Another Swiss Franc Buying Opportunity for Canadians

22 & 26 December 2007, edited 27 July 2008

The Swiss Franc has corrected over the past three weeks or so, in response to the US Dollar bounce and the continuing carry trade in Swiss Francs and Japanese Yen.

On November 9, 2007, I recommended that Canadians diversify into the Swiss Franc, as our currency has been very strong, and the very sound Franc has been lagging the Canadian dollar.

For Canadians who missed that early November opportunity, there appears to be another chance to own this high quality currency. The following chart, is not yet definitive, but you can see that the Franc's recent weakness against the Canadian Dollar may be short-lived. The Franc relative to the Canadian Dollar is hugging the lower Bollinger Band, and intersecting the 50-day moving average. We are also looking at a 50% Fibonacci retracement. The weakness of the Swiss Franc against the US Dollar has already subsided.

Therefore, I suspect that this is yet another opportunity for Canadians to consider this particular investment, though watch closely. If the Franc relative to the Loonie falls below the 50-day moving average, a steeper correction may be indicated.

Note: "Captain Hook" has just made a bullish call on the Swiss Franc (click 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.
_

Don't Blame the Financial Risk-Takers

16 December 2007

I was moved to address the present topic after visiting some of the “Flippers in Trouble” websites based here in the southwestern United States, where Susan and I have been staying for a 6-week period.

Let me offer two as an example for you.


Phoenix Flippers in Trouble is fairly objective, documenting the plight of those who unwisely bought into the Phoenix real estate market at the “top” of its recent bubble.

As you know, bubbles collapse quickly, and this has been the case here in Scottsdale/Phoenix. Therefore, individuals who made their purchases at the bubble’s peak (2005 through early 2007) are now listing their homes for sale at discounts as high as 48.3%.

It’s not that bad for all of these purchasers (who are now re-sellers), but significant losses, onsetting rapidly, appear to be indicated. And properties are sitting unsold for months even at drastically reduced prices.

I found, however, that the Marin Réal Estate Bubble site tends to take a particularly uncharitable view towards the unfortunate “flippers,” referring to the victims of the crisis as “fools” and whiners.”

How in fact did these real estate investors get into trouble?

There is not a single narrative that unites all of the situations.

Certainly some “flippers” were speculators who hoped to buy in a rising market that was gaining say 20% per year, and then to resell at a later date, possibly very soon, in order to capture quick and substantial profits. Many such speculators would then plow the gains into purchases of additional properties, thus over-extending themselves when the flow of easy money ground to an abrupt halt this summer.

Others facing significant losses are long-term homeowners who borrowed too much money against their homes when money was easy, and then faced the double whammy of personal financial setbacks combined with a declining real estate market.

Another scenario is one in which a mainstream family takes advantage of low interest rates to upgrade to a larger home that, in the case of unanticipated adversity, they cannot afford.

Finally, some buyers, hoping to see gains on resale, chose more expensive homes, hoping to capture a larger net increase in home value by applying the growth percentage to a larger initial number (say purchasing an $800,000 home instead of a $400,000 home).

A uniting theme is that these nominal homeowners (many in fact no longer hold any equity in their homes) are financially underwater. That is, what they owe on their homes (or real estate speculations) is either greater than the current market value of the home or greater than the amount they can currently pay on their monthly mortgage account. It is apparently not unusual to find individuals who are $100,000 or more underwater.

In this case, these individuals cannot properly be called “homeowners” at all. They are merely “debt servicers.”

In fact, the mortgage holder is the full owner of the home in many such cases. Further, the mortgage holders are often large investment funds (or participants in such funds) which bought “sliced and diced” mortgage-backed securities from faceless loan originators who essentially sold the mortgage products quickly to unqualified buyers in order to unload them for quick profits and fees to unwary investors seeking enhanced interest income.

