Monday, March 26, 2007

When Words Were Important

25 March 2007

It has been perhaps decades since television programming was primarily about spoken language.

There was a time when what television personalities had to say was the single most important element of television programming.

If you find this incredible, then George Clooney has done you a favour. He has documented the story of
Edward R. Murrow’s almost single-handed media battle with Senator Joe McCarthy of Wisconsin in the mid-1950’s.

The story is told in
Good Night, and Good Luck.

Let us say that the odds were formidable.

Murrow’s weapon?

His carefully selected use of language to dismantle and ultimately refute Sen. McCarthy's campaign of fear against freedom of thought and association in the United States in the post-war era.

Here is a small sample of Mr. Murrow’s mastery of our language (referring to Sen. McCarthy):

“His primary achievement has been in confusing the public mind, as between the internal and the external threats of Communism. We must not confuse dissent with disloyalty. We must remember always that accusation is not proof and that conviction depends upon evidence and due process of law. We will not walk in fear, one of another. We will not be driven by fear into an age of unreason, if we dig deep in our history and our doctrine, and remember that we are not descended from fearful men.”

Congratulations, Mr. Clooney. This is a worthy tribute to Mr. Murrow’s pioneering work in television journalism.

Sunday, March 25, 2007

The Marcel Proust Lifestyle

25 March 2007

OK. I have little in common with
Marcel Proust.

I am a workaholic. He hardly worked.

I am a fitness buff. He laid in bed, sneezed at every draft, and never went out without a fur coat and scarf.

When Proust spent an evening with James Joyce, he had nothing to say or to enquire of Joyce. I would have plied Joyce with dozens of questions, had I the opportunity to do so.

Why then is Marcel Proust my role-model at the present time?

I suspect it is the differences which intrigue me.

Perhaps I have been working too hard. I would be interested in savouring some of the leisure that was available to Proust.

I have no time for idle chit-chat in my life. Proust was perhaps one of the greatest conversationalists who ever lived.

Everything I do is rushed, hurried and harried. Proust had time to consider every word. He re-read and re-wrote the million and a quarter words constituting his epic work, In Search of Lost Time, on an ongoing basis.

I find it easy to talk about work and task-related matters. Mere conversation is more difficult. What is there to say if there is no defined objective? What do people talk about anyway? This is a difficult matter for me.

Marcel Proust knew what to talk about with people during moments of leisure, and he had no end of such moments available to him.

Proust was adored by his friends, both male and female, who described him as generous and fascinating – and always original (Proust deplored clichés in all contexts).

It is time for me to refocus my life – away from the accomplishment of tasks – and towards the enjoyment of leisure, conversation and relationship.

I recognize that my friends may be skeptical, as I have made such pronouncements before. However, my life circumstances are gradually changing, and it will soon be unnecessary for me to work this hard to pay the bills. Therefore, what better use of my time than to explore the world of leisure, conversation and relationships?

There are also books I desire to read, including those of M. Proust.

I am in search of lost time in my own life.

Marcel Proust is the forebear to whom I now look as a guide.

I go forward in the hope that Proust can change my life. (See
Alain de Botton’s more recent work of similar title.)

Friday, March 23, 2007

Canada is for Sale

23 March 2007

Without further comment.

More evidence that the Harper government is not only mean-spirited and socialistic, but also short-sighted.

Canada is for Sale, Part Two.

Thursday, March 22, 2007

Hypocrisy is not the Problem

22 March 2007

Credit to CBC Radio for yet another great story.

It turns out that David Suzuki, Al Gore and Michael Moore are ethically flawed.

I hope that you are not entirely shocked by this news. However, the problems are truly serious, particularly in the case of Michael Moore, whose work, in my view, is essentially undone.

What is the scoop?

Let’s begin with David Suzuki, whose global warming crusade is presently being powered by a “polar bear killer rock star” mega diesel bus that is flooding the atmosphere with hydrocarbons on a continuous basis as Suzuki travels the continent with 5 to 6 companions, spreading the news that humans are causing global warming by flooding the atmosphere with hydrocarbons on a continuous basis. Oops.

