Where Do Stocks Go Next? Probably Sideways

From mid-March to early May of this year, the stock market made a swift and steep 35% rise. Since late last year, you have seen blogging here about how much the recession and now this recovery feel like that of the mid-70s. To date the stock charts still track quite closely. And psychological sentiment (although not closely measured back then) still feels similar to the jitters and ambivalence consumers and investors manifested in mid-1975.

So where do we go from here? Continuing to use 1975 as our guide, look for the market to move sideways for quite some time. After a quick 2-3 month jump up in early 1975, it wasn’t until later that year and into 1976, that the market continued its march upward, resting at just north of a 60% bull move into early 1976. The market then kept meandering upward until late 1980 for a total 6 year return of close to 125%.

So we have likely seen the first leg up for stocks. For the remainder of the year, economists will be watching housing market stabilization, further improvement in manufacturing, and falling unemployment. Only then will the market have the confidence it needs to move higher.

Survivalism In The Suburbs

Despite humanity surviving and thriving for thousands of years using commodity currencies the fiat currency proponents have effectively marshaled the press and academia to equate those in favor of a commodity currency with those counting down to Armageddon.  When looking back through the corridors of history one lesson is clear from humanity’s experience:  at all times and in all circumstances gold and silver remained money.  After fiat currency debacles that resulted in self-inflicted financial and economic wounds it was the individuals with the foresight to store tangible assets that were able to provide the capital for humanity to do what they have always done:  rebuild.

Therefore, those in favor of a commodity currency who store tangible assets are the optimists.  Commodity currency advocates are neither ‘doom and gloomers’ nor vampiric fatalistic fiat currency disciples who will be vaporized by a rising golden sun.  Those in favor of a commodity currency who store tangible assets realize that the earth rotates, the sun rises and the ages turn.  As the night shifts to day life will go on with breakfast being cooked and eaten.  The issue is who will do the cooking and who will do the eating.

MEMORIAL DAY WEEKEND

Like most people I enjoyed the long weekend.  With a bunch of pizza we watched Lebron James sink an amazing three-point winning shot with 1.0 second left on the clock.  The following night I devoured a delicious coconut-banana smoothie with some friends while listening to a giant singing frog.  Afterward Aaron Krowne, the founder of ML-Implode.com, and I decided to recap our intense financial and economic discussion which is now available as episode #37 of the RunToGold podcast.

STRATEGIC RELOCATION

Shortly before Memorial Day I received an interesting, if not unanswerable, question from a reader:  ”Would you recommend a place to live in the Montana to Colorado area that will have minimal economical damage?”

The principle of human action holds that every individual derives utility according to their own preferences resulting in a subjective perception for determining value and price.  I hate cold weather.  Being trained in the law I am often accused of being cold-blooded but the reality is that I am just a desert rat.

While preparation expert Joel Skousen, author of Strategic Relocation, may consider Montana or Nebraska attractive locales I have about the same desire to live in Montana or Nebraska as I have for eating sauteed rats in South Korea.  Nevertheless, I know people who love living in Montana and others who find sauteed rat a delicacy.  Everyone has their own individual preferences based on their human action.

PREPARATION

A motto I have tried to implement is:  Be prepared.  Often the first step is to assess the environment and circumstances.  There is an infinity of scenarios that can play out.  The key is being able to assess what is possible and its probability of occurring.

Sure, a meteorite could come hurling out of left field and destroy your car, or the earth for that matter, but the probability is extremely low.  Even if I did purchase meteorite insurance I would still bear the counter-party risk.  Therefore, I have chosen to forgo meteorite insurance.  Nevertheless, I would not be surprised if a few of my extremely conservative readers did purchase meteorite insurance and maybe even additional reinsurance.  Everyone has their subjective preferences.

MENTAL CALCULATIONS OF VALUE

The use of fiat currency has greatly retarded the ability of the general populace to performance mental calculations of value.  These fiat currency illusions are like using the term ‘foot’ or ‘feet’ to perform mental calculations of distance when constructing a building but having either no definition of inches or conflicting definitions of inches.

Let us assume plans were drawn up for a building with a 7 foot door within a 10 foot wall.  However, the definition of feet when used for the door was 24 inches per foot and when used for the wall it was 6 inches per foot.  Can you imagine the resulting chaotic structure?

But that is precisely the problem most individuals and financial professionals have found themselves in.  As a result most people can neither accurately appraise the economic environment nor make accurate assessments of the possible events and their probability of occurrence.

SUBURBAN SURVIVALISTS

Yahoo Finance! reported that a new trend is coming out of chaotic California:  ’Crisis spurs spike in ’suburban survivalists’.  ”Six months ago, Jim Wiseman didn’t even have a spare nutrition bar in his kitchen cabinet.  Now, the 54-year-old businessman and father of five has a backup generator, a water filter, a grain mill and a 4-foot-tall pile of emergency food tucked in his home in the expensive San Diego suburb of La Jolla.”

I find Mr. Wiseman’s tale of ’spending roughly $20,000 since September on survival gear’ rather ironic on multiple levels.  First is his name.  Second is that he is a ‘fire protection contractor’ so it appears that he is in the risk management business.  Third is how he has approached the performance of these mental calculations of value.

Surprisingly Professor Markman does hit on a key issue when he says, “We have no real causal understanding of the way our world works at all”.

