"[T]his performance of the gold stocks as a group is the least commented on, and yet most remarkable transformation of the year. To go from virtually the bottom of the pack, to virtually the top of the pack, in a matter of less than two months, that’s an extremely rare event for equity markets. So it’s telling you something.” - Don Coxe, BMO Capital Markets, 9/27/12
Dear All,
As abysmal as yesterday's GDP report of 1.25% growth may have been, it was grossly overstated. As Shadowstats' John Williams reminds, skewed government statistics beget skewed government statistics. One of the components of an accurate calculation of GDP is of course an honest measure of inflation. Williams, who uses the Labor Department's unsanitized 1980 CPI basket in his calculations reports the latter at 9.02% and the former at negative 2.15%.
"All the talking heads and writers are on a tear saying QE will do nothing, emphasizing deflationary scenarios both from within the community to financial TV. Those that take that position are raving morons." - James Sinclair, 9/25/12
In referencing the intellectual capacity of the parade of experts regularly served up on broadcast television and in print, Jim Sinclair engages perhaps in a bit of hyperbole. "Uninformed and terminally linear in their thinking" is how I would have described them. Forget "out of the box" -- these folks operate deep within a ruminative crate that confines any analytical curiosity.
The predominant view is that through its printing binge the Fed is attempting to stimulate employment and economic activity. Balderdash! QE's raison d’être? -- to liquefy an overleveraged banking system whose rot is amplified by $trillions of non-clearable derivative contracts. Four years into the crisis the financial system is still flirting with collapse. Averting a deflationary death spiral is the Fed's real agenda, cloaked in conversation that its decision making is driven by economic statistics and labor reports. Mr. Sinclair's point is that this tidal wave of liquidity (which will prove to be entirely un-sterilized) will have a profound effect on the purchasing power of the U.S. dollar. Americans are going to experience the worst inflation of their lifetimes and no group will be more surprised than the experts.
In the parallel universe of interest rate policy the Fed is also a prisoner of debt levels. Its statement on the extension of its zero interest rate policy is more confession than doctrine. Here too it is compelled to fight market forces demanding increased compensation for risk and to corrupt the yield curve; for were the Fed to permit Treasury coupons to seek their natural level the financial infrastructure would likewise implode.
Pushed one credit cycle too far, the banking system cannot clear this debt nominally -- and here is one key to understanding why these monetary injections cannot be "offset" -- The debt cannot be written off. In fact, since 2008 the aggregate asset writedowns and liability revaluations at TBTF institutions have been virtually non-existent relative to the gap between carried values and reality. Banking analysts by and large will argue otherwise but most of these people are living in the same crate as the media pundits referenced above. Think back to AIG's collapse when the Fed absorbed $62 billion in toxic derivatives onto its balance sheet at par. Writing down AIG's obligations would have collapsed the counterparties to those obligations (Goldman Sachs most notably). You will recall too that TARP as originally sold to Congress and the American public was to encompass asset sales. But asset sales reveal market values which -- had they taken place -- would have established benchmark pricing and forced revaluation (i.e. writedowns) of similar assets held by other institutions. So the sales were canceled (which is to say they were never truly contemplated in the first place) and the garbage remained on the Fed's books. Through currency dilution the Fed is reducing debt principal in real terms. Simultaneously it is suppressing the price of credit by creating artificial appetite for Treasuries and mortgage securities through its own purchases and those of the TBTF banks it is liquefying.
Nowhere is the unwillingness/inability to restate assets and risk more blatantly revealed than in the quarterly derivative reports of the U.S. Office of the Comptroller of the Currency where in spite of the minor inconvenience of the 2008-2012 financial crisis, the stated risks of the five largest banks have barely budged . Of course this might seem understandable given the asinine leverage employed. Goldman Sachs for example had $1 of capital for every $1,990 in notional OTC derivatives on its books as of June 30th. With 2000:1 leverage, just a slight move of the needle on its mark would come at the price of wiping out the entirety of the firm's equity, but then again -- such are the priviledges that Fed backstopped/TBTF balance sheets enjoy.
Through Quantitative Easing large components of the fictionally valued balance sheets of TBTF institutions are being transferred to the Fed's in exchange for newly created currency which will never be offset or withdrawn from the system. This is Quantitative Easing. It is about nothing else.
Of course there are other matters which contend for the Fed's attention (currency) such as the looming monetization of Spanish and Italian debt (U.S. banks are knee-deep in European sovereign credit default swaps) or the inevitable bailout of the Pension Benefit Guaranty Corp. but it's a long list -- so let's sum up by stating that the future of the U.S. dollar is reciprocal to that of gold's.
If one needed proof that the war on drugs has failed, a subscription to the New York Times, where economist Paul Krugman has been presenting psilocybin-induced commentary since 1999 -- presents the case clearly. Peter Tenebrarum attempts an intervention for the Nobel Laureate in this excellent piece: A Cell Phone Will Save the US Economy
"The implication of this assertion is that fundamental economic laws magically cease to apply whenever the economy suffers a downturn...[E]conomic laws are not dependent on economic conditions. This is akin to arguing that the laws of nature will cease to be operational on Wednesdays."
Warren Buffet has commented that hedge funds are essentially management compensation schemes rather than viable investment vehicles. In aggregate, they are also Wall Street's dumb money: Zerohedge: 92% of hedge funds are underperforming the market.
"If you answered yes to more than five of the above, you might be a conspiracy theorist..." Mike Kreiger: You Know You Are a Conspiracy Theorist If…
One of the impediments to receiving a great education at a U.S. college today is the strong likelihood of exposure to other students:
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Gold and silver...
One of the most bullish features of this gold bull market is the stunning level of ignorance that remains -- so many years into it -- about precious metals on the part of Wall street and economists. By "economists" I am referring to the Keynesian variety, which comprises virtually all those trained at U.S. academic institutions -- whether at the high school level or at places such as Princeton, Chicago, or M.I.T. Wall Street by extension of course, is a Keynesian commorancy.
if for no reason other than that the price action requires it, attention to gold as an investment has advanced, yet with the secular bull now in its second decade, the understanding of gold's history, its place in the monetary system, its role as the oldest and most stable form of money (and the attributes that make it such) and its unique position as the sole currency free of credit risk has advanced little. Wall Street has been fighting the last war for a decade, obsessed with financial assets and the stock market as equities have continued to free-fall relative to gold.
This is where your advantage has been seeded. By making it your business to understand precious metals and the trends that underlie them (which I feature here in every post) you have for this past decade been producing investment returns far superior to those of Wall Street hamsters on their treadmills. Generating great returns can be achieved by recognizing a big secular trend and staying with it until the trend is no longer in place. The hard part is sitting still, staying in and not concerning yourself with temporary price when it goes against you.
So I am here to advise you that these trends that have been propelling the gold price are only becoming more entrenched and that the prolific lack of understanding about gold constitutes the mortar in the foundation of the requisite wall-of worry that every bull market climbs. If you understand gold's history you will see its future. The prices of both gold and silver are far closer to their 2001 lows than to where they are now heading.
All the best,
Jeff