US Passes Debt Milestone

19 December 2008

The news of the past week has been the Bernard Madoff Ponzi scheme - with Mr. Madoff having vaporized $50 billion of his investors' money. Dishonest and tragic, this is the sort of story that emerges in a widespread financial crunch, such as we are presently seeing.

However, make no secret of it, the next Ponzi scheme to emerge is unfolding in full public view.

The US government has no intention of repaying its debts - its bonds are worthless.

Or, to be more clear, the bonds will be repaid in US dollars that are of little or no value.

How much larger is the scale of the calculated US government default?

I've taken this piece from Agora Financial's "5 Minute Forecast." I'm reproducing this in whole, as the archives are somewhat challenging to track.

The combined debt and obligations of the US government now surpass the net worth of its citizens. That, of course, might be a redeemable situation.... But contemplate the direction the US government is now following, adding $1 to $2 trillion dollars per year to the figure.

The US has dug a hole so deep, there is now no way out - apart from an Argentina-style debt default.

Bernard Madoff - take heed. This is how you truly do it on a grand scale. From the 5 Minute Forecast:

"Which is greater? The U.S. government’s mountain of debt or the entire net worth of all U.S. citizens?

"For the first time in our history, it’s the former.

"As of the end of September, the U.S. government held '$56.4 trillion in debts, liabilities and unfunded promises for Medicare and Social Security,' said research published this week by the Peter G. Peterson Foundation. The number comes directly from the Treasury release we harped on Wednesday.

"And our collective net worth? $56.5 trillion, as calculated by the Fed at the end of September as well.

“'Given more recent developments, it’s clear that America now owes more than its citizens are worth,' said PGP Foundation president and protagonist of I.O.U.S.A. David Walker. 'Passing this shocking milestone highlights the need for President-elect Obama and the next Congress not only to turn the economy around and boost consumer confidence, but to put a process in place that will lead to tough choices getting made to strengthen the government’s financial condition once the economy begins growing again.'"

Thanks to Agora Financial for this piece of news....
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The Bailout Bubble

15 December 2008

I am mostly on vacation from the internet at present while I spend my actual end-of-year report-writing interlude and holidays in southern Arizona.

However, I think something needs to be said about what appears to be the next emerging international financial bubble - which I would like to refer to as "the bailout bubble."

The 1990s equity bubble appeared to have been the largest in US history - until it was dwarfed by the unprecedented housing (and debt) bubble.

Now the present bailouts (of any and every corporate entity which has wandered into trouble through imprudent behaviour) are dwarfing the size and scope of the housing bubble.

I am certain that the bailout bubble will have extensive ramifications as well, though they are certainly less obvious than those of the general stock and housing bubbles which came before.

To be honest, I am really watching only two aspects of the bailout bubble, and that is the emerging areas of strength tied to this particular bubble.

These are the bull markets in precious metals and in commodities.

These two bull markets have two distinct drivers.

The precious metal bull market is driven by continued money creation - which of course can now be seen to be going exponential as central banks and governments everywhere print money to stave off a global financial deep freeze.

The commodities bull market has an entirely different driver - which is the entry of the Asian and Middle Eastern economies into the international free market. Obviously the commodities bull is on hold for now, as every sector of the globe is reeling from the aftermath of the housing and debt bubble. The IMF has - quite prematurely in my view - called an end to the commodities bull market. This call is correct for now, but the commodities bull remains in its early stages, and has much further to go, after finding its present bottom and taking sufficient time to shake out momentum and sector rotation players.

The precious metal - and specifically the gold - bull markets are obviously still looking pretty lively. Gold mining costs are now falling rapidly while the gold price holds steady. So look to the gold mining and the infrastructure sectors to be next year's leaders.

And... doubt the IMF - or anyone else - who opines that the commodities bull has had its run. Sorry - this bull is much closer to its beginning than to its end!

More later when I get a moment!!!
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I'm a Part of the 62% Majority

3 December 2008

It is no secret to followers of my blog that I do not attempt to fit neatly into anyone's political pigeonholes. I hope always to provoke, and perhaps sometimes to shock, my readers, but only with well-reasoned argumentation....

