Monday, June 21, 2010

Moneyprinting as Policy: Winners and Losers

22 June 2010

As regular readers know, I often reference articles that I consider well though-out, particularly those that address current macroeconomic topics, as I am an individual investor saving for near-term retirement in a world that in my view punishes savers and rewards the reckless (or at least used to, until recently).

Steve Saville is among the economic analysts that I consider "very smart." He has recently written a short article, entitled "Inflation Update," that very simply and concisely sums up the present money supply and inflation issue in terms of the economic sectors that are most and least likely to "benefit" from excess central bank money printing. This is a notoriously tough area to call, as the winners and losers are different in every inflationary cycle, causing almost all pundits to be wrong on this topic almost every time!

Basically, Mr. Saville is saying that in sectors where there is excess supply, there will be no net benefit of Federal "moneyprinting." In fact, these sectors will sustain further deterioration. In our present situation (I'm referring primarily to the US, Britain and much of Western Europe), there are too many homes and too many labourers, thus precluding the flow-through benefits of inflation in these particular, already-beleaguered, sectors. That is, salaries do not rise and home prices fall, despite massive infusions of newly-printed dollars in circulation.

So what rises in value when the Federal Reserve Bank prints new money out of thin air? As I have often noted here, the costs of necessities are presently most under pressure, as they are relatively scarce in a world facing dramatically increasing Asian, Middle Eastern and, in selected cases, third world demand (in the case of commodity-exporting third world countries).

Mr. Saville refers in particular to energy and hard assets as sectors that will see price rises as a consequence of concerted global government-sanctioned inflationary policy, though many other necessities are also scarce relative to the vastly increasing quantity of printed (and electronically-created) money now in circulation (think insurance, government services, infrastructure, food, fertilizer, health services, postsecondary education, peace, safety and security - I could go on....).

The blowback?

According to Mr. Saville, the sectors nominally targeted by moneyprinting national central banks actually sustain net losses through inflationary policy --- which has most recently been in effect since the beginning of the Greenspan era at the US Federal Reserve in 1987. In the present case, home prices continue to deteriorate, and the cost of living rises for the long-suffering and now under-employed middle class.

I think Mr. Saville has succeeded in connecting a lot of dots in a few paragraphs - as well as showing that Austrian "true money supply" (TMS2 below) is still rising at a double-digit clip.

Read all about it here!

Friday, June 18, 2010

Gold: The Invisible Bull Market

18 & 19 June 2010

On February 11, 2007, I pointed out that gold's crossing the historic $800 threshold had elicited very few headlines, offering evidence that at that time, we remained in an early-stage gold bull market.

OK. Gold touched bottom at $255 per ounce for the last time on April 1, 2001 - over 9 years ago. That is, gold's bull market has persisted for almost a decade. Gold has gained in market price in every year since, with no exception, making it an ideal investment for cautious investors.

Today, gold set yet another record high, this time $1262.30. Ho hum. Apparently that's not news either. Certainly it's getting little media attention, and I've heard no one talking of it on the street.

Now, no doubt, coin collectors are wise to the precious metal boom - but hey, that's what the world's most desirable coins have always been made of, so coin collectors can only be identified as a special interest group.

And of course, the gold exchange traded funds are vacuuming up gold, sometimes at tons per day, accumulating gold holdings weightier than those of most countries. But these continue to be viewed as marginal investments by most financial advisors.

The Chinese government recently pronounced gold "too volatile" (that is, variable in price), to justify it as a primary investment. Meanwhile, China is steadily adding to its gold reserves and advertising to the public - through state-sponsored television ads - that it is a wise investment. Hmmm....

Most of today's investment advisors were trained, and certainly accumulated their experience, during the great equity bull market of 1982-2000. Well, no secret that equities have been in a bear market since. But the old conditioning seems to die hard, as almost all of today's advisories continue to push mainstream stocks. By my analysis, that backward-looking investment class could remain locked in a holding pattern for another decade to come, and a further equity "crash" is not out of the question!