How about Mr. Gore? Hmmmm. It turns out that his personal electrical bill for power to operate his (obviously lavish) home in the Tennessee Valley is running 13-20 times the national average, at about $1300.00 per month. And what is Mr. Gore’s core message? That we must stop placing inordinate demands on the earth’s environment, as this causes the atmosphere to be flooded with hydrocarbons, which are causing global warming. It appears that Mr. Gore and Mr. Suzuki are suffering from the same problem.

In Mr. Moore’s case, the problem is more serious. Mr. Moore is simply a liar who invents scenes which are dramatically interesting in order to bolster his message that morally inferior people are engaging in unethical behaviours in order to foist their questionable agendas on a susceptible public.

The problem is, Mr. Moore’s scenes are designed to make his enemies look bad and Mr. Moore look good. But – and this is an important but – the scenes were staged, and entirely false. For example, Mr. Moore, in an early film, depicted Roger Smith of General Motors as being unwilling to talk with him. In fact, Mr. Smith spoke with Mr. Moore twice. But this was inconvenient to the narrative which Mr. Moore wished to weave. So he dispensed with the truth and staged a lie.

Now a group of independent documentary filmmakers are documenting Mr. Moore’s story. Guess what? Mr. Moore is perpetually unavailable to talk with them – unlike his former nemesis, Roger Smith, who in fact was willing to speak with Mr. Moore about General Motors. Mr. Moore, welcome to your own club. You are a morally inferior person engaging in unethical behaviours in order to foist your questionable agenda on a susceptible public.

So, are Mr. Suzuki, Mr. Gore and Mr. Moore hypocrites?

Well, it would certainly be easy for any of their critics to make such a case against them. Their weak rejoinders constitute a somewhat pathetic defense. Mr. Suzuki and Mr. Gore purchase carbon credits to atone for their sins. Mr. Moore just likes to tell a good story – so why not blend art and politics in the making of film documentaries?

However, it is not my present wish to enter the particular – and all too obvious – charge of hypocrisy against any of the above three quite evidently hypocritical gentlemen.

My argument is different than that.

Personally, I am not deeply troubled that Mr. Suzuki burns diesel to spread the news about global warming. His message may be important enough to justify the environmental cost. I am also not that troubled by Mr. Gore’s voracious carbon consumption in the Tennessee Valley. Mr. Gore is a public citizen whose personal life must be larger-than-life in order to do what he does. I am somewhat more disturbed by Mr. Moore’s liberty with the truth. He may or may not stand the test of time as an artist of significance, but we can no longer think of him as a documentary filmmaker based on the current revelations.

What then is my criticism?

My far deeper concern is that all three public crusaders, each in his own way, has wandered somewhat off track due to a fundamental conceptual error. Each is focused primarily on what other people do, and in the case of each, this has made what he does, personally and individually, of lesser importance than what other people do. And this fundamental fact troubles me. Hypocrisy – its presence or absence – or its degree – is in this case a secondary concern.

Mr. Gore and Mr. Suzuki imagine that what they do – to persuade others to change – is of such importance that it might justify their personal carbon-lavish lifestyles. Perhaps they are correct in their thinking. But their own behaviour is obviously somewhat contradicting, and therefore undercutting, their mission.

I would assign Mr. Moore to a different, and deeper, level of hell. He is simply a liar, purporting to be a documentarian – and justifying it how? By the capacity of his films to influence the behaviour of others – while the core message – to be ethical and responsible for your actions – obviously does not apply to him in a personal kind of way.

What is the core problem with focusing our efforts – perhaps even our missionary zeal – on persuading others to change? I submit that it is fundamentally a problem of balance.

The heightened focus on the other is accompanied by a diminished focus on oneself. Why is this a problem? Because it in fact is the problem – at least the one that I have been railing about on these pages.

Personal and political agendas which seek primarily to change others are inherently self-defeating, and ultimately dangerous. This is a case I have presented in previous posts, and I will not reiterate it here.

What then might these gentlemen consider doing differently?

Let me proffer the case of an entirely different way of promoting a change agenda.

For over 30 years, I have been interested in the life work of
Helen and Scott Nearing. These (also flawed and sometimes hypocritical) individuals launched on a change crusade that was different in one critical respect from that of Mr. Suzuki, Mr. Gore and Mr. Moore. They determined to change themselves.