Several months ago, I figured out that I am not a conservative, but a post-liberal. My fiscal and international security views are conservative, but my social views are quite liberal and inclusive. From this standpoint, I adhere to the positions of none of the leading political parties of Canada (though perhaps some day, the Liberal Party of Canada, whom I regard as the most workable of the established Canadian political parties, may evolve to the "Post-Liberal Party of Canada...").

In the interim, I have come to despise Stephen Harper, primarily for his betrayal of small Canadian investors through the destruction of the oil/gas income trust tax exemption. I will not reiterate my critical analysis here, as I have previously posted at length on the issue.

I also feel that Mr. Harper entirely lacks vision for the economic future of the country. Despite the current global fiscal crisis, we are entering into an age of rebirth of commodity production - led by Asian growth. Canada's mining and mineral sector - and its resource sector more broadly - stands to lead the world into the new millennium. Canada has more registered mining companies than the remainder of the world combined, and this fact seems not yet to have come to Mr. Harper's attention, as he has scrambled to throw financial aid at the successful business sectors of the past, rather than to those which will lead Canada into the future.

Through research on the subject, I discovered that Mark Carney, the well-educated but regressively-minded Governor of the Bank of Canada, was the primary instigator of the sabotage of the primarily small Canadian investor-owned income trust system. The narrow-minded Finance Minister, Jim Flaherty, was easily led by the nose on this initiative, and I have already called for Mr. Flaherty's resignation....

In any case, I was absolutely delighted recently to discover that the three remaining political parties, who represent the clear majority of Canadian opinion, have banded together to turf Mr. Harper out of office. This is certainly a testament to the extent to which Mr. Harper is NOT a team player. He has managed to alienate entirely every element of the opposition in the house and the senate!

Sign the 62% majority petition here!

And, for a clear overview of the background issues, view my wife Susan's blog entry here.

Here is my last word on the subject: Good riddance to you, Mr. Harper.... Get thee gone, and do not again darken Canada's doorstep! And please, take Mr. Flaherty with you - as soon as possible!
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It Is Time To Arm the Populace - A Proposal for How This Can Be Done

27 November & 3 December 2008

We are presently in the midst of terrorist attacks on Mumbai, India. Similar attacks were planned in Canada, but fortunately averted, due to apprehension of the conspirators. Escalating incidents of automatic-weapon fuelled piracy on the high seas are now also being reported (see this link for a report of piracy in Somalia). Gun-enabled gang violence is escalating in the urban centres of many of the world's leading nations.

Terrorists and gangsters on land - and pirates on the sea - take advantage of the fact that our world is largely a peaceful place, with the consequence that the general populace is not armed. Obviously the world is changing, and our citizenry must now also change to adapt to the new circumstances.

To be clear - I am not calling for all citizens to carry arms - this must still be a privilege, not a right. But I do wish presently to submit a proposal for how an armed citizenry might defend itself against the emerging reality - that outlaws carry guns and weapons freely, using them to terrorize citizens.

I have long been an advocate of two years of national service for all citizens. I now propose that emergency situation and weapons training be a component of that two years of service, even for those who might volunteer to perform peaceful duties of service, such as work in hospitals or with senior citizens. Those who have completed two years of supervised service (including in-depth crisis intervention and weapons training and field practice, with careful scrutiny of their competencies and with fully positive evaluations) might then be authorized to travel freely as armed citizens, a citizen militia if you will. This would greatly increase the likelihood that when gangsters or terrorists strike, they will encounter citizen adversaries who are in a position to defend themselves and those present against the criminal use of weaponry.

Similarly, the present situation appears to require that there be training and arming of the personnel of merchant ships on the high seas, as well as of persons in positions of responsibility in areas of public transportation - whether trains, buses or airlines.

Let's stop making it easy for gangsters and terrorists to ply their trade by allowing them to exploit our society's peaceful citizen environment.

My proposal would thus see a fully qualified, trained and licensed citizen militia backing up our police and military forces.

Woe be to the terrorists and gangsters who attempted to dominate citizens by force of arms in such a world. In any public setting, they would surely meet their match, and tragedies such as that in Mumbai today - or that which was narrowly averted in Canada - would no longer dominate our headlines.

Normal checks and balances must apply, and my proposal cannot proceed without careful consideration of multiple safety measures and safeguards, for example, regular reviews of the licenses of armed citizens, ongoing training, clearly spelled-out accountability mechanisms, carefully-defined guidelines for weapons use, and of course speedily-implemented sanctions for misuse of the privilege.

