Jim Rogers: "Volume Is Not Going To Come Back. We've Had A Great 30 Years. That's Finished!"

Tuesday, May 15th, 2012

 
Jim Rogers is hedg­ing his gold (and sil­ver) posi­tions reflect­ing that this is nor­mal, fol­low­ing such a tremen­dous run, and that this is good for the pre­cious metal in the long-run. In his dis­cus­sion with Maria Bar­tiromo this after­noon, he notes India's anti-gold 'pro­tec­tion­ism' (and its poten­tial bal­ance of pay­ments issues) that are try­ing to force the hoard­ing into risky 'pro­duc­tive' assets (as oth­ers might say). The immutable com­mod­ity maven sug­gests JPMor­gan (and its peers) could be behind the drops in the over­all com­mod­ity com­plex as the uncer­tainty of their posi­tions (and liq­ui­da­tion poten­tial to raise cash as bank exam­in­ers begin their foren­sics) becomes more impor­tant. He holds the USD, which he hates; has a num­ber of equity shorts; and is most fear­ful of banks — specif­i­cally admit­ting he is a ser­ial seller of calls on JPMor­gan.

His advice, and per­haps Maria should look into it given their rat­ings recently, is to become a farmer; own farm­land; and spec­u­late on agri­cul­ture. On the dis­mal 'eth­i­cal' state of our lead­ers and man­age­ment, the thought­ful Rogers opines, "You can read world his­tory for decades. There are always peo­ple doing things wrong. We have not changed our human nature and we will con­tinue to have scan­dals and prob­lems" and in a follow-up to CNBC's stan­dard 'money-on-the-sidelines' argu­ment he crushes the money-honey's dreams: "Finance had a great 30 years. That's fin­ished. Now to advance, we have too many peo­ple, too many MBAs, too much lever­age and too many gov­ern­ments that don't like us". A must-see rebut­tal to the 'nor­mal' CNBC hopium with more on China's slow­down, a US reces­sion, Europe and a Greek exit, QE3, and 'tractors'.

Tags: Balance Of Payments, Bank Examiners, Cnbc, Farmland, Forensics, Gold And Silver, Hoarding, Human Nature, Jim Rogers, Maria Bartiromo, Maven, Money Honey, Precious Metal, productive assets, Protectionism, Qe3, Rebuttal, Sidelines, Slowdown, World History
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Will ECRI's Call for Recession Prove Accurate?

Sunday, May 13th, 2012

ECRI's Lak­sh­man Achuthan was mak­ing the rounds yes­ter­day, with yet another defense of his firm's reces­sion call – the first claim which came early last fall.  I do think (from mem­ory) he has pushed out the time frame a bit from when the ini­tial call came, but since early this year has claimed we will see it by mid year.  Per­haps the very warm win­ter hurt the call as well – who knows with these black boxes.  Below we have a video with CNBC and there is one nugget in there I did not know.  Con­ven­tional wis­dom is a reces­sion is back to back quar­ters of neg­a­tive GDP… but accord­ing to the NBER (and Achuthan) that is but one of a group of poten­tial signals.

The Com­mit­tee does not have a fixed def­i­n­i­tion of eco­nomic activ­ity. It exam­ines and com­pares the behav­ior of var­i­ous mea­sures of broad activ­ity: real GDP mea­sured on the prod­uct and income sides, economy-wide employ­ment, and real income. The Com­mit­tee also may con­sider indi­ca­tors that do not cover the entire econ­omy, such as real sales and the Fed­eral Reserve's index of indus­trial pro­duc­tion (IP).

10 minute video – email read­ers will need to come to site to view

Tags: Black Boxes, Cnbc, Conventional Wisdom, Economic Activity, Economy, Federal Reserve, GDP, Lakshman, Lakshman Achuthan, Measures, Memory, Nber, Nugget, Quarters, Real Gdp, Recession, Signals, Time Frame, Video Email, Warm Winter
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Warren Buffett Visits with CNBC

Monday, May 7th, 2012

Today is War­ren Buffet-palooza day on CNBC and I'd encour­age those who are new­bies (or vet­er­ans) to the mar­ket to take a lis­ten to his inter­views as he always has a lot of inter­est­ing things to say, even if he man­ages invest­ments in a way that is (nowa­days) con­trary to the major­ity.  CNBC videos can be found here, but I embed­ded his intro­duc­tory com­ments below.  You will actu­ally hear a lot of sim­i­lar thoughts on Europe and the U.S. sit­u­a­tions to what I have out­lined in recent interviews.

14 minute video – email read­ers will need to come to site

As for the mar­ket futures are down some this morn­ing, but well off the worst lev­els seen overnight as Span­ish and Ger­man mar­kets have turned green.   Despite a lot of hand wring­ing over Euro­pean elec­tions, the results in France were not a sur­prise to any­one and how a politi­cian gov­erns ver­sus how they cam­paign are two dif­fer­ent things… Greece is prob­a­bly more of a mess but we'll see how it all plays out.   Big­ger pic­ture, U.S. mar­kets – after fail­ing the fol­low through day sce­nario last week – remain under dis­tri­b­u­tion but are apt to snap back ral­lies within the con­text of said dis­tri­b­u­tion.  The S&P 500 did break through the lows of the past month at 1357 in the overnight ses­sion but have recov­ered to get back into "the box" of upper 1350s to low 1390s.  Things have become more herky jerky in mar­kets since early March, and it would be no sur­prise to see that con­tinue or accel­er­ate.  The largest bounces often hap­pen in downtrends.

Eco­nomic data is going to lighten up dra­mat­i­cally this week but a lot of Fed talk and the mar­ket should begin demand­ing assis­tance on every sell­off from here.  We know how this cycle works – the demand for paci­fiers should begin to hockey stock with each drop in equi­ties go for­ward.  Earn­ings sea­son is on its last legs, but some high pro­file names such as Price­line (PCLN) remain.  The next few weeks should focus on the demands for new rounds of cen­tral bankers assis­tance, and Europe.

Tags: Cnbc, Earnings Season, Economic Data, European Elections, Forward Earnings, German Markets, High Profile, Interesting Things, Introductory Comments, Last Legs, Lows, Market Futures, Overnight Session, Profile Names, Rallies, Selloff, Two Different Things, Video Email, Warren Buffet, Warren Buffett
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Bill Ackman and Hunter Harrison Discuss Canadian Pacific

Tuesday, May 1st, 2012

 
Bill Ack­man, [$11-billion activist bil­lion­aire hedgie] on Cana­dian Pacific [proxy battle]

A snip­pet from the tran­script:

Ack­man: "Even if you take the earn­ings away, they're still reported. the prof­itabil­ity of the com­pany is worse than it was six years ago. the profit mar­gin, the so-called oper­at­ing of the busi­ness was worse.

CNBC: But on you call­ing BS, if you will, on these num­bers, are you pre­pared to walk that back or do you think the num­bers are real?

Ack­man: Unfor­tu­nately right now we're in the mid­dle of a proxy con­test. i don't know who to believe. Let's just stick with the reported num­bers. By the way, if I got them wrong, I'm happy to admit I'm wrong.

CNBC: If the num­bers are right, you will say you were wrong?

Ack­man: Sure.

CNBC: There are a num­ber of reports where the com­pany has asked you to apol­o­gize and —

Ack­man: if I'm wrong, I'm delighted to apol­o­gize. Unfor­tu­nately right now, the com­pany real­izes they're los­ing so they want to cre­ate a side show out of a technicality.

CNBC: Who do peo­ple want? Do peo­ple want Fred Green to be CEO of the com­pany going forward?

Ack­man: The answer is no. Hunter, by the way, is the most dec­o­rated CEO in the rail­road industry.

 
Hunter Har­ri­son and Bill Ack­man on Run­ning a Bet­ter Railroad

Tags: Activist, Bill Ackman, Billionaire, Ceo, Cnbc, Earnings, Hedgie, Hunter Harrison, Nbsp, Profit Margin, Profitability, Proxy Battle, Railroad Industry, Running, Six Years, Snippet, Technicality
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Weakness Overseas on Chinese and European PMIs

Monday, April 23rd, 2012

I had a sense in the lat­ter part of last week that each time we kept bounc­ing off S&P 1370, that this mar­ket was going to do the thing that frus­trates the most num­ber of peo­ple – that is (if we were headed lower) to gap down through that key level – where no one could posi­tion for it intra­day.  [Apr 20, 2012: 1370 — Resis­tance Becomes Sup­port.... for Now]  Tongue in cheek I said I could envi­sion Joe Ker­nen of CNBC blam­ing any Mon­day morn­ing weak­ness of the win­ning of "a social­ist" in the first round of French elec­tions – because that's what Joe blames every­thing on.  ;)

News sto­ries this morn­ing are in part blam­ing the "uncer­tainty" of French elec­tions, along with the more likely rea­sons, con­tin­ued weak­ness in PMI fig­ures in China and Europe overnight.

• “The risk was always that the Euro­pean cri­sis and asso­ci­ated weak eco­nomic activ­ity would encour­age more extreme pol­i­tics. This is slowly hap­pen­ing and is some­thing we need to watch going for­ward,” said Jim Reid, strate­gist at Deutsche Bank, in a note.

Ger­many is of par­tic­u­lar con­cern as the wheel­house of Euro­pean manufacturing.

• Busi­ness activ­ity across the 17-nation euro zone con­tracted at a faster-than-expected pace in April, accord­ing to the pre­lim­i­nary pur­chas­ing man­agers' index, or PMI, read­ings released Mon­day by data firm Markit.
• Man­u­fac­tur­ing PMI fell to 46.0, the low­est in 34 months, from 47.7 in March, defy­ing econ­o­mists' expec­ta­tions for a rise to 48.1. A read­ing of less than 50 indi­cates a con­trac­tion in activity.
• Ser­vices PMI fell to a five-month low at 47.9 from 49.2 in March ver­sus fore­casts for a read­ing of 49.3.
• The com­pos­ite PMI also fell to a five-month low at 47.4 from 49.1 in March. Econ­o­mists had fore­cast a rise to 49.3. "The flash PMI sig­naled a faster rate of eco­nomic con­trac­tion in the euro zone dur­ing April, extend­ing what appears to be a double-dip reces­sion into a third con­sec­u­tive quar­ter," said Chris Williamson, chief econ­o­mist at Markit.
• Pre­lim­i­nary Ger­man PMI Man­u­fac­tur­ing decreased to 46.3 points in April, from 48.4 points in March.

China sta­bi­lized (bounced a tad), albeit at con­trac­tionary levels:

• China's man­u­fac­tur­ing activ­ity con­tracted fur­ther in April, although the sec­tor improved from lev­els seen in March, a pre­lim­i­nary read­ing from HSBC showed Mon­day. HSBC's so-called "flash" Pur­chas­ing Man­agers' Index rose to 49.1 in April, com­pared with a final read­ing of 48.3 in March.  The flash PMI is based on responses from 85% to 90% of those sur­veyed in a given month.

If this break of S&P 1370 holds going into 9:30 AM EST, last week's lows of 1365 and then lows of the pre­vi­ous week of 1357 are key lev­els that traders will eye.  A close and hold below 1370 will have inter­me­di­ate term lev­els of 1340 (March lows) on the radar.  If you are play­ing at home the "bear flag" I keep men­tion­ing seems to be ful­fill­ing.  Keep in mind Apple is at the 50 day mov­ing aver­age and per­haps buy­ers (and gam­blers who love to pile in ahead of earn­ings) will help keep it up, which would help NASDAQ – and thus lend a hand to the mar­ket as a whole.  We'll see.

Tags: Business Activity, Chief Economist, Cnbc, Consecutive Quarter, Deutsche Bank, Double Dip Recession, Economic Activity, Economic Contraction, Euro Zone, Extreme Politics, French Elections, Gap, Joe Kernen, Manufacturing Business, Monday Morning, Pmis, Purchasing Managers Index, Strategist, Tongue In Cheek, Wheelhouse
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Is the Fed Promoting Recovery or Desperation? (Hussman)

Monday, April 9th, 2012

On Fri­day, the Depart­ment of Labor reported that March non-farm pay­rolls increased by 120,000, falling well short of con­sen­sus expec­ta­tions in excess of 200,000. For our part, we con­tinue to expect a dete­ri­o­ra­tion in observ­able eco­nomic vari­ables, with weak­ness that emerges grad­u­ally and then accel­er­ates toward mid-year. On the pay­roll front, our present expec­ta­tion is that April job cre­ation will dete­ri­o­rate toward zero or neg­a­tive levels.

