future?

In thinking about this question I have identified six distinct answers to this question:

The dog: Place a bowl of food in front of a hungry dog and it will devour it without hesitation, lick the bowl clean and then look around for more. The dog’s world represents the very simplest economic system. What you have now is what you consume now. If there is plenty today the dog will eat itself sick. If there is no food tomorrow he will go hungry.

The squirrel: Before the first human walked the earth, animals such as squirrels discovered the first financial innovation. Just as the squirrel gathers nuts to get through the long winter, there are some goods that we can simply store and use in their current form. This is the simple and most obvious answer to the question listed above. For many people this is as far as they get when thinking about savings. However, money is not a can of beans. Simply storing money today does not automatically translate to purchasing power in the future.

The farmer: Around 10000 years ago humans discovered that seeds left in the ground would grow into new plants. Thus the birth of agriculture also represented the first investments. By not consuming some grain today, early farmers could ensure a reliable supply in the future. Many natural and living things allow this sort of simple investment. We now know that by not clear cutting a forest or fishing a species to extinction we can ensure an adequate supply for the future.

The builder: Some projects take a lot of time and effort before they yield any value. 10 people might have to work for half a year to build a house. Bigger projects like highways and dams can occupy hundreds or thousands of people for years. Of course all of those people need food, shelter and all the other necessities of life. Which brings us to the fourth answer to our big question. When I consume less then I produce, my surplus can sustain those who are working on larger projects. In exchange, I expect to receive some of the benefit of the completed project.

The parent: Over the course of ones life ones needs and abilities change. A new born infant is completely helpless to meet its basic needs. By providing for young children during their peak production years, the parent can count on their children to sustain them as they age. This familial relationship has been a cornerstone of nearly every society in human history. In modern societies this function is often aggregated, in that governments invests in education for children and pensions and medical care for the elderly. The logic is basically the same, individuals in their prime working years consume less then they produce, while the surplus goes to supporting children and the elderly.

The creator: The greatest achievements often require years of effort with only a small possibility of creating anything of value. Great works of literature, billion dollar corporations and medical breakthroughs all follow this pattern. An individual researcher may toil for 20 years with no tangible results before a discovery that creates millions of dollars of value. The artists, entrepreneurs, scientists and writers depend on the savings of the general population to support them in their efforts.

The financial sector is responsible for taking the excess production of today and using it to meet the needs of the future. Some goods can be stored for the future, but the vast majority of the production is services or perishable goods that cannot be stored. Forsaking consumption today does not guarantee that there will be plenty tomorrow.



One comment   Economic Theory, U.S. Economics   , ,  

Key Ratios Between Gold Silver Oil And Stocks Are Moving

By Trace Mayer, on May 7th, 2009

Serious investors should watch specific key ratios; which I provide freely to any RunToGold reader.  The major asset classes include gold, silver, oil and stocks.  At all times and in all circumstances gold and silver remain money.  Oil is the worlds primary energy source.  Among other purposes, stocks should represent the wealth generating capability of the economy.

There appears to be (1) a strong uptrend for gold, (2) a fairly decent bear market rally for equities that is running out of upward pressure, (3) a resurgent oil, (4) insane accounting sorcery that is rending any remaining confidence from the financial statements of corporations, (5) insolvent banks being sustained only through government bailout, (6) massive job losses with (6) continued bankruptcies which (7) detonate financial weapons of mass destruction.

DOW PRICED IN GOLD

10 Februrary 2009 I wrote about how the DOW had predictably crashed, again with a price of 8.67.  It later bottomed slightly under 7 or about a 20% decline.  The DOW has since recovered to 9.32.

Because of the 200dma and 50dma there appears to be plenty of downward pressure available for the DOW.

GOLD TO SILVER

Gold is the world’s monetary commodity.  By analogy, gold is like an oil supertanker while silver is like a speedboat.  Silver usually always chases gold both up and down in terms of fiat currency.  This is largely due to the much smaller hoards of silver and its industrial demand characteristics.  Silver is the speculator’s territory and smaller pools of capital can significantly impact its price.  Consequently, the recent breakout of silver portends a fairly strong bull market for the monetary metals.

BACKWARDATION

Earlier I explained the process and importance of both gold backwardation and silver backwardation because of their role as monetary commodities.  Since that time there was an unprecedented black swan where silver was backwardated for nine weeks!  While the ’sweat of the sun’ and ‘tears of the moon’ are no longer in backwardation on the LBMA forwards fixing; there continues to be some slightly unusual activity with particular interest in the 3 and 6 month silver contract and the 3 and 12 month gold contracts.

OIL IS GETTING MORE EXPENSIVE

As I explained in December, oil is the world’s primary energy source and therefore the gold to oil ratio does matter.  ”Oil is either going to go up, gold is going to go down or to move into some sneaky calculus the rate of oil’s rise will be faster than gold’s.”  Since that time oil has increased from 1.28 goldgrams per barrel to 1.92 or about 50%.  While gold has gone from the $770s to the $900s.

CALL OPTIONS

On 29 April 2009 Adrian Douglas of Market Force Analysis wrote, “The bets by bulls outnumber those by the bears by a 2.3 to 1 ratio which is even more bullish than for JUN 2009. The Total Call option interest is 113,663 contracts which is very similar to JUN 09. Furthermore if gold is trading at around $1600 by DEC then 100,000 contracts will be in the money!”

DENIAL

I highly recommend reading Nation Ready To Be Lied To About Economy Again by The Onion: America’s Finest News Source.  Among the notable quotes are, “According to a CBS News/New York Times poll, 98 percent of Americans no longer appreciate President Barack Obama’s attempts to break down the economic crisis into simple terms they can understand. Instead, many say the president should have the decency to insult their intelligence by using complex jargon to confuse and deceive them, perhaps even implying that the subprime mortgage fallout was just a big misunderstanding that resulted from a clerical error.