But who can question that advancing weapons technology and the widespread manufacture and availability of armaments has made the modern world a playground for those who practice terrorism and gangsterism? It is now time to make the world unsafe for terrorists, gangsters and pirates. The way ahead is not entirely unclear.

As is the case with all post-liberal reforms, the greatest obstacle to action is perhaps our reflexive aversion to measures which entrust citizens to exercise wise judgement in assuming responsibility for the solution of dilemmas which are apparent to all.

Peaceloving people have armed themselves to fight terrorist and criminal elements before. I regret that we now live in an era where this has again become necessary - but as I see it, bold action is what is now required. I believe that our citizens are smart enough to take on a responsibility of this kind, and that our lawmakers and judges are wise enough to hammer out the checks, balances and tests of efficacy that will assure the success of such a policy.

Restoring safety to our world must surely be possible, though as I see it now, only through an effort of rebalancing of forces, such as I have proposed. I see no way through to this goal without provision for professionally qualified and accountable citizen militias.

Let us debate the matter publicly and work out the checks and balances that will be needed, but then let us get on with the business of creating a world that is unsafe for the perpetrators of crime and of terror - because criminals and terrorists will no longer hold a position of unfair advantage over the general citizenry.

Note (3 December 2008): John R. Lott has a proposal much simpler than mine. He advocates that concealed handguns be worn on a discretionary basis for self-defense by citizens who do not have criminal records or a history of mental illness. Mr. Lott marshals extensive statistics in his book, More Guns, Less Crime, to support his argument that this simple practice makes the general population safer. Why? Because criminals are deterred by the prospect of costly consequences of their decision to engage in violence against law-abiding citizens. When their unfair advantage is removed, criminals are less motivated to engage in gun-based crimes. A brief summary of arguments against his view can also be found on the Amazon.com website. I believe my proposal is substantially different than that of Mr. Lott, though I think that his arguments are worthy of further examination.

On to the matter of arming citizens against terrorist attacks. Clearly terrorists take advantage of the fact that their vicious attacks against noncombatants are statistically infrequent and therefore unlikely to involve most citizens at any time. What therefore is the sense of arming the citizenry against low probability events?

The statistical answer lies on the other side of the equation.

For the terrorist storming a railroad station, for example, the low probabilities work very much to his or her favour. That is, if there is a low likelihood of encountering armed resistance, then only two gunmen can kill dozens and maim many more, as was recently the case in multiple locations in Mumbai. To increase the likelihood that terrorists will encounter armed opposition in response to one of their low probability attacks, there must be a very high probability of armed opposition in most public places at most times of the day.

That is, the real statistical question does not concern the likelihood that if I carry arms, I will happen to be in a position to repel a terrorist attack. The likelihood is that I will never encounter such a situation. However, the key question has to do with the chances that a terrorist storming a public transportation terminal or a hotel will encounter armed opposition among those citizens present. In order to assure that this will occur, a very significant component of the population should be bearing arms.

The plain fact is that we are living in a world out of balance. I know what it feels like to sit back as an observer in a position of powerlessness while terrorists carry out their heartless attacks against innocents. I do not know what it will feel like when a terrorist raids a school, movie theatre, airport, restaurant or hotel and is shot down - or, better still, disarmed and captured - as he draws and prepares to use his weapon - before harm to innocent civilians can occur.

I do know that it will be better still if terrorists can be apprehended before carrying out their planned attacks, as occurred in Toronto in 2006 (though I'm not sure that the general population appreciates fully the seriousness of the attack that was averted in this case).

If we can learn to prevent the conditions that breed new terrorists, that will be yet again more preferable - and the key to this may actually lie in easing the massive flow of funds to unstable Middle Eastern and South Asian countries, as well as, of course, in forming friendships with individuals in such unstable circumstances who are open to alliances with the peoples of the West.

Let me also speak to the general question of the prevention and detection of terrorist action. I am very impressed with the British video surveillance system which has made apprehension of many terrorists possible. Certainly further harm to innocent persons has been prevented due to the use of such measures. We also require more sophisticated systems to prevent suicide bombings and the transportation of explosive materials. This is well beyond my area of knowledge. I'd certainly be happy to have widely dispersed and ideally unobtrusive scanning systems for explosives so as to prevent their further exploitation by terrorist or criminal elements.

