By Rok Spruk, on January 18th, 2010
Frederic Mishkin says not all bubbles are a threat to the economy (link):
“Nonetheless, if a bubble poses a sufficient danger to the economy as credit boom bubbles do, there might be a case for monetary policy to step in. However, there are also strong arguments against doing so, which is why there are active debates in academia and central banks about whether monetary policy should be used to restrain asset-price bubbles.
But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy…”
By Trace Mayer, on October 29th, 2009
The recent gold bull upleg is in the midst of a predictable slight correction and consolidation. When that finishes it is highly probable, based on seasonality and technicals, that the next part of the upleg will commence. The Federal Reserve and Washington are only making matters worse through their extremely damaging policies.
GOLD PARTY BARELY STARTED
Back on 9 September 2009 I wrote:
200 day relative price of gold is at 1.08x … Based on seasonal trends gold and silver will be strengthening, with the strongest months in September and November
This upleg in gold and silver will have significant strength because of the long period of consolidation just like in 2004 and 2006 which provided the foundation for the uplegs in 2005 and 2007 that took gold from $400 to $700 and $650 to $1,000, respectively. If the current upleg is similar to the previous two then the 200 day relative prices for gold and silver at the top of this upleg would be about 1.5x and 1.7x, respectively.
This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms
Back then the price of gold was $996 and the 200dma was about $920. Today gold’s price is about $1,030 with a 200dma of about $950. While the probability for a profitable trade is not nearly as high as it would be should the price relative to the 200dma be significantly below the 200dma there is still room for the price to run as we enter winter. The October intermission is likely coming to a close.
OCTOBER INTERMISSION
Dr. Greenspan testified in 1998 that, ”Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”
One of the key reasons to keep the price of gold suppressed through central bank gold leasing is to keep interest rates low. This will be particularly helpful for the $182,000,000,000,000 of certificates of confiscation that will be sold during the week of 26-29 October 2009. Another reason is that NYMEX November options expired 27 October 2009.
PHYSICAL PREMIUMS RAISED
The physical coin dealers are fairly wise to the machinations of Wall Street. When the paper price of bullion falls precipitously then the dealers often raise the premiums.
For example, a reader asked me a few weeks ago when would be a good time to buy gold American Eagles. I suggested after the next drop and if lucky then he may be able to acquire them around $1,025 spot but the premium would likely increase. He reported his shopping to me a couple days ago after the recent drop in price and informed me the premium had been raised from $37.95 to $41.95 per coin.
SILVER BACKWARDATION
On 12 September 2009 I observed that “the London SIFO, the Silver Forward Mid Rates, have been trending towards backwardation.” It is interesting to observe the continuing trend and brief entry of silver in backwardation in the LBMA on 9 October 2009. It seems like the physical silver market is getting a little tight.
 QUANTITATIVE EASING
The big issue is whether the Federal Reserve will be able to, as Ben Bernanke said on 8 October 2009 in The Federal Reserve’s Balance Sheet: An Update, ‘tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration?’ Back in March 2009 when Bernanke started this lunacy I asserted that The Federal Reserve Will Fail With Quantitative Easing.
Bernanke asserts:
Although the Federal Reserve’s approach also entails substantial increases in bank liquidity, it is motivated less by the desire to increase the liabilities of the Federal Reserve than by the need to address dysfunction in specific credit markets through the types of programs I have discussed. For lack of a better term, I have called this approach “credit easing.
What Bernanke is trying to do is get capital to take on additional risk by moving up the liquidity pyramid. But The Great Credit Contraction has begun. While there may be differences in the velocity at which capital moves down the liquidity pyramid the overall direction has not changed. Washington and the Federal Reserve are tiny actors compared to the total size of the market.
Their policies are aimed and designed to grant special privilege to banks like JP Morgan and Goldman Sachs. Through government assistance the banks are able to move their capital down the liquidity pyramid. In effect, they have privatized the gains and socialized the losses. While there may be a case for a rise in the FRN$ in the short term the ultimate destiny is known: the fiat currency graveyard.
EXACERBATING THE GREATER DEPRESSION
As Murray Rothbard observed on page 18 of his 1963 America’s Great Depression:
It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market. But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment.
Mr. Rothbard continues the observation that government policy can hobble the adjustment process by: “(1) Prevent or delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize unemployment.”