How is that different?

In 1932, as I recall, Mr. Nearing had burned several bridges behind him. The author of what was then North America’s leading economics textbook, and a professor at the prestigious Wharton School of Finance at the University of Pennsylvania, Mr. Nearing alienated his employer by espousing communism – at that time an idealistic crusade in a desperate world struggling to find answers. In my view, communism was the wrong answer, and the communists apparently had the same idea. Almost simultaneously, in both cases due to his independent thinking, Mr. Nearing was ejected from his position with the University of Pennsylvania, and also from his standing as a “card-carrying member” of the communist party. In essence, he had no allies left.

So Helen and Scott, possessing few personal resources at the time, set out to live an honest and simple life in close harmony with the land.

For 20 years, they made their living in the sugar bush of Vermont, producing maple syrup by traditional methods and living in a hand-built stone home with few modern comforts. Then, for somewhat more than an additional 30 years, they moved to the coast of Maine and did the same thing all over again, making their living by growing blueberries.

Did the Nearings have a cause to promote? In fact several.

During their off-time in the winters, they traveled the country in a station wagon loaded with books and pamphlets, speaking to small groups who were interested in hearing what they had to say – about living simply, lightly on the land, healthily and happily. They never became celebrities, though as they travelled from place to place, there were always those willing to hear what they had to say.

In fact, somewhere near my tenth year of life, I happened to meet them as they travelled through my home town of Springfield Missouri, where they spoke at the Unitarian Universalist Fellowship which was attended by my parents. I recall that natural food snacks were served at the casual gathering which followed their presentation.

The Nearings had no super diesel bus, nor did they have a lavish, energy-guzzling home to return to. They had a simple lifestyle and a simple message. They were not media superstars, and their work was not widely known.

However, something that the Nearings did do (with a zeal akin to that of Suzuki, Gore and Moore) was carry on with their simple way of life, and they were willing to entertain visitors who were personally motivated to travel first to the mountains of Vermont, and then to the coast of Maine in order to spend time with them and to learn something of how the Nearings lived. In turn, the Nearings put their visitors to work, building stone walls, and digging gardens and ponds. The Nearings also fed their guests and chatted with them. They were willing to put their way of life on display for others.

The Nearings were far from perfect or morally consistent. They maintained some pension income about which they rarely spoke, and they hawked Scott’s books avidly to visitors, generating income to enable them to make ends meet and carry on with their not-entirely-simple simple life. In some years in the 60s, 70s and 80s they received thousands of visitors, sometimes dozens in a day. It was not always so simple.

In fact, I was one of those visitors, having travelled to their home on the Maine coast in the spring of 1981, two year’s prior to Scott’s death. At age 98, Mr. Nearing took me outdoors with him to saw the day’s firewood, and then the two chatted with me for an hour or two, before I went on my way. I found them hospitable and gracious in response to my intrusion.

What is different about Helen and Scott Nearing and the three gentlemen whom I profiled earlier? Several contrasts are possible, one of which is of particular interest to me.

Helen and Scott Nearing set about changing themselves. They were willing – in fact eager – to tell others about it, but this was secondary to their purpose. They made a decision to live a certain way, went about doing it, and were willing to take some pains to tell others about it, both by entertaining thousands of visitors, and by driving thousands of miles each winter. But the message always started and stopped from their home and from their way of life.

The message was about how they lived, and it was always borne out of their day to day lives.

I wish now to close with a single idea.

Much lower profile than Al Gore, David Suzuki or Michael Moore, Helen and Scott Nearing were, in my opinion, infinitely more effective.

Suzuki, Gore and Moore are in the business of promoting a message with the primary intent of motivating others to change. The Nearings were in the business of changing their own way of life, and then sharing their experience with others who responded with interest to what they saw the Nearings doing.

The Nearings changed themselves and got it right. Suzuki, Gore and Moore are focusing on changing others, and getting important pieces wrong in the bargain.

The course of the Nearings is in my view both the wiser and the more effective course.

Would you like to learn more?

Visit the
Good Life Centre here.

Learn about
Helen and Scott Nearing here.