Until the likelihood of the apprehension of terrorists becomes reasonably high, it is unlikely that terrorists will be dissuaded from plotting harm against civilians around the world. Until the odds of survival and success are in favour of civilians and to the disadvantage of terrorists, we will not truly be inhabiting a world that is unsafe for terrorists. And until we have learned to dissuade young people in vulnerable areas from looking up to terrorists as role models and heroes, the possibility of returning to a way of life free of the intrusion of weapons of violence will not be available to us.

There is much more to consider before our actions in response to this problem are complete.
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Gold is Better Than the Swiss Franc

8 & 11 October & 21 November 2008

Over the past several months, most of the visitors to my site have been enquiring about the Swiss Franc.

The Swiss Franc remains my top currency pick.

But, and this is a big but... I don't like currencies.

Any of them.

Why?

Because currencies are managed by governments, and currency devaluation is the fastest, easiest fix for the economic ills that most upset the general populace.

Therefore, governments inflate the money supply and devalue their currencies in order to make debt repayment easier, to keep money flowing when confidence is low, to mask incompetence and greed, to punish saving and to reward spending, and for a host of additional reasons. Inflation is a quick and easy but ineffective fix, and governments have been doing it since time immemorial.

(The following chart is courtesy of the Aden Forecast. I recommend that you subscribe to this very insightful advisory service.)

As we are presently seeing, inflationary monetary policy always ends in tears - in financial exhaustion. But that has never stopped government leaders from relying upon inflation, because votes and popularity are won by immediate rather than long-term policy outcomes. It is a paradox, because inflation makes people feel wealthy even as it impoverishes them.

At present, gold is the strongest investment out there. Why? Because gold is not managed by any government. It is hard won from out of the depths of the earth. It is costly to find and to produce, and it is inherently scarce, particularly in times of economic uncertainty when increasing numbers of global citizens are seeking preservation of the value of their savings.

The entire fleet of international helicopters is now in the air, dropping money out of the sky to solve the present global financial crisis.

Unfortunately, throwing money at the problem doesn't fix the problem. It just cheapens the money.

Therefore, buy gold. It is a better choice than any paper-based currency.

As you can see, gold is getting ready to take off compared to the Swiss Franc (it will not very likely go up in a straight line, but all of the recent world economic and government policy developments are certainly fundamentally bullish for gold!).

Buy gold now for a doubling of your investment over the next one to three years.

My primary analysis of the intrinsic value of gold (Gold's 1980 High – Think $5000 - No $6000 - per Ounce) as an aggressive preserver of value can be found here.

Here is a list of my blog entries concerning the Swiss Franc:

1. Canadians, Buy the Swiss Franc Now!

2. The Swiss Franc Continues To Climb in Canadian Dollars.

3. My first compliment from Fleck.

4. Currencies 101.

5. Another Swiss Franc Buying Opportunity for Canadians.

6. All You Need To Know About Global Money Supply in One Place.

7. The Swiss Franc Is Still Strong.

8. Use "FXF" (CurrencyShares Swiss Franc Trust) To Buy the Swiss Franc.

9. Gold is Better Than the Swiss Franc.

10. Swiss Franc Alert

11. Gold Isn't Gaining All That Much... In Canadian Dollars!

Addendum: Many visitors to this site have enquired about how to purchase the Swiss Franc. The most direct method is simply to purchase Swiss Francs from a currency dealer. In Canada, Custom House Currency Exchange offers competitive rates. You may also wish to contact your broker about an exchange-traded fund or a Swiss Franc government bond (which would pay interest on your investment, but could be subject to decline in value even if the currency itself rises relative to other currencies). Additionally, some banks permit investors to maintain foreign currency accounts. Sophisticated investors may wish to enter this trade through purchasing futures contracts or other types of options, such as calls. Many brokers specialize in foreign currency purchases, so I suggest that you start with a broker familiar to you. As I understand it, Pamela and Mary Anne Aden at Aden Research, for example, will execute foreign currency trades for their customers. But for those who don't know how, simply purchasing the currency from a competitive currency trader (possibly your local bank, or a trader recommended by your bank) will be a good place to get started. Ideally the "spread" between the buy and ask price for the currency should be less than 4 cents on the dollar (roughly 4%). That is, you should not pay a premium of greater than 2% to purchase the currency. This being said, my own experience with currency dealers is that it is very difficult to exchange currencies in this idealized range. Our local broker's rates are much higher, for example. Never exchange currencies in large amounts at airports, hotels and other locations that are charging large premiums to provide a convenience service to travellers. Look for the best rates any time you exchange currencies!