In the present case, mark-to-market rules, like FAS 157, are not implemented, delayed, ignored or willfully violated. The financial markets are now undergirded by fair-value lying standards. For example, Section 132 of the Emergency Economic Stabilization Act of 2008 is titled “Authority to Suspend Mark-To-Market Accounting” and restates the SEC’s authority to suspend the application of FAS 157.
The Austrian definition of inflation is an increase in the money supply. The Adjusted Monetary Base, the very lowest layer of power money, shows a tremendous increase over the past year. The effects are most likely masked by the tremendous slowing in the velocity of money.
In an effort to stimulate consumption and discourage savings that will result in keeping prices and wages high the Obama administration has unveiled a $1 trillion stimulus package. The Geithner toxic asset plan will only serve to hasten the destruction of wealth from the economy as the system evaporates.
The Federal minimum wage rose in July 2009. Unemployment will be subsidized by extending benefits for 13 weeks and delaying the income tax payments. Legacy industries, like the auto industry, are receiving bailout money to keep wage rates up and people employed doing nothing all day long because of the huge over capacity of automobiles. With Cash-For-Clunkers automobiles which have value are destroyed to reduce supply of alternative goods to new cars made by Government Motors. This is a prime example of what Washington DC is: A giant wealth destruction machine.
Therefore, like heroin to cure a hangover the quantitative easing from the Federal Reserve and the lunatic policies from Washington are not improving the situation for average people but instead exacerbating the greater depression. Now is the time to Raze The Fed and while doing the spring cleaning who needs Washington?
CONCLUSION
The current correction and consolidation of gold appears to be within trend and expected based on the seasonality. November is the strongest month and this recent correction on low volume is laying a strong foundation for a large move upwards.
The Federal Reserve’s quantitative easing programs have not been helping the situation but instead exacerbating the greater depression. All in an effort to save the inefficient, barbarous and archaic relics of a fiat currency and fractional reserve banking system that is destined for extinction and replacement. The Crash of 2008 was just the start of The Great Credit Contraction and it will last for decades.
DISCLOSURES: Long physical gold and silver and no position the problematic SLV or GLD ETFs.
By Trace Mayer, on October 19th, 2009
On 9 October 2009 I was interviewed by Business News Network, Canada’s premier financial channel, live from the NASDAQ in Times Square New York about the rise of gold.
BNN HOST: A note that caught out eye from RunToGold.com saying “Gold price rise pretends another round of the Credit Crisis. … Gold in Q2 2010 $1,300.”. Joining us to talk about that prediction, Trace Mayer, financial blogger and author of The Great Credit Contraction. He is in the city so nice the name that twice New York, New York. Very happy to be with us, Trace.
TRACE: Oh Thank You.
BNN HOST: You said the credit crisis has not been calmed but intensified. Why?
TRACE: Yes, one of the reasons is that the FASB mark-to-market has just obfuscated the toxic assets. So it is preventing the credit liquidation. So we still have the same bad assets that have not been liquidated in the market on the balance sheets. But people do not necessarily know where they are lurking.
BNN HOST: So the idea that the stimulus package and government back stops, things of that nature, have really delayed the inevitable more than anything else?
TRACE: Yes. They have delayed it and they have just pushed it off. And because people continue to make misallocations of capital because of that government intervention. It will only lead to bigger crisis later.
BNN HOST: Ok. When is later though?
TRACE: Well, we have been pushing this off for decades now. It seems to have really picked up in 2007 and the next round appears to be coming pretty soon. Mostly because of the move into gold. We see it closing at $1,050 this week and it now has a 3 week moving average above $1,000 and so there is a lot of strength. And a reason is because gold functions as a currency.
BNN HOST: Really the only currency that does not have obligations.
TRACE: Yes, it is a currency that at all times and in all places remains money. And there is a difference between money and currency. Gold is money because it can never become worthless. As you say it is no one’s liability.
BNN HOST: What is really moving gold on a day to day basis though, more speculation than actual demand. Is that accurate?
TRACE: Yes, there is a lot of speculation along with the central bank gold price suppression scheme. Because gold is a competitor to their fiat paper franchises they have a heavy vested interest in interfering with the gold market. So in the short term we do see a lot of central bank interference. But now it appears that Greenspan’s Call which is leasing gold should the price rise has been counteracted by the Beijing Put which appears to be putting quite a floor in the gold market.