Monday, March 19, 2007

Unstable, Unbalanced, Uncoordinated, and Unsustainable

19 March 2007

Stephen Roach of Morgan Stanley is on a roll. He is paying attention to a story that we should all be following. The title of his post, "Unstable, Unbalanced, Uncoordinated, and Unsustainable," is a direct quotation from China’s Premier, Wen Jiabao. This is unusually blunt language for a national leader under any circumstances. Mr. Wen is describing the present state of the Chinese economy, and stating his clear intention to do whatever it takes to slow it down. Read Stephen Roach's comments here.

Sunday, March 18, 2007

A Proposal for an Individual Citizen Response to the Problem of Global Warming

18 March 2007

In Canada, the
Liberals have just proposed to tax Canadian industries to resolve the problem of global warming. In my book, this places them in the same unredeemable category to which the Conservatives assigned themselves when they determined to assure continued government revenues by taxing income trusts.

The layers of hypocrisy behind the notion that industry should foot the bill for the problem of global warming are mind-boggling. As though industry is not providing goods and services consumed – and desired – by the general public!

I am not one of the skeptics that human activity causes global warming. I think the balance of probabilities is that it does. But it is a separate matter entirely to suggest that this is yet another problem that we bill to industry. In Canada, the Liberals have a lengthy history of such boondoggles, and the present situation now offers no political choice, as the Conservatives are punishing industry and investment by taxing the income trusts, and the Liberals propose to tax productive companies to settle the account for our guilt-offering for global warming.

I have studied enough ecology to recognize that human activity impacts the environment, and there is no doubt that human activity is ecologically disruptive. Asia has now joined the wave of rising expectations, and the ecological impact of Asian economic growth will be unimaginable, as well as uncontainable.

I think I may be in the minority in believing that we need smaller numbers of people on our planet living better. Perhaps that would be the ultimate human challenge – to decide how to limit out population – without resorting to the coercive tools of dictators (among whom I include the Liberals and Conservatives of Canada). How would free people choose to limit their population – and do so cooperatively?

I know the Chinese are just now coming out of their period of the one-child policy, yet there are some estimates that the Chinese population could be as high as 1.5 billion souls. Believe me, we will not have 1.5 billion Chinese living a North American lifestyle without far-reaching and damaging global ecological consequences.

I do not believe it will work to tax or otherwise punish people for having children, so there has to be some other scheme to bring about voluntary population reduction.

The Africans are solving the problem by indiscriminately sharing communicable diseases with each other – often under coercion, as well as by engaging in seemingly interminable ethnically and ideologically-based genocidal atrocities. I see this as the most undesirable of all responses to the population problem.

The rising socialist governments of Latin America are doing it by robbing from the rich to pay the poor (most of this being filtered by government agents on its way down). Mr. Mugabe in Zimbabwe has demonstrated definitively that this policy does not work (and Mr. Putin will demonstrate it yet again in the new Russia).

The Arab nations are failing in their efforts to distribute the wealth of the oil boom, and this, along with Western reactionism, is feeding the mood of jihad across the Muslim world.

The desperate solutions of the third world represent in my view the worst of all possible answers to the problem. The danger signals are loud and audible, and the first world is no more secure than the so-called third world.

Yet there is also no leadership in the first world – if we may still call it that – only shallow, ideologically-based “politically correct” reactionism in which one politically-motivated entity shifts responsibility for addressing the problem to another politically defined group – with the hope that by doing so their hands will be washed clean of the implied personal responsibility for responding to this gradually unfolding but all too evident crisis. The first world solutions, from UN bureaucracies to legislated carbon emission levels to Canadian corporate taxation schemes, are every one of them reactive, coercive, punitive and ultimately counter-productive.

Every proposed scheme is patently doomed to fail, and the shortcomings of the proposals are so apparent that any child could see the certainty of their failure before their implementation is begun.

If there is a solution to global warming, it will inevitably have to address the fact of ineluctable human population growth, as well as individual human lifestyle choices. More difficult still, any workable solution will have to affix the problem at the level where responsible action is possible – in the sphere of individual human choice.

The necessary end – human population reduction and voluntary lifestyle change – will certainly be enforced by nature if it is not first advanced through human action.