August 5, 2008: As currency purchases at fair exchange rates are extremely difficult to obtain, I am now recommending that mainstream investors simply purchase the FXF exchange traded notes, "CurrencyShares Swiss Franc Trust" (denominated in US dollars) through their broker. This exchange traded note uses the interest on its deposits to cover the management fees of the fund, with the result that you will receive modest interest income via this method.

Note (9 August 2008): Most global currencies happen to be weak against the US dollar right now, as the US market is presently driven by the fantasy that the US government's now $800 billion rescue of the financial system by "nationalizing" the government sponsored enterprises (Fannie Mae and Freddie Mac) and using taxpayer money to guarantee worthless bank assets will make everything "all right again." That fantasy will persist for a season, and then it will fade, as all fantasies do.

In the meantime, the Swiss Franc may not have bottomed for US investors. However, I note that the Franc is holding up fine against the Canadian dollar, as both are under pressure versus the US dollar, which is presently enjoying a transient upward move due primarily to concerns about the stability of the Euro. Pamela and Mary Ann Aden advise that the market value of the Euro is presently stronger than that of the Swiss Franc. My own take is that the Swiss Franc clearly possesses superior fundamentals compared to the Euro, which relies upon the historically unproven concept of international cooperation (don't expect the cooperation of the European countries to be maintained in hard times or in crisis!).

October 11, 2008: If you're interested in Swiss Franc Government Bonds, here is a recommendation from WikiAnswers. This brief note recommends EuroPacific Capital. Its C.E.O. and Chief Global Strategist, Peter Schiff, is a long-term US dollar bear who saw the present economic meltdown coming years ago. EuroPacific Capital is a secure and well-managed company, and I can certainly vouch for the reputation of Mr. Schiff, whose articles on the mismanaged US economy I have been reading for years on Safehaven.

While I am currently recommending gold as a superior store of value to the Swiss Franc, gold trades as both a commodity and a currency, with the result that its market price is much more volatile. If you are a long-term buy-and-hold investor, gold will certainly outperform the Swiss Franc as a long-term store of value. But if you don't like $100 price moves in a day (gold has had two such moves in the past month - including only yesterday!), then holding the Swiss Franc may prove less unsettling.

21 November 2008: My call on gold's superiority to the Swiss Franc was a bit early on October 8, 2008. However, as the following chart shows, gold reached its bottom against the (now only informally 20% gold-backed) Swiss Franc on October 24, 2008, and has strongly outperformed the Swiss Franc since that time.

Thus, my October 8 recommendation - that gold is a better long-term store of value than the Swiss Franc - still stands. However, for Canadian investors, the Swiss Franc has outperformed the Canadian Loonie for the duration of the present financial crisis, as the chart below shows.

Thus, Canadians have obviously done well to hold the Swiss Franc during this time of turmoil. Further, the US dollar is obviously in a topping process, with its strength at this point hinging only on the need of investors who are liquidating their malinvestments to purchase US dollars so that they can hold cash. The US dollar is certainly cruising for tougher times ahead.

(Chart courtesy of Clive Maund.)

Therefore, US investors would also be wise to be holding a portion of their savings in the Swiss Franc now, if they have not already done so, particularly if they require a less volatile store of long-term value than gold!

Gold of course remains the best store of value of all, and it is the true global reserve currency!
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This Is Not My Market

20 November 2008

I began investing in the precious metals sector in 2003 because I believed that the financial policies of both government and business had become unreasonable, irresponsible and reckless.

Recent events have proven my original thinking correct.

As a Canadian investor with the majority of my holdings in registered retirement accounts, I did not have the option of holding gold and silver directly. I also did not have the option of taking short positions in what I considered to be over-priced general equities. Therefore, I have been investing in gold and silver mining and exploration companies.