COMPLEX SYSTEMS

A few years ago I was touring a Wal-Mart store with its general manager.  He showed me all around, how the trucks were packed and explained the Just-In-Time computer system that automatically managed the inventory to make sure that just the right amount of goods arrived at the stores at just the right time.  After all, this helped reduce inventory which freed up cash and made the company more profitable.

Also a few years ago at a lunch I had a discussion with Kevin Rollins, former President and CEO of Dell Computers, about inventory management.  His statement still sticks in my mind about measuring inventory turnover not in days but hours.

Tremendous innovations in supply chain management have taken place over the last decade.  Companies and their inventory are leaner than ever which conserves their cash and supposedly increases profitability.  But sometimes a black swan flies in, disrupts the system and chaos in sues.  Other times it is a gaggle of black swans.

SIMPLE PREPARATION

If Mr. Wiseman really needs his various preparations then what would the probability be that the area he is in is experiencing massive civil unrest, supply chain disruptions, gang warfare and a host of other undesirable effects?

Often when thinking of disaster preparation people get a little extreme, do not accurately assess the probability of events, focus on fairly immaterial questions like how to buy gold or silver and neglect the more important issues.

When considering physical preparation I think the best insurance is a three month supply of food and a 72 hour kit.

The kit should be extremely portable such as a backpack which may be quickly taken in the automobile should there be a need to evacuate.  The food storage is a great hedge against inflation, insurance that you can eat which is not subject to counter-party risk, protection against potential supply chain disruptions such as the recent swine flu advertising campaign, and relatively cheap.  Food storage is a form of savings and procuring a three month supply of food may cost only a few hundred FRN$s.

Many of the economic establishment has an insane belief that savings can be too high and often berate China for their high savings rate.  The savings rate can never be too high.

For example, an individual can never have too much food.   But many negative effects, such as death, result from having too little food.  Therefore I would rather bear the risks from having too much food such as spoilage, etc. than any of the effects from having too little food.  After all, the body measures food and water inventory in hours not days.  To reduce the cost of having excess food therefore I follow the principle of storing what I eat and eating what I store.

Many, such as billionaires Eric Sprott and Richard Rainwater, find the Peak Oil theory persuasive and foresee a long emergency.  Sure, there are additional preparations you can make such as opening a free GoldMoney account where you can begin using gold or silver in ordinary daily transactions, procuring a shotgun or Glock 9mm, storing a year or two of food, spending hundreds of thousands or millions of FRN$s on a ranch in a remote location, etc.  For those interested, I address the principles for a comprehensive strategy in chapter 6 of The Great Credit Contraction for dealing with the current environment to protect, preserve and grow one’s wealth.

CONCLUSION

Using gold to perform mental calculations of value is extremely important in determining how to profitably allocate capital.  The current worldwide monetary system is based on a rapidly evaporating illusion.  The FRN$ system is facing intense pressure which is resulting in many undesirable consequences.  Being able to assess possible events and discern their probability is becoming increasingly important.

Our current society functions because of complex systems and they can easily be disrupted.  Preparation to hedge against these uncertainties can cost anywhere from a few hundred FRN$s or become a black hole for capital and time.  Having a three month supply of food and a a 72 hour kit will provide protection against the vast majority of probable scenarios.  The Great Credit Contraction has only begun and the landscape is changing at a rapid pace.

Are you prepared?  To benefit other readers please leave you questions or suggestions in the comments.

What if India had a Hong Kong?

An alternate history that I find interesting is a scenario where, in 1947, the British kept one city in India – e.g. Surat. This is analogous to the British control of Hong Kong in China after the communist revolution.

Why is Surat interesting for such an analysis, and not Bombay? It sounds too implausible for free India to have tolerated colonial rule for Bombay. A solution like Hong Kong, Macao or Goa for a less important place is more plausible. The other reason why Surat is of interest is that before Shivaji sent the merchants of Surat scurrying to the safety of British-controlled Bombay, Surat was the commercial capital of the West Coast. So there is perhaps some natural geographical advantage of that location.

If the British had run Surat in the fashion that they did for Hong Kong, how might this have changed India’s trajectory? The analogy with Hong Kong is straightforward. In this scenario:

  • Surat would have become a place with a market economy, with strong public goods of law and order, judiciary and legal system.
  • When India embarked on socialism, this would have been a place for people and capital to go to. Some of the brain drain and capital drain that India suffered to locations all over the world would have instead gone to Surat.
  • Surat would have then become a key mechanism for India to plug into globalisation, for trade in goods and services and for financial services.
  • When India started stepping out of socialism, a good deal of institutional capability, human capital and financial capital would have been ready at hand to help get the mainland going again.
  • When a country wants to undertake institutional reform, it is quite useful to have `regional role models’ (a term drawn from the World Bank’s East Asian Miracle book). India unfortunately has few regional role models other than the good work done in Sri Lanka on trade liberalisation before the war, and the work done in Bangladesh in microfinance; this is in contrast to East Asia where each country is able to pick and choose from regional success stories in any area of reform. If Surat had been a Hong Kong, then institutional arrangements there would have been a natural starting point for thinking about legal, regulatory and institutional development in India. This would have given faster institutional evolution and thus growth in India, once India wanted to actually do institutional reform.
  • The last point is a bit speculative. Suppose Surat was a vibrant outpost of good institutions and laissez faire, while India was headed off into a bad institutions and dirigisme from the late 1950s onwards. Would the very existence of a visible alternative have modified India’s trajectory? It is easy to think that from the early 1990s, when India was getting interested in reintegrating into the world economy, and in building institutions, that a Hong Kong would have helped. But look back even before that; would India’s long descent have been reduced or even averted by having a counterpoint? We know that in the Chinese case, they had Hong Kong and still suffered from the disasters of the cultural revolution. But in a functioning democracy with freedom of speech, the power of ideas and impact of information is greater.