Imme­di­ately after the pay­roll num­ber was released, CNBC shot out a news story titled "Dis­ap­point­ing Jobs Report Revives Talk of Fed Eas­ing." Of course it does, because this remains a mar­ket depen­dent on sugar. And with lit­tle doubt the Fed will even­tu­ally deliver it — per­haps fol­low­ing a mar­ket plunge of 25% or more — but with lit­tle doubt nonethe­less, because like the indul­gent par­ent of a spoiled tod­dler, the FOMC can't stand to see Wall Street throw a tantrum with­out reach­ing for a lollipop.

If the Fed indeed steps in with an addi­tional round of QE, a few dis­tinc­tions may be help­ful. First, regard­less of Fed actions, and even in the past few years, the mar­ket has invari­ably suf­fered sig­nif­i­cant losses fol­low­ing the emer­gence of the "over­val­ued, over­bought, over­bull­ish, rising-yields" syn­drome that we presently observe. In con­trast, the main win­dow where it has not paid to "fight the Fed," so to speak, has been the period com­ing off of over­sold lows. That's pri­mar­ily the win­dow where finan­cials, cycli­cals, mate­ri­als, and garbage stocks with highly lever­aged bal­ance sheets have out­per­formed. Regard­less of the fact that QE has had no durable eco­nomic ben­e­fits (more on that below), and does lit­tle but to repeat­edly lay fresh wall­pa­per over the rot­ting edi­fice that is the global bank­ing sys­tem, the main effect of QE has been to pro­vide tem­po­rary sup­port for the most spec­u­la­tive cor­ners of the finan­cial mar­ket after they have been pummeled.

Strate­gi­cally, then, we con­cede that there is some lat­i­tude to ease back on defen­sive­ness between the point where QE induces an early improve­ment in mar­ket inter­nals and an upturn in var­i­ous trend-following indi­ca­tors (com­ing off of a pre­vi­ously over­sold con­di­tion), and the point where an "over­val­ued, over­bought, over­bull­ish, rising-yields" syn­drome is estab­lished. But once that syn­drome is estab­lished, it is unwise to ignore it, and a defen­sive stance becomes essen­tial (as we saw sep­a­rately in 2010 and 2011, not to men­tion at most major mar­ket tops over his­tory). Mean­while, it is unwise to believe that addi­tional rounds of QE will do much to help the econ­omy in any event, as its pri­mary effect is merely to drive investors into spec­u­la­tive invest­ments by starv­ing them of safer yields.

There is a very well-defined the­o­ret­i­cal and empir­i­cal rela­tion­ship between the mon­e­tary base and tar­gets like short-term inter­est rates and mon­e­tary veloc­ity (see Six­teen Cents: Push­ing the Unsta­ble Lim­its of Mon­e­tary Pol­icy), but investors should note that the response of the stock mar­ket and other finan­cial assets to quan­ti­ta­tive eas­ing is far more based on super­sti­tion than on struc­ture. We can observe, for exam­ple, that drown­ing the finan­cial mar­kets in zero-interest assets has tended to lower the yields (and there­fore raise the prices) of higher-risk, longer-duration assets, but that response is depen­dent on a cer­tain form of myopia. Specif­i­cally, investors either have to assume that they can safely spec­u­late until some par­tic­u­lar date arrives on the cal­en­dar and they can all take their prof­its simul­ta­ne­ously, or they have to ignore the ten­dency for low prospec­tive long-term returns to go hand in hand with quite neg­a­tive prospec­tive intermediate-term returns. For that rea­son, any "QE indi­ca­tor" we might develop (as sev­eral peo­ple have requested) would likely be spu­ri­ous and not very robust going for­ward, even though one might be back-fitted to the data. A bet­ter approach, as noted above, is to take a sig­nal from mar­ket action and trend-following mea­sures, but emphat­i­cally to also impose sev­eral alter­nate exit cri­te­ria — includ­ing for exam­ple a dete­ri­o­ra­tion of those mea­sures, or the estab­lish­ment of an over­val­ued, over­bought, over­bull­ish, rising-yields syn­drome. I remain con­vinced that investors who sim­ply have blind faith that QE is reli­ably bull­ish in and of itself, or can be trusted to limit losses, will have their heads handed to them.

How QE "works"

Keep in mind that the U.S. bank­ing sys­tem has tril­lions of dol­lars sit­ting in idle deposits with the Fed already. Quan­ti­ta­tive eas­ing sim­ply does not relieve any con­straint that is bind­ing on the econ­omy. Rather, QE is a method by which the Fed hoards longer-duration, higher-yielding secu­ri­ties like U.S. Trea­sury bonds and replaces them with cash that bears zero inter­est. At every moment in time, some­body has to hold that paper. The only way for the holder to seek a higher return is to trade it for a more spec­u­la­tive asset, in which case who­ever sells the spec­u­la­tive asset then has to hold the cash. The process stops when all spec­u­la­tive assets are finally priced so richly and pre­car­i­ously that the peo­ple hold­ing the cash have no fur­ther incen­tive to chase the spec­u­la­tive assets, and are sim­ply will­ing to hold idle, zero-interest cash balances.

Why does the Fed want this? Sim­ple. Chair­man Bernanke believes that by cre­at­ing a bub­ble in spec­u­la­tive assets, peo­ple will "feel" wealth­ier and keep con­sum­ing — regard­less of the fact that real incomes are stag­nant and debt bur­dens are already intol­er­a­ble, and despite the fact that there is extremely weak evi­dence for any such "wealth effect" in the his­tor­i­cal record. Undoubt­edly, it would be dif­fi­cult for Bernanke to refrain from these reck­less poli­cies when every­one is cry­ing "do some­thing!" But the will­ing­ness to tol­er­ate short-term crit­i­cism in the inter­est of long-term ben­e­fit is part of what sep­a­rates lead­er­ship from cowardice.

Given the bub­bling con­cerns among var­i­ous FOMC mem­bers about infla­tion risk, the next round of QE is likely to be "ster­il­ized." Essen­tially, the Fed would buy Trea­sury bonds from banks, and would pay for them with newly cre­ated cash, but the Fed would then bor­row those funds back from banks, hold­ing them as idle deposits with the Fed­eral Reserve. By def­i­n­i­tion, the addi­tional "liq­uid­ity" cre­ated by a ster­il­ized round of QE would not be avail­able for new lend­ing (as if there aren't enough idle reserves in the bank­ing sys­tem already). So again, the main goal is to increase the out­stand­ing stock of zero– and low-interest assets in the econ­omy, in order to lower the yields and increase the prices of more spec­u­la­tive investments.

Now, if you think care­fully about this, you'll rec­og­nize that the U.S. gov­ern­ment is still run­ning a deficit of more than 8% of GDP, so the Trea­sury will have to issue more than a tril­lion dol­lars of new debt in the com­ing year any­way. Given that banks already hold tril­lions of dol­lars in idle bal­ances, the Trea­sury could have the iden­ti­cal effect of an addi­tional round of QE sim­ply by issu­ing a larger por­tion of the new debt as very short-term T-bills, which also yield next to noth­ing. So why bother doing this as "quan­ti­ta­tive eas­ing" when the Trea­sury could just change the matu­rity pro­file of the new debt all by itself?

Well, for one, the Trea­sury secu­ri­ties are issued on the open mar­ket. The Fed typ­i­cally pre-announces which issues it will buy, allow­ing the banks that act as pri­mary deal­ers to essen­tially front-run: buy­ing the newly issued debt from the Trea­sury in expec­ta­tion of get­ting a higher price from the Fed. So doing all of this as QE has the ben­e­fit of hand­ing the banks a nice trad­ing profit. Sec­ond, the Fed has an awful lot of Trea­sury debt on its bal­ance sheet, which is lever­aged about 50-to-1 against its own cap­i­tal. By pur­chas­ing Trea­sury secu­ri­ties and cre­at­ing zero-interest cash (or low-interest reserves), the Fed essen­tially earns a spread that can cover any short­fall it might expe­ri­ence if it is ever forced to unwind its posi­tion and sell any of those secu­ri­ties at a loss. It's true that if the Fed earns any sur­plus inter­est, it has to go back to the Trea­sury, but the sur­plus ren­dered back to the Trea­sury is only what remains after a night on the town in the Fed's bal­ance sheet.

Finally, the rea­son for doing QE through the Fed (rather than sim­ply chang­ing the matu­rity pro­file of the new Trea­sury debt) is that Wall Street — at least — believes that the Emperor is actu­ally wear­ing clothes. Despite the fact that the main effect of QE is to boost spec­u­la­tion and release brief bursts of pent-up demand, both which imme­di­ately soften when the poli­cies are sus­pended, this recur­ring pat­tern is still unclear to many investors and ana­lysts. As long as that delu­sion per­sists, we can expect the Fed to peri­od­i­cally exploit it.

Ignore that the side-effect of this delu­sion is the mis­al­lo­ca­tion of cap­i­tal toward spec­u­la­tive assets in the belief that the Fed has set a "put option" under the mar­kets. For­get that sav­ings are dis­cour­aged, bad lend­ing deci­sions are res­cued, incen­tives and eco­nomic sig­nals are dis­torted, and the accu­mu­la­tion of pro­duc­tive cap­i­tal is dis­abled. We have the most cre­ative, entre­pre­neur­ial nation on the planet, but our pol­icy mak­ers are intent on pre­vent­ing debt restruc­tur­ing and mis­al­lo­cat­ing scarce cap­i­tal. As a result, they con­tinue to com­pro­mise long-term growth in favor of tem­po­rary bouts of short-term speculation.

What about recent employ­ment gains?

But wait. How can we say that quan­ti­ta­tive eas­ing has such weak effects on the econ­omy when we've clearly enjoyed a sig­nif­i­cant amount of job cre­ation since mid-2009? Isn't that clear evi­dence that Fed pol­icy is working?

Well, that depends on what one means by "working."

Last week, we observed "Real income declined month-over-month in the lat­est report, which is very much at odds with the job cre­ation fig­ures unless that job cre­ation reflects extra­or­di­nar­ily low-paying jobs. Real dis­pos­able income growth has now dropped to just 0.3% year-over-year, which is lower than the rate that is typ­i­cally observed even in reces­sions." It wasn't quite clear what was going on until I read a com­ment by David Rosen­berg, who noted that much of the recent growth in pay­rolls has been in "55 years and over" cohort. Sud­denly, 2 and 2 became 4.

If you dig into the pay­roll data, the pic­ture that emerges is breath­tak­ing. Since the reces­sion "ended" in June 2009, total non-farm pay­rolls in the U.S. have grown by 1.84 mil­lion jobs. How­ever, if we look at work­ers 55 years of age and over, we find that employ­ment in that group has increased by 2.96 mil­lion jobs. In con­trast, employ­ment among work­ers under age 55 has actu­ally con­tracted by 1.12 mil­lion jobs. Even over the past year, the vast major­ity of job cre­ation has been in the 55-and-over group, while employ­ment has been slug­gish for all other work­ers, and has already turned down.

For most of his­tory prior to the late-1990's, employ­ment growth in the 55-and-over cohort was a fairly small and sta­ble seg­ment of total employ­ment growth. Undoubt­edly, part of the recent increase has sim­ply been a change in the clas­si­fi­ca­tion of exist­ing work­ers as they've aged (1945 + 55 = 2000, so the we would have expected to see some grad­ual bulge in this bracket since 2000 due to aging baby boomers). But the shift is too large to be explained sim­ply by reclas­si­fi­ca­tion. Some­thing more trou­bling has been underway.

Begin­ning first with Alan Greenspan, and then with Ben Bernanke, the Fed has increas­ingly pur­sued poli­cies of sup­press­ing inter­est rates, even dri­ving real inter­est rates to neg­a­tive lev­els after infla­tion. Com­bine this with the burst­ing of two Fed-enabled (if not Fed-induced) bub­bles — one in stocks and one in hous­ing, and the over-55 cohort has suf­fered an assault on its finan­cial secu­rity: a dif­fi­cult tri­fecta that includes the loss of inter­est income, the loss of port­fo­lio value, and the loss of home equity. All of these have com­bined to pro­voke a delay in retire­ment plans and a need for these indi­vid­u­als to re-enter the labor force.

