Friday, November 26, 2010
I am still too busy to post much on my blog, so here is an excerpt from a note to a friend....
As you know, I so distrust the financial markets that the precious metals are the only sector in which I will invest. This decision has so far has proven rewarding as well as "safe." I don`t think I`m paranoid, though I got burned in the tech bubble (prior to beginning to study financial markets and how they work!).
I know what I`m looking for in terms of responsible fiscal policies, but don`t actually see ANY of what I`m looking for so far!
It does seem that a 30s scenario has been averted, but that is not the only problematic possible outcome. The most probable future certainly continues to present a picture of devalued dollars, increased taxes, continuing dislocations and imbalances, etc. The prudent will continue to bail out the reckless, and savers will be punished. So these are not really good signs!
I can only see "repair behaviour" being stimulated by a future crisis situation, probably "the funding crisis," when the US can no longer sell treasuries at low interest rates. (The Fed can only buy so many without destroying confidence in the currency.)
So if you're in the (gold and silver) ETFs, good for you!
One of my advisories (Aden Forecast) is calling for a temporary pullback in gold, so your next buying opportunity may be coming up. They are advising against new purchases at this time, so I pulled out a small amount of cash today to cover current travel expenses.
One of my new positions is Gold Resource. They have an inspiring dividend policy, which might interest you.
I am also following Copper Canyon closely, due to this company's lilnkage to the NovaGold Galore Creek project.
And I would never sell Alexco (Resource Corp.) under any circumstances! They are about the smartest people in the business, and are perfectly located in the Yukon's historic Keno Hill silver district....
Monday, November 22, 2010
Some things are so obvious, they shouldn't require explaining. Yet somehow, we seem to make simple things so complicated that we abandon common sense.
An example of this is health care.
In essence, government-sponsored health care works in Canada. All Canadians have a right to health care. It is not cheap, nor perfect, but it is affordable. Our government is not going to go broke over this issue.
Any Canadian can tell you that we have universal health care because of the "greatest Canadian," Tommy Douglas (Kiefer Sutherland's grandfather, if that helps the younger folks).
The Canadian system can be diagrammed simply, as follows:
There, that was simple, wasn't it?
Want to know why US health care is expensive, inequitable and unwieldy?
Check out this diagram:
Or this one:
The Americans are so afraid of government involvement in health-care provision that they have created an unwieldy mechanism to flow funds and services into and around the health-care system. Most of it doesn't get to where it needs to go. It is a disaster.
Wealth is created by the free market. Let's keep government out of it as much as possible. However, infrastructure - and the rule of law - are best managed by government.
Health care is infrastructure. It is not a market commodity.
There, wasn't that simple?
My suggestion.... Bring the Canadians down. They'll have the US system working in a year or two!
No more Rube Goldberg health care in the US!
Friday, November 19, 2010
Barry Ritholz has written a brilliant piece of analytical satire - a parody of Warren Buffet's recent "Dear Uncle Sam" ("Pretty Good for Government Work") letter.
Go here now and read it - "Dear Uncle Sucker" - wow! That was concise!
Honestly, Mr. Ritholtz has dug much deeper than Mr. Buffett on this particular issue....
Thursday, November 18, 2010
I have entered a contest....
From Bill Fleckenstein's November 18, 2010 “Ask Fleck" column:
Reader question: Hi, You often mention a funding crisis. I looked it up on search and there are so many references. Could you please define what is a funding crisis???
OK. Here is my go at that one-year free subscription.
What is the “funding crisis?”
1. Any entity that spends money must also receive money to fund its expenditures.
2. There are two ways around this – credit and money creation (both temporary fixes).
What entities spend money and thus require revenues?
Basically all entities.
What entities have been spending too much money?
Basically, most of the above, but particularly the western nations and Japan, which have aging populations that have access to government-funded entitlements and require more of same, specifically health care and pension funds. Also – individuals and corporations in “bubble” sectors have been over-spending, often on the “wrong” things, such as overly lavish homes and productive capacity for items for which demand is not presently growing (this is called capital misallocation).
Is credit fixing the problem?
Well, it seemed to be doing so for a while. But individuals have over-borrowed, and now have difficulty repaying what they borrowed, particularly if they have lost their jobs or have reduced incomes for other reasons.