Therefore, the problem will be solved, whether passively, through the “blowback” of natural systems in response to human disruption of the ecosystem, or, also undesirably, by the failure of human civilization through global warfare or anti-globalist and inwardly-focused nationalism, regionalism or ethnocentrism, or – and this is what I very strongly desire – actively, through voluntary and collaborative human action.

I prefer the latter option, though I do not know how it can easily unfold. That is, I am not sure how it is even possible to get “there” from “here.”

How would individual humans voluntarily determine to limit their reproduction, as well as, moreover, to live a simpler and more local way of life with reduced environmental impact, simply because it would assure human quality of life and our survival as a species? Our daily decisions are, in essence, never based on such considerations.

I have no grand scheme to offer. I do not think the solutions will be either comfortable or easy in the reflexive sense. This is not because the solutions would fail to improve our quality of life. We would certainly all live better – both locally and internationally – were we to decide, on a globally collaborative basis, to limit human population growth and with it, environmental disruption through human activity.

The conundrum is that at the individual level we are entirely capable of exactly the type of selfless action required to resolve our unfolding ecological crisis.

Individual humans are, in my experience, infinitely accommodating and generous under the correct circumstances. The challenge is that we are incapable of acting in a yielding and self-giving way when we organize ourselves politically.

This is another problematic facet of the bane of the political correctness of both the left and the right. Neither side can act – collectively – in a self-giving way. And this creates exactly the conditions that block the type of yielding and accommodating individual human action that is required to answer to the dilemma of international human population growth and ecological disruption.

What we fail to do every time, in my observation, is to ask individual humans to take voluntary personal action to solve the problem. Again, I have no grand solution to offer.

But if there were some process by which our leaders could enter into dialogue with us as citizens about how each of us, individually, could limit our impact upon this fragile earth, I suspect that solutions would begin to emerge. They would vary from person to person and from locality to locality, but I believe that something would arise and begin to grow which would be workable. We simply lack the processes to carry out popular actions of this kind.

I am not suggesting that changes and innovations in government policy would not be required. It certainly makes no sense to reward and subsidize population expansion and wasteful consumption of finite natural resources. But I am suggesting that our government policies, both nationally and internationally, should emerge in response to the requests and initiatives of individual citizens who are in some way enabled to carry their share of the responsibility for global problems.

The answer is not to shift responsibility for the problem of global warming – which in itself is merely one aspect of environmental degradation – from one politically-defined entity to another, but to restore responsibility to the level of individual human action and choice, and from there, to rework our government policies in response to citizen initiatives.

I cannot predict what this will look like because a process of this kind is, by its very nature, unpredictable. It will depend on the generosity and selflessness of
6.6 billion humans around the globe. Obviously we are not there yet. But perhaps it is now time to decide that this is in fact where we want to go.

Friday, March 16, 2007

Stephen Roach Said It First

16 March 2007

There is not much I have to say today. Stephen Roach has said it better than I could possibly have done.

In his current essay, Roach summarizes our present economic predicament in only a few short paragraphs.

His essay is entitled “
The Great Unravelling.” Read it here.

Wednesday, March 14, 2007

Market Tumbles, Bernanke Panics, Gold Soars

13 March 2007

OK. This is not today’s headline. But how long do we wait before the above sequence of events becomes the news of the day?

I am now thinking that the wait will not be long.

US investment markets have been running on the notion that the Federal Reserve will maintain a moderate-to-aggressive stance based on a strong economy.

The strong economy notion is now unwinding – along with the carry trade In the Japanese Yen.

The collapse of the US subprime lending industry is bringing with it the realization of the obvious – that the other sectors of the economy are not far behind. That is – deflating home values make subprime loans unrecoverable. That returns something like 2 million homes to the faltering US real estate market. That in turn places downward pressure on mid-range home prices, and so on. You can figure it out. Anyone can.

(As one example, and this is today’s news, General Motors announced that it will be flowing $1 billion to its formerly profitable GMAC finance arm to cover losses on subprime loans. GM has not made money selling cars for years, and is selling the GMAC unit to prop up its moribund auto manufacturing business. Unfortunately, GM is now losing more money due to its careless speculation in the subprime and no-documentation mortgage market – think Ditech. It does not take a sophisticated analyst to see that this is merely the tip of the iceberg.)