In short, what we've observed in the employ­ment fig­ures is not recov­ery, but des­per­a­tion. Hav­ing starved savers of inter­est income, and hav­ing repeat­edly sub­jected investors to Fed-induced finan­cial bub­bles that cre­ate volatil­ity with­out durable returns, the Fed has suc­cess­fully pro­voked job growth of the oblig­a­tory, low-wage vari­ety. Over the past year, the major­ity of this growth has been in the 55-and-over cohort, while growth has turned down among other work­ers. Mean­while, over­all labor force par­tic­i­pa­tion con­tin­ues to fall as dis­cour­aged work­ers leave the labor force entirely, which is the pri­mary rea­son the unem­ploy­ment rate has declined. All of this reflects not health, but despair, and explains why real dis­pos­able income has grown by only 0.3% over the past year.

Eco­nomic Notes

It's impor­tant to rec­og­nize that our con­cerns about the stock mar­ket here are inde­pen­dent of our eco­nomic con­cerns, in that the "Angry Army of Aunt Min­nies" we've recently observed are asso­ci­ated with very neg­a­tive aver­age mar­ket out­comes regard­less of eco­nomic con­di­tions. Even in the past few years, the emer­gence of these con­di­tions has invari­ably been fol­lowed by declines that have wiped out all of the inter­ven­ing gains since the ear­li­est sig­nal was observed.

As noted above, even in the event of another round of quan­ti­ta­tive eas­ing, the par­tic­u­lar win­dow to ease back on a defen­sive posi­tion would be between the point where QE induces an improve­ment in mar­ket inter­nals and an upturn in var­i­ous trend-following indi­ca­tors (com­ing off of a pre­vi­ously over­sold con­di­tion), and the point where an "over­val­ued, over­bought, over­bull­ish, rising-yields" syn­drome is estab­lished. To ignore the syn­dromes we observe at present, in the hope that the hope of QE will be suf­fi­cient to limit mar­ket risk, is a strat­egy that would not have been suc­cess­ful even in recent years.

Still, though our present mar­ket con­cerns are inde­pen­dent of eco­nomic con­cerns, they are also rein­forced by those eco­nomic con­cerns. We've reviewed var­i­ous lines of evi­dence, from lead­ing indi­ca­tors to "unob­served com­po­nents mod­els," and I con­tinue to view the com­ing weeks as a likely mine­field of eco­nomic dis­ap­point­ments. The issue here remains the dis­tinc­tion between lead­ing, coin­ci­dent and lag­ging mea­sures of the econ­omy. As I've noted before, a ten­dency toward pos­i­tive eco­nomic sur­prises over this period would improve the under­ly­ing eco­nomic state that we infer from observ­able data, but here and now, the most lead­ing com­po­nents remain clearly neg­a­tive. The con­cerns are also clearly com­pounded by the uni­form dete­ri­o­ra­tion in eco­nomic mea­sures in Europe, China and India, among other regions. The charts below con­vey the gen­eral situation.

Over the week­end, the New York Times pub­lished a good arti­cle (Some Dreary Fore­casts from Recov­ery Skep­tics) that sum­ma­rized the con­cerns of a num­ber of eco­nomic observers, plac­ing Lak­sh­man Achuthan of the ECRI and me into the clas­si­fi­ca­tion of "perma-bears." Actu­ally, with respect to the econ­omy, I'm pleased to be in good com­pany, and don't greatly object to the "perma-bear" label in that I con­tinue to believe major under­ly­ing eco­nomic prob­lems have merely been kicked down the road and remain unre­solved (pri­mar­ily an over­hang of unser­vice­able debt, which con­tin­ues to need restruc­tur­ing, and which will leave the global econ­omy prone to recur­ring crises until that happens).

I also peri­od­i­cally get the "perma-bear" label with respect to my views on the finan­cial mar­kets. While I do believe that stocks have been gen­er­ally over­val­ued since the late-1990's (a view that is sup­ported by the pre­dictably dis­mal over­all total returns on stocks since that time), I do think that some observers mis­clas­sify the 2009-early 2010 period as being a reflec­tion of our stan­dard invest­ment strat­egy instead of what it was — a period when we sus­pended risk tak­ing until we were con­fi­dent that we had ade­quately stress-tested our meth­ods against Depression-era data. That may seem like a dis­tinc­tion with­out a dif­fer­ence, but the dif­fer­ence is that for most peri­ods since 2000, our present invest­ment meth­ods would do very lit­tle dif­fer­ently than we actu­ally did in prac­tice (though there are of course a few mod­er­ate dif­fer­ences due to var­i­ous refine­ments and ongo­ing research). The 2009-early 2010 period is dis­tinct in that it is not at all indica­tive of the hedge posi­tion that can be expected of our strat­egy in future mar­ket cycles, even under iden­ti­cal con­di­tions and evi­dence. The fact that we removed about 70% of our hedges in 2002 (when our pro­jec­tion for 10-year S&P 500 total returns was not much more com­pelling than what it is today), should be some evi­dence of that.

Finan­cial mar­kets fluc­tu­ate, and prospec­tive returns change. We will undoubt­edly have ample oppor­tu­ni­ties to accept finan­cial risk in expec­ta­tion of rea­son­able returns, and if his­tory is any guide, those oppor­tu­ni­ties will emerge well before our eco­nomic prob­lems are behind us. What con­cerns me here is the refusal of investors to even rec­og­nize those prob­lems; the army of hos­tile syn­dromes we observe in both finan­cial and eco­nomic data; the blind faith that sim­ply chang­ing the mix of Trea­sury debt and bank reserves can pro­duce growth and put a floor under spec­u­la­tive assets; the near-complete denial of ongo­ing debt strains; and heav­ily bull­ish sen­ti­ment that Investors Intel­li­gence cor­rectly notes is now in "ter­ri­tory asso­ci­ated with mar­ket tops."

Mar­ket Climate

As of last week, the Mar­ket Cli­mate for stocks remained char­ac­ter­ized by a hos­tile "over­val­ued, over­bought, over­bull­ish, rising-yields" syn­drome, and a vari­ety of other hos­tile syn­dromes that I've reviewed in recent com­ments. Strate­gic Growth and Strate­gic Inter­na­tional Fund remain tightly hedged here. Strate­gic Div­i­dend Value has a hedge equal to about 50% of the value of its hold­ings — its most hedged stance. Strate­gic Total Return con­tin­ues to have a dura­tion of just under 3 years, and a small per­cent of assets in util­ity shares and for­eign cur­ren­cies. We raised our expo­sure in pre­cious met­als shares to just over 4% on last week's price weak­ness, but there too, our stance remains decid­edly con­ser­v­a­tive at present.

—

Tags: Balance Sheets, Banking System, Cnbc, Consensus Expectations, Cyclicals, Department Of Labor, Desperation, Economic Benefits, Economic Variables, Edifice, Fomc, Global Banking, Hussman, Job Creation, Lollipop, Lows, Market Plunge, Non Farm Payrolls, Payroll Number, Qe, Tantrum
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PIMCO's Gross: Market Has Bernanke in a Box, QE3 Still on the Way

Thursday, April 5th, 2012

Bond king Bill Gross is right along the same line of think­ing as I am on this sub­ject.  Unfor­tu­nately, moral haz­ard is now the name of the game, and rather than being dis­si­pated, it has been enhanced.  To that end the top head­line on CNBC is "Why Fed is likely to Inter­vene if Mar­ket Falls too far" – as if "stock mar­ket man­age­ment" is part of their Con­gres­sional man­dated duty.

Bernanke wants a wealth effect from equi­ties since he is unable to reblow a bub­ble into hous­ing, and the mar­ket knows it.  Hence the tem­per tantrums each time the mar­ket does not get what it wants.  Ben also sees how badly the mar­ket acted dur­ing peri­ods the Fed was not sup­port­ing it the past few years.  You can imag­ine they are watch­ing what has hap­pened since 2 PM yes­ter­day in hor­ror.   Gross pro­vides more color, and why the mar­ket over­re­acted to a few words yes­ter­day.  Again, what that means for the mar­ket in the next hour or days or weeks, who knows.

• The stock mar­ket is over­re­act­ing Wednes­day to what the Fed­eral Reserve didn't say about quan­ti­ta­tive eas­ing in the min­utes from its March meet­ing, bond king Bill Gross told CNBC. It's much ado about noth­ing or much ado about a lit­tle," the founder of Pimco said.
• "We should think of the Fed as like a chess game where some of the pieces are more impor­tant than oth­ers," liken­ing Fed Chair­man Ben Bernanke to the king, San Fran­cisco Fed gov­er­nor Janet Yellen to the queen and New York Fed chief William Dud­ley to the cas­tle, with the rest of the gov­er­nors the knights.  "You have a story when some of these major pieces, one of the three, basi­cally con­cedes and says, 'Check mate.' But we haven't seen that," Gross said. "Until that hap­pens this wordsmithing…is rel­a­tively unimportant."
• But Gross thinks the Fed is very cog­nizant of the state of the stock mar­ket, and if it falls too much it may have to act with some form of eas­ing. The Fed and other cen­tral banks have "got to keep going [with some form of stim­u­lus] if they expect equity mar­kets to continue…at this level," he said.
• "When QE1 has ended, when QE2 has ended, basi­cally the stock mar­ket has gone down by 1,500 points the next month or two," Bill Gross, co-CEO of bond giant Pimco, said in a CNBC inter­view. "Is the Fed trapped in this conun­drum of pro­vid­ing cheaper liq­uid­ity in order to pump up the stock mar­ket and risk mar­kets? I think they are. I won't argue…whether it's good pol­icy, but it's nec­es­sar­ily pol­icy based on where cen­tral banks have led us."

8 minute video

Tags: Bill Gross, Central Banks, Check Mate, Chess Game, Chief William, Cnbc, Fed Chairman, Fed Chief, Fed Governor, Gross Market, Market Management, Moral Hazard, Name Of The Game, New York Fed, PIMCO, S Gross, Temper Tantrums, Wealth Effect, William Dudley, Wordsmithing
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The World's A Little Richer

Saturday, March 31st, 2012

Imag­ine your daily con­sump­tion cost­ing you less than a cup of Star­bucks. About 1.3 bil­lion peo­ple around the world live this real­ity. The good news is that it’s the low­est num­ber of peo­ple ever.

The World Bank released an update to its con­sump­tion poverty esti­mates in devel­op­ing coun­tries, and for the first time ever, the orga­ni­za­tion found progress in all the regions they track. In terms of the num­ber and per­cent­age of peo­ple liv­ing on $1.25 a day (on a pur­chas­ing power par­ity) at 2005 prices in 130 devel­op­ing coun­tries, the world is a lit­tle richer.

The area see­ing “dra­matic progress” was East Asia, reports the World Bank. Back in the 1980s, this region had the world’s high­est inci­dence of poverty. Nearly 80 per­cent of peo­ple lived on less than $1.25 each day; In 2008, the num­ber dropped to 14 percent.

Across these poor­est coun­tries, in 1981, 70 per­cent of peo­ple were liv­ing on less than $2 a day; 2008 data shows that the fig­ure has fallen to just above 40 per­cent. Whereas just over 50 per­cent of peo­ple in the poor­est coun­tries were liv­ing on less than $1.25 a day in 1981, only about 25 per­cent are today.

I dis­cussed the impor­tance of this ris­ing con­sumer with CNBC’s Squawk Box Asia’s Mar­tin Soong and Lisa Oake this week. I stopped by their stu­dios while I was in Sin­ga­pore to dis­cuss my thoughts on the con­tin­u­ing build-out of emerg­ing markets.

Watch it now.

By click­ing the link above, you will be directed to a third-party web­site. U.S. Global Investors does not endorse all infor­ma­tion sup­plied by this web­site and is not respon­si­ble for its con­tent. All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor.

The S&P/ASX 200 Index is a market-capitalization weighted and float-adjusted stock mar­ket index of Aus­tralian stocks listed on the Aus­tralian Secu­ri­ties Exchange. E-7 are the seven most pop­u­lous emerg­ing mar­ket countries—China, India, Indone­sia, Brazil, Pak­istan, Rus­sia and Mexico.

Tags: Asx 200, Australian Securities, Australian Stocks, Brazil, Cnbc, Dramatic Progress, East Asia, Emerging Market Countries, India, India Indonesia, Market Capitalization, Martin Soong, Oake, Paki, Poorest Countries, Poverty Estimates, Purchasing Power Parity, Russia, S Martin, Squawk Box, Starbucks, Stock Market Index, U S Global Investors
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The Demise of Risk-on / Risk-off and the Emergence of Heteroscedasticity

Wednesday, March 28th, 2012

by Jason Doiron
FRM, PRM, SVP — Head of Fixed Income & Deriv­a­tives
Sen­tinel Asset Man­age­ment, Inc.