BNN HOST: You have an interesting graphic in the report of the Day, an inverted pyramid, explain this to us.
TRACE: Yes. This inverted pyramid is the liquidity pyramid and shows the different assets in the world economy. And what has happened over hundreds of years is capital moved up the pyramid into less safe and less liquid assets. And that was the great credit expansion. And now we have reached the top and economic law shows that capital moves down the liquidity pyramid. And that is the great credit contraction; capital moving into safer and more liquid assets.
For example, capital is moving out of auction rates securities or commercial mortgage backed securities and into Treasury Bills. And eventually it will move from Treasury Bills into the monetary metals. And the reason for that is that fit currency and central banking are barbarous relics that are not really needed in the Information Age. We could have gold and silver and platinum circulating as currency in ordinary daily transaction (Goldmoney). We do not need these archaic devices anymore. And it may take some creative destruction for that to happen. But I think that the market will pull through because there are more efficient ways of handling our currency in our ordinary day to day transactions.
BNN HOST: So as we get more and more concerned with the top of that pyramid, the derivatives play, you are talking about $1,300 bullion. How do you get to that figure?
TRACE: $1,300 bullion comes from looking at the 200 hundred day moving averages and where gold has consolidated and where it goes based on the usual uplegs. It looks like we are following the same thing that happened in 2004 with the rise in 2005, the consolidation in 2006, which went to the rise in 2007, and the consolidation in 2008, and it looks that it will lead to a similar rise in 2009 and 2010 which will take gold to $1,300 which should be a little bit above its 200 day moving average. But in the same trading ranges as we saw in 2005 and 2007.
BNN HOST: We have a 10 year chart on the screen but you look back even five or seven years ago; more so I suppose take it back 10 – 20 years. Looking at gold on an inflation adjusted basis and gold is dirt cheap by comparison.
TRACE: Yes. The reason for that, we hit on it earlier, was Alan Greenspan testified twice before Congress “that central banks stand ready to lease gold should the price rise.” And the reason that central banks leased gold since early 1995 and onward, and actually before that they were in the market, is to keep the interest rates suppressed. So we have had this inflation in the system and the consequences have been masked by the central bank gold leasing. But it seems that the central banks are now losing control over their physical bullion, the market is asserting itself and we are seeing this rise in price as a result. Because when you own gold in effect you are fighting every central bank in the world.
BNN HOST: Are we also not fighting the U.S Dollar. What is your expectations Trace for the green back?
TRACE: That is a very excellent question. The dollar is the world reserve currency but as Alan Greenspan and said, “This rise in the gold price is the first real step towards a move away from fiat currency. And so we do not know how long it will take but the dollar has tremendous problems. And now it has appeared to become the carry-trade currency. So we are seeing a lot of people sell the dollar to fund purchases and buy other assets and that puts further selling weakness on the dollar.
BNN HOST: Trace, we appreciate…
TRACE: And will probably persist for a long time just like the Japanese Yen.
BNN HOST: Well, we are going leave it there. Thank you so much for your insights and all the best to the Columbus Day Long Weekend.
TRACE: Oh. Thank you.
BNN HOST: Trace Mayer, Financial Blogger and Author of The Great Credit Contraction.
DISCLOSURES: Long physical gold, silver and platinum with no position in the problematic GLD or SLV ETFs.
By Rok Spruk, on October 9th, 2009
Recently released data from OECD Economic Outlook (link) suggest that the recessionary period is likely ending as the output in world’s major economies is reversing the trend of the past year. In 2009, the U.S economy is expected to contract by 2.8 percent annually. Germany, suffering from a significant decline in inventory orders and foreign demand, is set to contract by 6.1 percent and Japanese economy is likely to decline by 6.8 percent. The end of the global recession will be continued by a slow recovery as the economic growth in the OECD economies is most likely to reach 0.7 percent in 2010 after a 4.1 percent decline in 2009.
Besides Israel and Estonia, Slovenia is the next country to join the OECD. The macroeconomic outlook for Slovenia, unfortunately, remains sluggish. In Q2:2009, Slovenian economy contracted significantly. The output decreased by 9.3 percent. In Q1:2009, the economic activity decreased by 9.However, the data on GDP decline is too optimistic compared to the real sector. According to the latest availible data, the industrial production in April contracted by 28.26 percent, followed by double-digit consecutive declines each month. Investment, which in 2008 accounted for 28.9 percent of the GDP declined significantly. In Q1:09, the business investment contracted by 32.3 percent.