US workers have had no substantial income gains to support their feverish spending habits, so if they cannot generate cash by advancing loans against the (now declining) equity in their homes, the consumer market must slow. The US economy is based 70% on consumerism – a consumerism so powerful that it has undergirded much of the expansion in the global marketplace over the past two to three decades.

The coming “whoosh” downwards in US equity markets will rapidly confirm that the capacity of the ever-spending, ever-borrowing US consumer to continue to fuel global economic growth is finally drawing to an end.

Is this a panic scenario for Ben Bernanke and the US Federal Reserve?

I think so.

What will Mr. Bernanke do?

The only thing he knows how to do.

You can forget about inflation targeting. That is talk. Mr. Bernanke is afraid of deflation – read “economic collapse” if you prefer.

Mr. Bernanke doesn't want another 1929 on his watch.

Mr. Bernanke will inflate the US money supply, and lower interest rates.

No more Mr. Tough Guy. When the going gets tough, Mr. Bernanke will be Mr. Nice Guy.

Is dropping interest rates and inflating the money supply really a nice thing for a “nice guy” to do?

We've discussed this before. It is a policy of short-term gain for long-term pain. More inflation by the US Federal Reserve will mean yet more capital misallocation and more inflation (though Mr. Bernanke talks against it).

What will preserve value when this occurs?

Precious metal investments (gold and silver).

Here is the sequence.

1. Market plummets.
2. Bernanke panics.
3. Gold and silver soar in value (relative to the ever-devaluing US currency).

It has often been noted that every new Federal Reserve Chairman gets his crisis.

Mr. Bernanke's crisis is coming. In fact, it is now here.

Mr. Bernanke will panic – and be loved for doing so.

It is a very bad response, but a very predictable one.

Gold and silver investors will benefit.

It now looks as though this will be occurring sooner rather than later.

Monday, March 05, 2007

A Simple-Minded Commentary on the Recent Reversal in Precious Metals

March 6, 2007

Many observers have commented that gold and silver stocks, as well as many commodity stocks, have retreated more than general stocks in the recent sharp market reversal.

I concur that this is the case, and our portfolio has declined 15% in the last 5 trading days, or 3% a day. This is double the decline in gold and in the Dow Industrials.

Further, Adam Hamilton and Scott Wright have noted that the present advance of gold stocks in parallel with gold is
the most lackluster since the onset of the present precious metals bull market in 2001. As of today, precious metal stocks have demonstrated no leverage at all to the precious metals on the current upleg – in fact, they are now lagging.

Is the bull market trend petering out for precious metal miners?

How could it be?

When gold and silver advance dramatically in value, this inevitably benefits the miners (though mining is a difficult, arduous and often thankless business). 2006 Profits have been stellar for many of the miners, and this positive trend remains in its infancy.

Why then are precious metal stocks going down more than general stocks?

It is certainly possible that precious metal miners are now facing a reversal of fortune, but I am skeptical of this all-too-bearish explanation.

Let me offer a simpler answer.

The precious metal mining stocks go down more because they go up more. I think it is really as simple as that.

The gains have been dramatic since 2001, and a breather is not uncalled for. Technically, there are many forces of resistance to deal with at this juncture, most dramatically, the 3-1/2 decade downtrend in the value of gold mining stocks relative to gold.

Resistances are formidable technical hurdles in the world of investments – they are really a psychological barrier – and they typically require repeated advances and retreats in order finally to be vanquished.

The present reversal in precious metal mining stocks may not yet be done its course, though I suspect that most (perhaps 80-90%) of the reversal is now in. And the struggle may not yet be done. That is, the miners may advance once more and be turned back yet again.

But my gut sense is that the bull market is not over for the miners – rather, that this is only just the beginning of a multi-decade journey.

This would mean that the present ugly environment is a "wall of worry." That would make sense, as this phenomenon characterizes all bull markets, guarding them against unsustainable extremes in positive sentiment.

In my view, sentiment on the miners is already more negative than positive – and this means that there are many uncommitted investors out there who have yet to join us.

If this is a bull market for the miners as well as for the precious metals themselves, then I continue to foresee a bright future for the precious metal mining stocks – despite the all-too-obvious negatives that have dragged them down 15% or so in the past five days alone.