I esti­mate that I inad­ver­tently watch 12 hours of finan­cial news pro­gram­ming per day. Too much tele­vi­sion? per­haps, but for a port­fo­lio man­ager it has become an occu­pa­tional neces­sity. One of the great­est ben­e­fits to watch­ing this much tele­vi­sion is that I can recite ver­ba­tim every com­mer­cial that plays on CNBC with no clue which com­pany is spon­sor­ing the ad — pig on a skate­board any­one? The other ben­e­fit is that I am pro­vided with a front row seat to a rogues gallery of pun­dits who describe the com­plex­i­ties of the finan­cial mar­kets through sound bites.

After a close con­test with "kick the can down the road" and "tail risk," the undis­puted cham­pion of sound bites since 2008 has been "risk-on / risk-off." Both terms accu­rately describe the mar­ket sen­ti­ment for cer­tain peri­ods over the past 3.5 years. But as with all good sound bites, the use­ful life span of these terms is quickly com­ing to an end. Before we bid farewell to these terms, let me explain my rea­son­ing for pre­dict­ing the demise of risk-on / risk-off.

1) Irrel­e­vance:
No other term more accu­rately described the mar­ket sen­ti­ment in 4Q08 and 1Q09 than risk-off. Dur­ing the sum­mer of 2011, the term risk-off accu­rately described the sen­ti­ment in cer­tain sec­tors of the fixed income mar­ket such as CMBS. But the term risk-off does not accu­rately describe a 2 point sell-off in the SPX [1] on a Thurs­day after­noon before a 3 day week­end in July. That is sim­ply called a pull back.

2) Pro­fes­sional:
I can assure you that the terms risk-on and risk-off did not orig­i­nate from any­one in the risk man­age­ment pro­fes­sion. Risk man­age­ment pro­fes­sion­als do not reduce an oppor­tu­nity set down to a binary out­come such as on/off. If a true risk man­age­ment pro­fes­sional were try­ing to describe the risk on/off phe­nom­e­non, they would use a term like homoscedas­tic­ity.

3) Fun­da­men­tals:
The demise of the term risk-on / risk-off should be a wel­comed event by investors. Over the past three years, the only ques­tion that investors have needed to get right is risk-on or risk-off. Invest­ing became a binary out­come where the instru­ments that you uti­lized to express either of these views mat­tered lit­tle as long as you got the on / off call cor­rect. This seems easy enough but in a homoscedas­tic world, the ben­e­fits of diver­si­fi­ca­tion will prove to be futile in your fight against the risk on / off mentality.

We are start­ing to see an invest­ment land­scape where fun­da­men­tals mat­ter again. A land­scape where secu­ri­ties derive their value from the fun­da­men­tal under­pin­nings rather than from a head­line on failed votes regard­ing debt ceil­ing lim­its or sov­er­eign default write-downs. The pun­dits will need a new sound bite to suc­cinctly describe this land­scape so I offer up. Het­eroscedas­tic­ity!

Sources: Sen­tinel Asset Management

[1] The Stan­dard & Poor's 500 Index is an unman­aged index of 500 widely held U.S. equity secu­ri­ties cho­sen for mar­ket size, liq­uid­ity, and indus­try group representation.

Copy­right © Sen­tinel Asset Man­age­ment, Inc.

Tags: Asset Management Inc, Binary Outcome, Cmbs, Cnbc, Complexities, Doiron, Fixed Income Market, Frm, Life Span, Market Sentiment, Portfolio Manager, Risk Management Profession, Risk Management Professional, Risk Management Professionals, Rogues Gallery, Row Seat, Sound Bites, Spx, Thursday Afternoon, Undisputed Champion
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Lazlo Birinyi – Über Bull Calls for S&P 1700 this Year

Tuesday, March 6th, 2012

Looks like we are going to see the market's first sig­nif­i­cant gap down of the year this morn­ing – no spe­cific rea­son, it is just "due". There have been any num­ber of bears who have been turned to the bull camp in the past 2–3 weeks, but one guy con­sis­tently bull­ish has been well known pun­dit Las­zlo Birinyi, who came out with a S&P 1700 call yes­ter­day on CNBC. It would be easy to say "hey that was an obvi­ous 'call the top' moment" but there have been any num­ber of sim­i­lar sig­nals (Roubini bull­ish, über bull­ish Bar­ron cover, etc) over the last month which have led to only more pain for bears. Either way it's always good to see the 'other side' of the argu­ment so below is the video:

• Well-known stock com­men­ta­tor Las­zlo Birinyi sees more than a ris­ing stock mar­ket. The mar­ket bull told CNBC Mon­day he sees signs of a U.S. econ­omy that may be doing far bet­ter than oth­ers expect. "This year the bet is GDP of 2 per­cent to 2.5 per­cent," he said. "When I look at the mar­ket I see stocks like Cum­mins and Salesforce.com, Microsoft, Gen­eral Motors up 20, 30 and 40 per­cent. That makes me ques­tion, maybe the market’s say­ing some­thing about a good econ­omy. "I just won­der if we’re pre­pared for a 3 per­cent to 4 per­cent GDP? If it does [reach that level] I think we can again have a mir­ror of 1995 where the mar­ket sur­prised every­body on the upside."
• The head of Birinyi Asso­ciates, who has long stressed pick­ing strong indi­vid­ual stocks that can resist mar­ket volatil­ity, last week released a robust fore­cast for a Stan­dard & Poor's 500 spik­ing to 1,700 this year, up over 20 per­cent. He based the fore­cast on mar­ket pat­terns show­ing this year's rally is remark­ably sim­i­lar to what hap­pened in 1995, when expec­ta­tions were low for both stocks and bonds.
• "What hap­pened was just the oppo­site. Inter­est rates went down, the mar­ket went up 35 per­cent" and had the best year in 50 years, Birinyi told CNBC. "As I’ve often said, the neg­a­tive case is always more artic­u­late, it’s always more ratio­nal, more rea­son­able because we see it," Birinyi said. "The mar­ket is look­ing ahead, and I con­tend what stocks are telling us is a pos­si­bil­ity, and I think a fairly good pos­si­bil­ity, that some­thing pos­i­tive is going to develop [and] per­haps we’re under­es­ti­mat­ing the econ­omy. Don’t dis­re­gard the pos­si­bil­ity of some­thing good happening."

Tags: Barron, Bet, Birinyi Associates, Cnbc, Commentator, Cummins, Gap, GDP, General Motors, Laszlo Birinyi, Lazlo Birinyi, Market Patterns, Market Volatility, Negative Case, S 500, Salesforce, Stock Market, Stocks And Bonds, Uber, What Happened In 1995
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10 Things You Should Know About The Federal Reserve

Friday, March 2nd, 2012

By Michael Sny­der

What would hap­pen if the Fed­eral Reserve was shut down per­ma­nently? That is a ques­tion that CNBC asked recently, but unfor­tu­nately most Amer­i­cans don't really think about the Fed much. Most Amer­i­cans are con­tent with believ­ing that the Fed­eral Reserve is just another stuffy gov­ern­ment agency that sets our inter­est rates and that is watch­ing out for the best inter­ests of the Amer­i­can people.

But that is not the case at all. The truth is that the Fed­eral Reserve is a pri­vate bank­ing car­tel that has been designed to sys­tem­at­i­cally destroy the value of our cur­rency, drain the wealth of the Amer­i­can pub­lic and enslave the fed­eral gov­ern­ment to per­pet­u­ally expand­ing debt. Dur­ing this elec­tion year, the econ­omy is the num­ber one issue that vot­ers are con­cerned about. But instead of end­lessly blam­ing both polit­i­cal par­ties, the truth is that most of the blame should be placed at the feet of the Fed­eral Reserve. The Fed­eral Reserve has more power over the per­for­mance of the U.S. econ­omy than any­one else does.

The Fed­eral Reserve con­trols the money sup­ply, the Fed­eral Reserve sets the inter­est rates and the Fed­eral Reserve hands out bailouts to the big banks that absolutely dwarf any­thing that Con­gress ever did. If the Amer­i­can peo­ple are ever going to learn what is really going on with our econ­omy, then it is absolutely imper­a­tive that they get edu­cated about the Fed­eral Reserve. 

The fol­low­ing are 10 things that every Amer­i­can should know about the Fed­eral Reserve....
 
#1 The Fed­eral Reserve Sys­tem Is A Pri­vately Owned Bank­ing Car­tel


The Fed­eral Reserve is not a gov­ern­ment agency.
The truth is that it is a pri­vately owned cen­tral bank. It is owned by the banks that are mem­bers of the Fed­eral Reserve system.

We do not know how much of the sys­tem each bank owns, because that has never been dis­closed to the Amer­i­can people.

The Fed­eral Reserve openly admits that it is pri­vately owned. When it was defend­ing itself against a Bloomberg request for infor­ma­tion under the Free­dom of Infor­ma­tion Act, the Fed­eral Reserve stated unequiv­o­cally in court that it was "not an agency" of the fed­eral gov­ern­ment and there­fore not sub­ject to the Free­dom of Infor­ma­tion Act.

In fact, if you want to find out that the Fed­eral Reserve sys­tem is owned by the mem­ber banks, all you have to do is go to the Fed­eral Reserve web­site....

The twelve regional Fed­eral Reserve Banks, which were estab­lished by Con­gress as the oper­at­ing arms of the nation's cen­tral bank­ing sys­tem, are orga­nized much like pri­vate corporations–possibly lead­ing to some con­fu­sion about "own­er­ship." For exam­ple, the Reserve Banks issue shares of stock to mem­ber banks. How­ever, own­ing Reserve Bank stock is quite dif­fer­ent from own­ing stock in a pri­vate com­pany. The Reserve Banks are not oper­ated for profit, and own­er­ship of a cer­tain amount of stock is, by law, a con­di­tion of mem­ber­ship in the Sys­tem. The stock may not be sold, traded, or pledged as secu­rity for a loan; div­i­dends are, by law, 6 per­cent per year.

For­eign gov­ern­ments and for­eign banks do own sig­nif­i­cant own­er­ship inter­ests in the mem­ber banks that own the Fed­eral Reserve sys­tem. So it would be accu­rate to say that the Fed­eral Reserve is par­tially foreign-owned.
But until the exact own­er­ship shares of the Fed­eral Reserve are revealed, we will never know to what extent the Fed is foreign-owned.
 
#2 The Fed­eral Reserve Sys­tem Is A Per­pet­ual Debt Machine


As long as the Fed­eral Reserve Sys­tem exists, U.S. gov­ern­ment debt will con­tinue to go up and up and up.
This runs con­trary to the con­ven­tional wis­dom that Democ­rats and Repub­li­cans would have us believe, but unfor­tu­nately it is true.
The way our sys­tem works, when­ever more money is cre­ated more debt is cre­ated as well.

For exam­ple, when­ever the U.S. gov­ern­ment wants to spend more money than it takes in (which hap­pens con­stantly), it has to go ask the Fed­eral Reserve for it. The fed­eral gov­ern­ment gives U.S. Trea­sury bonds to the Fed­eral Reserve, and the Fed­eral Reserve gives the U.S. gov­ern­ment "Fed­eral Reserve Notes" in return. Usu­ally this is just done electronically.

So where does the Fed­eral Reserve get the Fed­eral Reserve Notes?
It just cre­ates them out of thin air.

Wouldn't you like to be able to cre­ate money out of thin air?

Instead of issu­ing money directly, the U.S. gov­ern­ment lets the Fed­eral Reserve cre­ate it out of thin air and then the U.S. gov­ern­ment bor­rows it.

Talk about stupid.

When this new debt is cre­ated, the amount of inter­est that the U.S. gov­ern­ment will even­tu­ally pay on that debt is not also cre­ated.
So where will that money come from?

Well, even­tu­ally the U.S. gov­ern­ment will have to go back to the Fed­eral Reserve to get even more money to finance the ever expand­ing debt that it has got­ten itself trapped into.

It is a debt spi­ral that is designed to go on perpetually.

You see, the real­ity is that the money sup­ply is designed to con­stantly expand under the Fed­eral Reserve sys­tem. That is why we have all become accus­tomed to think­ing of infla­tion as "normal".

So what does the Fed­eral Reserve do with the U.S. Trea­sury bonds that it gets from the U.S. gov­ern­ment?
Well, it sells them off to oth­ers. There are lots of peo­ple out there that have made a ton of money by hold­ing U.S. gov­ern­ment debt.

In fis­cal 2011, the U.S. gov­ern­ment paid out 454 bil­lion dol­lars just in inter­est on the national debt.

