"The opposite of success is not failure. It is name dropping. People go to Davos for name dropping....it was very depressing for me to go there to realize that these people have no clue." -- Nassim Taleb on Bloomberg Television, 2/17/10
Dear All,
Oil is above $90 per barrel, a 26-month high. Copper and cotton are at all-time highs. Coffee is at a 13 year high. The commodities markets are on fire. Curiously though, the CPI measures benign inflation. Remarkable.
John Williams of the indispensable Shadowstats pointed out last week that the often touted figure of $2,391 per troy ounce as the inflation adjusted equivalent of the earlier (January 1980) all-time gold high of $850.00 per troy ounce is a fib. That computation utilizes the official CPI methodology of dollar adjustment. Shadowstats' non-fiction version of the index -- the SGS-Alternate-CPI instead places the former gold high at $7,840 per ounce in inflation adjusted dollars. Likewise, the all-time high price for silver of $49.45 per troy ounce (also reached in January 1980 and yet to be matched even in nominal terms) would according to official measurement need to hit $139 per troy ounce in inflation-adjusted dollars to reach its former high. Shadowstats places the actual figure at $456 per troy ounce.
Let the foregoing serve as a warning to investors counting on the yield on TIPS* -- tied to the "official" CPI to honestly compensate them for the effects of inflation.
It would have been helpful if the New York Times addressed the real issues here. NYTimes: A Secretive Banking Elite Rules Trading in Derivatives I'm a subscriber but sometimes wonder why. Notwithstanding the provocative yet appropriate headline, the Times appears to have little interest in going any further in earnestly probing the dirty dealings of these banks. The Fourth Estate serves as enabler of nefarious banking interests. The internet is the now the world's relevant source of information. One needs to be cognizant and skeptical of sources of course, but only marginally more so than with conventional print media.
Former OMB Director David Stockman had some pointed comments last week about the state of our financial markets: "These are pure casinos, they are not capital markets, they are not adding to the productive capacity of our economy, they simply are a bunch of robots trading with each other by the millisecond as a result of the Fed giving them zero cost overnight money, and giving them all kinds of hand signals on what to front-run."
Lexapro Alert: Fungible (fun'-gi-bil): Capable of mutual substitution; Being of such a nature that one part or quantity may be replaced by another equal part or quantity in the satisfaction of an obligation.
"Goldman repaid the TARP loans with funds it procured days earlier from the Federal Reserve. Then, over the ensuing months, Goldman recapitalized its balance sheet by selling tens of billions of dollars of mortgage-backed securities to the Fed." Eric Fry: Outing Ben Bernanke
Mark Madoff's suicide leaves unanswered the question of whether he was aware of his father's awful fraud, which he claimed he was not. What is not subject to question is that subsequent to the fraud's exposure he made no offer to disgorge himself of the many $millions in blood money that his father's criminal operation steered to him.
Sound familiar? I've been emphasizing this (along with the dreadful condition of public pension funds) for the past two years while mainstream media has been asleep (So too was the municipal bond market). The enormity is slowly sinking in. Meredith Whitney nails it on 60 Minutes: "The most alarming thing about the state issue is the level of complacency...It has tentacles as wide as anything I've seen. I think next to housing, this is the single most important issue in the United States and certainly the largest threat to the U.S. economy." CBS 60 Minutes: Day of Reckoning
Unfortunately many municipal bond investors haven't understood the credit risks they've taken. Municipal bond prices have plummeted hard at all but the shortest maturities. So much for the quaint notion of clipping coupons for tax free income (while the market value of your capital erodes). U.S. Treasuries aren't far behind. The perception of which assets are "safe," "risky" and speculative" will change sharply over the next several years. Municipals and U.S. Treasuries are in fact a high risk/minimal reward proposition.
The trend:
NYTimes: Sidestepping the U.S. Dollar, a Russian Exchange Will Swap Rubles and Renminbi
The attack on the vehicle carrying Prince Charles and his wife, Camilla in London by a crowd yelling "Off with their heads" is noteworthy to those familiar with European history. This assault on British monarchy would have been unthinkable only a few years ago and reveals the undercurrent of populist European rage discussed in goldmap: Nigel Farage.
