By The Gold Report, on October 10th, 2011
   When the currency system as we know it dies, some people will become very wealthy. In this special report from the Casey Research/Sprott Inc. Summit “When Money Dies,” The Gold Report cornered Global Resource Investments Founder and Chairman Rick Rule, Casey Research Senior Editor Louis James and Casey Energy Opportunities Senior Editor Marin Katusa for a roundtable discussion on the best strategies for thriving during the coming economic transition.
The Gold Report: Since we are at a conference called “When Money Dies,” please explain who killed money and how, after all these years of governments around the world trying everything from quantitative easing to bank bailouts, we are still in the midst of the weakest global economy in this generation’s history?
Rick Rule: The answer is in an old Pogo Cartoon that reads: “I have seen the enemy and he is us.” Collectively in the West, we have lived beyond our means for a substantial amount of time. We rely on a government that we have paid to steal from our neighbors. Money is how we deal with transfers. Dealing with transfers dishonestly by making more of the medium that isn’t backed by any value is the process by which money dies.
Louis James: The problem is that you are asking the guardian who has stolen the goods to recover them. Government has been in charge of money for hundreds of years. When it is debased, you have to ask: “Who was watching the hens in the hen house?” When you discover who the fox is, you don’t want to put him back in charge.
TGR: We are looking at quantitative easing 3 (QE3) in the U.S. Europe is considering the same thing. Even China is doing its version. Will money actually die or will it all inflate together?
Marin Katusa: I am going to take the contrarian view. With all this quantitative easing, there is actually asset deflation occurring right now if you look at the valuations from an equity standpoint. Trillions will be printed, but look at the deflation in the assets. He who has cash will be king because he can afford to buy these discounted stocks. If you do your homework and be sharp, you will make a fortune in the next three years.
TGR: But money is an asset; cash is an asset. If you are holding your wealth in money wouldn’t it all deflate?
MK: It’s all about purchasing power. Look at Canada’s largest oil company. It is just as good of a company as it was three months ago, but it has lost half its market cap, which means your dollar will buy more of a great company. It isn’t inflationary all across the board. It’s an asset deflationary market. That is a current example of equity asset deflation in the market right now.
TGR: So cash will deflate less rapidly than physical equities?
MK: Yes, right now.
RR: It is likely that the purchasing power of Western currencies will lose 5%–7% compounded for a long while, maybe until they go extinct. But in the interim, when you are experiencing incredible volatility, that is demonstrably better than losing 30% per anum in assets that are illiquid. Despite the fact that money is going to die, perversely you have to have lots of it to take advantage of the liquidity crisis.
LJ: You see, inflation figures are averages. Asset price destruction in a certain area doesn’t negate monetary inflation, nor its impact on other prices. Tremendous money creation is going on. This has economic consequences. The guy at the supermarket can see it even if his house is worth less. It is the worst of all possible models. Necessities cost more, but once trusted assets—the store of wealth in real estate and pensions—are depreciating. This has investment and economic consequences. The government is creating all this money and blowing it out the window. You have to figure out where to stand with a net.
TGR: How do you know what way the wind is blowing so you know where to place your net?
LJ: It’s all about stuff. Stuff people need is, in general, good when paper or theoretical money is bad. In certain asset classes, including real stuff, there will be price destruction. Real estate, for instance, still has a speculative side to it and has not yet bottomed. But fundamentally, real stuff that has value can’t just blow away. The world will go forward. People will need food and raw materials. Gold is another vehicle with intrinsic value. These things can’t be inflated out of existence. When prices on valuable stuff goes down ridiculously, that should be seen as a godsend. People will still need copper, steel and timber. Buy when that stuff is priced low and wait for it to go high, then sell.
TGR: Oil is priced in dollars. Is there a dollar price above which demand stops?
MK: Yes, that is why you have to put the price into perspective when considering an investment. Are you valuing a company at $60, $70 or $80/barrel (bbl.) oil? If a company isn’t making money at $60/bbl. oil, you don’t want to own that stock.
TGR: The market in the last six months has been volatile, but it seems to be like a roller coaster coming back to where it started. Is there a bigger trend moving daily prices?
RR: Dramatic volatility will lead to higher highs and lower lows. Despite the fact that it may look like a mean on a chart, people who experience it don’t experience a mean. They experience extraordinary discomfort. The fact that a $10 stock becomes a $7 stock in a few days causes people to speculate less frequently. It tames the animal spirits. The volatility will act as a depressant on the market.
That is why it is important to understand the causes of these fluctuations. QE is a polite way of saying counterfeiting. If you debase the denominator, the numerator doesn’t seem to matter much. You are actively debasing the currency by making it less rare. In the process, the government has declared a war on savers, reducing the utility they could get through traditional savings, forcing them to make more speculative investments.
The problem is even deeper than that, however. At the same time you have plentiful money, you have restrictive credit. People assume prices get set across the whole spectrum, but they get set on the margin and dramatically on the margin based on the psychology of the participants. It makes no sense. Look at the downdrafts in commodities. Nothing about the utility of copper caused it to fall. But interdraft lending dried up and when credit goes away, fabricators, traders and shippers can buy. Economic dislocations like this cause the market to be really volatile for substantial periods of time, which will unnerve many market participants.
I am actually fairly excited about it. I believe if it is going to happen anyway, find a way to enjoy it.
TGR: Marin, you are skilled at mathematics. Your models help assess equities. In a market driven by psychology and government policies, how relevant are your models and have you changed the factors you use to value companies?
MK: Since so many people are investing on emotion in the resource sector, you have to take your profits in a bull market and have lots of cash on hand to take advantage of deals in a bear market. In the program I created, there are literally thousands of variables you can analyze and interpret, but one of my favorite metrics for the junior exploration sector is the Casey Cash Box Indicator. One year ago, three companies were trading for less than cash on hand. Now I know of a little over 30. But, we are no where near the low of March 2009 when over one-third of all the companies on the TSX and TSX-V were trading less than cash. The Cash Box Indicator is what I use to give me a “feel” of the psychological sentiment in the market. When there are lots of companies trading under cash, people are fearful, and that is good if you’re looking for value.
For the junior exploration companies that do not have any tangible assets, the models I use for producing projects with cash flow are not as relevant.
TGR: Louis, you are out there visiting companies all over the world. In this market, how important is management?