In summary, if you think that China’s incredible economic success was aided by having laissez-faire Hong Kong handy, then in this alternate history, a similar evolution for Surat would have helped India.

I recently came across similar arguments being made by Paul Romer. He uses the term `Bridge Cities’ for such cities, which can help speed up the development of the host country.

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The Decline of the Left

riting in Business Standard today, Surjit Bhalla has a table of the vote share of the CPI and the CPI(M) put together. I thought it would be useful to see this data as a time-series, so here is the result.

Click on the graph to see it more clearly. Each circle is a data point. The dashed line is a (robust) regression with a shift in the intercept in 1991, reflecting the fall of communism. As we can see, the fall of communism seems to have gone along with a loss of vote share of 1.3 percentage points for the Left.

The latest result is a bit worse than the trend line might have suggested: tactical factors went a bit against the Left. At the same time, the CPI and CPI(M) leadership can take heart: the latest result is not all that far from the historic decline of the left, so this does not suggest that the leadership made particularly large tactical errors. What they are perhaps up against is historical forces.

The red coloured plus sign is the linear extrapolation for 2014; the slope implies losing roughly 0.13 percentage points of vote share each five years. (The statistical signifiance is weak; it’s a t stat of -1.52).

Here’s the R code which you can experiment with:

library(MASS)
dates <- c(57,62,67,71,77,80,84,89,91,96,98,99,104,109)+1900
vshare <- c(8.9,9.9,9.4,9.8,7.1,8.7,8.6,9.1,8.7,8.1,6.9,6.9,7.1,6.8)
post1991 <- dates > 1991
m <- rlm(vshare ~ -1 + dates + post1991)
summary(m)
m$coefficients[1]*5 # lose this much each gen. election

png(”ic.png”, width=550,height=550, pointsize=16)
par(mai=c(.8,1.1,.2,.2))
plot(dates, vshare, type=”p”, xlim=c(1957,2014), xlab=”", ylab=”Vote share of CPI + CPI(M)”)
lines(dates[1:9], fitted.values(m)[1:9], lty=2, lwd=2)
lines(dates[10:14], fitted.values(m)[10:14], lty=2, lwd=2)
abline(v=1991, col=”red”, lwd=2)
points(2014, m$coefficients %*% c(2014,0,1), cex=3, col=”red”, pch=3)
text(1966,9.1,”Regression line pre-1991″,cex=.7)
text(2003,7.3,”Regression line post-1991″, cex=.7)

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Silver premiums and fake spots

Interesting resurrection of a Kitco post from October 2008 about silver premiums. There was a lot of heated words and a bit of sillyness. In October 1000 oz bars were quoted @ 69 cents and 1 oz Eagles @ $6.99. Now it is 19 cents and $1.99.

For those who would only trust physical, the smart play was 1000oz bars @ 69c. I’m not sure what the buyback discount is in the US, lets say 1% under the so-called “fake” spot. So sell the 1000oz bar and lose 15c and then buy Eagles at $1.99. Total cost = 69c + 15c + 1.99 = $2.83, still way cheaper than $6.99.

Also, reading back over those posts there seemed to be a view that there was a difference between “industrial” silver (1000oz bars) and “investor” silver (1oz coins). In the Perth Mint’s Depository by far the most popular physical form held in allocated storage by individual investors is the 1000oz bar, not coins, simply because it is the cheapest. From my point of view a 1000oz bar IS and investor product.

As to the view that COMEX is some sort of “paper” price “disconnected” from the “real” physical price. Arbitrage in the professional market keeps COMEX price in line with spot price for physical. The fact is that huge quantities of 1000oz physical silver bars change hands at this “fake” spot price.

It is interesting that commentators who were making a huge deal about the big premiums on coins and using this as proof of the fakeness of COMEX and that it meant the end of the world and silver was going to the moon etc etc are now very quiet about the reduction in premiums. If the low premiums are mentioned, it is as an aside and no conclusions are drawn. They really shouldn’t have been making a case for investment in silver based on premiums (as that just reflects manufacturing capacity shortages) but on the spot price (which reflects real shortages of the underlying physical).

Green Shoots Are Red Roots

The ‘green shoots’ of the economy are really red roots evidenced by a labor market stasis and plummeting earnings.  Chairman Bernanke told ‘60 Minutes’ on Sunday that “green shoots” of economic resurgence are sprouting.  But those perceived green shoots are really red weeds that the Federal Reserve has internally debated for weeks.  The economy is grinding to a halt, the FRN$ is under intense pressure and beginning to buckle again while gold is predictably playing its role.

But the Fed officials do realize Americans want to be lied to about the state of the economy so they spout worthless pablum on national television and bury what remaining facts they decide to release in mostly unread reports.