Strikingly, these low quality products (“collateralized debt obligations,” often called “garbage” securities) have ended up in a broad spectrum of “money market” funds held by mainstream, even conservative, investors, who in many cases did not know that such questionable products were “spicing up” their (anticipated) interest income – by promising to pay higher interest rates than bonds, but in fact offering little reasonable expectation that the higher rates would ever be paid at all. (Bear in mind that Mr. Paulson, the US Treasury Secretary, is now promising to freeze the rates on such products – assuring that the money market funds will certainly not produce the returns they have promised.)


As we all know, financial bubbles entice the unwary, robbing multitudes of mainstream investors of their hard-won life savings.

Unfortunately, that has happened again to many hundreds of thousands if not millions of American real estate investors (Paul Kasriel of Northern Trust reports that 2 million US homes are now unoccupied, up from 1/4 that number as recently as 1978; he reports that Americans' liabilities have tripled against their assets since 1950).

Obviously, many of these persons were engaging in behaviour they knew to be risky with their eyes wide open. Others were simply caught unaware when fortune turned against them, as the following story from the Marin Bubble blog indicates:

Wealthy Marin not immune to foreclosure crisis

"Ian Minto isn't exactly homeless, but he sure doesn't have his home. The 58-year-old former banker lost his job and, last fall, began falling behind on mortgage payments on the Mill Valley house he grew up in on East Manor Drive. Desperate, he sold the home - appraised at $1.2 million - for about $300,000 less than it was worth. "(I felt) like I wanted to kill somebody or jump off the bridge," said Minto, who just took a job at Radio Shack to help cover the cost of a $600-a-month windowless room he is moving into on Fourth Street in San Rafael…."

The author of the blog adopts a very blaming attitude towards Mr. Minto, presumably because he appears to have extracted excessive equity from his family home when times were good, leaving him in desperate straits with the loss of his job.

Mr. Minto is hardly a flipper. He may have made unwise financial choices, but he is clearly not the sort of real estate “speculator” that is currently being blamed for driving up the current housing bubble.

Why are investors around the world engaging in higher and higher risk behaviour? Are people simply growing more and more irresponsible, or is some other causative factor at work?

Let me assert here that in blaming the home equity extractors, the flippers and the over-reachers, we are misunderstanding the fundamental problem.

As I have discussed many times previously on this blog, the fundamental financial wrong driving United States and much of global monetary policy is “easy money” (that is, excessively low interest rates and accommodative central bank policy, in fact a misnomer, but we'll get to that).

How do people behave in a healthy economic environment?

First of all, and most importantly, in a healthy economic scenario, growth is driven by business investment and gradually growing consumer spending deriving from accumulating savings and return on invested savings.

In our present scenario, the investment community pays only lip service to business and consumer spending. All eyes are in fact fixed on the Federal Reserve, which, by providing injections of liquidity (increasing the money supply through creating new “federal funds” literally out of thin air), has now become far and away the most important driver of global economic growth. This is fundamentally and deeply wrong.

One need not read very far in the current financial literature to see references to central banks “increasing economic growth” by “assuring liquidity” (read: printing money out of thin air).

And, what is everyone in the investment community waiting on tenterhooks to hear? Not that business is growing and investing in productivity, which has become a concern of the past, but that the “Fed” is lowering interest rates to “stimulate economic growth.”

The notion that lower interest rates will drive so-called “economic growth” has now won such widespread acceptance that it is hardly questioned in the mainstream financial media.

But this unquestioned certainty is fundamentally erroneous.

Low interest rates punish savers, plain and simple – and punishing savers is no way whatsoever to “create economic growth.”

In fact, by punishing savers (and retired citizens) with low interest rates, our government authorities (read big-spending governments at all levels) and our central banks (the printers of the “make believe” money) are directly not only encouraging but forcing citizens to engage in incrementally riskier and riskier behaviours.

When saving is rewarded, citizens rein in risk and invest for meaningful gains in bank deposits, bonds and dividend-paying stocks.

When saving is punished – and it has never been so roundly punished as it is today – citizens seek out higher returns by investing in risky ventures to compensate for excessively low interest rates.

What I am asserting is that irresponsible government policy makers and central bankers are literally forcing citizens to engage in high risk financial behaviours, and that the entirely foreseeable and inevitable outcome of irresponsible low interest rate policies will be financial ruin for many citizens – and not economic growth whatsoever.