LJ: It is and it isn’t. Having competent people to run the show is imperative. The alternative is non-competent people. Who wants that? Incompetence shows up quickly in performance. But just because a company has good people and a good project doesn’t mean it will do well; nature may not cooperate with exploration, or it could run out of money. When fear is in the driver’s seat, people are less willing to take chances, even on good people.
In the end, volatility is your best friend because you know that a market that’s down will go up again. When your favorite wine or something you value goes on sale, you don’t complain. You celebrate and buy two. We have that opportunity now. Wall Street hates volatility, Howe Street loves volatility—or it should, even on the downside, because that is a sign that it’s shopping season.
TGR: In the 1970s, we saw a bullish precious metals market, followed by a big upside. This time we had a big upside and now extreme volatility. Have we already experienced the extent of the bull side?
RR: You have to acknowledge the fact that despite volatility’s unpleasantness, it can be an opportunity. Gold and silver still have a long way to go although it may not be straight up. Even if it were to go to $2,500/ounce (oz.) eventually, it could test $1,000/oz. first. You have to have an understanding of history in order to understand what you might face. Keep cash on hand to take advantage of the volatility. Prepare yourself to have the courage to take advantage of the dips. A lot of people have been responsible investors and studied everything about the market except themselves. They haven’t prepared themselves. You need the cash and courage to use volatility.
Be careful, however. Don’t get your information from the market. The market is a mob. It is a facility to buy fractional ownership of businesses. But you have to get a sense of the value of the business to make good decisions. Take advantage of the idiocy of the other players. Other players only drive value of the stock in the short term. In the long term, the company fundamentals will determine the value of the business. What the three people in this room have become good at is buying companies that will be taken over by the industry at higher prices later. Playing foolishness is fun, but that is less important than the fundamentals associated with the valuations of the companies. The safest and most consistent money is made when you find discrepancies in the valuation of a company and the market valuation and play the arbitrage.
TGR: How can you value gold in a volatile market like this where the price of gold can vary between $1,000/oz. and $1,900/oz. Do those lows wipe out some companies?
LJ: The average cost of production for most companies is $600/oz. Even at $1,000/oz. gold, a 40% margin in any industry is considered pretty good. A lot of mining companies are making lots of money right now, which means they are fundamentally strong. In the face of that, when the market fluctuates, it’s a good thing; it brings opportunity. I have stocks in my portfolio that we have been able to take profits on when they were high and buy again when they were stupid cheap. We have been able to make doubles this way multiple times—on the same stock.
But not all gold stocks are production stories. How do you value an exploration play where there is no particular asset? That is difficult. You can use peers, or speculate about what the company might have in the ground if it is successful and try to estimate a value. Whatever path you choose, you should have some kind of metric, a sense of what is reasonable.
A great example of how volatility can create opportunity and profits is Extorre Gold Mines Ltd. (XG:TSX; XG:NYSE.A; E1R:Fkft), the spin out from Exeter Resource Corp. (XRC:TSX; XRA:NYSE.A; EXB:Fkft), operating mostly in Santa Cruz, Argentina. I have been there and looked at the main asset. I have no doubt the flagship Cerro Moro project is going to be a highly profitable mine, unless the government goes completely insane. Extorre had good exploration success there and has started getting very positive results from a second project. Based on this work, Extorre went from CAD$2 to CAD$14, so naturally we took profits along the way. I love Extorre, but at CAD$12, its market cap was greater than some profitable producers with cash flow and it was still just exploring. Now, with no bad news from the company, the market correction has the stock down to CAD$7. We know more about its assets now than we did when the shares were higher, but it’s selling cheaper, so it’s a better value now. We don’t know when things will go up and down, we just know they will. We know when they are cheap it is a good time to buy; when they are expensive, it’s a good time to take profits.
TGR: It seems like investors have to be more active now, going in and out of stocks. They can’t just buy and sit on them.
MK: You have to be careful in this volatile market. An investor needs to understand what type of investor he/she is. If you are a day trader, this is your type of market, because the volatility and big swings are present. I don’t believe relative valuation. I think it is important to distinguish between intrinsic valuation and relative valuation. But the answer to your question really depends on what type of investor you are and why you bought the specific stock. In my experience, my biggest gains have been buying big positions in companies where I believed in management and the projects, and bought more when the stock was down, and held the stock for more than a few years.
LJ: There is a distinction between resource investing and mainstream investing. Tried and true Graham-Dodd analysis was never applicable to our industry because the underlying commodities change too quickly, making even the biggest companies too fickle for that sort of securities analysis. However, I would posit that Wall Street is becoming more like Howe Street in a post-Lehman Brothers world. Everyone is taking more risk. There is no safe place anywhere in the world where you can buy a stock and forget about it.
RR: The two central tenets of Ben Graham’s book The Intelligent Investor deal with evaluating the margin of safety and management. You have to speculate in companies that have the financial wherewithal to weather the most immediate risks. In today’s volatile market, you are competing against manic-depressive traders who show up one day wanting to pay more than what you have is worth and the next day willing to sell for less than their assets are worth. In a devotion to net-nets, one of the best indicators of when you ought to be all-in is when it is full of people so disgusted in the market they are selling for less than they are worth. It’s a great time to be an investor.
TGR: If a lot of these companies are worthless, how does the average investor know which companies can go the distance?
LJ: You have to make your own decisions based on your risk tolerance. Your mileage will vary. Read the financial statements, talk to management. At some point you have to act, but you can and should wait until you are fully confident in your investment decision, so your confidence won’t be easily shaken by market volatility. It’s not like baseball; you can wait for the perfect ball, so don’t swing until you’re sure you’re buying low.
MK: Great tools are available. Watch the legends and insiders to see what they are buying and selling.
TGR: My last question is how does a new investor start in this industry?
RR: Go for a walk. Have a conversation with yourself. Do a personality audit. How hard are you willing to work and what is your risk tolerance? If you aren’t willing to work and don’t like volatility, try owning physical trusts, ETFs or seniors. If you have a longer-term perspective and stomach for volatility, you can take advantage of the opportunities in the junior space. But you need to have a plan.
MK: You can’t succeed unless you are passionate in whatever you do. If you don’t really like the sector, then you won’t go as deep as you need to have success and you won’t make the best decisions. Make sure you have a passion for mining. And have fun. Life is short.
You also have to be willing to make lonely trades. When everyone else says you are wrong, that is when investing becomes very interesting.
