"There is for example the risk of a misinterpretation of our duties. It is not currently our job now to dilute the debts of an irresponsible government." -- Dallas Fed President Richard Fisher, 4/13/11
Dear All,
The Dallas Fed president's protest notwithstanding, dilution of debt is precisely the course on which the US Federal Reserve will remain. Fisher went on to say, "In the past, allowing budget deficits to be financed by central banks has always led directly to the abyss."
The Fed has examined the various alternatives and chosen the abyss as the most appealing.
What bunk: Moody's: Deficit-Reduction Plan May Mark Positive Turning Point
There is no political will for this as the meaningless 11th hour 'budget deal' demonstrated. Moody's and S&P have the credibility of pedophiles at a Wiggles concert:
Congressional Report: Credit Rating Agencies Triggered Crisis
Levin Report: Moody's, S&P Caved to Mortgage Pressure by Goldman, UBS
As you see, democracy is busting out all over: AP: Egypt blogger gets 3 years for criticizing army.
The western press lives on a planet I am not familiar with. The big winner in the democracy love-in that has swept the Middle-East and North Africa is Al-Queda.
Not content with the number of futile combat operations it is presently engaged in the U.S. has designated Libya to screw up. The lessons of Vietnam are that there were no lessons.
This thought provoking piece may alter your perception about the Libyan "Rebels" and more generally, what is really behind the insurgency. It is a curious fact that in the midst of the chaotic and bloody business of attempting to overthrow a dictator, the rebels were able to set up a central bank. Ellen Brown: "Libya: All About Oil, or All About Banking?" Military operations and war are rarely about ideology or morality. They are always about money.
It should have been obvious to any observer as early as 2003 that the United States never had any intention of leaving Iraq -- ever. Gates: U.S. troops could stay in Iraq for years.
Soon after the U.S. invaded Iraq plans were put into place to install there the largest U.S. embassy facility in the world. The 27 building complex beside the Tigris River would encompass 104 acres (the size of 80 football fields) and facilitate 5,500 Americans and Iraqis. The cost of the now completed embassy complex reportedly exceeds $700 million but the cost grew markedly over the years and no final figure is trustworthy. The complex is about the size of Vatican City -- ten times the size of a typical US embassy and six times the size of the UN complex in New York. It is effectively a small city with its own defense force and self-contained power and water. In addition to its assortment of apartment and office buildings it has its own school, a movie theater, tennis courts, barber and beauty shops, a food court, gym facilities and the biggest swimming pool in Iraq. The entire complex is surrounded by a bomb-proof, fifteen foot thick wall.
In the face of the foregoing, not to mention the formidable oil resources involved -- serious people actually believe that the U.S. presence in Iraq was intended to be temporary.
South of the border ...
While eyes are on the Middle-east and North Africa there is reason for concern closer to home. In the current issue of his superb (and deadly accurate in its geopolitical forecasting over the past 15 years) 'U.S. Early Warning Report,' Richard Maybury addresses potential trouble in Mexico, in good part ignited by the same U.S. Fed that sparked uprisings elsewhere:
"What scares me the most is food shortages escalating the Mexican Civil War...If rising food prices escalate the war in Mexico, as they have the war in Libya and elsewhere, we have no idea what will be coming across our southern border...We could suddenly see hordes of refugees and gangs streaming across the border while the US armed forces, scattered all over the world, can give us little help...Remember, a gang of cutthroats in Mexico can drive from Juarez to Minneapolis in 22 hours...I cannot say loudly enough that I think the Mexican Civil War is the single greatest threat to America." [Sic]
One of the issues discussed here that has engendered much reaction is my aversion to Exchange Traded Funds (ETF's). Casey Research: Are ETFs Really Safe?
The ETF is only the latest Wall Street creation that is assumed to be perfectly safe until one day one blows up and everyone at once realizes there's a big problem. Collateralized debt obligations (CDO's) are the most obvious example but let's not forget that the entire money market fund industry had to be saved from collapse by the Feds. Two common characteristics among the variety of Wall Street products that have imploded are:
a) The lure of convenience
b) Failure to identify derivative risk
Other than the matter of profiting, the point of owning silver and gold is to opt out of the financial system. That system is in the midst of slow-motion breakdown -- overwhelmed by naked OTC derivatives with counter-parties that are systemically backstopped by a central bank that is forced to inflate currency in order to prevent a full collapse. Gold and silver ETF's are part of that system. The fact that an ETF is a publicly traded entity does not mean that its opaque derivative dealings are in any manner public. The gold or silver ETF's are promoted as convenient ways to buy gold and silver and "avoid the hassles" of security, storage fees etc. The 'conveniences' though accrue more to the fund than the shareholder, a good portion of whose gold and silver may rather inconveniently not be owned and stored as assumed. Hardly a convenient way to own physical gold or silver, ETF's are mere OTC derivative conduits. It is quite plausable that under certain conditions ETF shareholders could wind up as unhappy general creditors of busted entities. Incurring investment risk without compensation is a no-no. Avoid ETF's.