The pre-crisis boom in business investment was surged by quantitative easing and low interest rate which contributed to historic highs of credit stock. In addition to deteriorating macroeconomic outlook, the export of goods and services, which once used to be the core engine of Slovenia’s economic growth, contracted by 21.1 percent in the Q1:2009. Thus, during 2008, the economic activity experienced unusually high rates of economic growth spurred by investment, foreign demand and historically high consumption spending. Throughout 2008, the economy was starting to exhibit strong signals of overheating.
By the beginning of the crisis, the economic policy pursued a radical debt-driven infusions of liquidity in the banking and bailouts to the real sector. Consequently, the state of public finance changed dramatically. For decades, Slovenia maintained on of the lowest public debt/GDP ratios in Europe. As a fiscal measure, low public debt had been of the merits that enabled the fulfillment of convergence criteria before entering the EMU.
As a result of government intervention, debt guarantees and surging public spending, the public debt is likely to soar from 21.5 percent of the GDP in 2008 to 32.6 percent of the GDP in 2009. The public debt is expected to rise further. If the current trend continues, the public debt is estimated to soar up to 53.7 percent by 2013 (link).
The black line and the left axis on the graph show general government balance while the left axis and yellow bar show public debt. Both categories are expressed in percent of the GDP.
Public debt and general government balance as a percent of the GDP (2004-2013)
 Source: Ministry of Finance (link)
As we can see, the primary budget deficit will move from -0.27 percent of the GDP in 2008 to 6.58 percent of the GDP in 2009. By 2013, the deficit is estimated to move to -7.4 percent of the GDP. Compared to small and open economies, Slovenia’s primary budget deficit is higher than in most small and open economies. It is, for instance, higher than in Denmark, Greece, Austria, Czech Republic, Finland, Luxembourg, Netherlands, New Zealand, Slovakia, Sweden, Switzerland and Norway. As far as I know, Norway is the only developed country without budget deficit in the near future (According to the OECD and Norges Bank, Norway will post 8.6 percent budget surplus in 2009, down from 18.8 percent in 2008. In 2010, the budget surplus will likely increased by 0.4 percentage point).
The government intervention in the real sector further regulated the labor market by introducing subsidies to employers to retain the employees and discourage layoffs to prevent the rise in unemployment. However, recent data suggested that public sector employment grew significantly while private sector employment declined respectively. In Q2:09, private sector employment decreased by 9.3 percent. Public sector employment, on the other hand, increased by 1.4 percent on the annual basis.
For at least two decades of transition, Slovenia’s gradualist economic policy favored rigid and inflexible labor market embodied in collective bargaining, high tax rates on labor supply and barriers to entry. The economic policymakers created discriminatory labor market structure which still discourages young graduates from entering the labor market after graduation. Consequently, unit labor costs are among the highest in the EU. Recently, The Economist snapped a nice chart, showing that tax burden on labor supply in Slovenia is the highest in the world (link). In combination with ageing population and of the youngest retirement generations in the world, the abovementioned labor market dualism further encouraged policymakers to raise health and social security contribution rates. It lead to one of the lowest growth rates of private sector employment in the EU. It further lead to the highest tax wedge in the EU and the unusually high growth of unit labor cost relative to productivity growth. In addition, strongly regulated labor market is the major cause of Slovenia’s low productivity convergence relative to the EU15. The majority of central European and Baltic countries have been lowering the productivity gap behind the Euroarea much faster than Slovenia.
In 2009, Slovenia reach 90 percent level of EU27’s GDP per capita. Compared to the Euroarea, Slovenia reached 83 percent level of the GDP per capita. Compared to EU15, which is a reasonable measure of comparison, Slovenia reached 81.7 percent level of GDP per capita. Compared to Switzerland, Slovenia sustains only 64 percent level of Swiss GDP per capita (link). Interestingly, if Slovenia were a part of the U.S, its GDP per capita would be at the 54 percent of the U.S level, even lower than in Mississippi and West Virginia – the least developed states in the U.S.