That is 454 bil­lion dol­lars that was taken out of our pock­ets and put into the pock­ets of wealthy indi­vid­u­als and for­eign gov­ern­ments around the globe.

The truth is that our cur­rent debt-based mon­e­tary sys­tem was designed by greedy bankers that wanted to make enor­mous prof­its by using the Fed­eral Reserve as a tool to cre­ate money out of thin air and lend it to the U.S. gov­ern­ment at interest.

And that plan is work­ing quite well.

Most Amer­i­cans today don't under­stand how any of this works, but many promi­nent Amer­i­cans in the past did under­stand it.

For exam­ple, Thomas Edi­son was once quoted in the New York Times as say­ing the following....

That is to say, under the old way any time we wish to add to the national wealth we are com­pelled to add to the national debt.

Now, that is what Henry Ford wants to pre­vent. He thinks it is stu­pid, and so do I, that for the loan of $30,000,000 of their own money the peo­ple of the United States should be com­pelled to pay $66,000,000 — that is what it amounts to, with interest.

Peo­ple who will not turn a shov­el­ful of dirt nor con­tribute a pound of mate­r­ial will col­lect more money from the United States than will the peo­ple who sup­ply the mate­r­ial and do the work. That is the ter­ri­ble thing about inter­est. In all our great bond issues the inter­est is always greater than the prin­ci­pal. All of the great pub­lic works cost more than twice the actual cost, on that account.

Under the present sys­tem of doing busi­ness we sim­ply add 120 to 150 per cent, to the stated cost.

But here is the point: If our nation can issue a dol­lar bond, it can issue a dol­lar bill. The ele­ment that makes the bond good makes the bill good.

We should have lis­tened to men like Edi­son and Ford.

But we didn't.

And so we pay the price.

On July 1, 1914 (a few months after the Fed was cre­ated) the U.S. national debt was 2.9 bil­lion dollars.

Today, it is more than more than 5000 times larger.

Yes, the per­pet­ual debt machine is work­ing quite well, and most Amer­i­cans do not even real­ize what is hap­pen­ing.
 
#3 The Fed­eral Reserve Has Destroyed More Than 96% Of The Value Of The U.S. Dol­lar

Did you know that the U.S. dol­lar has lost 96.2 per­cent of its value since 1900? Of course almost all of that decline has hap­pened since the Fed­eral Reserve was cre­ated in 1913.

Because the money sup­ply is designed to expand con­stantly, it is guar­an­teed that all of our dol­lars will con­stantly lose value.
Infla­tion is a "hid­den tax" that con­tin­u­ally robs us all of our wealth. The Fed­eral Reserve always says that it is "com­mit­ted" to con­trol­ling infla­tion, but that never seems to work out so well.

And cur­rent Fed­eral Reserve Chair­man Ben Bernanke says that it is actu­ally a good thing to have a lit­tle bit of infla­tion. He plans to try to keep the infla­tion rate at about 2 per­cent in the com­ing years.

So what is so bad about 2 per­cent? That doesn't sound so bad, does it?

Well, just con­sider the fol­low­ing excerpt from a recent Forbes arti­cle....

The Fed­eral Reserve Open Mar­ket Com­mit­tee (FOMC) has made it offi­cial: After its lat­est two day meet­ing, it announced its goal to devalue the dol­lar by 33% over the next 20 years. The debauch of the dol­lar will be even greater if the Fed exceeds its goal of a 2 per­cent per year increase in the price level.

 
#4 The Fed­eral Reserve Can Bail Out Who­ever It Wants To With No Account­abil­ity


The Amer­i­can peo­ple got so upset about the bailouts that Con­gress gave to the Wall Street banks and to the big automak­ers, but did you know that the biggest bailouts of all were given out by the Fed­eral Reserve?

Thanks to a very lim­ited audit of the Fed­eral Reserve that Con­gress approved a while back, we learned that the Fed made tril­lions of dol­lars in secret bailout loans to the big Wall Street banks dur­ing the last finan­cial cri­sis. They even secretly loaned out hun­dreds of bil­lions of dol­lars to for­eign banks.
 

Accord­ing to the results of the lim­ited Fed audit men­tioned above, a total of $16.1 tril­lion in secret loans were made by the Fed­eral Reserve between Decem­ber 1, 2007 and July 21, 2010.
 
The fol­low­ing is a list of loan recip­i­ents that was taken directly from page 131 of the audit report....
 
Cit­i­group — $2.513 tril­lion
Mor­gan Stan­ley — $2.041 tril­lion
Mer­rill Lynch — $1.949 tril­lion
Bank of Amer­ica — $1.344 tril­lion
Bar­clays PLC — $868 bil­lion
Bear Sterns — $853 bil­lion
Gold­man Sachs — $814 bil­lion
Royal Bank of Scot­land — $541 bil­lion
JP Mor­gan Chase — $391 bil­lion
Deutsche Bank — $354 bil­lion
UBS — $287 bil­lion
Credit Suisse — $262 bil­lion
Lehman Broth­ers — $183 bil­lion
Bank of Scot­land — $181 bil­lion
BNP Paribas — $175 bil­lion
Wells Fargo — $159 bil­lion
Dexia — $159 bil­lion
Wachovia — $142 bil­lion
Dres­d­ner Bank — $135 bil­lion
Soci­ete Gen­erale — $124 bil­lion
"All Other Bor­row­ers" — $2.639 tril­lion
 
So why haven't we heard more about this?
 
This is scan­dalous.
In addi­tion, it turns out that the Fed paid enor­mous sums of money to the big Wall Street banks to help "admin­is­ter" these nearly interest-free loans....

Not only did the Fed­eral Reserve give 16.1 tril­lion dol­lars in nearly interest-free loans to the "too big to fail" banks, the Fed also paid them over 600 mil­lion dol­lars to help run the emer­gency lend­ing pro­gram. Accord­ing to the GAO, the Fed­eral Reserve shelled out an astound­ing $659.4 mil­lion in "fees" to the very finan­cial insti­tu­tions which caused the finan­cial cri­sis in the first place.

 
Does read­ing that make you angry?
 
It should.
 
#5 The Fed­eral Reserve Is Pay­ing Banks Not To Lend Money


Did you know that the Fed­eral Reserve is actu­ally pay­ing banks not to make loans?
It is true.
 
Sec­tion 128 of the Emer­gency Eco­nomic Sta­bi­liza­tion Act of 2008 allows the Fed­eral Reserve to pay inter­est on "excess reserves" that U.S. banks park at the Fed.
 
So the banks can just send their cash to the Fed and watch the money come rolling in risk-free.
 
So are many banks tak­ing advan­tage of this?
 
You tell me. Just check out the chart below. The amount of "excess reserves" parked at the Fed has gone from nearly noth­ing to about 1.5 tril­lion dol­lars since 2008....

 
But shouldn't the banks be lend­ing the money to us so that we can start busi­nesses and buy homes?
 
You would think that is how it is sup­posed to work.
 
Unfor­tu­nately, the Fed­eral Reserve is not work­ing for us.
 
The Fed­eral Reserve is work­ing for the big banks.
 
Sadly, most Amer­i­cans have no idea what is going on.
 
Another exam­ple of this is the gov­ern­ment debt carry trade.
 
Here is how it works. The Fed­eral Reserve lends gigan­tic piles of nearly interest-free cash to the big Wall Street banks, and in turn those banks use the money to buy up huge amounts of gov­ern­ment debt. Since the return on gov­ern­ment debt is higher, the banks are able to make large prof­its very eas­ily and with very lit­tle risk.
 
This scam was also explained in a recent arti­cle in the Guardian....

Con­sider this: we pre­tend that banks are pri­vate busi­nesses that should be allowed to run their own affairs. But they are the biggest scroungers of pub­lic money of our time. Banks are lent vast sums of money by cen­tral banks at near-zero inter­est. They lend that money to us or back to the gov­ern­ment at higher rates and rake in the dif­fer­ence by the bil­lion. They don't even have to make clever invest­ments to make huge profits.

That is a pretty good lit­tle scam they have got going, wouldn't you say?
 
#6 The Fed­eral Reserve Cre­ates Arti­fi­cial Eco­nomic Bub­bles That Are Extremely Dam­ag­ing
 
By allow­ing a cen­tral­ized author­ity such as the Fed­eral Reserve to dic­tate inter­est rates, it cre­ates an envi­ron­ment where finan­cial bub­bles can be cre­ated very eas­ily.
Over the past sev­eral decades, we have seen bub­ble after bub­ble. Most of these have been the result of the Fed­eral Reserve keep­ing inter­est rates arti­fi­cially low. If the free mar­ket had been set­ting inter­est rates all this time, things would have never got­ten so far out of hand.
 
For exam­ple, the hous­ing crash would have never been so hor­rific if the Fed­eral Reserve had not cre­ated such ideal con­di­tions for a hous­ing bub­ble in the first place. But we allow the Fed to con­tinue to make the same mis­takes.
 
Right now, the Fed­eral Reserve con­tin­ues to set inter­est rates much, much lower than they should be. This is caus­ing a tremen­dous mis­al­lo­ca­tion of eco­nomic resources, and there will be mas­sive con­se­quences for that down the line.
#7 The Fed­eral Reserve Sys­tem Is Dom­i­nated By The Big Wall Street Banks
 Even since it was cre­ated, the Fed­eral Reserve sys­tem has been dom­i­nated by the big Wall Street banks.
The fol­low­ing is from a pre­vi­ous arti­cle that I did about the Fed....

The New York rep­re­sen­ta­tive is the only per­ma­nent mem­ber of the Fed­eral Open Mar­ket Com­mit­tee, while other regional banks rotate in 2 and 3 year inter­vals. The for­mer head of the New York Fed, Tim­o­thy Gei­th­ner, is now U.S. Trea­sury Sec­re­tary. The truth is that the Fed­eral Reserve Bank of New York has always been the most impor­tant of the regional Fed banks by far, and in turn the Fed­eral Reserve Bank of New York has always been dom­i­nated by Wall Street and the major New York banks.

 
#8 It Is Not An Acci­dent That We Saw The Per­sonal Income Tax And The Fed­eral Reserve Sys­tem Both Come Into Exis­tence In 1913
 On Feb­ru­ary 3rd, 1913 the 16th Amend­ment to the U.S. Con­sti­tu­tion was rat­i­fied. Later that year, the United States Rev­enue Act of 1913 imposed a per­sonal income tax on the Amer­i­can peo­ple and we have had one ever since.
 
With­out a per­sonal income tax, it is hard to have a cen­tral bank. It takes a lot of money to finance all of the gov­ern­ment debt that a cen­tral bank­ing sys­tem cre­ates.
 
It is no acci­dent that the 16th Amend­ment was rat­i­fied in 1913 and the Fed­eral Reserve sys­tem was also cre­ated in 1913.
They have a sym­bi­otic rela­tion­ship and they are designed to work together.
We could fill Con­gress with peo­ple that are com­mit­ted to end­ing this oppres­sive sys­tem, but so far we have cho­sen not to do that.
So our chil­dren and our grand­chil­dren will face a life­time of debt slav­ery because of us.
I am sure they will be thank­ful for that.
 
#9 The Cur­rent Fed­eral Reserve Chair­man, Ben Bernanke, Has A Night­mar­ish Track Record Of Incom­pe­tence
 
The main­stream media por­trays Fed­eral Reserve Chair­man Ben Bernanke as a bril­liant econ­o­mist, but is that really the case?
Let's go to the video­tape.
The fol­low­ing is an extended excerpt from an arti­cle that I pub­lished pre­vi­ously....
———-
In 2005, Bernanke said that we shouldn't worry because hous­ing prices had never declined on a nation­wide basis before and he said that he believed that the U.S. would con­tinue to expe­ri­ence close to "full employment"....

"We’ve never had a decline in house prices on a nation­wide basis. So, what I think what is more likely is that house prices will slow, maybe sta­bi­lize, might slow con­sump­tion spend­ing a bit. I don’t think it’s gonna drive the econ­omy too far from its full employ­ment path, though."

In 2005, Bernanke also said that he believed that deriv­a­tives were per­fectly safe and posed no dan­ger to finan­cial markets....

"With respect to their safety, deriv­a­tives, for the most part, are traded among very sophis­ti­cated finan­cial insti­tu­tions and indi­vid­u­als who have con­sid­er­able incen­tive to under­stand them and to use them properly."

In 2006, Bernanke said that hous­ing prices would prob­a­bly keep rising....