“I know when he’s telling the truth, and it bothers me,” recently laid-off schoolteacher Mary Hanover said of Obama. … Thus far, many policymakers in Washington have responded favorably to their constituents’ requests, saying they respect and understand the public’s need for dishonesty.”

With politicians encouraging fair-value lying in conjunction with rewarding financial terrorists for detonating financial weapons of mass destruction there is good reason shell-shocked Americans prefer to be repeatedly lied to about the state of the economy.  Please, in the comments tell me what you think about whether the video The Goverment Should Stop Dumping Money Into A Giant Hole?

NEXT GLIMPSE OF REALITY

Last June on stage at the Cambridge House conference after the Bear Stearns fiasco I was asked a question about whether the economy would get better.  Unlike the other commentators I responded, “No, the light at the end of the tunnel is just the next train and there will be plenty more.  Get out of the way!”

So likewise the light at the end of the tunnel is not safe but dangerous.  The next round will consist of failed corporations starting with Chrysler, a credit crunch starting with the single digit midget Bank of America needing $34B and derivative settlements on credit default swaps like BTA or GM.

As much as individuals, corporations and governments would like to deny reality there is basic economic law at work.  At the behest of their owner’s the Obama administration is intentionally exacerbating the Greater Depression because the financial terrorists who make so much money vaporizing companies are gleefully detonating financial weapons of mass destruction.

THE GREAT CREDIT CONTRACTION

Like a skydiver closing its eyes, the derivative illusion has allowed a brief reprieve from staring at the rapidly approaching reality.  Like a skydiver who does not understand the basic laws of gravity and why they are falling and not floating; most Americans feel helpless in their current situation and have an intuitive sense that something really big and really bad is coming.

But there is a parachute, already properly packed, and a ripcord to pull.  The immortal risk-free asset that can never become worthless idly sits ready to protect and preserve capital.  Capital is rapidly moving down the liquidity pyramid into safer and more liquid assets while the fictitious capital evaporates away when liquidity dries up and no bids are offered.

The Great Credit Contraction has only begun.  While gold is money it is nowhere close to being used as a currency in ordinary daily transactions.  While the trust purports to hold over 1,000 tons of physical gold a simple reading of the prospectus reveals a tremendous amount of risk with GLD ETF in contrast to an option like GoldMoney that poses no counter-party risk and is not involved in OTC derivatives.

The amount of individuals who have allocated even a small portion of their net worth to the safest and most liquid asset is terribly small.  That is one of the most bullish aspects of the immortal currency.  After all, there is only about 4/5th of an ounce available per person.

CONCLUSION

Because of incredible activity in gold call options, a fairly decent bear market rally for equities, oil having strengthened considerably, insane accounting gimmicks, insolvent banks, continued bankruptcies triggering financial weapons of mass destruction along with settlement the next few months will be particularly interesting.

While the DOW may continue its rally I highly doubt it will breach 11.5 gold ounces before it resumes its downward destiny and reaching 5-6 ounces sometime this year.  Silver will likely continue its upward ascent and return to a more normal ratio with gold around 55.  A little bit more difficult to prognosticate is oil but if I were to wager it would not descend too far below 15 on the chart but the probabilities are not particularly clear either way.

Like the basic laws of physics such as gravity; the basic laws of economics are not difficult to grasp.  As “T. S.” recently remarked a couple days ago about my work The Great Credit Contraction, “Thanks, my whole perception has again shifted.  Finished the book yesterday. I studied a little economics at school and Uni and hated it.  Your work is brilliant and makes sense.”

Gold, silver, oil and stocks are sometimes expensive and sometimes cheap.  The investor wants to buy cheap and sell expensive which reveals gold’s true role:  Money.  Gold is as effective at accurately relating value today as it was hundreds or thousands of years ago.

Disclosure:  Long physical gold and silver.

Copyright © 2008. This article was published on http://www.RunToGold.com by Trace Mayer, J.D. on May 7, 2009. This feed is for personal and non-commercial use only. Applicable legal information and disclosures are available. The use of this feed on other websites may breach copyright. If this content is not in your news reader then it may make the page you are viewing an infringement of the copyright. Please inform us at legal@runtogold.com so we can determine what action, if any, to take. (Digital Fingerprint: 1122aabbLittleBrotherIsWatching3344ccdd)




Leave a comment   Monetary Policy   , , , , ,  

All Ordinaries Fair Value 1,700 to 2,300

By Bron Suchecki, on May 7th, 2009

From the latest Leithner Letter:

Given how we came to this pass, where Australia now stands, what the government is doing to us and what may lie before us, it’s difficult to conclude that stocks are cheap and easy to believe that they remain dear. True, the AOI is less overvalued now than it was, but “less overvalued” is not the same as “undervalued.” Accordingly, Leithner & Co.’s plans include the possibility that an environment marked by recession and stagflation (like the one that plagued the early 1970s to the mid-1980s) prevails during the next several years. In such a climate, the fair value of the All Ordinaries Index would be ca. 1,700-2,300. That implies a fall of ca. 70% from the Great Bubble’s maximum and the harshest bear market in Australian history. Furthermore, taking 2,000 as the AOI’s “bottom” and assuming a long-run growth rate of 7.5% per annum, ca. 17.5 years will pass before the Index returns to its Bubble maximum of ca. 6,850. If so, this will be the most fraught recovery in Australian history.

The newsletter is worth reading for the detailed analysis behind that conclusion – it is not just some number picked out of the air or drawing some trend line on a graph. It is not coincidental that the Directors of Leithner & Co are Austrians (as in economics).



Leave a comment   Financial Markets   , ,