RR: Just because everyone else’s money dies, that doesn’t mean your money has to die. You are responsible for your future.
Founder and CEO of Global Resource Investments and President of Sprott Asset Management USA, Rick Rule began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker and asset manager specializing in mining, energy, water utilities, forest products and agriculture. Rule’s company has built a sterling reputation for its specialist expertise in taking advantage of global opportunities in the resources industries. In 2011, Rule closed a landmark deal with Eric Sprott, Founder of Sprott Inc., another famous powerhouse in the arena. Sprott Inc. offers resource-oriented investors opportunities in segregated managed accounts, mutual funds, hedge funds and private partnerships. The collective organization offers unparalleled expertise and access to investment opportunities in all resource sectors. Sprott Inc. manages a portfolio of small-cap resource investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S.
Louis James is chief metals and mining investment strategist at Casey Research, where he is also the senior editor of Casey’s International Speculator, Casey Investment Alert and Conversations with Casey. When not in meetings with mining company executives in Vancouver, B.C., James regularly travels the world evaluating highly prospective geological targets and visiting explorers and producers getting to know their management teams. For more than 25 years, Casey Research, headed by investor and best-selling author Doug Casey, has been helping self-directed investors to earn returns through innovative investment research designed to take advantage of market dislocations.
Investment Analyst Marin Katusa is the senior editor of Casey’s Energy Report, Casey’s Energy Opportunities and Casey’s Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Katusa’s insightful research has made his subscribers a great deal of money. Using his advanced mathematical skills, he created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Katusa has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Katusa also manages a portfolio of international real estate projects.
By Trace Mayer, on April 19th, 2011
The precious metals have been on a tremendous upleg as I predicted. But for the past few years I have maintained that gold and silver are about average value and sometimes a little expensive. In other words, they are no where near as cheap as they were at the beginning of this secular bull market in 1999.
Then my ears perked up when I heard Marc Faber on CNBC say, “I think maybe gold is cheaper today than it was in 1999 when it was $252.”
Is Mr. Faber’s subjective valuation of gold rationally optimistic, delusional or just plain insane?
Plus, one should be acutely aware of return-free risk.
HOW TO VALUE GOLD AND SILVER
When I am looking to buy or sell an asset, whether real estate, stock, bonds or precious metals, I generally use the 200 day moving average to determine its relative price and give a quick determination of whether it is cheap, average or expensive. On RunToGold I even have key ratios where one can easily view the DOW:gold or DOW:silver ratios based on the spot price or 200 day moving averages. I find these extremely helpful to get a quick assessment of current market ratios.
Despite being extremely bullish about silver and understanding the silver backwardation implications on the silver price I have nevertheless been extremely cautious because of the overstretched 200 day moving average; based purely on technicals silver looks very expensive and due for a correction to around $30. But these are just techniques and do not get to the fundamental issues. They are only as good as their underlying premises.
Many financial professionals struggle with valuing gold. This is because traditional valuation techniques and strategies focus on discounted future cash flows, discount rates, interest rates, risk-free rates, real returns, ROI, IRR, WACCs, etc. Distilled simply they base all of their premises and conclusions on a faulty premise: The 10 year US Treasury is the risk-free rate.
As a result, most people including almost all the gold bugs I know keep their balance sheets, income statements and cash flow statements using the FRN$ or Euro as the numeraire. Even among gold bugs I know it is only myself and Anthem Blanchard who seem to keep regular financial statements denominated in gold as the numeraire.
The truth of the matter is that the benchmark for ‘risk-free’ is subjective and a decision every investor should make for themselves. What one uses for a numeraire is a completely different issue from what one should buy, sell or hold, etc. Plus, one should be acutely aware of return-free risk. Here are a few of the factors that persuaded me to use gold as my prime numeraire:
1. Gold, an element in the periodic table, is a tangible physical asset with a constant definition.
2. There are large above ground stockpiles of gold which results in low relative changes in size and those changes are largely predictable.
3. Gold is a current asset with significant financial liquidity properties. It belongs in the cash portion of the balance sheet.
4. Gold has value in itself, is not subject to counter-party risk and can never become worthless.
5. Gold has a long-term relationship with other commodities. Professor Jastram in The Golden Constant explained on page 130,
As we have said, the purchasing power of gold depends on the relation of commodity prices to gold prices. A close scrutiny of this relationship over time discloses an affinity of a curiously responsive character. It could be called the ‘Retrieval Phenomenon’, meaning that the commodity price level may move away higher or lower, but it tends to return repeatedly to the level of gold.
6. When feeling insecure about the financial and economic conditions one can always pet their gold. Go ahead, pet your platypus.
Perhaps most shocking when one begins to perform this initial paradigm change is to see what I like to call the inversion of interest income; store of capital expense.
SWITCHING ONE’S LENS
Viewing the financial and economic world through the prism of the FRN$, Euro, Yen, Pound, etc. leads to gross distortions. Due to the gold price suppression scheme one’s vision is only slightly improved, and definitely not to 20/20, by viewing through the lens of gold as numeraire. But the one-eyed man is the dodgeball God when playing among the blind.
To be honest, I do not really care if people disagree with how I assess value; I just kick their bum in the market and am rewarded with the purchasing power. It reminds me of what one of my banker’s said about 10 months after we had closed on an acquisition, “You sure underpaid for that business.” My response was, “We were buying, right?” Duh. Plus, the seller named his price so he got exactly what he wanted!
In nature, atrophy is the natural order of things. The fiat currency and fractional reserve banking system has resulted in a concave financial prism that results in a financial inversion. The natural order of things would have a negative, not positive, interest rate. Perhaps most shocking when one begins to perform this initial paradigm change is to see what I like to call the inversion of interest income; store of capital expense.
For example, if you have a batch of bananas or wheat you would not expect there to be more of higher quality tomorrow merely by the fact of putting them in a pile. In most cases, wealth does not just magically create and organize itself. In fact, most rational people would assume there would be less wealth because the bananas or wheat would spoil. So likewise with gold; there is a storage expense and insurance instead of earning interest. Most people forget that interest is supposed to compensate for risk which has largely been cartelized and resulted in tremendous moral hazard that will be meted out under economic law with systemic collapse.