FOMC MINUTES

The 28-29 April 2009 FOMC minutes were released today, 20 May 2009, and with all the blah, blah, blah edited out there is some useful information including:

“Labor market conditions deteriorated further in March. … The civilian unemployment rate climbed to 8.5 percent … Real spending on equipment and software dropped markedly … Business output continued to drop sharply, and credit availability was still tight. … the growth of real gross domestic product (GDP) in China appeared to pick up … investors were apparently surprised by the Committee’s announcement that it would increase significantly further the size of the Federal Reserve’s balance sheet … Poor liquidity in the market for Treasury inflation-protected securities continued to make these readings difficult to interpret. … daily trading volumes for Treasury securities remained low. … The spread between the forward trend earnings-price ratio for S&P 500 firms and an estimate of the real long-run Treasury yield–a rough gauge of the equity risk premium–narrowed during the intermeeting period but was still very high by historical standards. … Commercial bank credit contracted … Commercial real estate loans also fell. … Unemployment claims were exceptionally elevated … The economies of many key trading partners were seen as experiencing quite severe contractions. [emphasis and hyperlinks added]“

ECONOMY GRINDING TO A HALT

Credit is tight because holders of capital are seeking safer more liquid assets and refusing to lend.  Treasuries, the ‘risk-free asset’, has anemic volumes as do the klepto-TIPS.   To compensate the Federal Reserve engages in quantitative easing but will fail.

The value of real estate, both commercial and residential, is a function of the underlying business productivity.  In January when I attended the IMN Real Estate conference it was dead.  Commercial real estate loans are still falling.  Why lend money to buy ghost malls?

I agree with Bespoke Investment Group that Jeremy Siegel of the Wall Street Journal is ‘living in la la land’ regarding his view on the S&P 500 earnings calculations.

The United States economy, a consumption gulag, is fueled by the top lines of individuals.  The labor market is disappearing, unemployment is quickly rising, unemployment claims are probably rising faster and are exceptionally elevated while businesses are not spending or producing.  This downturn is neither comparable nor is the S&P 500 making any money.

DOLLAR NEGATIVE

The Great Credit Contraction has begun and the system does not collapse but evaporate.  Access to credit has evaporated.  Jobs and earnings evaporate which causes real estate values to evaporate.

Then real wealth is evaporated as bailouts for corporations or individuals toss money into the money hole and light it on fire.  This results in tax revenues evaporating with government spending rising at an greater rate and leads to in an exponential increase in the budget deficit.  Beware if you have a safety deposit box.

As capital flees to the safer and more liquid assets, anemic Treasury volumes result as capital flees into the world markets which, along with the trade deficit, results in a precarious current account deficit; particularly in real terms as Americans are less able to import and purchase foreign goods from real economies like Brazil which I discussed in-depth with Contrary Investors Cafe on 20 May 2009.

Then the budget deficit must be financed but it is the Treasury bubble which will burst.  On 18 January 2009 I wrote how and why the Treasury bubble will burst.  ”When foreign demand for U.S. debt subsides then at least two scenarios can happen:  (1) printing the money with hyperinflation or (2) a default”.

Before a complete collapse there will be inflation through monetization, partial defaults or increased interest rates.  All are negative for business activity.  All reinforce the downward spiral. 

GOLD POSITIVE

Because the FRN$ is the world reserve currency and because gold is the risk-free asset therefore they are poles apart.  Not paper gold like the problematic GLD ETF or some other flimsy substitute but cold and hard bullion.  Gold will hold its purchasing power during times of fiat currency illusion inflation.  But it is during deflationary credit contractions that gold really performs best.

As I wrote about a couple weeks ago, “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.”

The gold to silver ratio has moved from 72 to 65.8, or about 8.6%.  During this latest bear market rally some of the key ratios have normalized but even with the monstrous move silver is still out of normal with more upside potential.  The next downward phase for the bond and equity markets will be upon us and if during deflation the FRN$ is king then gold is emperor.

CONCLUSION

‘Green shoots’ are growing in China and the Brazilian Amazon but not in the current American economy and Chairman Bernanke knows it.  Business activity is grinding to a halt with S&P 500 earnings looking like red roots.  Quantitative easing will fail.

The Great Credit Contraction grinds on and capital continues seeking safer and more liquid assets while key ratios continue to normalize.  Physical gold and silver, the ultimate forms of cash, will be prime beneficiaries of this mega-trend.

Disclosures:  Long physical gold and silver and no position in the GLD ETF or US Treasuries.

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“Limits Of Power” by Andrew Bachevich

“The Limits Of Power” is an engaging book that explores the contemporary imperialism of the United States Of America.

Most of the facts that Andrew Bacevich puts forth in the book are quite true. The central core of the book, the weakness of the idea of American exceptionalism, is indeed valid. That exceptionalism and the resulting imperialism is, in the long run, more of a threat to American citizens and society, and indeed the whole world, than most foreign powers. Even though he gets that right, he harbors some essential misunderstandings which only serve bring him to some misguided conclusions.

His premise is that, because Americans have a fetish about freedom, they have succumbed to consumerism and dependence on foreign oil and other goods, in order to live the good life. This dependence has put a premium on military might to protect the freedom to consume. He sees this as the primary cause of the Middle East conflicts. Americans protecting their interests, using the false front of freeing the people of that region from tyrants, use military might to protect their supply of cheap oil.