Although Slovenia is often cheered as being the “Switzerland of the East” and the most developed former communist country, its economy will likely resemble slow growth in Italy, Germany and France rather than dynamic growth in Singapore, Hong Kong, Australia and Switzerland. Current economic policies are the recipe for eurosclerosis, experienced by pre-Thatcher Britain. If such pattern of economic policy will continue, the Slovenian economy will, sooner or later, exhibit economic stagnation with low economic growth, onerous tax burden, high structural unemployment and rapidly ageing population.
By Erica Tesla, on September 24th, 2009
How do you pay at the checkout line? Between checks, credit and debit cards, and online payment services like Paypal, it’s sometimes surprising when we see someone pull out actual cash these days. The way you pay may seem to be of little importance, but in truth, the money doesn’t all spend the same.
Particularly if you’re under 30, you probably use – and grew up using – a debit card for a lot. It just makes so much sense; less bulk in your wallet, less for a pickpocket to lift, less chance of getting caught at the store five dollars short. Plus, it’s trackable – the money that you spend on a debit card no doubt comes with online banking, allowing you to look back at the end of the month and determine why the grocery money ran out so quickly.
The trouble with this idea that debit cards are more trackable than checks or cash, according to Hong Kong researcher Dilip Soman, has to do with the fact that humans, not computers, have to do most of the work involved in that tracking on a day-to-day basis. According to his research, we have mental “pools” for how much money we’ve spent on broad categories of purchases – housing, food, entertainment, and so on – and each time we complete a transaction, we subtract the transaction price from the appropriate pool, mentally.
Regardless of your mental faculty with basic arithmetic, doing this mental juggling requires that you remember the transaction. As it turns out, debit and credit card transactions leave very little in the way of a mental imprint. If you consider the process of a card transaction, it’s easy to see why: with a card, you swipe, sign a slip, and you’re done – you don’t even have to look at the total. (Today, if the transaction is small enough, you don’t even have to sign, most places; new technology has also removed the physical contact of the swipe, opting instead for touchless systems like PayPass.) If you write a check, on the other hand, you have to take the time to write out the full transaction amount in words and numbers, cementing the exchange in your mind. Cash would seem to provide the lowest imprint – nothing to write, nothing to sign – but with cash, a physical exchange occurs. You can tell how much you’ve spent from moment to moment simply by checking the amount remaining in the wallet.
On top of this, social and behavioral researchers Morewedge, Holtzman, and Epley recently described a broader phenomenon related to card use, called the “accessible account effect.” They suggest that people perceive the sting of a financial transaction as a fraction – the cost of the good being purchased versus the amount they have to spend. If the pool of money is the $100 in your wallet and the season box set of The Wire is $50, that’s half of your money gone. With the increasingly common setup of a debit card linked to the checking account where your paycheck direct deposits, however, the pool of money you have to spend becomes an arbitrarily large number compared to the amount of cash you would reasonably be carrying, so that $50 is a very small fraction of your available funds.
A month later, you’ve spent that $50 ten times over, easy as a wave of the card-hand. All of this stealth spending can add up to one big, painful blow to your finances. Fortunately, the research says you won’t remember it, anyway.
By Bron Suchecki, on June 18th, 2009
From Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, G Von Haberler, rev ed., 1939, published by League of Nations:
Prosperity comes to an end when credit expansion is discontinued. Since the process of expansion, after it has been allowed to gain a certain speed, can be stopped only by a jolt, theere is always the danger that expansion will be not merely stopped but reversed, and will be followed by a process of contraction which is itself cumulative.
If the restriction of credit did not occur, the active phase of the trade cycle could be indefinitely prolonged, at the cost, no doubt, of an indefinite rise of prices and an abandonment of the gold standard.
Well, we abandoned the gold standard, had unrestricted credit, so now we wait for an indefinite rise of prices?
Bookkeeping is more or less based on the assumption of a constant value of money. Periods of major inflations have shown that this tradition is very deeply rooted and that long and disagreeable experiences are necessary to change the habit. One of the consequences is that durable means of production – such as machines and factory buildings – figure in cost accounts at the actual cost of acquisition, and are written off on that basis. If prices rise, this procedure is illegitimate. The enhanced replacement cost should be substituted for the original cost of acquisition. This, however, is not done, or is done only to an insufficient extent and only after prices have risen considerably. The consequence is that too little is written off, paper profits appear, and the entrepreneur is temptted to increase his consumption. Capital in such case is treated as income.