If you had 3,800 gold ounces, about $1,000,000 of value, in 2001 and wanted to store the capital until 2007 you could choose among many different tools. Let’s assume you chose an interest bearing checking account and GoldMoney. The monthly store of capital expense for the bank account is about $1,500 while about $500 using GoldMoney. I should probably run the numbers to see if the fiat currency and fractional reserve banking system has gotten more expensive since 2007 but this is what Mr. Faber is asserting.
CONFISCATING CERTIFICATES OF CONFISCATION
THE CURRENT VALUE OF GOLD
Over the past 40 years, the world economy has attempted to leave gold’s orbit through the world reserve currency rocket of the FRN$ but it has ran out of fuel before reaching escape velocity and therefore been unsuccessful which has resulted in The Great Credit Contraction that has only just begun a few years ago with capital burrowing down the liquidity pyramid. The regression theorem reversed.
A tremendous portion of the liquidity pyramid, particularly with derivatives, has been created since 1999. Looking just at high-powered currency, the adjusted monetary base, relative to gold gives an interesting valuation metric. Supposedly the United States government has 261.5 million ounces of gold in Fort Knox. Despite the gold having not been audited in over 50 years and rampant corruption, inefficiency, misstatements, lies and omissions by the United States and other governments on countless topics we will assume for the sake of argument that they really do have the approximately 8,000 tons of gold.
 This chart from the Federal Reserve Bank of Saint Louis shows there was approximately $500B of adjusted monetary base in 1999 and about $2.5T in March 2011 with a corresponding 5.8x increase in the price of gold relative to FRN$. This places a ratio of adjusted monetary base to gold in 1999 of $1,912 and in 2011 of $9,478.
Reasoned analysis for Mr. Faber’s valuation comes into focus. As Mr. Robert Landis asserted at GATA’s 2005 event, “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 asserts that central banks have only 1/2 to 1/3 of the gold they claim which would yield a ratio of $28,434.
After all of the worldwide quantitative easing and competitive devaluation of the last few years what are the adjusted monetary base ratios of the ECB, Bank of England, Korea, China, Japan, etc. relative to their minuscule gold holdings? As Alan Greenspan said to the Council of Foreign Relations, “Fiat money has no place to go but gold.”
When the crystal ball is clouded just hunker down at the liquidity pyramid’s tip.
CONCLUSION
For the last several years I have thought that gold and silver were about average valued based on the current market conditions and their liquidity. But after hearing Mr. Faber’s assertions that gold may be cheaper now than in 1999 and analyzing the changed market conditions such as the rise of the digital gold currency GoldMoney, increased gold hypothecation via JP Morgan, tremendous increase in the adjusted monetary bases of central banks around the world, failed quantitative easing policies, the exacerbation of the Greater Depression , lack of access to knowledge and facts concerning the true state of affairs which is exemplified by Bloomberg taking the Federal Reserve to the Supreme Court and negative business and entrepreneurial environment due to increased government regulation and taxation therefore I may be changing my view on the underlying valuation of the precious metals. Despite the massive secular bull market they may actually be getting cheaper!
The current metals prices may seem high in nominal terms but what is unseen is the change in fundamental value of the FRN$. I hate owning the precious metals because of the store of capital expense. I would much prefer to own a wealth generating business or real estate. But for now I will continue to buy gold, silver, platinum and palladium only because I do not see any other better alternatives and the difficulty in discerning the financial and economic landscape because of the twilight zone induced effects from quantitative easing. In other words, when the crystal ball is clouded just hunker down at the liquidity pyramid’s tip.
DISCLOSURES: Long physical gold, silver, platinum and palladium.
By Claus Vistesen, on February 4th, 2010
Watching, monitoring, and analysing the economy and her markets is as much about tracking discourses (and how they change) as it is about perusing data material on various leading and lagging indicators. And thus, as I am still knee deep into putting the last touch on my thesis [1] I thought that I might as well move in with some random shots at what just might (or might not) be a subtle change of discourse in the context of the areas of the economy I am interested in.
Rallying Risky Assets no More?
The first interesting piece that got my attention was the coverage by FT Alphaville’s Tracy Alloway of this week’s musings by JPMorgan and UBS about whether the recent dip in risky assets (and subsequent rally of the buck) is a decisive turning point or merely a blip à la Dubai.
In terms of a change in discourse there is not much in the way of one as e.g. JPMorgan’s equity team concludes;
We advise adding to positions on weakness and would revisit this view if jobless claims were to move back towards 500k, if Greek default becomes a reality or if manufacturing leading indicators roll over.
Now, this appears as full out frontal bid on equities to me since if jobless claims were to move into the 500ks it would not, I presume, happen overnight as well as a de-facto Greek default would constitute, an ex-post, post mortem on an equity market in shambles as it would surely wreck havoc even in the initial stages. As for the leading indicators they are of course, by nature leading and thus this may be the figue leave JPMorgan can cling on to if and when they decide to back pedal on this bullish strategy. More generally, UBS is quoted of pointing to three sources for the recent dip in risky assets and thus immediate source of a sudden correction. The first is the growing worry by part of Chinese policy makers of the bubblicious state of the economy and thus the incipient signs of monetary tightening. The second relates to the recent barrage from Obama against the financial sector and especially, I assume, the declared war against proprietary trading which has been the source of fat profits for the likes of Goldman, illuminati, Sach, Morgan Stanley and other of their ilk. Finally, there is of course the growing unease in the market place with the unfolding mess in the Eurozone where Greece is still taking center stage teetering on the brink of a bailout in the form of either and IMF led representation or an internal agreement with the EU.
While I certainly agree that those factors represent sand in the otherwise smoothly running machine of excess liquidity driving the rally in risky assets I tend towards a more straightforward source of a potential correction. Consequently, and for all the stimulus and inventory driven growth we are currently observing I think that final demand at the end consumer as well as the willingness and capabilities of companies to ramp up investment will disappoint thoroughly to the downside. The need to rebuild balance sheets and deleverage across all sectors of the real economy will trump the current positive discourse. It is ironic in this sense that the current flurry on government deficits (especially in the Eurozone) represents exactly the inflection point reached by many OECD governments with respect to the need to decisively rein deficit spending in order to put in a reasonable effort at covering future age related liabilities (as the principal although not only reason). In short; it is really difficult to see from which sector in the real economy we are likely to see a recovery to confound the current expectations in the market.
Yet, as is clear from the latest equity research from the good equity analysts at JPMorgan and UBS the discourse is still fixed on recovery. My bet though is that it will change at some point in 2010 in line with the lack of response from the real economy in taking over from stimulus driven growth, but of course; when it comes to the movements of stocks … I am not the right one to as. Really, I am not!