He is writing from a background as a retired army colonel. Thus, when he speaks of The United States, America or Americans, he is generally speaking of the collective political apparatus of the state, not about the people at all. This does set the tone for much of the book and his outlook. There are times, however, when he does use the terms to describe individual people, consumers in the “crisis of profligacy.” This mixture serves only to confuse the logic of his arguments.

A fundamental error in his logic, which affects most of his conclusions and recommendations, is that he misconstrues the notion of freedom. The only coherent understanding of freedom is that it has limitations only in the responsibility to refrain from interfering with the freedom of others. That is not the understanding of freedom that Bacevich uses. He states that “freedom has an underside.” His statement in the first section of the book is telling. “In the aftermath of the attacks on the World Trade Center and the Pentagon, Washington’s resolve that nothing interfere with the individual American’s pursuit of life, liberty, and happiness only hardened.”

It may be that politicians wanted Americans to think that they were interested in preserving freedom, but everything that they did resulted in the destruction of freedoms for Americans. As he noted later in the book, American politicians and military leaders used the pretext of freedom for Middle East countries to initiate aggressive military and political intervention in the affairs of foreign countries, with the objective of installing friendly governments. Yet he doesn’t grasp his own inconsistent understanding and misuse of the term throughout his discussions.

Through much of the book, that disconnect was quite disturbing, because I agree with much of what he said. Imperialism is weakening America, morally, politically and financially. American politicians are trying to impose on the world standards that they themselves refuse to abide by. Frequently, however, I would be jolted by something that didn’t fit, conclusions that were wrong. It seems to come down to the idea that freedom is the problem.

In his conclusion, he comes close to being right, but then veers off course by construing that international relations are only political or military. He refers to his master, Reinhold Niebuhr, saying “Yet he [Niebuhr] understood that a nation satisfies its interests more easily when those interests are compatible with the interests of others.” What he is stating is the essence of free trade. When people are free to trade with whoever they want on whatever terms they want, the interests of each are made compatible. Lack of coercion creates benefits of cooperation for both parties.

Where he goes wrong is to believe that the interests of American politicians are the interests of the Americans. That is the root of most economic fallacy and problems in international relations. The self interest of politicians is almost always at odds with the self interest of citizens. Bacevich treats them as one and the same. On the very last page, he quotes Neibuhr again, “social orders will probably destroy themselves in the effort to prove that they are indestructible.” The reality is that politicians will destroy social orders because their own self interest is in power, and power ultimately destroys freedom and progress.

Bacevich’s entire line of reasoning seems to be based on his understanding that “Freedom is the alter at which Americans worship, whatever their nominal religious persuasion.” That unrestrained pursuit of life, liberty and happiness leads to the outward projection of military might to protect American’s right to buy stuff for cheap. That has led to a dependence on foreign countries for cheap oil and cheap goods. The American standard of living is thus, according to Bacevich, the result of imperialism. The conclusion is that Americans must accept a lower standard of living in order to bring the imperialist government in line. If they keep demanding stuff, the government will feel obliged to get it for them.

There are, in fact, many people who do worship at that alter that Bacevich talks about. But the freedom he is talking about is not freedom with any coherent meaning. That false freedom denies that anyone else has freedom to pursue their own self interests. Because Americans are free to trade does not in any way give any philosophical support to the idea that they have a right to force others, domestic or foreign, to trade with them on terms that they themselves set. That is not freedom, in any coherent sense, but rather the use of coercion, the rejection of freedom of others. True freedom is, in fact, a two way street.

Americans have no right, whatsoever, to the petroleum resources or any other goods of any nation or person. If every Middle East country stopped producing and selling oil, that would probably be harmful to Americans in the short run. That fact does not give the American military or the CIA the right to interfere militarily or politically in the workings of any of those nations. Americans can and would adjust. But moreover, that scenario is highly unlikely to ever happen. The fact that Americans are dependent on foreigners for oil means that they are dependent on us for other things. When Americans pay in dollars, foreigners have to buy something from Americans to use those American dollars.

Bacevich suffers from the illusion that dependence is a bad thing, and that Americans would be better off by being independent of any country for any good. It is a very sound and widely accepted economic principle that international trade between individuals makes all parties better off. Thousands of different factors give comparative advantage to different regions, different cultures and different people. When someone concentrates on what they are good at and trades for what they are not good at, they will likely be significantly better off. The braoder and more international the structure on which comparative advantage can be pursued, the higher the standard of living will be for all involved. It is not dependency but rather interdependency.

The notion that nations trade is a fallacy that promotes imperialism. Nations don’t trade, the people of the nations do. Neither they nor their state apparatus has any right to coerce others to trade with them.

A more realistic line of reasoning to me is that economic freedom created prosperity. That prosperity allowed the possibility of large, powerful government that was capable of imperialism. That large government and its imperialism are a threat to the very freedom that created the prosperity. Thus, massive government and imperialism must be resisted by all people interested in true freedom and future prosperity. If the individuals in America were held responsible for their own lives and were free to trade with people, at home and in other nations, unhindered, and the people in other nations were free to trade with Americans without coercion and the threat of military force, America would be a shining star among nations in the world. Terrorists would not target Americans, because American military would not be using force for economic blackmail and political benefit. America’s military prowess could be deployed in true defense, not interfering in the politics of other nations. As Bacevich states, “We don’t need a bigger army, but rather a smaller foreign policy.”