The paper profits are also likely to add to the cumulative force of the upswing, because they stimulate borrowers and lenders to borrow and lend more. The foster the optimistic spirit prevailing during the upswing, and so the credit expansion is likely to be accelerated. This phenomenon has its exact counterpart during the downswing of the cycle.
Those interested in the above may also find Professor Fekete’s paper Is Our Accounting System Flawed? of interest.
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By Trace Mayer, on May 21st, 2009
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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By Trace Mayer, on May 20th, 2009
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.
By Trace Mayer, on May 1st, 2009
BANKS HAVE MORE THAN ENOUGH CAPITAL
At a congressional oversight panel on the government’s financial rescue program the tax evading Treasury Secretary Timothy Geithner testified, “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.” With the recent fair-value lying accounting changes banks have reported surging quarterly profits. Even the single digit midget Bank of America booked a first quarter net income of $4.247 billion – 6% more than it made in all of 2008.
Olivier Garret, CEO of Casey Research, asks a couple penetrating questions and gives a couple answers.
“For starters, just where did all this income come from? And has credit quality really improved.
The answers to both can be found buried in a company press release bearing the encouraging title “Bank of America Earns $4.2 Billion in First Quarter.”
I’d like to draw your attention to the four most telling excerpts from this release.
- Equity investment income includes a $1.9 billion pretax gain on the sale of China Construction Bank (CCB) shares.”
- Noninterest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening.”
- Credit quality deteriorated further across all lines of business as housing prices continued to fall and the economic environment weakened.”
- Nonperforming assets were $25.7 billion compared with $18.2 billion at December 31, 2008 and $7.8 billion at March 31, 2008, reflecting the continued deterioration in portfolios tied to housing.”
BANKRUPT BANKS
Bank of America makes $4.2B almost completely from a one time sale of a Chinese bank and some accounting sorcery on Merrill’s failing mortgages. Looking at the cash position of Bank of America if those two extraordinary events were backed out and preferred dividends were included then Bank of America actually bled about $1.3B.
The head of the sorcery order, Goldman Sachs, was very creative by changing its reporting calendar which effectively erased the impact of $1.5B loss in December from showing up in its earning statements although it still flowed through to the balance sheet. Bank of America is not the only bank with these shenanigans.
The FDIC poltergeist possessed another four banks on Friday bringing the total for the year to 29. The evaporated banks that went poof were dotted across the nation holding about $1.6B in deposits including American Southern Bank of Kennesaw, GA with $104M in deposits, Heritage Bank of Farmington Hills, MI with $152M in deposits, First Bank of Beverly Hills in Calabasas, CA with $1B in deposits and the First Bank of Idaho in Ketchum, ID with $374M in deposits.
DETERIORATING CREDIT QUALITY
It is clear that credit quality continues to deteriorate at the banks and almost all banks are engaged in fraudulent accounting sorcery. On the bright side for these vampires, the steep yield curve helps generate tremendous real income for the banks as they are able to suck the life out of the remaining wealth generating companies in the economy.
JP Morgan reported a stunning profit because the value of their bonds declined in the market and Citigroup had a similar $2.5B gain.
MARKED DOWN BUT NOT ENOUGH
A few days ago I attended an art walk with some colleagues. While the funnel cakes, BBQ, smoothies and live music were fun we began to chatter about business.
 One of them happened to be a commercial property appraiser. He was telling me about the difficulty of appraising buildings because the market is failing to clear and data points are getting extremely scarce. For example, quarterly he appraises a beautiful 100,000+ square foot high-quality office building that overlooking the Pacific in Oceanside, CA.
Usually this premium building is never vacant but starting November 2008 its vacancy rate climbed to about 20%. He avoided a write down in Q4 2008 turning in a $64M appraisal. But because the vacancy rate, lack of comps, etc. is now typical for the market in Q1 2009 he had to evaporate $8M from the building turning in an appraisal of $56M and did not receive any complaint from the client. He told me he is currently working on the Q2 appraisal and figures he will need to evaporate another $4M. This is what happens to real estate values when the discounted future cash flows decline because of huge vacancies and leases being renegotiated.
NO BID THEN NO VALUE ASSESSMENT
My suggestion for valuing the building if the market was not clearing and there were no comps was a simple $0. Then I told him the story of my encounter with a senior partner from DLA Piper whose client had a 40+ story condominium that was worth less than worthless.