So where should conservative investors look today?

Well, while stocks have gone nowhere this decade, gold has gained over $1000 in market valuation during the same period, adding almost exactly 400% to its cash exchange value during the past 9 years. I don't know what that tells you, but it suggests to me that gold might actually be a better investment than equities!

What do most people think of gold today? I most commonly hear others ask, "Well, gold has gone pretty high, can it go much higher?" Beyond this naturally sceptical response, many professional advisors suggest that gold is a risky asset class, that it "doesn't do anything - it doesn't pay dividends or interest," and that it "will soon start heading back the other way." It is "too dangerous," "too volatile," or "already in bubble territory."


Unfortunately, the professionals have been talking like this since 2001, missing the full 400% appreciation in gold's value.

For those who have been following my blog, you know that I am expecting an ultimate high in the gold price in perhaps the $5-6000 range in approximately 2019, assuming that we don't slip into hyperinflation - in which case the price of virtually everything - including gold - will be dramatically higher than today, due to a currency collapse.

So, can gold go much higher than the present $1200 mark? Based again on my personal analysis, I think we'll see $1300-1400 later this year, and $2000-3000 as soon as 2012. Another slow period is likely following the next strong run, I'd guess at some point following an interim 2012 high, perhaps through 2014 or so. Then, I think popular sentiment will shift to something very different than the early-to-mid bull market behaviour we are seeing today.

Between 2014 and 2020, my guess is that "everyone" will be talking about gold, most people will hold a significant portion of gold in their portfolios, and gold will gain over $1000 in some years during that period. But that will also signal the final years of the gold bull market.

That is, it's not too late to catch another decade-long 400% gain in the gold price. I think it's going to do it again next decade!

It is an ineluctable quality of human psychology that we are late to detect trends. And, just when gold is truly popular, another asset class (possibly bonds and equities again) will be stirring in the beginnings of a new bull market - and most members of the public will be left behind - again!

My advice. Don't be left standing and watching. Examine the evidence for yourself, and think big - think gold for the decade to come!

And... enjoy the ride (which will be choppy at times)!

19 June 2010:

P. Radomski, my favourite technical analyst, does not see gold topping here. Summer is definitely a slow season for gold and gold stocks overall, as Adam Hamilton has shown (click here), but Radomski sees technical grounds to suggest that gold can continue to climb through mid-July. So even if you're a strategic investor, now may still be a good time to be holding - or even purchasing - gold investments!

BP's Fateful Discovery: Bottomless Liability

3 & 18 June 2010

How does BP stay in business here? I'm honestly not sure why anyone is buying the stock these days, even with the company's market capitalization slashed by $70 billion or so (it has bounced back up from $36 to $39 the past two days).

The problem is liability. The greatest Gulf of Mexico oil spill in history has created unending damages to wildlife, ecosystems and countless human activities - with human health, fisheries, leisure travel, waterfront real estate (and property values) impacted, presumably for many years to come.

No corporation (or mega-corporation), BP included, could possibly ever muster the funds to reimburse all affected for the damages unleashed by this disaster. Apparently 1/6 of all British dividend payments originate from BP. I don't see how that lasts either.

I haven't seen much discussion of this issue. There was talk on CBC radio today about the immense value of BP's assets - but that calculation disregards the company's liabilities. We saw
Johns Manville plunge into bankruptcy over asbestos insulation claims.

BP in the gulf is bigger than that - far bigger by at least an order of magnitude. Once again - the US taxpayer will foot the bill, and I predict that many of the damages will never be paid (think about Florida Gulf Coast real estate values, just for a starter).

Once again, we are facing a paradigm shift, and the market hasn't caught up with the concept of "bottomless liability." Take my word for it, this case is not over until BP is in bankruptcy court. No corporation on earth could bear liability on this scale.