"Hous­ing mar­kets are cool­ing a bit. Our expec­ta­tion is that the decline in activ­ity or the slow­ing in activ­ity will be mod­er­ate, that house prices will prob­a­bly con­tinue to rise."

In 2007, Bernanke insisted that there was not a prob­lem with sub­prime mortgages....

"At this junc­ture, how­ever, the impact on the broader econ­omy and finan­cial mar­kets of the prob­lems in the sub­prime mar­ket seems likely to be con­tained. In par­tic­u­lar, mort­gages to prime bor­row­ers and fixed-rate mort­gages to all classes of bor­row­ers con­tinue to per­form well, with low rates of delinquency."

In 2008, Bernanke said that a reces­sion was not coming....

"The Fed­eral Reserve is not cur­rently fore­cast­ing a recession."

A few months before Fan­nie Mae and Fred­die Mac col­lapsed, Bernanke insisted that they were totally secure....

"The GSEs are ade­quately cap­i­tal­ized. They are in no dan­ger of failing."

For many more exam­ples that demon­strate the absolutely night­mar­ish track record of Fed­eral Reserve Chair­man Ben Bernanke, please see the fol­low­ing arti­cles....
*"Say What? 30 Ben Bernanke Quotes That Are So Stu­pid That You Won’t Know Whether To Laugh Or Cry"
*"Is Ben Bernanke A Liar, A Lunatic Or Is He Just Com­pletely And Totally Incom­pe­tent?"
But after being wrong over and over and over, Barack Obama still nom­i­nated Ben Bernanke for another term as Chair­man of the Fed.
———-
 
#10 The Fed­eral Reserve Has Become Way Too Pow­er­ful
 
The Fed­eral Reserve is the most unde­mo­c­ra­tic insti­tu­tion in America.

The Fed­eral Reserve has become so pow­er­ful that it is now known as "the fourth branch of gov­ern­ment", but there are less checks and bal­ances on the Fed than there are on the other three branches.

The Fed­eral Reserve runs the U.S. econ­omy but it is not account­able to the Amer­i­can peo­ple. We can't vote those that run the Fed out of office if we do not like what they do.

Yes, the pres­i­dent appoints those that run the Fed, but he also knows that if he does not tread lightly he won't get the money from the big Wall Street banks that he needs for his next election.

Thank­fully, there are a few mem­bers of Con­gress that are com­plain­ing about how much power the Fed has. For exam­ple, Ron

Paul once told MSNBC that he believes that the Fed­eral Reserve is now actu­ally more pow­er­ful than Con­gress.....

"The reg­u­la­tions should be on the Fed­eral Reserve. We should have trans­parency of the Fed­eral Reserve. They can cre­ate tril­lions of dol­lars to bail out their friends, and we don’t even have any trans­parency of this. They’re more pow­er­ful than the Congress."

As mem­bers of Con­gress such as Ron Paul have started to shed some light on the activ­i­ties of the Fed­eral Reserve, that has caused many in the main­stream media to come to the defense of the Fed.

For exam­ple, a recent CNBC arti­cle enti­tled "If The Fed­eral Reserve Is Abol­ished, What Then?" makes it sound like there is absolutely no other ratio­nal alter­na­tive to hav­ing the Fed­eral Reserve run our economy.

But this is not what our founders intended.

The founders did not intend for a pri­vate bank­ing car­tel to issue our money and set our inter­est rates for us.

Accord­ing to Arti­cle I, Sec­tion 8 of the U.S. Con­sti­tu­tion, the U.S. Con­gress has been given the respon­si­bil­ity to "coin Money, reg­u­late the Value thereof, and of for­eign Coin, and fix the Stan­dard of Weights and Measures".

So why is the Fed­eral Reserve doing it?

But the CNBC arti­cle men­tioned above makes it sound like the sky would fall if con­trol of the cur­rency was handed back over to the Amer­i­can people.

At one point, the arti­cle asks the fol­low­ing question....

"How would the U.S. econ­omy then func­tion? Some­thing has to take its place, right?"

No, the truth is that we don't need any­one to "man­age" our econ­omy.
The U.S. Trea­sury could be in charge of issu­ing our cur­rency and the free mar­ket could set our inter­est rates.

We don't need to have a centrally-planned economy.

We aren't China.

And it goes against every­thing that our founders believed to be run­ning up so much gov­ern­ment debt.

For exam­ple, Thomas Jef­fer­son once declared that if he could add just one more amend­ment to the U.S. Con­sti­tu­tion it would be a ban on all gov­ern­ment bor­row­ing....

I wish it were pos­si­ble to obtain a sin­gle amend­ment to our Con­sti­tu­tion. I would be will­ing to depend on that alone for the reduc­tion of the admin­is­tra­tion of our gov­ern­ment to the gen­uine prin­ci­ples of its Con­sti­tu­tion; I mean an addi­tional arti­cle, tak­ing from the fed­eral gov­ern­ment the power of borrowing.

Oh, how things would have been dif­fer­ent if we had only lis­tened to Thomas Jef­fer­son.
Please share this arti­cle with as many peo­ple as you can. These are things that every Amer­i­can should know about the Fed­eral Reserve, and we need to edu­cate the Amer­i­can peo­ple about the Fed while there is still time.

About The Author — Michael Sny­der is the founder and edi­tor of The Eco­nomic Collapse

The views and opin­ions expressed herein are the author's own, and do not nec­es­sar­ily reflect those of Econ­Mat­ters.

Tags: American People, Banks, Bloomberg, Cartel, Cnbc, Congress, Currency, Economy, Election Year, Federal Government, Federal Money, Federal Reserve, Federal Reserve System, Feet, Government Agency, interest rates, Michael Snyder, Money Supply, Political Parties, Private Banking, Truth
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Scott Minerd: "A Wide Range of Assets Are About to Make Large Gains"

Thursday, March 1st, 2012

Scott Min­erd, Guggen­heim Part­ners CIO, dis­cusses his long-term strat­egy, invest­ing for an asset bub­ble, the risk-on trade, and short­ing Trea­suries. Also, how best to imple­ment and apply the trend, with the Fast Money traders.

From CNBC:

“The world is being flooded with liq­uid­ity,” says Min­erd in a live inter­view on CNBC’s Fast Money. “Money is com­ing out of cen­tral banks around the world.” And he adds that the Fed­eral Reserve is com­mit­ted to keep­ing rates low for an extended period of time.

With so much liq­uid­ity chas­ing return, Min­erd thinks a wide range of assets are about to make large gains. “Over the next 2–3 years, it’s risk on,” he says. And he’s plan­ning to posi­tion as follows:

- Long High-Beta Equi­ties
– Long gold and sil­ver
– Long junk bonds
– Buy art & col­lectibles
– Short Treasurys

In the near term, that sounds good for your equity port­fo­lio –but if you have a longer time hori­zon, Min­erd also makes some trou­bling comments.

Tags: 3 Years, Art Collectibles, Assets, Central Banks, Cio, Cnbc, Federal Reserve, Guggenheim Partners, Junk Bonds, liquidity, Live Interview, Money Money, Period Of Time, risk, Term Strategy, Time Horizon, Treasuries, Treasurys
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Golden Boy: Paul Brodsky on Warren Buffett

Tuesday, February 28th, 2012

War­ren Buf­fett deserves the public’s respect. His great suc­cess and appar­ent mod­esty, kind­ness and rea­son in a field replete with pro­mot­ers and chest thumpers have allowed him to stand out in our soci­ety. He is to most an hon­est bro­ker among char­la­tans, uniquely capa­ble of sep­a­rat­ing truth from fic­tion, the way it is and will always be ver­sus cock­eyed the­o­ries touted by igno­rant new­bies. He has been the most suc­cess­ful and most char­i­ta­ble financier of the last hun­dred years, and his procla­ma­tions become, ipso facto, the com­mon per­cep­tion of truth.

Buf­fett may be a sage, a wiz­ard, and an ora­cle when it comes to nom­i­nal rel­a­tive value pric­ing of finan­cial assets, but it is well worth not­ing that Buffett’s procla­ma­tions are not nec­es­sar­ily wor­thy of being con­sid­ered “fact” in mat­ters unre­lated to finance, just as the leg­endary Joe Paterno’s judg­ment seems to have been sorely lack­ing when it came to sort­ing out mat­ters unre­lated to a win­ning foot­ball program.

That has not seemed to stop Mr. Buf­fett from express­ing wide rang­ing views from tax pol­icy to the value of gold. In fact, over the last two weeks — in a Forbes inter­view, in Berk­shire Hathaway’s annual report and this morn­ing on CNBC — Buf­fett chose to com­ment on gold even though he does not have a pub­licly dis­closed posi­tion in it. We must assume his aggres­sive gold com­ments have been meant to force the price of gold lower. (We do not know why he is so inter­ested in doing so though we do have a rea­son­able the­ory, for another time). We strongly dis­agree with Mr. Buffett’s views and we thought it would be best to explore his com­ments and pro­vide our counter-arguments.

Pro­duc­tive Assets vs. True Savings

The crux of Buffett’s argu­ment is that he prefers pro­duc­tive assets (pro­cre­ative, he calls them) and that gold is not one. This implies cor­rectly that gold is a form of sav­ings. Regret­tably, the rest of his argu­ment relies on con­fus­ing the two, which leads him to two-dimensional logic that clearly fails in prac­ti­cal terms.

We would share Buffett’s pref­er­ence for pro­duc­tive assets in a Utopian world where money was scarce and credit was funded exclu­sively with organic sav­ings. In such a world sim­ply deposit­ing our sav­ings in a bank would pass-on our cap­i­tal to pro­duc­tive busi­nesses that would in turn earn the pro­duc­tive return, all while we (the saver) would retain the risk. That would be a great deal for the bank and the pro­ducer but a lousy deal for the saver.

Such a warn­ing to savers (gold hold­ers) is a ridicu­lous posi­tion to take, how­ever, in the con­text of our mod­ern global mon­e­tary sys­tem char­ac­ter­ized by over-levered cur­rency and unre­served bank credit. Though Buf­fett is cor­rect that sav­ing in the form of inces­santly inflat­ing fiat cur­rency is a fool’s game today, he is dan­ger­ously wrong in not see­ing that exchang­ing fiat cur­rency for finan­cial assets and busi­nesses with egre­giously inflated enter­prise val­ues, (via the egre­giously inflated and inflat­ing cur­ren­cies in which they are denom­i­nated), is not equally foolish.

War­ren Buffett’s argu­ment against gold falls woe­fully short of the mark because he does not acknowl­edge that there is always a role for robust sav­ings wherein the saver nei­ther suf­fers the dilu­tion­ary pain of fiat cur­rency deval­u­a­tion nor the defla­tion­ary pain of acquir­ing over-levered assets. The medium that allows the true saver to escape both trap doors is gold. It is sim­ply a form of sav­ings that can­not be diluted and the nom­i­nal prices of all things lever­aged (includ­ing finan­cial assets) will revolve around it and other scarce, unlev­ered items.

Within this con­text, we re-print and rebut Mr. Buffett’s spe­cific obser­va­tions related to gold from Berkshire’s annual report, below:

Buf­fet:

“…the sec­ond major cat­e­gory of invest­ments involves assets that will never pro­duce any­thing, but that are pur­chased in the buyer’s hope that some­one else – who also knows that the assets will be for­ever unpro­duc­tive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buy­ers in the 17th century.

This type of invest­ment requires an expand­ing pool of buy­ers, who, in turn, are enticed because they believe the buy­ing pool will expand still fur­ther. Own­ers are not inspired by what the asset itself can pro­duce – it will remain life­less for­ever – but rather by the belief that oth­ers will desire it even more avidly in the future.

The major asset in this cat­e­gory is gold, cur­rently a huge favorite of investors who fear almost all other assets, espe­cially paper money (of whose value, as noted, they are right to be fear­ful). Gold, how­ever, has two sig­nif­i­cant short­com­ings, being nei­ther of much use nor pro­cre­ative. True, gold has some indus­trial and dec­o­ra­tive util­ity, but the demand for these pur­poses is both lim­ited and inca­pable of soak­ing up new pro­duc­tion. Mean­while, if you own one ounce of gold for an eter­nity, you will still own one ounce at its end.”