While the physical silver and gold ETF's (GLD and SLV are the largest) may be particularly egregious, read your prospectuses and you will find that wide management discretion to enter into derivative contracts is provided in almost every type of ETF.
Also to be avoided -- as an inflation hedge -- are TIP's ('Treasury Inflation Protected Securities'). TIPS are indexed to the fraudulent CPI and will drastically under-compensate holders for actual inflation. I see nobody writing about this.
Two MIT professors, Albert Cavallo and Robert Rigobon have launched the Billion Prices Project, a non-fiction alternative to the official government inflation index. Particularly compelling is its use of continually updated real-time price data, as opposed to the largely fabricated CPI 'basket' of goods, which is tweaked, hedonicized, massaged and substituted such that it conforms to Bernanke's "benign" inflation pronouncements:
"..our data are collected every day from online retailers using a software that scans the underlying code in public webpages and stores the relevant price information in a database. The resulting dataset contains daily prices on the full array of products sold by these retailers. Our data include information on product descriptions, package sizes, brands, special characteristics (e.g. “organic”), and whether the item is on sale or price control." MIT Inflation project
As is the case with the Shadowstats 'SGS Alternative CPI,' the MIT measure is already reporting sharply higher inflation than the CPI.
Lexapro Alert... RollingStone: The Real Housewives of Wall Street 'Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?'
The trend...
India’s gold demand to rise over 1,200 tonnes by 2020: WGC
CNBC: Toxic Dollar: Why Nobody Seems to Want US Currency
EconomicTimes: BRICS credit: Local currencies to replace dollar
Reuters: Central banks turned net buyers of gold
Bubble-talk....
"If it were a bubble a lot of people would have gold. The whole world would be trading gold 24 hours a day. But I don't think it's really a bubble. I think gold is maybe cheaper today than it was in 1999, when it was $252." -- Marc Faber, on CNBC, 4/8/11
International Forecaster's Bob Chapman observed this week: "At the recent meeting of wealth managers in Singapore, 200 attendees were told that the Dow has lost 80% versus gold and silver over the past 11 years. When asked how many attendees had more than 5% of their assets in gold no one raised their hand. Does that sound like a bubble to you?"
These are "wealth managers," mind you (although for the most part they collectively engage in the wholesale mis-management of assets). The public is still not participating in the best performing asset class of the decade. Instead they are glued to CNBC and its parade of "stock jockeys."
Gold, silver and the shares...
Just in -- Bloomberg is reporting that The University of Texas has taken delivery of $1billion worth of gold bullion: Bloomberg: Texas University Holds $1 Billion in Gold Bars. The acquisition by the country's second-largest university endowment represents 5% of its assets. It is highly noteworthy that the University has chosen to hold its gold bars in physical form and not make an ETF or other derivative investment. The endowment is willingly incurring storage fees in order to have physical possession of some 20 tonnes of gold. This reflects a sea change in the perception of physical gold's appropriateness in institutional portfolio allocation and is precisely the type of shift we have been anticipating. Institutions are sheep. It will not take very much increased incremental demand from institutions to ignite the price.
Investors in the shares of silver and gold companies this week were left scratching their heads as they watched both metals make new highs while the stocks merely shrugged. I draw your attention first to this excellent piece by Dan Norcini which explains some current short-term distortions in the correlation between the metals themselves and the shares. I also want to emphasize that while that positive correlation remains very much intact, this is not necessarily the case on the daily or monthly charts. Historically, large capitalization precious metal stocks move at two to three times the percentage rate as the price movement in the metals themselves while smaller companies move at considerably greater multiples.
Notwithstanding the superb performance of both the metals and the stocks over the past couple of years, the shares have actually lagged in their historical out-performance of the metals -- so much so that they are now dirt cheap in my view. Anyone who had the profitable pleasure of having purchased silver and gold stocks two years ago may be surprised to hear this, but it is so. Below is a chart provided by Dan showing the ratio of the HUI gold stock index to gold (Please click to enlarge). Note the sharp acceleration in the gold:share ratio in the early years of the bull market from 2002 through 2004.
I believe that we will shortly enter another phase of that type of performance in the shares.
My best,
Jeff