Gold and silver are worth much more than they were in 2001 and 2003 respectively, and this means that the gold and silver in the ground – in the miners' possession as proven, probable and inferred reserves – is also steadily climbing in value.

In my view, this simple fact will continue to translate into progressively advancing market value – that is, into continued rises in share prices.

If I am right, then the gold and silver mining stocks are a very good buy – right here, right now.

If you haven't committed to acquiring precious metal mining shares, then today – that is, Tuesday, March 6, 2007 – might just be a perfectly fine day to buy more of them.

Saturday, March 03, 2007

A Safe Haven in a Global Storm

3 March 2007

The broad market sell-off this week actually hit precious metals and precious metal stocks harder than the general market.

We may not be done with this reversal yet, although those who have a big stake in market stability will be pulling out the stops to restore confidence to the global marketplace.

What is going on?

Well, we've discussed excess liquidity before. By definition, excess liquidity (too much money being created as opposed to the value of all goods and services being created) creates the conditions for capital misallocation. In short, all this extra money will get invested in locations that are not fundamentally productive.

Why is that?

If economic growth were attributable to rising productivity, then capital would be invested in productive assets. But our recent period of economic growth is not about productivity, it is about liquidity.

Government creation of excess money supply makes people feel richer – for a while. But a vastly increased sum of money chasing only marginally increased quantities of goods and services simply drives up the cost of goods and services, through the operation of the law of supply and demand.

Essentially, every major government in the world is doing this right now, so what we are presently witnessing is the creation of a breeding ground for a liquidity crisis of global proportions. (Click
here to see how the US Federal Reserve Bank rationalizes its commitment to excess liquidity.)

While governments can increase the amount of money in circulation – and they have been doing so at a stunning pace – the quantity of US Dollars in circulation alone is now increasing on the order of one trillion dollars per year – democratic governments have only limited means of controlling where the money flows once it is in others’ pockets.

This is capital misallocation.

Basically, well-positioned international investors are redirecting these excess funds for quick gains, and only rarely for increased (and rationally considered) long-term productivity.

Some of the more obvious manifestations are: (1) burgeoning Asian and Middle Eastern economic growth and infrastructure spending (this is potentially productive, but is excessive and unbalanced, driven by transient market forces – such imbalances are presently driving a global glut of memory capacity in the information technology field, for example, and this is rapidly driving down prices and undermining the value of the infrastructure investment in memory technology); (2) an until recently rapidly inflating – and now rapidly deflating – US real estate market; (3) the now well-discussed Yen carry trade – which involves borrowing Japanese Yen at low interest rates and investing these cheaply obtained funds in any asset that is appreciating in value more rapidly than the interest due on the Yen loans; and (4) what will soon be extensively discussed – the proclivity of global hedge funds (usually private funds which use leverage of up to 10-20 times to invest long and short in a wide variety of usually short-term speculative investments).to move opportunistically in and out of various investments on a very short-term basis.

What is driving the liquidity?

Virtually every government in the world is guilty of printing money at an excessive clip.

But one government is in big trouble, and that is our neighbour to the south.

The United States is now running deficits in global trade and federal government spending on the order of one trillion dollars per year, and that deficit closely matches the one trillion dollar per year rate of growth of the United States money supply.

That is, the United States is not utilizing an increase in productive assets to meet its global and domestic debt obligations, but is simply creating the money out of thin air to make these payments. The newly created dollars are then sold in the international bond market, and this is the point where their ownership rapidly passes out of US hands.

The global investors who are acquiring US Dollars have a spectrum of interests, some but not all of which are aligned with the interests of the United States. For the most part, international investors who are in receipt of US Dollars through the massive US current account and trade deficit – particularly the Chinese, the Japanese and the Middle Eastern oil producers – have been buying back United States assets. While this is comforting to the powers that be in Washington, D.C., it does indicate that ownership of US assets is rapidly slipping out of US hands.

In brief, to use an analogy, the homeowner is selling the kitchen sink and the living room carpet to pay the mortgage – and the equity interest in the home is declining against ever-rising debt claims.

Countering this trend, however, has been a gradual and so far gentle shift of global investment positions out of US assets and into alternative assets, including Asian and Middle Eastern infrastructure and business development, commodities generally, alternative currencies – particularly the Euro, and precious metals.