Europe's drama is our drama. Most of Shakespeare's themes are being played out on the European continent -- a geography brought to its knees by an arrogant and self-assured political class, enabled by a population that continues to insist that government provide an ever increasing quantity of things without a corresponding amount of productivity in return. What is it that to this day the populations of failed socialist European states are protesting by and large? -- neither the incessant stupidity nor heinous deceit of the political class that led them there but rather, the fact that the free lunch is no more. The alluring but false promises of socialism die a slow death. From 'Global Speculations' on Dec. 12th:
" [Also disturbing are the ideas behind the riots. The protesters are not protesting for peace or civil rights like their 1960s predecessors. They are not protesting the draft or other form of forced compliance with government policy or edict. They are not rebelling. Not at all. They are protesting for exactly the opposite. They are setting shops ablaze to maintain the status quo. LA had Race Riots. London and Athens have Largess Riots.]
What is potentially more disturbing is the reaction from those not protesting. There are louder and louder calls from both sides of the political spectrum for the government do something to maintain order. They want the government to be more aggressive with the protesters. This is disturbing because unrest and duress are often stepping stones to tyranny and oppression. Tyranical governments often rise in response to public outcry for calm and order.[ ]
In both Athens and London, mobs are taking to the streets to ensure that others are required to pay for their peace of mind. In Athens, the rioters are burning cars and buildings to ensure that the Greek government will continue to squeeze the productive or cook the books or do whatever else is required so that the recipients of government largess can stay on the gravy train which is the only profitable train in Greece."
In the Euro the misguided elitists created their pièce de résistance, a financial Frankenstein larger than the sum of its ailing parts. Having cooked their books to gain entry to the European Union, member states are now inexorably bound by their circular fraud. Germany now sits with near 20% of its GDP invested in EU debt. The United Kingdom, though a non-participant in the common currency is through its financial institutions a prodigious EU creditor, particularly to Ireland. The British pound is in its own right a disaster. The Bank of England is on a parallel track with the Fed in attempting to inflate its way through the debt collapse and deficits by debasing its currency.
The drama now playing in the European capitals is coming to Broadway and the U.S. production will be considerably more spectacular. The majority of the U.S. republic's member states are insolvent and as with EU members, lack the ability to print their own currencies. If one member withdraws others will follow.
Gold...
Another report of tightness in the physical markets: NepalNews: Govt. to resume gold imports with silver and gold in short supply
Forget about the stock market -- keep your eye on the U.S. Treasury market. It's in critical condition. If it breaks down you will see capital flow out of U.S. dollars to gold. Mainstream economists will tell you just the opposite -- that higher interest rates are negative for gold. They've got it wrong, as usual. They have no street smarts.
I keep reading and hearing that gold "has no utility." This along with other trite platitudes concerning gold abound. I suppose for the purpose of keeping the body warm paper currencies have more utility. There are famous photographs of Weimar Germans burning reichmarks in their fireplaces because it was less costly to burn than trade for its value in firewood.
Gold's monetary role is to serve as both a store of wealth and as the sole currency that is not a debt. These are no small attributes. In such capacities gold enjoys incomparable longevity and the most powerful brand name. Where no paper currency has yet survived more than a few hundred years without failing, gold's perfect 5,000 year track record of non-default stands apart. That would seem to me to be plenty of utility but perhaps because it cannot be refined into products that power machines as can a barrel of oil, or used in industry to the extent of copper that people scratch their heads about gold. Perhaps this is because the head scratchers have never had to cross a border under duress with their life savings on their person. Perhaps they don't realize that they'd be able to carry very few barrels of oil over the border with them, or at $4. per pound (vs. gold's $1,380 per ounce) very little copper. It is probable that they have never considered that diamonds, which as with gold enjoys high concentrated value in small volume -- cannot serve as currency because no two diamonds are alike and cannot be melted to create uniformity. Perhaps too it escapes them that the durability of gold has no match in cotton or pork bellies or copper. For its aforementioned attributes, gold -- one imagines, would offer a smuggler or capital allocator plenty of utility -- but these are lessons borne most often from necessity and experience, not from CNBC.
At a holiday party this week an investment manager when asked advised me that precious metals holdings comprise less than two percent of client accounts. It warmed my heart.
Happy Holidays!
Jeff
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* Treasury Inflation Protected Securities