Speaking Truth on Japan
Meanwhile in Japan it was interesting to note the comments by economist at the BOJ Kazuo Momma who managed to pinpoint with surgical precision what exactly Japan’s current woes are in terms of macroeconomic dynamics;
(Quote Bloomberg)
Japan’s economy is far from achieving self-sustained growth as the export-led recovery fails to spur spending at home, according to Kazuo Momma, the Bank of Japan’s top economist. “The risk that the Japanese economy will fall off from a cliff is small, but there is still a long way to go,” before the expansion becomes sustainable, Momma said in Tokyo today. “Even if the global economy continues to recover, the spread of that to capital spending and the labor market will be limited.”
The key thing to notice above and beyond the real economic effects in the form of entrenched deflation and low growth is the failure of the momentum from external demand to reach the domestic economy. Perhaps more than anything this is the defining characteristic of the Japanese economy and, I would argue, export dependent economies in general. Consider also that the discourse on Japan to large extent has been solidly anchored in the expectation that the strong momentum of the export related activities would eventually lead into a positive feedback loop with domestic activity. This has so far closely resembled the well known perennial wait à la Beckett and it is worth I think to ask what exactly underlies this disconnect in the economy. In this sense, I thought it interesting that Mr. Momma and thus the BOJ moved in with such a decisive recognition that something seems thoroughly broken in terms of the ability of the domestic Japanese economy to gain traction.
Elsewhere on Japan I also took note of the veritable tableau d’horreur in the context of the estimated fiscal outlay in the coming years. Consequently, recent numbers from the ministry of finance suggest that Japan will up the its bond issuance by as much as 16% moving towards 2013. Concretely, the butcher’s bill is estimated to total 51.3 trillion yen in the year starting April 2011, 52.2 trillion yen in the fiscal year of 2012 and 55.3 trillion yen in the fiscal year of 2013. Naturally, former minister and now opposition member Yoshimasa Hayashi was quick to slam on the critique simply noting that it was unclear whether the new DPJ led government was worried at all about the fiscal conditions of Japan’s economy. Specifically Mr. Hayashi worries about 10 year yields which I reckon is the right time horizon for when this could really turn out sour for Japan; (quote Bloomberg) …
The deteriorating fiscal position has raised concern that bond investors may start to demand higher yields for holding Japan’s debt. The yield on the 10-year government bond rose half a basis point to 1.31 percent at 2:28 p.m. in Tokyo. It hasn’t exceeded 2 percent in more than a decade.
Finance Minister Naoto Kan said yesterday that the government’s mid-term fiscal strategy to be released by June will help to maintain investors’ confidence. “We need to keep yields around the current level by maintaining markets’ trust in our fiscal health,” he told parliament. S&P’s downgrade of the outlook for Japan’s debt to “negative” indicates it may cut the local-currency rating for the first time since 2002. National Strategy Minister Yoshito Sengoku called the warning a “wake-up call.”
Before we start comparing Japan with Greece et al though there is little doubt that demand will be there for the securities since we can be pretty sure that the BOJ will be provide the bid through quantitative easing. However, in a longer term perspective and with largest debt to GDP ratio as well as the oldest population in the world one does not have to be a macroeconomic literate to see how this cannot go on forever. However, as long as Japan remains a net external lender the problem is one of accounting really and with its own independent central bank the show can go on for quite a while. Moreover, the likely side effect on the JPY makes it an almost attractive route to follow by Japan in the sense that a long waited depreciation of the JPY (if it comes) will not only strengthen the export sector but also provide some welcome inflation to the economy.
Wither the Euro (as a “reserve” currency)?
Perhaps the most interesting headline coming in on the wires in the beginning of the week was this Bloomberg piece running under the header that the Euro is losing its allure as a reserve asset.
Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardizing its status as a substitute to the dollar as the world’s reserve currency.
Last year, policy makers loaded up on euros, while analysts at Barclays Plc in London and Aletti Gestielle SGR SpA in Milan predicted central bankers would make good on threats to reduce the greenback’s dominance. Now the euro is down 8.4 percent since Nov. 25 in its fastest slide in 10 months amid concern that cash-strapped countries like Greece won’t pay their debts. Billionaire investor George Soros said Jan. 28 that there’s “no attractive alternative” to the dollar.
Well well, what a difference a couple of jitters in Southern Europe makes. Now, before we get ahead of ourselves in terms of the long term significance of the Euro’s recent slip I think this abrupt change in discourse on the Euro is a good testament to the difficulty many have in understanding exactly what these so-called global imbalances are. This may sound arrogant as I imply here that I do actually understand, but I find it extremely difficult to see how people who hitherto believed in the Euro as a the new dominant global currency can suddenly shift position on the back of trouble in Greece, Spain et al. I mean, surely and if you had cared to look and listen the structural difficulties of the Eurozone and the obvious inability of the EUR/USD to move about in the 1.50s/1.60s and thus act as the main vessel of rebalancing were there for anyone to see. Well not quite and while the coup de grace from George Soros is significant in itself I think it worthwhile to think back to the heaty days when Bernanke lowered rates as an initial response to the subprime fallout (and the ECB momentarily raised) and thus where the Eurozone was hailed as the new engine of the global economy to take over from an ailing US economy. Some of us tried to dimiss this nonsense but it appears that it takes near default along the periphery, before it really hit the main wires. So let me be quite clear here. The Euro is not an alternative to the Dollar in so far as goes rebalancing of the global economy which would entail the Eurozone being a relatively large and sustained net external borrower. In fact, given the troubles in Spain and Greece the real challenge is how the Eurozone can become a net surplus region and thus reduce the borrowing of key member countries.
Bubble Trouble in China
This one is hardly news and neither has there been much of a change in discourse as it has been some weeks now that Chinese authorities little by little have started to voice concerns over the growing tendencies of overheating in the Chinese economy and property sector in particular.
China’s “real worry” is asset bubbles as capital flows into an economy awash with money and the nation emerges from the crisis into a “boom time,” central bank adviser Fan Gang said. Moves by the central bank this year to curb liquidity were “timely and necessary,” Fan told a forum in Beijing today. “Although globally we’re still talking about the crisis, China and some developing countries now are facing another boom time.”