Why is there such an effort to keep the asset prices high? If these assets are being ‘held for the long-term’ then it should not matter if they are carried on the balance sheet at tremendously understated values. After all, Mr. Buffett often takes this approach.
I have never heard of an investor suing or regulator prosecuting fraud, except perhaps in divorce, tax or similar cases, because assets were undervalued on the balance sheets. They can always be marked up later or a gain can be taken at a sale. Additionally, this may even have beneficial tax consequences.
Of course, this type of accounting methodology may have a negative effect on fraudsters, Ponzi scam artists and fractional reserve bankers who are by definition engaged in embezzlement. These immoral individuals always want to misrepresent asset values to the upside but never the downside and prosecuting fractional reserve banking as embezzlement would be beneficial for society and lead to a more efficient allocation of resources.
ILLUSORY INCOME VERSUS REAL ASSETS
So let me get this straight: the greater depression is intentionally exacerbated with a skyrocketing unemployment rate, construction and commercial loans become impaired as projects are either stopped because the unsustainable consumer economy is grinding to a halt or phantom equity is evaporated. This causes the banks to either go under or become more of a credit risk. If the bank survives then it is an even a higher credit risk as their debt trades at a discount and that discount is booked as income. The banks record profits, CNBC declares all is well and the stock market soars.
By comparison, a consumer charges up a bunch of credit card debt at McDonald’s, loses their job, their credit worthiness diminishes and the bid for the consumer’s credit card debt in the market declines so the the consumer books income. Which begs three important questions: Is there any real income? Will a real economic loss be taken? By whom?
Wealth can take two forms: (1) a financial asset or (2) a tangible asset. Tangible assets have intrinsic value and can never become worthless.
Uncertainty from the lying on financial statements and by costumed government officials is briskly eroding the confidence of a inherently unsound confidence based system. In times like these there stands only one safe haven: commodity currency. At all times and in all circumstances gold and silver remain money. Their value is not subject to counter-party risk and accounting sorcery, unless it is fool’s gold or silver held in the GLD or SLV ETFs, and the metals will always buy something. Gold is the risk-free asset and does not require fraudulently induced confidence because it generates real confidence.
CONCLUSION
Fractional reserve banking is embezzlement and the accounting rules have changed to protect those engaged in fraud. The intrinsic value of the financial companies mentioned is almost impossible to accurately determine, may be nothing and therefore should be avoided. Asset values are rapidly evaporating and the credit quality of borrowers is quickly deteriorating which will lead to more banks failing. On 20 March 2009 FDIC Chairwoman Sheila Bair said some very scary words, “Without additional revenue beyond the regular assessments, current projections indicate that the fund balance will approach zero.”
The Great Credit Contraction grinds on and holders of capital continue migrating down the liquidity pyramid seeking the safest and most liquid assets. Your electronic digits representing illusory currency are not safe in any of the fractional reserve banks and when the FDIC fails there will more pandemonium. With the FDIC begging to increase its line of credit from the Treasury from $30B to $500B the likely cure, whatever it may be, will inflict another laceration on the already mortally wounded FRN$ and further destroy wealth and hobble the economy.
During these relatively calm times for your businesses and daily transactions I recommend developing an alternative plan, and eventual substitute, to the current monetary system. For reducing your risk and keeping your capital safe there are three main options: (1) using gold and silver coins, (2) using the services of a full reserve institution, like GoldMoney, or (3) withdrawing the Federal Reserve Notes, putting them under the mattress and using cash as much as possible.
 Disclosures: Long physical gold and silver with no position in GS, JPM, BAC, C, CCB
By Trace Mayer, on April 13th, 2009
Technology keeps thrusting forward at an ever increasing rate as the Information Age transforms the world at a rapid pace. Business is happening at the speed of thought as companies are beginning to morph into digital entities in a physical world. Fortunes have already been made in supply chain management and product distribution as evidenced with Toyota and WalMart. With top lines under constant pressure as the credit contraction grinds on increased efficiency is being eked out of every possible source.
Man’s financial progress is a function of effort times tools. Business has, is and will be the primary tool to generate wealth. The ‘job’, a relic of the Industrial Age, is rapidly being replaced with outsourced freelancers. Millions of Americans have lost their jobs in recent months.
This vast pool of usually skilled workers are now navigating a brave new world. While hundreds apply for a single job; an exponentially expanding web invites the adventurous and rewards the productive. Never in the history of the world has there been such powerful Internet marketing tools available to the lone entrepreneur to leverage their productivity.