QB:

Gold is not an asset and is not meant to be pro­cre­ative. Above all else it is a cur­rency, like US dol­lars, and its daily spot pric­ing reflects its exchange rates with cur­ren­cies cur­rently being issued by global cen­tral banks on behalf of their host gov­ern­ments and used as media of exchange. Gold is not cur­rently a medium of exchange (although to some peo­ple it remains a store of pur­chas­ing power vis-à-vis other cur­ren­cies cur­rently in use as exchange media). Thus, in today’s fiat mon­e­tary sys­tem gold is sim­ply poten­tial money and its spot price indi­cates the degree to which global wealth hold­ers are will­ing to hand­i­cap the pos­si­bil­ity that the future pur­chas­ing power of cen­tral bank-issued cur­rency will be diluted against it.

Gold is no more or less “life­less” than Dol­lars, Euros or Yen. One needs to lend each in order to have a return on them. (We argue one would be fool­ish to lend gold and receive inter­est denom­i­nated in other cur­ren­cies when gold is rel­a­tively scarce — and get­ting scarcer — to them.) As for being “not of much use”, yes gold is pretty useless…until it isn’t.

Mr. Buf­fet is wrong when he implies gold is a bub­ble (like Tulips). In fact, in spite of all the noise there is very lit­tle spon­sor­ship of gold today rel­a­tive to finan­cial assets. As indi­ca­tors, the value of the world’s largest gold ETF is one-fifth the mar­ket cap­i­tal­iza­tion of Apple, and total pre­cious metal expo­sure rep­re­sents just 0.15% of global pen­sion assets.

Mr. Buf­fet is again wrong in argu­ing gold needs more avid buy­ers to keep the bub­ble inflat­ing. It does not, and in fact we think it is unlikely there will be many buy­ers rel­a­tive to finan­cial asset hold­ers as time goes on. Rather, we believe the price of gold will increase in fiat terms with or with­out wide­spread sec­ondary mar­ket endorse­ment pre­cisely because cen­tral banks must increase their mon­e­tary bases to de-lever their bank­ing sys­tems, which in turn de-values the cur­ren­cies in which lever­age is denominated.

Paper claims on gold, such as futures, swaps and dubiously-backed ETFs, will fluc­tu­ate with the chang­ing sen­ti­ment of finan­cial asset investors until, one day, for some rea­son that can­not be pre­dicted, claim hold­ers begin to demand phys­i­cal bul­lion. All it will take to trig­ger “a run” will be more demand for phys­i­cal bul­lion than the amount avail­able on-hand for deliv­ery. When this hap­pens there will not be a “rea­son­able” price at which an exchange can be made. Spot pric­ing will cease to exist and all paper claims on gold will set­tle in bro­ker­age accounts at the price of the last spot trade. We think very few com­mit­ted finan­cial asset investors will own gold in any size at the pre­cise moment they will need it most.

Those that do hold phys­i­cal gold (or shares in gold min­ers) would be able to then set the exchange rate to fiat cur­ren­cies (gold price) at which they would part with their bul­lion. Any exter­nal­i­ties, such as gov­ern­ment inter­ven­tion or price con­trols that would serve to try to set the exchange rate at a lower-than-market rate, would likely be met with indif­fer­ence among bul­lion hold­ers and miner share­hold­ers. So yes, Mr. Buf­fet may be cor­rect that an ounce of gold will always be only an ounce of gold, but he does not seem to be con­sid­er­ing its exchange rate.

Buf­fet:

“What moti­vates most gold pur­chasers is their belief that the ranks of the fear­ful will grow. Dur­ing the past decade that belief has proved cor­rect. Beyond that, the ris­ing price has on its own gen­er­ated addi­tional buy­ing enthu­si­asm, attract­ing pur­chasers who see the rise as val­i­dat­ing an invest­ment thesis.

As “band­wagon” investors join any party, they cre­ate their own truth – for a while. Over the past 15 years, both Inter­net stocks and houses have demon­strated the extra­or­di­nary excesses that can be cre­ated by com­bin­ing an ini­tially sen­si­ble the­sis with well-publicized ris­ing prices. In these bub­bles, an army of orig­i­nally skep­ti­cal investors suc­cumbed to the “proof” deliv­ered by the mar­ket, and the pool of buy­ers – for a time – expanded suf­fi­ciently to keep the band­wagon rolling. But bub­bles blown large enough inevitably pop. And then the old proverb is con­firmed once again: “What the wise man does in the begin­ning, the fool does in the end.”

QB:

The great bub­ble from 1981 to 2006 was in unre­served global credit dis­tri­b­u­tion, which explains the fund­ing behind Mr. Buffett’s mar­ket psy­chol­ogy dis­cus­sion. The cur­rent bub­ble is in global base money print­ing, which has risen over 200% just since 2008 and must increase five times more from cur­rent lev­els to cover unre­served bank assets. Finan­cial assets are the direct ben­e­fi­ciary of credit expan­sion and real assets are the direct ben­e­fi­ciary of base money expan­sion. Gold is sim­ply respond­ing to the bub­ble pol­icy mak­ers are admin­is­ter­ing. We believe gold is the most under-valued and most opti­mal risk-adjusted hedge against the cur­rent bubble.

Buf­fett:

“Today the world’s gold stock is about 170,000 met­ric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Pic­ture it fit­ting com­fort­ably within a base­ball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 tril­lion. Call this cube pile A. Let’s now cre­ate a pile B cost­ing an equal amount. For that, we could buy all U.S. crop­land (400 mil­lion acres with out­put of about $200 bil­lion annu­ally), plus 16 Exxon Mobils (the world’s most prof­itable com­pany, one earn­ing more than $40 bil­lion annu­ally). After these pur­chases, we would have about $1 tril­lion left over for walking-around money (no sense feel­ing strapped after this buy­ing binge).

Can you imag­ine an investor with $9.6 tril­lion select­ing pile A over pile B? Beyond the stag­ger­ing val­u­a­tion given the exist­ing stock of gold, cur­rent prices make today’s annual pro­duc­tion of gold com­mand about $160 bil­lion. Buy­ers – whether jew­elry and indus­trial users, fright­ened indi­vid­u­als, or spec­u­la­tors – must con­tin­u­ally absorb this addi­tional sup­ply to merely main­tain an equi­lib­rium at present prices.

A cen­tury from now the 400 mil­lion acres of farm­land will have pro­duced stag­ger­ing amounts of corn, wheat, cot­ton, and other crops – and will con­tinue to pro­duce that valu­able bounty, what­ever the cur­rency may be. Exxon Mobil will prob­a­bly have deliv­ered tril­lions of dol­lars in div­i­dends to its own­ers and will also hold assets worth many more tril­lions (and, remem­ber, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still inca­pable of pro­duc­ing any­thing. You can fon­dle the cube, but it will not respond.

Admit­tedly, when peo­ple a cen­tury from now are fear­ful, it’s likely many will still rush to gold. I’m con­fi­dent, how­ever, that the $9.6 tril­lion cur­rent val­u­a­tion of pile A will com­pound over the cen­tury at a rate far infe­rior to that achieved by pile B.”

QB:

As we’ve writ­ten in the past, our pre­ferred piles (we call them “buck­ets”) are these: Bucket A is the stock of money and Bucket B is the value of all things not money. At any given point of mea­sure­ment the value of Bucket A must equal the value of Bucket B. Thus, the debate reduces to “what is money?” If one pre­sumes that fiat cur­ren­cies and unre­served bank credit have no mar­ginal cost of pro­duc­tion (elec­tronic ones and zeros), then their ter­mi­nal value in exchange must be zero. This leaves gold in the money bucket to assume the value of all things not money. Mr. Buf­fet again misiden­ti­fied gold as an asset, not as money.

Sum­mary

We think it is impru­dent to advise legit­i­mate savers to invest in lev­ered finan­cial assets. The extra­or­di­nary rel­a­tive wealth one may have amassed over the last forty years in the finan­cial mar­kets was most likely legit­imized by nom­i­nal scale that can­not be sus­tained in real terms. Such ben­e­fi­cia­ries of lever­age and infla­tion typ­i­cally built very lit­tle sus­tain­able cap­i­tal and inno­vated noth­ing. The largest ben­e­fi­cia­ries of lever­age and infla­tion had a near infi­nite fund­ing advan­tage, either near zero-rate short-term fiat cur­rency fund­ing or very low term fund­ing. Insur­ers like Berk­shire could effec­tively divert wages from their country’s fac­tors of pro­duc­tion (by charg­ing insur­ance pre­mi­ums) and rein­vest those wages by pro­vid­ing financ­ing to busi­nesses that would main­tain their pric­ing power (through strong brand­ing or demand inelas­tic­ity). That great fund­ing advan­tage is now gone and Mr. Buf­fett does not seem too happy about it.

The nar­row gap sep­a­rat­ing wage growth and asset price growth had to widen fol­low­ing the demise of Bret­ton Woods. Mr. Buf­fett may have known about this oppor­tu­nity ear­lier and bet­ter than almost any­one else because his father, (Howard Buf­fett, US Con­gress­man from Nebraska), was out­spo­ken in aggres­sively sup­port­ing gold and a fixed exchange cur­rency sys­tem. It would be coun­ter­pro­duc­tive and beyond our area of study to try to under­stand what psy­cho­log­i­cal impulse might com­pel Mr. Buf­fett to pur­sue and achieve life­long finan­cial suc­cess in a man­ner directly con­trary to his father’s views on the value of gold and paper cur­ren­cies. So we can only guess whether his astound­ing suc­cess in con­sis­tently posi­tion­ing a lever­aged infla­tion port­fo­lio has been the result of a sound pre-meditated strat­egy passed down from his father or has merely been very ironic.

Mr. Buffett’s moti­va­tions are not impor­tant. He is rich and we think he will always be rich in rel­a­tive terms because most wealth hold­ers will remain com­mit­ted to finan­cial assets. Nev­er­the­less, we sus­pect Mr. Buf­fet is aware that his wealth is about to be greatly deval­ued in real terms, just as he cor­rectly fore­saw the fate of dot-com bil­lion­aires who held their out­lets for unre­served credit too long (in the form of cor­po­rate shares). Fur­ther, we think Mr. Buf­fett must be aware that the pro­cre­ative assets he touts are cur­rently priced at mul­ti­ples of their future nom­i­nal cash flows and dis­counted for almost 0% inter­est rates, ensur­ing their future pur­chas­ing power will be destroyed in an infla­tion­ary envi­ron­ment no mat­ter how much rev­enue growth they produce.

We believe true savers across the world not beholden to West­ern finan­cial assets under­stand or will soon under­stand the dif­fer­ence between rel­a­tive nom­i­nal returns and absolute real returns. They do (or will) not care about the views of very suc­cess­ful lever­aged money chang­ers. Yes, an inert rock today will be an inert rock tomor­row. But it will be an even scarcer inert rock tomor­row rel­a­tive to the fiat cur­rency in which it is priced (same for fine art). Lev­ered pro­duc­tive assets will lose their value against both unlev­ered scarce inert rocks and unlev­ered inelas­tic com­modi­ties. The only things they will out­per­form in a period of great mon­e­tary infla­tion are bonds and cash (both also levered).

Mr. Buf­fett is no doubt bril­liant but we respect­fully dis­agree with his sense of real value. We find inspi­ra­tion in the good sense and gra­cious­ness of Sir John Tem­ple­ton who became fab­u­lously wealthy invest­ing in cap­i­tal build­ing enter­prises and always seemed to main­tain an objec­tive and flex­i­ble invest­ment perspective.

Kind regards,

Lee Quain­tance & Paul Brod­sky
pbrodsky@qbamco.com

(h/t: Barry Ritholtz, The Big Pic­ture)

Tags: Berkshire Hathaway, Brodsky, Buffett Warren, Charlatans, Cnbc, Financial Assets, Football Program, Honest Broker, Joe Paterno, Legendary Joe, Mr Buffett, Price Of Gold, Proclamations, productive assets, Relative Value, Thumpers, True Savings, Truth From Fiction, Value Of Gold, Warren Buffett
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Doug Kass Calls for a Correction

Friday, February 24th, 2012

Hedgie Doug Kass was on CNBC's Fast Money last night, and is call­ing for a mod­est cor­rec­tion (5–6%ish), out­lin­ing his rea­sons in the video below. Quite a few of his 'tech­ni­cal' rea­sons are based on points I've been mak­ing in the past week – weak­en­ing breadth, and trans­ports break­ing down for exam­ple. (iron­i­cally breadth has improved today) Before you dis­miss his com­ments, Doug has been on a roll this year as he was one of the few enter­ing the year who called for poten­tial all time highs in the S&P 500 and a big rally in the financials.