Government Fundamentalism

Free market fundamentalism is a disparaging term that attempts to emasculate the credibility of anyone who is in favor of the free market, who believes that a voluntary society is morally justified and gives the best result. People have been trained to think of fundamentalists as dangerous, crazy people, so the strategy is to paste the descriptive term “fundamentalist” on someone who thinks that the government has exceeded its bounds, has screwed things up enough already, and that it’s time to try freedom again.

Freedom is ownership of your own body and your property, to use as you see fit. The only restriction is that you can’t infringe on the rights of anyone else. My freedom to swing my fists ends where your nose begins. The opposite pole is slavery. It is the absence of rights and lack of ownership of your body and property. Totalitarian socialism is slavery taken to its obvious and necessary conclusion. All citizens forfeit their rights to those of “society”, or the dictator, who poses as the all knowing mind of society. The opposite of free market fundamentalism is slave market fundamentalism. In all cases, slavery has been and is possible in the long run only if government is an active enabler or participant. Since government is the enforcer of slavery and the eliminator of voluntary markets, a synonym for slave market fundamentalism could be government fundamentalism.

The choice that we need to make is whether we want to move in the direction of freedom or in the direction of slavery.

Though America is still among the most free countries, we actually haven’t had truly free markets and free society for a very long time, only less oppression than others. We have the freedom to vote, but that has evolved into a license for legalized theft. Freedom has been replaced by bribing voters with goodies. Both major parties are big government fundamentalists. Both want to be the master. They differ only in their approach and target audiences.

We have the freedom to buy things, but that freedom is bound by the requirement to use the legal tender created by government, which is constantly being manipulated and systematically devalued. Our present economic situation is due to the boom and bust cycle inherent in our national monetary policies of interest rate distortion, loose credit and expansive money supply. At this time, nearly 98% of the value of the dollar has been inflated away by the Federal Reserve Bank since its founding in 1913.

We have the freedom to work, but that freedom is bound by a complex maze of regulation and distorted incentives which discriminate against the poorest and least skilled people in society. We are free to earn money, but that freedom is bound by confiscatory taxes of approximately 40% of national income to support unproductive government. It is a huge and growing parasite on the productive people in society.

We still have some level of freedom in our health care choices, but it is heavily bound by the chains of protectionism, regulation, and distortion by floods of federal dollars. Of any of the markets in America, health care is one of the least free, the most heavily bound by bureaucratic strangulation. It can be no surprise that it is also one of the most wildly distorted.

Education in America at all levels is a wreck and failing us and our children because of central planning by the government education monopoly. Any alternative is made very expensive and, in most cases, impractical. There is little freedom in education.

I am a market fundamentalist. I think freedom is right and is the definition of justice. Since free markets are merely freedom in all its forms, the only other alternative is to move toward slavery. Any person or business that doesn’t violate the body or the property of anyone else should not be subject to the whims of a politician. Any business that does violate the body or property of someone else should be punished for whatever violation they commit.

A distorted legal system that doesn’t protect rights, or corrupt officials that don’t punish wrong doers, are absolute necessities for slavery and oppression to flourish. A government of bureaucrats that imposes arbitrary, detailed rules on everyone is a form of slavery. Freedom and dignity include not being told what to do by a master, whether that master is a slave owner or a government bureaucrat. The move away from free markets is the move toward government fundamentalism.

Immorality Writ Large and How to Fight It

We are living through a time in which all common sense and logic has been sacrificed for blind hope and misplaced faith. According to the current gospel, peddled by the Messiah and even his anti-Christ enemies (the Republicans ironically), in a crisis in which millions are being thrown out of jobs, debts are being called in and people are being forced to cut back and save more, naturally we must see to it that these forces are prevented.

So we pump public funds into failed banking institutions that took risks imprudently and followed a business model in which short-term windfalls were rewarded over long-term viability and sustainability…all at the cost of the taxpayers and the financial companies that would have been able to find value and profitability in the assets that would have been liquidated had the banks been allowed to fail. We do the same with the auto industry, bailing out our failing companies, and specifically the UAW – the union that pushed the companies towards failure by demanding the massive salaries and benefits that bankrupted the companies in the first place. We reward debtors who purchased homes they could never afford by forcing lenders to rewrite mortgage contracts and allowing the government to purchase mortgage debt to keep interest rates low, with the government thumbing its nose at those who had responsibly paid off their mortgages. We relieve people who took on too much credit card debt by forcing lenders to lessen their fees (the fees necessary to compensate them for the risk involved in allowing people to finance their purchases through debt) by putting restrictions on “unfair” charges, inevitably causing those who were more responsible in paying off their debts to pay higher rates of interest.

When it comes to the protection of failing bureaucracies, it looks as if all of the states in the nation will be forced to bail out California (amongst others) when the federal government comes in and helps ameliorate their debts created by reckless spending. More importantly, the responsible states will not only be sacrificing their money, but their sovereignty to the federal government, due to the fiscal idiocy of the other states.

Even looking to something as fundamental as our progressive tax structure, whereby those who generate more income are penalized through higher levels of taxation (and forced to subsidize) those who earn less income, in every single case the people that are in the wrong are rewarded, while the people that are right or at least not responsible for these problems are penalized. Given the rate at which our national debt is expanding, the burden of these current problems unfortunately will be borne on the backs of future generations of Americans as well.