As to nations, again the western nations have been borrowing like crazy by selling bonds, and those who are not borrowing (read Asian and/or BRIC nations) are loaning them the money they need for expenditures, that is “funding” the deficits, the most egregious of which is that of the US, with something like a real $2 trillion annual shortfall in revenues versus expenditures and entitlements (promised future expenditures).
Also borrowing (like crazy) have been state (California, Illinois, etc.) and municipal governments and individuals. Corporations in non-bubble sectors have been more “sane.” Basically, most all (western) individuals and agencies are maxed out on credit, with many reaching the point of inability to repay it. Thus, creditors are beginning to question the wisdom of loaning money to individuals and government entities that are unlikely to repay them, particularly as they can no longer re-sell (“pawn off”) loan portfolios to imprudent “investors.”
Enter money creation, also known as quantitative easing, presently in its “QE2” stage. Central banks print new money to buy government bonds, thus inflating (and devaluing) the money supply. When money printing (massive) exceeds economic growth (stagnant), you're in trouble.
Thus, we’re in trouble now.
Only national governments and monetary authorities (specifically the European Union) can in most cases print money. So long as everybody is doing it, you have “competitive devaluation,” and one currency doesn't rise or fall that much versus another. However, some players are so profligate that they have no foreseeable ability to repay borrowed funds without money-printing, and at some point lenders are going to look at the bigger picture and decide they do not wish to be repaid in a sharply devalued currency (also known as “play money” or “monopoly money”) in exchange for “real money” loaned today.
A crisis represents a sudden shift in sentiment and behaviour in recognition of a gradually evolving picture of the world as it is. When those who loan money (buy treasuries) decide that they are unlikely ever to be repaid with anything of value (“real money”), they simply stop providing the revenues (cash flow) for the big spenders, in the present case, particularly the United States and some profligate European counterparts (known as PIIGS).
When treasury buyers stop funding government debts by buying government bonds, the bonds decline in value (reduced demand combined with over-supply), and interest rates rise until they are high enough that somebody (the “next fool”) starts buying them. At this point, we will see the kickoff of escalating interest rates combined with rising consumer prices and declining incomes and revenues, ergo, “the funding crisis.”
That is, the big spenders no longer have funds flowing in to cover their expenditures, thus necessitating a radical readjustment in either expenditures (drastically reduced) or the value of money (grossly inflated).
Coming soon (perhaps), to a government and/or nation state near you!
22 November 2010:
The winners to the "funding crisis definition" contest are now in. Mr. Fleckenstein has chosen the following two (hopefully the reader will not find my "essay," above, to be far off the mark):
The best reader definitions
A funding crisis happens to a country when other nations or institutions believe that the value of its sovereign debt or the value of its currency will decline significantly over time due to poor fiscal or monetary policies.
When that happens, fewer and fewer people are willing to purchase the sovereign debt of that country, leading to a sharp increase in interest rates and greatly increased difficulty in the ability of that country to raise new debt.
A funding crisis thus refers to the inability of a country to finance itself without resorting to outright money printing. This can lead to a vicious cycle of currency depreciation, rising interest rates, poor economic performance and poor investor sentiment, all of which feed on each other in a downward spiral.
A funding crisis can only end when proper monetary and fiscal discipline is restored, usually at the expense of severe economic hardship.
This one earned a tie as it was almost as good AND he used the search so well
In gentle criticism to the Rap Reader who inspired this little exercise, it may be useful and prudent to read a majority of those “so many references” pertaining to the “Funding Crisis”. I searched “Funding Crisis” and read everything that had a score of over 25. In this review, I discovered you started describing the “Funding Crisis” in the middle of 2006, but you did not give it a ‘handle’ until late 2008. I am glad I participated in this exercise as I learned a great deal and have a more clear financial picture of where we have been, where we currently are and where we may be going.
A Funding Crisis: the successor to the financial and economic crises; created mainly as a result of Federal Reserve policy over the last twenty years. A funding crisis occurs due to a lack of credibility in the Federal Reserve (and, the United States) to instill confidence in the value of the US dollar and repayment of current and future liabilities. The result of a US funding crisis is: a declining value of the US dollar and rising interest rates in debt markets.
My advice - if you want to understand the present economic situation, particularly in the US, do subscribe to Mr. Fleckenstein's moderately priced web service.