Stocks fell in Asia and Europe today on speculation that Chinese policy makers will do more to cool the world’s fastest- growing major economy after two reports showed a sustained rebound in manufacturing and rising prices. Excess liquidity is a “problem” as low interest rates and slower growth in the U.S. and Europe encourage money to flow into China, said Fan, the academic member of the monetary policy committee.
One economist and long time China observer, Andy Xie, that I tend to lean on is much more out spoken on the current risks in China as well as a recent report by BNP Paribas sees decisive turning point already in 2010 as tighter liquidity conditions begin to bite;
China’s property market “bubble” is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today. Tougher property policies may lower 2010 sales volumes 10 percent, compared with an earlier forecast for growth of as much as 5 percent, BNP Paribas said in a report today.
I agree in the main. The key however is timing and just how far China may run here. It may be longer than many imagine, but I agree with the fundamentals of the argument. Xie apparently thinks that 2010 will see a significant correction. I have no reason to disagree, but a bubble in China (in general) may run a long time before she runs out of steam. Having said this though, recent bits and pieces of information that I have been fed from the ground in China by my “contacts” strongly suggest that a breaking point is near. One key ingredient here according to a property insider in China is that almost all of the stimulus money currently being poured into the Chinese economy (which is a lot) is going into property and needless to say, this cannot run forever.
More generally, a full blow out of the Chinese property sector in e.g. some of the most bubbilicious parts of the real estate sector would constitute a severe dent in the expectations of a global recovery driven from Asia. Perhaps this more than anything suggests why it is important to keep a weary eye on port side property in Shanghai and elsewhere even if you are not in the market for a condo.
A Change in Discourse?
Whether there has really been a change in discourse in some parts of the market as per reference to the points mentioned above or whether I am just preying on a well worn narrative to take some random shots I will leave it for the reader to decide. In general, the ball is still rolling on the recovery discourse but with events in the Eurozone and a Chinese economy looking set to fall short of the promises to pull forward the global economy things might change sooner rather than later. To this I would add the fundamental and lingering trend of deleveraging in all real sectors of the economy which ultimately means that self sustained growth will disappoint thoroughly to the downside and this I hold to be quite certain and not just a random shot.
—
[1] – Which I will present here in due course.
By Claus Vistesen, on October 9th, 2009
I should immediately reassure my readers that I am not going to re-account or even continue Macro Man’s story of 2007 in which Sherlock Holmes was looking for a vanishing bid in risky assets. Also, I am not sure that we are actually looking at a bid which will vanish but one which will perhaps taper off gradually or so at least is the estimated scenario policy makers would like markets to believe in. Of course, recent messages from the BOJ suggested a very cautious stance towards the economic outlook and although the ECB’s chairman Trichet has ardently argued that an exit strategy from extraordinary financing provisions, the statement that, now is not the time to exit, still echoes most of the official messages coming from the ECB.
But perhaps more important than when to exit is the question of how and whether indeed it will be so easy and simple for central banks to simply wind down the supply of medicine. In the context of the ECB for example, I remain rather sceptical.
However, this day is all about the Fed decision and although I only rarely delve into account of US monetary policy decisions (comparative advantage you know!) this one is important since it was always going to be parsed very closely for signs of hawkishness on rates on the one side as well as indications of the future wind down of asset purchases. Now, for those who expected a big bang, I have to side with Macro Man that it seems to be much ado about nothing in the sense that the Fed basically reiterated the general view that although economic activity had been showing positive signs lately and especially in the context of leading indicators pointing to a strong bounce in Q3 and Q4 activity, the fundamentals of very low capacity utilisation and deleveraging across the real economy remain intact. In the context of Fed speak this translates into maintaining the current rate target at the zero bound and the the forward looking statement that rates are to kept low for an extended period;
Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
So far so good then and this was really all we needed, one would imagine, to extent the rally in risky assets as well as the downward trend in the USD as the new funding currency for carry traders and others of their ilk. So far, there has been no signs of panic anywhere and everything seems to be all engines go.
Meanwhile, the Fed did actually give away some details as to how the future bout of asset purchases are to be conducted. On the matter of treasury purchases the Fed will its total purchase of $300 billion by the end of October. Most of us would naturally like to be able to predict what this will to do yields and prices and really you could spin this two ways. In the context of supply side worries, the Fed’s withdrawal from the treasury market should push down yields if we add the, perhaps dubious assumption, that the $300 billion worth of supply of treasury bills has only been there to the extent that the Fed has been the main bidder (Say’s law and everything). On the other hand it could also push up yields in a world where one assumes that there has been a decisive need to issue such bills and now that the Fed is stepping aside new buyers must step in and notwithstanding those with a printing press of their own, it should push up yields. Although this may seem quite innocuous and technical (i.e. unimportant) it may turn out to be important in a general context when it comes to the ability of economies (not just the US) to lift themselves out of the mire without the crutches of stimulus to lean on.
In the context of the Fed’s outright asset purchases, the statement delivered good news for bulls/doves in so far as goes the fact that although the Fed was invariably going to issue a deadline, it seems to have been pushed somewhat out in the distance; well, at least a quarter. Consequently, the Fed will buy $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt, purchases which are set to be concluded by the end of the first quarter and not by year end which was the final date I had been led to believe judged by the points made in various economics report digested over the last week.
So, it is here perhaps that we may be looking at a disappearing bid in the context of the Fed gradually but surely reducing its presence in the market for MBS turds not to mention the agency market which went belly up as Fannie and Freddie crashed and burned. In the nice soothing light of efficient markets it is difficult to expect the decision to wind down purchases to be a big market mover as long as the incoming bout of data continues to provide plenty of upside and no downside. But if we get a setback just around the time when the Fed had envisioned to stand down its most aggressive measures of QE, one finds it difficult not to expect general sentiment and thus, in a forward looking perspective, real economic activity to take a hit which is exactly what we would all like to avoid; the double dip recession or “WL” recession if you will.
Ultimately, it is of course all still a great big mess, something which was neatly conveyed by the way Bloomberg handled the message carried by the IMF envoy to the G20 summit. On the one hand, the IMF was quoted for urging central banks to map a viable and transparent exit strategy and on the other hand Managing Director Dominique Strauss-Kahn was quoting for urging policy makers to not withdraw fiscal stimulus to quickly. Lost in translation are we?