At length I have spoken in the past about how economically destructive these policies are, merely exacerbating problems instead of allowing markets and the individuals that make up the markets to adjust. I have explained that many of these problems were created by the government in the first place. I have also spoken to the fact that the holes that we are digging in attempting to stave off our problems, in the wasted future resources and diverted current resources being put towards government-planned projects, the massive amounts of money and debt creation by the federal government and also in our move overall towards a collectivist society.

But fundamentally, what I am seeing is that there is something far more insidious at play. What this crisis has illuminated to me is that because everything the government does has the force of law, it allows it to embody all of the worst traits of fallible man, writ large. More specifically, practically every single thing the government does and has done is about taking things from one group of people or more often all people and redistributing them to other people. Since the government can tax, it has the legal authority to rob you of your wealth and give it to someone else. Since the government can regulate, it has the power to help certain companies and harm the ones it doesn’t like. Since all can vote for government officials, government can allow 50% + 1 of the people to destroy the rights of all people; or allow 99% of people to subjugate the rights of the other 1%.

What I have come to realize is that unfortunately, our Founding Fathers did not think through deeply enough how far men were from angels, because the Founders were imperfect just like the people that they built the government for. They did not understand that while they tried to protect us from democracy, given the power to amend the Constitution, democracy could be implemented, with certain classes plundering other ones and bankrupting the nation in the process. Were the document to lay out in clear language any number of restrictions separating the public sphere from the private, this would simply lead to innovation amongst the people in subverting law and usurping power. Unfortunately, they didn’t understand the fatal flaw that they designed a framework in which the people got the government they deserved, not the government that was best. I do not mean to decry their efforts, but merely point out that as great as the Constitution they crafted was, it still could not ensure that people did not corrupt or disregard it.

As some have argued, were the populace to be more educated, our government would be better policed and regulated by the people it is supposed to help protect, and closer to the kind of paradigm that was intended by our forefathers. However, the government through public education gets to indoctrinate the citizens from day one. Even for those who are home-schooled or receive a private education, they still might be deluded into voting for bad candidates — just look at the New York Times crowd or the Ivy League (I know, I can’t believe I am emerging from it with a clear head either). And an educated populace might be even more adept at using the government to serve its interests as is.

I have always found that more influential than any of these institutions are the people that we grow up with and live with – our families, our friends and our mentors. And this is why I believe that our role as free-thinking individuals is so important, and that we must seize this moment in which the world is upside down, when good is treated as bad and moral is treated as immoral to seek to open the eyes of our fellow men. We need to educate by teaching in theory, demonstrating in practice and appealing in good sense and morality to the fact that this system whereby everyone plunders everyone else in the end leads to our demise; into a land devoid of all values, corrupted and whithered like so many empires that came before us.

We need to engage in debate, unafraid of saying what we feel in our hearts and in our minds is right. We need to sharpen our arguments against our challengers so that we can swiftly, calmly and rationally show them the errors of their ways and turn them into our friends, or at least respectful enemies. We need to explain that our actions affect more than just those around us, but also our future: our children, and our children’s children. We need to preach that as Reagan put it “Freedom is never more than one generation away from extinction. We didn’t pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same.” We need to argue that principles and values do matter, and that the consequences of sidestepping them are fatal. We need to scream at the top of our lungs that all progress comes from individuals, not coercive powers that dictate to free men that they must build pyramids or dingy fuel-efficient cars.

As things get worse and worse, people will first most likely react angrily. They will be looking for heads to roll. But we must keep our heads. We must be there with the answers, because it is only when people have lost everything that they will be willing to listen to the voices they dismissed before. If socialism can come into fashion so quickly from the height of what people thought was capitalism, then why can’t Liberalism supplant socialism just as quickly?

Until that day however, we must continue to advocate our principles in the face of angry, irrational intolerant sophists. We must keep fighting the good fight even if it means being hated. Derision and ridicule should be met with satisfaction, because it will mean that our detractors can only react emotionally to our reasoned arguments.

There is no shame in being hated by a group that is wrong theoretically, practically and morally. We must continue along, emboldened in the face of tyranny. We must defeat the gravest of evils with the greatest of goods: freedom.

Physical Gold In The Hands Of The People

Decades ago Ludwig von Mises wrote in The Theory of Money and Credit,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments.  Ideologically it belongs in the same class with political constitutions and bills of rights.

There is a simpler way to state the rule:  He who has the gold makes the rules.

One of the reasons, if not the chief reason, for the excessive government encroachment on civil liberties is the abandonment of sound money.  Contained within the United States Constitution are very specific monetary powers and disabilities.  This constitutional violation is the chief cause the world has become a very dangerous place.  Governments and their central banks are able to engage in legalized counterfeiting which is confiscation through inflation and a form of taxation without representation or due process of law.

Why a special interest group is given an exclusive monopoly enforced through violence to produce the currency used in ordinary daily transactions baffles me.  A common Western ideal is equal justice under law.  So likewise currency should be money and a tool for society that is fair to one and all.  Anyone and everyone should have the same power as the Federal Reserve to print up little paper tickets or be able to create as much new money as they want.  But nowhere should those paper tickets be decreed legal tender.

As a result the market would choose, voluntarily, commodities as currency and civil liberties would be protected.  There is a great book on this topic by Jörg Guido Hülsmann called The Ethics Of Money Production.