THE OLD ORDER
Creative destruction is taking place in almost every aspect of the the economy from the exciting realm of newspapers and journalism to the mundane of postal and package delivery. The United States Postal Service enjoys a substantial monopoly imposed by Federal law. Predictably this system has catered to special interests with their army of lobbyists. That is the reason most receive tons of dirty and annoying advertising SPAM in the mailboxes that waste their time and like most governmental policies harm the environment.
Bloomberg reports that “The U.S. Postal Service said it will offer early retirement to about 150,000 workers … In the past year the service has taken ‘very aggressive cost-cutting actions,’ including a nationwide hiring freeze and halting construction of new postal facilities, according to the statement. Potter [Postmaster General] asked Congress in January to let the Postal Service reduce its six-days-a-week delivery schedule by one day to save money.”
Why does postal mail, the vast majority of it SPAM, need to be physically delivered even once a week? Why does an address in north Alaska cost the same to deliver to as one in Los Angeles? Legislative interferences in the marketplace to prop up failing institutions lead to expensive moral hazard, inefficient systems, poor customer service and a lower quality of product. Is the use of violence to perpetuate this failing system moral?
THE NEW ORDER
With the advent of the Internet the delivery of postal mail and packages can be accomplished with greater efficiency. Through innovative Internet-powered CMRAs (Commercial Mail Receiving Agency), customers can view images of their envelopes in email or online and have their mail securely scanned into a PDF, recycled, shredded, or forwarded. For the privacy minded, like victims of spousal abuse, etc. the ability to vanish using this type of ghost address is extremely valuable.
As the Center on Budget and Policy Priorities reports, “States are facing a great fiscal crisis. At least 47 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well. Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion.”
Many individuals have their own budget with policy priorities and given all the Tea Parties, I highly doubt it involves paying more taxes than legally required. For example, customers can easily have the ability to receive packages in states like Oregon where there is no sales tax, forward the package using Fedex or the United Postal Service (UPS), and the savings would likely be greater than the cost of an entire year of the service. This may slightly perturb some States, which are breaking into safety deposit boxes and auctioning the contents on Ebay, resulting in greater enforcement of sales and use tax laws but that will likely be very difficult.
Ebay and Amazon are simply digital flea markets and the digital nomad can finish all their work at a Fedex Office. The Internet entrepreneur relies on package tracking to ensure their products and sold on the digital flea markets are delivered. And so it happens that business goes offline to online and online to offline.
DIGITAL BEHEMOTHS
Most people think of Ebay, Amazon and Google as the digital behemoths. But Fedex CEO Frederick Smith understood the future with his long-held mantra that “The information about a package is as important as the package itself.” Fedex and UPS are as much information management companies as they are shipping companies. They have large, deep and formidable moats that will prevent competitors from siphoning market share.
Their charts are likewise similar:
 While Fedex has recently laid off 1,000 of its 223,400 employees both it and UPS, which is expanding door-to-door service in Mexico, will be around generating profits for a long time. But the current administration is exacerbating the greater depression which will drag down their earnings. So when will UPS and Fedex shares be a good value? Gold is the most reliable instrument for calculating value and is being re-enthroned as a currency in ordinary daily transactions.
| gg = gold gram |
FEDEX |
UPS |
| Share Price |
$51 or 1.786gg |
$53.50 or 1.852gg |
| Market Capitalization |
$16B |
$53B |
| EPS |
$2.35 |
$2.94 |
| Target Price |
1.100gg |
1.250gg |
CONCLUSION
 Creative destruction is taking place at a rapid pace during the Information Age. Many Internet marketing tools are available for the entrepreneur. Services like Earth Class Mail, which exist through voluntary relationships, will rise. The old State sponsored monopolies enforced through violence will fall. Fedex and UPS are digital behemoths which will play a critical role in the new online to offline and offline to online economy.
As the great credit contraction continues the top lines of firms will be under extreme pressure and will most likely affect Fedex and UPS while the FRN$ will continue its wild fluctuations in purchasing power. Therefore, while Fedex and UPS are solid companies with a bright future they should get materially cheaper, at 1.1gg and 1.25gg per share respectively, before they become a good value. They will most likely be back there again.
Disclosures: Long physical gold and silver with no position in UPS, FDX, or the other firms mentioned.
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