This accounts for the 30% decline in the international exchange value of the US Dollar over the past 5 years, and plays a role in the topping out of the US stock market (which has been declining relative to gold since 1999).

The point I wish to emphasize today is that the excess money supply has clearly been misallocated. At the most basic level, monetary inflation is a tax on citizens that punishes those with stable incomes and rewards those who can exploit liquidity flows to leverage their gains.

Thus, salaried wage earners are seeing their purchasing power slip while CEOs and hedge fund investors (not to mention precious metal investors – and this can be anyone, including you or me) are able to multiply their assets in this ebullient and highly liquid, but precariously unbalanced, global economic environment.

Precious metals, as I have discussed previously, are a hedge against global monetary insanity, and this is why they are a superior investment vehicle now.

Mainstream investors, perhaps unaware of the global imbalances which are destabilizing the global economy, continue to invest in assets that are perceived to be stable and productive – most often real estate, government and corporate bonds and general stocks.

Unfortunately, while this would be a wise choice in “normal” economic times, we are no longer in normal times, and all of the above-noted mainstream investment vehicles have actually become risky due to the game of international monetary manipulation, which is now nearing a century-long crescendo.

That is, the real estate market has become a bubble, and severe declines are probable in the hottest markets, with stagnation most probable for mainstream markets (in which most Canadian real estate investments are included).

The bond market has become imbalanced by the so far almost imperceptible drift of global interest away from US assets, and this is pushing up long-term interest rates – and undercutting the value of bonds. Bonds, therefore, are unlikely to be a remunerative long-term investment.

The current global economic boom, due to its being driven by massive debt accumulation, particularly in the United States, will not be able to sustain corporate profits, and this accounts for the already-cited 7-year decline of general equities against gold.

Last, and unfortunately least, cash is literally being “trashed” by the central banks of virtually every major global power. Thus, holding cash has become a certain prescription for future poverty.

I began today’s entry by noting that precious metals have declined more than global equities in this past week’s sell-off. This would seem to contradict my assertion that precious metals are in fact the most secure and rational defensive investment against the global debt and liquidity boom.

Not at all. Closer examination shows that precious metals are being sold off because they have been an effective store of value to hedge risky investments in highly leveraged short-term speculations in such areas as the Yen carry trade, currency swaps, booming Asian and previously booming Middle Eastern markets, etc. Leveraged investors need to sell their productive assets in order to cover their losses when their speculations fail. This appears to account for gold and silver’s decline this past week.

That is, the present sell-off in gold is clearly a transient phenomenon, though it may take some further weeks to unwind, while the destabilization of international markets is a growing and dangerous trend which in the very near future will drive global investors back to gold as a safe haven against gold’s much riskier alternatives. (Every alternative class of investments is riskier than precious metals in the present global marketplace.)

A look at sentiment indicators indicates that gold market sentiment is nowhere near as bullish (70%) as it was near its most recent May 2006 peak (90%). That is, there are investors presently outside the gold market who will soon be moving in, some of them for the first time, due to global financial instability, and this is a stronger long-term trend than the recent short-term move out of gold by speculators who are covering their losses in high-risk and unsound investments.

As I have stated previously, the gold bull market offers a vigorous and jolting ride, with many sharp pullbacks as well as powerful surges. It is not by any means a comfortable ride, nor is it for the faint-hearted. But the global financial marketplace itself is anything but a safe and comfortable environment at present.

That is, there is no place of peace and security anywhere in the global investment world at this time. Even the safest of seats – and that is in gold’s section for certain – will inevitably be buffeted by the crosscurrents of excess liquidity, capital misallocation and global rebalancing.

A worldwide storm is coming, and it is time to make proper preparations. The hour is drawing near. In fact, it is already with us.

What would you prefer? To be bucked about by the gold bull (hang on, don't let go) – or to be boiled slowly with the lobsters in the pot of the global cash, equity and bond markets?

While many commodities will also prove to be outstanding long-term investments in the present environment – and some may fare better than gold and silver – if you are seeking a safe haven against the coming storm, gold and silver remain the place to be. Come on in – there will be good and more company in the house of gold before this multi-decade bull market has run its course.