GOLD PRICE SUPPRESSION SCHEME

A lot of profit can be made running and riding cartels.  OPEC is a good example that when economic actors own a lot of something it is in their best interest to run a cartel to keep the price up.  Cartels are a common occurrence and take place in all types of industries such as potash, diamonds, etc.  But contrary to initial logical impression, the Gold Anti-Trust Action Committee, GATA, alleges that central banks run a cartel to keep the price of gold down.

But if you own a lot of something then why run a cartel to suppress the price?  After honing in on GATA’s beacon and applying some initial analysis the answer is actually quite simple and makes a lot of sense.

The power of central banks to issue without limit irredeemable tickets that billions of individuals use as currency in ordinary daily transactions is infinitely more valuable than the price of a portfolio asset.  As such, gold is a currency and always poses a mortal threat to their irredeemable fiat paper ticket franchises.

By analogy the current currency market is like McDonalds (FRN$), Burger King (Euro) and Wendy’s (Yuan) receiving preferential treatment by government decree which requires that customers must pay exorbitant prices to eat their inferior food.  But governments did not create food so there is always competition in the marketplace and therefore anyone who wishes to eat food made by the trans-fat cartel’s common chief competitor, a star French chef serving kobe beef (gold), must pay excessive taxes or be shot in the head.  After all, what would the rational customer have for lunch if a Big Mac cost $100 and an expertly prepared kobe beef filet was $5?

Consequently, legal tender laws and taxes on gold and silver serve the purpose to hobble gold and silver as competitors in the currency market.  But even with such extreme handicaps they are still formidable competitors and so as Dr. Alan Greenspan testified before Congress in 1998, “central banks stand ready to lease gold in increasing quantities should the price rise.”

As an IMF paper titled Treatment Of Gold Swaps And Gold Deposits (Loans) reveals, the asset side of central bank balance sheets are incredibly overstated.  The net effect of these gold derivatives, creative fictitious accounting and leasing of physical gold into the market to keep the price suppressed has greatly weakened central bank balance sheets.  As a result, GATA alleges that central banks have less than half the gold claimed and confusingly “carry gold in the vault and gold out on loan as one line item; as a result report cash and accounts receivable as one in the same thing.”

But even more important is that the central bank gold price suppression scheme is a key lynchpin of a monetary system that is in complete opposition to the supreme law of the land.  Even more disturbing is that the deeper one digs the more essential the gold rig appears to be.

PHYSICAL GOLD DELIVERY IS GOLD CARTEL’S ACHILLES HEEL

The distinguishing characteristic between gold and its chief competitors is that it actually is something tangible.  Gold has atomic number 79, a standard atomic weight, melting and boiling points, etc.  Gold is real in contrast to FRN$, Euros or Yuan which are mere illusions absent of any consistent tangible definition.  There are many inferior substitutes for gold, such as the problematic GLD ETF, but they generally have much lower melting points than 1,064.18 °C or 1,947.52 °F.

One of the reasons governments are abusing their livestock is because of the livestock’s lack of possession of physical gold, silver and guns.  While central banks thought they would slowly leak 100-200 tons of gold per year instead GATA alleges they have been hemorrhaging between 1-2,000 tons of physical gold.  Precise figures are difficult to obtain.  Some central banks, like China, have been understating their reserves.  Others refuse to allow their reserves to be properly audited.  For example, Fort Knox has not been audited in many decades.  But all this does not destroy the reality of gold:  gold is either in your possession or it is not.

THE GOLD ATM

Curiously and despite the language barrier I have many readers in Germany.  While their Weimar experience which led to the rise of Hitler may be faded in the corridors of memory it is still brighter than the American’s experience with the Continental.

On 19 May 2009 Reuters India reported that

a German asset management company which plans to set up 500 “Gold-To-Go” ATMs in Germany, Switzerland and Austria … ‘In absolute numbers, the demand for physical gold is still tiny in Germany.  But in relative terms, the growth is explosive, inquiries have been doubling every six weeks’ … The gold ATMs to be set up at central locations such as airports, railway stations and shopping malls are intended to gradually accustom people to the idea of investing in physical gold.

And so hastens the remonetization of gold in ordinary daily transactions.  With gold dispensing ATMs, digital gold currencies like GoldMoney and complete ignorance of monetary science by the vast majority of the world’s inhabitants the future for gold is brighter than ever.

With the current above ground salable gold there is only about 0.8 ounces per person or approximately $740.  That is a pitifully small amount for checking or saving account cash balances.  But it is the fundamental lack of interest in gold as money and currency that is perhaps the most bullish aspect of this cycle.

CONCLUSION

Gold and silver are not mere barbaric commodities but essential checks and balances in the political machinery.  Most individuals are extremely ignorant of monetary science and gold’s role as money, currency and protector of liberty but through advances in communication the ideas are spreading rapidly.  The central banks are profusely bleeding physical bullion.  The flow to individuals is hastened with ATMs in Germany expelling the ’sweat of the sun’.

Tremendous amounts of fictitious capital was created during the great inflationary credit expansion.  But there has been a change in psychology and The Great Credit Contraction has begun resulting in capital is seeking safer and more liquid assets.  Consequently, as the penultimate asset the future for gold is extremely bright and with physical gold in the hands of ordinary people they will begin making the rules.

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Disclosures:  Long physical gold and silver.