Well, I am perhaps being unfair here to the editors of Bloomberg not to mention the IMF in particular since ultimately; talking about exit strategies is not the same thing as enforcing them. However, I do feel rather strongly about the need to make the following point that the two are of course intimately connected and withdrawing QE cannot but affect the trajectory of fiscal stimulus. This is a point which I believe for example is absolutely crucial to understand in the context of the Eurozone where the ECB’s refinancing operations seem to be implicitly underpinning national governments’ efforts to shore up their capsized economies.
In this context and assuming that both the BOJ and the ECB will be trailing the Fed somewhat, it will be most interesting to see whether Bernanke manages withdraw the bid on financial markets currently offered by the Fed’s policies and indeed whether others may follow in his footsteps and withdraw theirs.
By Trace Mayer, on July 28th, 2009
“By the pricking of my thumbs, / Something wicked this way comes” is from Act 4, scene 1, lines 40-41 of the Bard’s Macbeth.
A year ago at Cambridge House when asked whether the economy was going to rebound I responded, “That light at the end of the tunnel is just the next train. Get out of the way!” Another commentator on stage responded that things would get better. What happened?
Lehman Brothers, AIG, Fannie Mae, Freddie Mac, Bank of America, Merrill Lynch, Citigroup, the Adjusted Monetary Base exploded from $800B to $1,800B as the Federal Reserve fails with quantitate easing, unemployment began to soar and the DOW crashed from 12,000 to 6,500 or 13.95 gold ounces to 7.
The prehistoric media wails about how no-one saw this crisis coming. Yet they are still praising Obama’s economic policies, heralding an economic recovery and living in denial. Why believe them? Why even read their newspapers or turn to their channels? Many people, coincidentally almost all of the Austrian school of economics, saw this financial and economic crisis coming.
There is another massive crash coming. For those people who do not see this coming crash the issue is not one of subjective or objective opinions. The issue is a personality block where the individual cannot handle the truth. If you see neither were we are nor where we are headed then you have a personality block and need professional therapy.
ASSET LIQUIDITY
Price is what you pay but value is what you get. During the Great Credit Contraction capital is seeking not only the safest assets but also the most liquid.
Market liquidity is a business, economics or investment term that refers to an asset’s ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value.
Famed value investor Warren Buffett managed to see his net worth fluctuate from $62B to $37B over the past year. His paper profit from bailing out Goldman Sachs has already earned about $2B. Despite his ‘massive losses’ there is a lot to learn from Buffett’s annual letter to shareholders. I have read them all. Particularly interesting is his view on market liquidity from 1993:
In assessing risk, a beta purist will disdain examining what a company produces, what its competitors are doing, or how much borrowed money the business employs. He may even prefer not to know the company’s name. What he treasures is the price history of its stock. In contrast, we’ll happily forgo knowing the price history and instead will seek whatever information will further our understanding of the company’s business. After we buy a stock, consequently, we would not be disturbed if markets closed for a year or two. We don’t need a daily quote on our 100% position in See’s or H. H. Brown to validate our well-being. Why, then, should we need a quote on our 7% interest in Coke?
NYSE Program Trading (Click here for full size)
At the end of the day, a buyer and a seller agree on a price. Prices in the public markets are always set at the margins. When the transaction is not consensual, such as with robbery, there is no price and such transactions are unsustainable because they are immoral and will eventually always fail.
The quoted price for assets is becoming increasingly illusory because of the fake liquidity which will learn how to vanish. For example, the NYSE reported, “Due to an NYSE system error, Goldman, Sachs & Co. was inadvertently omitted from the chart of most active firms, but the firm’s program activity was included in the total level of programs as a percentage of NYSE volume, which remains unchanged at 48.6 percent.”
Naked short sales or FTDs (failure-to-deliver) that represent about 37.5% of the volume of securities that require delivery. The galavanting SEC has now taking steps against but it is probably a too little too late. Many investors would be flabbergasted to know that the 100 shares of YYY in their brokerage account were really failure-to-deliver IOUs for 100 shares of YYY. Combined with the fake liquidity that can be instantly withdrawn if serious selling starts it will create a very unfavorable marketplace for additional potential sellers.
ASSET VALUATIONS
There are many ways to value assets such as ownership of a company, real estate, etc. Some of the basics include discounted future cash flows, dividend payout ratio, price to earnings multiple, book value, etc. When assessing the health of a company I get a quick snapshot from the current ratio, acid test ratio, return on equity, free cash flow, net income and dividend payout ratio. I like dividends because when cash must be distributed it is much more difficult for management to play accounting games using the new generally accepted fair value lying standards.
The payout ratio is the percentage of earnings paid to investors and is calculated by dividing yearly dividends per share by the price per share and is the opposite of the plowback ratio. Think of cash like blood and dividends like blood donations. Extremely healthy companies can donate lots of blood without hindering their operations and the investor can then deploy the cash elsewhere for a higher return.
The S&P 500 is a value weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. Dividends are an important component of the total return from equities, accounting for a third of the total return of S&P 500 since 1926.
The S&P 500 earnings have collapsed while dividends have declined at a slower rate. As Ian McAvity has demonstrated, the dividend to earning ratio is now above 300%. This means companies are distributing $3 of dividends for every $1 of earnings. This is accomplished by burning through cash reserves, selling off assets, borrowing, etc. This is unsustainable.
One would think that only the New York Times is stupid enough to borrow money to pay dividends while gross revenue and net income decline. Likewise the current price to earnings ratio of the S&P 500 needs a reality check. When body mass is shrinking (declining gross revenue), blood is leaking (lower earnings or losses) the last thing those setting dividend policy should do is pull out another knife and cut themselves deeper to hemorrhage faster.
But perhaps they are listening to the propaganda organs that neither saw the gathering economic storms nor have taken shelter from the browbeating winds and think their earnings are going to recover which will bring the ratios back into normalcy.
UNEMPLOYMENT
This is no ordinary recession. Obama is intentionally exacerbating the greater depression. For the appetizer the American economy has lost over 4 million jobs. 30 June 2008 the Emergency Unemployment Compensation program began. Benefits have been extended twice. Obama may delay the first course of dinner by extending it a third time. The National Employment Law project estimates that, “Around the country, the number of people exhausting their benefits is piling up. By the end of September, more than 500,000 people will exhaust their benefits checks”.