The current market has punished gold and silver miners more severely than general equities. I regard this as irrational, but I have never expected markets to behave rationally.

If markets were rational, general equities would never have attained their (recently departed) high-flying prices.

I believe that gold and silver will continue to perform well as safe and sound alternative investments. Therefore, the shares of gold and silver mining companies will continue to appreciate over the long run. (The explorers will not do well again until they can obtain development capital at reasonable prices.)

Thus, I am not a seller in this market. And, because I am not a seller, I am also not a buyer (though we do add gradually each month to our registered retirement savings accounts).

The gold and silver miners will some day again attain reasonable valuations, and those valuations will be much higher than today's levels.

Similarly, general equities will also proceed towards more reasonable valuations, though in my opinion, many of those values may be lower than those we see today (depending partly on the decisions of governments and central banks with respect to continuing to follow their grossly inflationary practices of the past 21 years - here I am referring to the duration of the "Greenspan-Bernanke administration" at the US Federal Reserve).

My present investment strategy?

I'm just sitting this one out.

This is not my market.
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Upcoming Blog Topics

10 November 2008, updated 20 November 2008

Sorry!

I've been too busy to blog. I'm getting ready for a seven-week working holiday, and have had no free time at all. We start out on the road to Scottsdale in the near future, and I'll be blogging again once I settle in.

Topics that are at least mentally in the works include:

(1) The market is a blind, charging beast.

Along with fellow precious metal investors, I saw the recent market collapse coming years ago. I invested in precious metal mining and exploration stocks because they are NOT correlated with the general market. Here's what I didn't allow for... the precious metal miners have performed worse than the broad market, and the precious metal exploration companies have fared far worse - they are trading as though they are going out of business! I was right that my investments wouldn't be correlated, but it was not in the direction I expected. Are precious metal miners and explorers therefore the wrong place to be? I don't think so, though so far, the market obviously doesn't agree with me. As it happens, I also don't agree with the market. More later.... perhaps much more!

(Chart courtesy of Mark Lundeen)

(2) The US election - Mr. Obama catches a sack of hot potatoes.

President-elect Obama has a hard job. He also has a bad economic plan (attack the rich to aid the poor - it doesn't work), though 20 advisers are apparently guiding his actions. Hopefully they're smart, because George Bush's job looks easy compared to the debt-laced lemonade that the spendthrift Republican administration is handing over to Mr. Obama! Personally, I have had all I can take of the Republicans' paranoid, "interest-based" international politics, as well as of their intrusions into their citizens' private lives, both of which have grown totally out of hand. So, I'm holding my nose and wishing Mr. Obama well. He'll need all the good wishes he can get, but at least he is acknowledging the complexity and diversity of human nature, and of the US melting pot of the 21st century.

(3) What do you love?

The answer, for me... is stories, and art as the context of the story, if you will. I raised this topic on September 12, 2007, and I now plan to get back to it!

(4) Ephemeralization... How to do more with less in the 21st century.

Hats off to Buckminster Fuller. The challenge of our age is obviously about how to do more with less. Let's get a little more serious about that!

(5) Healthy living.

What are the core constituents of a healthy lifestyle? My latest thoughts, with an acknowledgement to Chris Crowley, Henry Lodge and Ray Kurzweil.

(6) Ghomeshi - moving beyond Gzowski to take us into the 21st century.

Jian Ghomeshi, presently of CBC Radio Q (now playing in the mornings at 10:00 a.m.), has taken on the mantle of Peter Gzowski, and worn it well. He is Canada's foremost radio personality, and well-equipped to lead the broadcaster into the new millennium. A tribute to the genius of Ghomeshi.

For now, I'll just be posting concepts for future entries.

I'll have time to post the full content at some point after arriving in Arizona next week!

November 20, 2008:

Here are two more topics coming up....

(7) "Thirty Reasons for Great Depression Two by 2011." Here I am referring to Paul Farrell's can't miss editorial on Marketwatch. Click the link until I can say more about this!

(8) We Are All Millionaires - A Parable. Here I want to reflect on the fact that every one of us is rich beyond words in unimaginable gifts. I also intend to argue that almost every one of us has an area of intellectual specialization that endows us with unique genius. More coming on this topic for sure!
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