Dis­clo­sure Notice

Any secu­ri­ties men­tioned on this page are not held by the author in his per­sonal port­fo­lio. Secu­ri­ties men­tioned may or may not be held by the author in the mutual fund he man­ages, the Pal­adin Long Short Fund (PALFX). For a list of the afore­men­tioned fund's hold­ings at the end of the prior quar­ter, visit the Pal­adin Funds web­site at http://www.paladinfunds.com/holdings/blog

Tags: All Time Highs, Breadth, Cnbc, Disclosure Notice, Doug Kass, Money, Mutual Fund, Personal Portfolio, Portfolio Securities, Rally
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Jim Rogers: "Let Greece Go Bankrupt"

Friday, February 17th, 2012

"Let Greece go bank­rupt, let all the peo­ple who bank­rupt go bank­rupt, and then you can start over, you reor­ga­nize the assets and start over," Jim Rogers, CEO of Roger Hold­ings, told CNBC. "Until that hap­pens, this is going to be an on-going end­less dis­cus­sion," he said.

Source: CNBC.com

Tags: Assets, Ceo, Cnbc, Greece, Jim Rogers, People
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Dow 15,000: Is this an Outlier Call or Consensus?

Friday, February 17th, 2012

Sources:
Feb. 13, 2012 — (Bloomberg) — Jeremy Siegel, pro­fes­sor of finance at the Uni­ver­sity of Pennsylvania's Whar­ton School, talks about the out­look for U.S. stocks, and his call for the Dow to reach 15,000 by the end of this year, and pos­si­bly even 17,000 over at least the next two years, with Trish Regan on Bloomberg Television's "Street Smart."

http://www.bloomberg.com/video/86292500/

Mon 13 Feb 13 — Is it too soon to call for a Dow 15,000 based on an arti­cle in Barron's over the week­end? Jim Paulsen, Wells Cap­i­tal Man­age­ment shares his thoughts. | 04:06 PM ET

http://video.cnbc.com/gallery/?video=3000073016

Feb. 13, 2012 — Bob Doll, of Black­Rock, dis­cusses the like­li­hood that the Dow will hit 15,000 in 2012.

http://video.cnbc.com/gallery/?video=3000072922

Doug Kass says bull­ish sen­ti­ment is just to preva­lent period. And he points to the fol­low­ing:
– Sur­veys show­ing a sub­stan­tial rise in bulls and decline in bears over the last cou­ple weeks
– Hedge funds have increased net long expo­sure
– Indi­vid­ual investors are putting money into domes­tic equity funds
– Famed bear Nouriel Roubini is opti­mist on the mar­ket
All told, that would sug­gest the next big move should be lower.

http://www.cnbc.com/id/46342627

Tags: Barron, Blackrock, Bloomberg Television, Bob Doll, Bullish Sentiment, Cnbc, Couple Weeks, Domestic Equity Funds, Doug Kass, Hedge Funds, Individual Investors, Jeremy Siegel, Likelihood, Nouriel Roubini, Optimist, Substantial Rise, Trish Regan, University Of Pennsylvania, Wells Capital Management, Wharton School
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PIMCO's El Erian: "Too Early to Declare Victory"

Wednesday, February 8th, 2012

PIMCO's Mohamed El-Erian vis­ited with CNBC this morn­ing, and offered his usu­ally inter­est­ing thoughts on the macro econ­omy and invest­ment themes. Inter­est­ingly, he touted pre­cious met­als in this inter­view (rel­a­tive to equi­ties) which is the first time I've really heard him tout them.

8 minute video – email read­ers will need to come to site to view:

• This year's mar­ket gains will need more than an improv­ing eco­nomic pic­ture and investor will­ing­ness to shrug off the Euro­pean debt cri­sis, Pimco's Mohamed El-Erian said. "It's too early to declare vic­tory," the co-CEO for the world's largest bond fund told CNBC in an inter­view Tuesday.
• He out­lined three issues that must be addressed if the 2012 rally is to continue:

1) Geopo­lit­i­cal risk that remains both in Europe and the Mid­dle East.

2) A "hand­off to more sus­tain­able poli­cies" beyond the mon­e­tary eas­ing from the world's cen­tral banks.

3) Get­ting "long-term investors" off the side­lines and putting their money to work in riskier assets than bonds.

• As those head­winds remain, El-Erian advises investors to ded­i­cate a smaller por­tion of their port­fo­lios to stocks and a larger allo­ca­tion toward pre­cious met­als. On bonds, he advo­cates shorter dura­tion, with a tar­get of seven years or less, which is where the Fed­eral Reserve has focused its debt-buying efforts.
• "They're both will­ing and able," El-Erian said of the Fed and other cen­tral banks and aggres­sive mon­e­tary poli­cies. "The issue is the effec­tive­ness. Even the cen­tral bankers are begin­ning to announce that it is not just about the ben­e­fits, it's also about the costs and risks."
• "The cen­tral banks are absolutely com­mit­ted, but we must not extrap­o­late that they will remain highly effec­tive," he con­tin­ued. "They need help. They are a bridge and they have to be a bridge to some­where. So far the other gov­ern­ment agen­cies are on the sidelines."
• "There's more to do," El-Erian said. "It's crit­i­cal that noth­ing be done to inter­rupt this won­der­ful cycli­cal bounce. We want the cycli­cal bounce to trans­late into a sec­u­lar bounce, because that's what the mar­kets need to sus­tain the won­der­ful returns so far this year."
• El-Erian con­trasted the sit­u­a­tion in Europe from the Lehman Broth­ers col­lapse in 2008, and said that while cen­tral banks "have become much more proac­tive" with refi­nanc­ing oper­a­tions, the cur­rent econ­omy may not be as pre­pared for eco­nomic shock. Regard­ing the "Lehman moment," El-Erian said, "If you define it as the econ­omy being able to take the shock, that's in fact a higher risk because we are in a worse place than we were in '08."

Dis­clo­sure Notice

Any secu­ri­ties men­tioned on this page are not held by the author in his per­sonal port­fo­lio. Secu­ri­ties men­tioned may or may not be held by the author in the mutual fund he man­ages, the Pal­adin Long Short Fund (PALFX). For a list of the afore­men­tioned fund's hold­ings at the end of the prior quar­ter, visit the Pal­adin Funds web­site at http://www.paladinfunds.com/holdings/blog

Tags: Bond Fund, Central Banks, Cnbc, Debt Crisis, Handoff, Headwinds, Improving Economic Picture, Investment Themes, Macro Economy, Mohamed El Erian, Monetary Policies, Other Government Agencies, PIMCO, precious metals, S Central, S Market, Sidelines, Sustainable Policies, Target, Term Investors
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2012 is "Nothing Like 2008" — O'Neill, Faber, Siegel, Dreman

Friday, February 3rd, 2012

World Eco­nomic and Equity Mar­kets Out­look — Week 5, Feb­ru­ary 2012

Goldman's Jim O'Neill chair­man of Gold­man Sachs Asset Man­age­ment, told CNBC, "we came into the year with peo­ple fear­ing 08 if not worse and the evi­dence from all over the place is that it is noth­ing like 08, at the core of the euro zone is that Ger­many appears to be accel­er­at­ing."

http://video.cnbc.com/gallery/?video=3000070038

Marc Faber says Stocks may'' dis­ap­point'' after a'' strong open,'' in the first half of this year, Marc Faber, pub­lisher of the Gloom, Boom and Doom report, said in a Bloomberg tele­vi­sion interview...

http://www.bloomberg.com/video/85476510/

Jeremy Siegel, Whar­ton School pro­fes­sor of finance, dis­cusses why sees this mar­ket as a his­toric buy­ing oppor­tu­nity for investors

http://video.cnbc.com/gallery/?video=3000071052

David Dre­man, well known con­trar­ian investor, says that stocks are the cheap­est they've been since 1982, the best he's seen in 30 years.

http://video.forbes.com/fvn/inidaily/david-dreman-contrarian-investment-strategies-pt1

Tags: Bloomberg Television, Boom, Cnbc, Contrarian Investment Strategies, Contrarian Investor, David Dreman, Doom, Euro Zone, Forbes, Fvn, Gloom Boom And Doom Report, Goldman Sachs, Goldman Sachs Asset Management, Jeremy Siegel, Marc Faber, Nbsp, O Neill, School Professor, Stocks, Television Interview, Wharton School
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Outlook for Gold, Equities and Earnings, and USD — Borthwick, Merk, Gartman, Ortel

Wednesday, February 1st, 2012

Dura­tion: 8:40 mins

A must see com­pi­la­tion of inter­views with Faros Trading's Dou­glas Borth­wick, Axel Merk, Den­nis Gart­man, and New­port Part­ners' Charles Ortel, who share their not-so-basic, uncon­ven­tional thoughts on gold, equi­ties and earn­ings qual­ity, and the U.S. dollar.

Sources:

Charles Ortel on BNN, Jan­u­ary 26, 2012

Dou­glas Borth­wick on Bloomberg — Jan­u­ary 26, 2012

Axel Merk on Bloomberg — Jan­u­ary 26, 2012

Den­nis Gart­man on CNBC — Jan­u­ary 31, 2012

Tags: Axel, Bloomberg, Bnn, Cnbc, Compilation, Dennis Gartman, Dollar, Duration, Earnings Quality, Gold Equities, Merk, Newport Partners, Ortel, Outlook
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Eurozone Remains In Jeopardy — Rogers, Soros, Altman, Lagarde, Weinberg

Tuesday, January 31st, 2012

Per­spec­tives from the Euro Cri­sis, Week 4, Jan­u­ary 2012

For the com­plete inter­views, visit the fol­low­ing sources:

Jim Rogers:
Jim Rogers — Jan­u­ary 30, 2012 — CNBC.com — No coun­try will exit the euro zone this year but a solu­tion to the debt cri­sis remains elu­sive, Jim Rogers, CEO and Chair­man at Rogers Hold­ings, told CNBC Mon­day. Rogers elab­o­rated that because there are around 40 promi­nent elec­tions hap­pen­ing around the world this year, that noth­ing is going to be allowed to hap­pen this year, how­ever, he is not so con­fi­dent about 2013, or 2014.

George Soros:
George Soros — Jan­u­ary 25, 2012 — CNBC.com — Despite some improve­ment in the euro zone cri­sis after the Euro­pean Cen­tral Bank's recent actions, bil­lion­aire investor George Soros told CNBC on Wednes­day that more is needed to safe­guard the region in the face of a pos­si­ble Greek default and ris­ing national debts.

Roger Alt­man:
Roger Alt­man — Jan­u­ary 27, 2012 — CNBC.com — The turn­ing point in the Europe cri­sis was when the ECB made a very American-like step by lend­ing 450-billion euros and pro­vid­ing liq­uid­ity to the bank­ing sys­tem, says Roger Alt­man, Ever­core Partners.

IMF's Chris­tine Lagarde:
Chris­tine Lagarde — Jan. 27 (Bloomberg) — Inter­na­tional Mon­e­tary Fund Man­ag­ing Direc­tor Chris­tine Lagarde dis­cusses Greece's progress on struc­tural over­hauls and the role of the IMF in avoid­ing a default. She speaks with Maryam Nemazee and John Fra­her on Bloomberg Television's "The Pulse" from the World Eco­nomic Forum's annual meet­ing in Davos, Switzer­land, telling them that her crit­i­cal objec­tive at this moment is to get Greece debt under con­trol, down to a level that is equal to 120% of GDP. (Source: Bloomberg)

Carl Wein­berg:
Carl Wein­berg — Jan. 30 (Bloomberg) — Carl Wein­berg, founder and chief econ­o­mist at High Fre­quency Eco­nom­ics, talks about a Euro­pean Union lead­ers' sum­mit in Brus­sels, that starts today and the euro zone debt cri­sis. Wein­berg told Betty Liu on Bloomberg Television's "In the Loop," that the EU needs to step up and fund the EFSF (Euro­pean Finan­cial Sta­bil­ity Fund) to the tune of an addi­tional 300-billion euros to match the fund­ing agree­ment reached by the ECB, because even the big-name banks like Uni­credit, are strug­gling, and this is the only way to safe­guard the Euro­pean bank­ing sys­tem. In addi­tion, he added they are spend­ing too much time address­ing the wrong issues. (Source: Bloomberg)

Tags: Banking System, Bloomberg Television, Chief Economist, Christine Lagarde, Cnbc, Critical Objective, Davos Switzerland, Debt Crisis, Euro Zone, European Union Leaders, Evercore Partners, George Soros, High Frequency Economics, International Monetary Fund, Jim Rogers, Maryam, National Debts, Nemazee, Roger Altman, Soros George, Stability Fund, Weinberg, World Economic Forum, Youtube
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