The Great Depression lasted for over two decades and was not a single event. The early years were marked by lost jobs which were not replaced. As top lines evaporated they were not replaced. People and businesses began to deplete their savings before becoming destitute and getting corralled into soup lines.
In the present case, job losses have been piling up like a massive train wreck. The American consumer has slightly scaled back on their purchases because they still have access to liquidity such as unemployment benefits, credit cards, 401Ks (which have become 201Ks), etc. Those sources of liquidity are drying up as credit card limits are slashed, minimum payments are raised, HELOCs are denied, retirement plans collapse and now, in September, unemployment benefits will end.
The numbers on that chart are estimated to go from 50,000 to 1,500,000 by the end of the year or a 3,000% increase. The issue for the American families kicked out of their worthless homes and onto the street is becoming survivalism in the suburbs. People are not going to care about contributing to their retirement plans, buying name brands like Coca Cola, Proctor & Gamble, Wonderbread, etc. They are going to care about generic bread or Top Ramen on the table.
Consequently, gross revenues for the S&P 500, which are down 10% year over year, are going to be under even more pressure. With most of the slack already trimmed earnings are going to be under even greater pressure. To bring PE ratios into historical norms stock prices are going to have to tumble.
COMMERCIAL REAL ESTATE
The value of real estate is a function of the earning capacity of the underlying business base. With collapsing earnings, rapidly rising unemployment and a commercial real estate market ice age the value of commercial real estate is plummeting. Originations of commercial mortgage backed securities is almost non-existent. Financing for new purchases is almost impossible to secure. Being able to find comparables for appraisals is getting increasingly difficult. Real property taxes will likewise decline putting further strain on state budgets which are in chaos like California.
Many outstanding loans are non-performing and the lending banks are failing. From the 6th to the 27th of July another 12 banks have failed. In January 2008 I warned that the FDIC was preparing for massive bank failures. Lately I have warned about how the annual worldwide platinum production is valued at about $7.8B compared to the FDIC’s $12B of reserves to cover$4,831B of insured deposits. The monetary metals are one way to protect yourself from the risk of massive bank failures and a potential bank holiday.
MARKET MANIPULATIONS
Chris Powell of the Gold Anti-Trust Action Committee has observed that “There are no markets anymore, just interventions.” Where would the manipulators get the massive amounts of capital needed? Perhaps Donald Rumsfeld knows.
The United States Constitution provided safeguards against these types of problems. This is one reason the barbarous relic known as the Federal Reserve should be razed. The unfair and immoral monetary system is complete opposition to a Constitutional monetary system. These interventions of manipulating both the supply and cost of currency are failing as is the Federal Reserve’s attempt at quantitative easing.
MONETARY METALS
During The Great Credit Contraction capital will seek the safest and most liquid assets. At all times and in all circumstances gold remains money. Because of the large aboveground stockpiles gold is the world’s primary monetary commodity. Likewise silver and platinum are also risk-free commodity currencies.
Two weeks ago I recommending buying platinum which has since risen $80 per ounce or about 9%. I also recently suggested buying silver around FRN$12.50 which is now over $14 or about a 12% gain.
I have found GoldMoney to be the best alternative to the current failing worldwide monetary system. I recently sold a few copies of The Great Credit Contraction for platinum. A Swedish buyer remarked, “I have now made my first payment in platinum  … I think we may have seen a glimpse of the future. … (And as a gold-bug I think it can be good.) Thanks a Lot!”
Many people may take for granted the liquidity of the financial markets, banking system and other grease for the wheels of commerce. How would your investments be affected if the financial markets closed for 1-2 years? How would your business be impacted if there was a bank holiday for an undetermined period of time?
Having an alternative system, completely independent on the current failing structure, in place and operational is good business sense. Eventually the Information Age alternative to the barbarous relics of central banks and fractional reserve banking become complete substitutes because of the lower costs, ease of use, lower risk and other superior attributes. As the liquidity of the monetary metals increases through their use in ordinary daily transactions, like being used to purchase books, their value will rise.
Additionally, gold’s technicals are looking extremely strong. The 200dma at $880 while the current price is about $955 or 1.08x. The 18 month consolidation above $900 has laid a very strong foundation for the next upleg. The reverse head and shoulders pattern is extremly bullish. Seasonally gold is weak during the summer and strong during the fall but lately it has been trading like power currency.
While massive short positions are being taken by commercials gold will likely easily breach and maintain $1,000 ounce this fall. With unemployment skyrocketing, bailout fever in Washington, earnings declining the FRN$ is going to be under tremendous pressure from ballooning budget deficits which will have to be monetized. All of this is positive for the ancient metal of kings.
CONCLUSION
The Great Credit Contraction, an economic climate change from an inflationary summer to a deflationary ice age, has barely begun. The remaining liquidity in the market is largely illusory. Residential real estate, commercial real estate, the major stock markets and even the banks are almost all zombie institutions anchored to fraudulent financial statements that are preventing the needed healing liquidation. The unemployment situation is escalating out of control and The Greater Depression is wearing on people and psychology is being changed. Earnings are collapsing and dividend to earning payout ratios are unsustainable. Meanwhile the monetary metals appear poised for a significant rise as the FRN$ continues evaporating.
Because there is no intelligible answer for what is a dollar therefore it is an unreliable instrument for performing mental calculations of value. This next crash which appears imminent but could take a while to materialize because of manipulations will likely see the DOW fall from its current 9.5 ounces to about 5 ounces of gold and the S&P 500 sliding from its current 1.3 ounces of gold to about 0.85 ounces.
Additionally, the really good buying opportunities will be enjoyed by those who can settle transactions because their assets are liquid, like with gold coins in a safe or a reputable third-party like GoldMoney, and not frozen in some closed market or holidaying bank. If you want real cash, not illusions like the FRN$, Euro, Yen, Pound, etc. which can evaporate in hyperinflation, then you better learn how to buy gold because it is the safest and most liquid asset. With gold you will always be able to buy something.
Disclosures: Long physical gold, silver and platinum with no positions in the problematic GLD or SLV ETFs, S&P 500, DOW, NYT, GS, Berkshire Hathaway, Coca Cola, Proctor & Gamble, Bank of America or Citigroup.
Copyright © 2008. This article was published on http://www.RunToGold.com by Trace Mayer, J.D. on July 27, 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. If you are interested in how to buy gold or silver then you may consider GoldMoney.(Digital Fingerprint: 1122aabbLittleBrotherIsWatching3344ccdd)
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