Click here for one forum that is discussing this somewhat complex issue. For example, BP's total liabilities may be limited by law, at a small fraction of the total damages.... As to insurance coverage - they insure themselves through a sub-venture known as "Jupiter."

18 June 2010: For more on oil spill clean-up, ask Cecil, at "The Straight Dope." The good news - oil is biodegradable, and natural bacteria are probably more effective - and certainly safer - than chemical dispersants. The bad news - in low oxygen areas, not much degradation can occur.

Re today's news. Will a $20 billion fund cover "bottomless liability?" I wish, but I don't think so.... As of today, $20 billion is 20% of BP's total market capitalization of $99.28 billion. I think BP can be restructured, but I still see this one going to bankruptcy court.... Very bad news for British investors - to run into the full force gale of US tort - and possibly criminal - law! How can any company survive the unstinting assaults of the combined US political and legal systems?

Interestingly, Douglas McIntyre proposes that BP made a mistake to cave-in on the $20 billion fund. Read about it here.

The New York Times thinks that BP may be facing a total bill on the order of $56 billion, but that BP can generate enough cash to pay the cost, assuming all goes well. I see two problems with this analysis: (1) bottomless liability will continue swelling the amount to be paid, and (2) it is seldom
that everything goes well for anyone in the real world which all of us inhabit. Read the NYT article here.


After Hours: 31.62 Down 0.09 (0.28%) 7:59PM EDT

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Trade Time:Jun 17
Change:Down 0.14 (0.44%)
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Ask:31.66 x 100
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BP plc (BP)

Friday, June 11, 2010

My Reply to James Galbraith

11 June 2010

In an interview with Ezra Klein (excerpted by Jonathan Lundell, see below), James Galbraith has maintained that "the danger posed by the deficit is zero." Well, it's an interesting idea... but in my view, this particular idea's time is limited.

Following are Galbraith's interview excerpt, and my reply:

Ezra Klein – Galbraith: The danger posed by the deficit ‘is zero’

James Galbraith is an economist and the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin. He’s also a skeptic of the prevailing concern over America’s long-term deficit. With many people now comparing America’s fiscal condition to Greece, I spoke with Galbraith to get the other side of the argument. An edited transcript of our conversation follows.

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It’s not overstated. It’s completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn’t rational. And if the market isn’t rational, there’s no point in designing policy to accommodate the markets because you can’t accommodate an irrational entity.

Laurence R. Hunt / Jun 11, 2010

How about let’s NOT design policy to accommodate the (irrational) market, but let’s design policy to create a stable economy, and let the market adjust on its own (freely AND irrationally). In my view, the problem of the past two decades has been shaping policy around market moves. Rather, let the market move around policy – we have had it backwards.

Low interest rates punish savers and fuel speculation, and when speculation becomes the lifeblood of the market, well, you’ll have irrationality for sure! The “market” will not like economic sanity, but the longer we put off the day of decision, the greater the imbalances grow – as perhaps the past 20 years have already shown. And – long-term interest rates will climb.

We are just talking about glaciers here. There are vast rivers beneath the surface of the glaciers, and they are masked by the glaciers’ comparatively limited rates of movement. But at some point, the glaciers break off – and at some point, long-term rates will rise – and the US government will be forced to balance the budget. If anything is a demonstration of the long-term principle of karma – it is the market. And then suddenly it looks rational again – the corrective process in action!


Tuesday, June 01, 2010

Gold - Are You Watching?

1 June 2010

It could be time for gold to make its next big move soon:

Radomski: Gold To Hold Well Even If Stocks Plunge Like In 2008

This would fit with the Adens' model too, and we should hear from them next week.

Looks like $1400 gold to me, with a peak in July or so.

This fits with my model posted last fall, except we are now looking at a peak perhaps in July 2010, versus my original supposition that it would come in March or May this year.

The gold market always throws in a twist or two - or three or four....

The gold tsunami continues.

I'm still expecting the big surges in 2012 and 2019 (approximately).