There is a better way, which I have discussed here many times before.

Allow interest rates to seek a natural (market-driven, and from here, certainly higher) level, and give the economy back to savers and business investors, who, much more slowly and gradually (without dramatic economic booms and busts) will create a more stable but also a more steadily-growing economic environment for us all.

In fact, let’s take the central banks, particularly the United States Federal Reserve – out of the business of running the economy altogether (let alone playing the role of the economy’s primary driver).

Let’s then make the financial news about business again, and no longer about central bank liquidity injections.

And let’s place the responsibility for the real estate bubble, including the entire spectrum of fruitless speculation in that bubble, where it truly belongs. It is government policy-makers and central bankers who have created this bubble and forced citizens to raise the bar on risk in order to compensate for chronically low interest rates in an economy driven by liquidity rather than by citizen savings and business growth.

Speculators have not driven the real estate bubble, but have merely responded to the long-term government and central bank policy of punishing savings and attendant normal investment practices.


The speculators are not the guilty party in the present situation. But the central bankers and the big-spending government policy-makers are very much at fault in creating a climate which forces people to speculate in increasingly risky and dangerous ways.

Hopefully the above exposition has set the record straight on the question of real estate speculation here and now and once and for all.

In the Retribalized Global Village, What We Focus on Increases

10 December 2007

I’d like to present today a fairly simple but profound psychological idea.


What we focus on increases.

Human beings learn through classical and operant conditioning and through role-modeling (observational learning).

In classical conditioning, we generalize our responses to a wider range of similar or related initial stimuli. The classic study was Pavlov's ringing bell. When the bell was rung at mealtime, the dog in Pavlov's study learned to salivate in response to the ringing of the bell alone. Food was no longer required.

In operant conditioning, the intensity and frequency of our behaviours varies depending upon their consequences. For instance, the two most “clicked-on” features of this blog so far have been my article on gold’s historic $5000 inflation-adjusted peak value and my posting of Picasso's groundbreaking artwork, Les Demoiselles D’Avignon, in my entry on retribalization. I confess I am somewhat intrigued by what these two topics may have in common – perhaps not that much….

But it often crosses my mind to repost similar articles, as these two have by far been the most widely read on this site.

The most subtle – and profound – aspect of human learning is observational learning, often referred to as role-modeling or social learning. Humans are much more influenced by role-modeling than the other species that walk this planet. In fact, our susceptibility to role-modeled behaviours is clearly a factor that distinguishes us from essentially all of our animal peers (though the chimps, for example, who share 99% of our genome, are also notably receptive to role-modeling).

Through role-modeling, we learn primarily problem-solving behaviours by observing how those around us solve their problems.

I would now like to target one particular aspect of human learning that particularly concerns me.

In the hope of clarifying my primary point through the use of historical analogy, let me begin with the following exemplar of the principle I wish to present.


We can now look with considerable distance at the public panics that swept the western world from about 1450-1700 AD, resulting in the notorious witch hunts and trials of that period. From our present perspective, this 2-1/2 century era in human history is challenging to grasp. The obsessive preoccupation with witchcraft and the associated fear and panic of that era seem impossibly bizarre to us now.

My fundamental point is that all three aspects of human learning keyed into the witch-hunting process of that era. That is, humans became increasingly concerned about women whose behaviours appeared to resemble widely disseminated portrayals of the conduct of witches.

Women meeting privately? It must be the gathering of a coven!

This is classical conditioning at work. If it looks and acts like a witch, it must be a witch. The public preoccupation with that particular stimulus (in this case, “witchy” behaviour) increased the saliency of all similar or imaginatively related behaviours. People paid increasing attention to behaviours in this particular category of concern.

When these innocent women were tried, the process employed forced them to admit their status as witches. Thus the behavioural pattern of hunting down witches and extracting confessions from them was reinforced, and the practice increased, sweeping across New England and Europe.

The role of public confession in reinforcing the public’s concern with the perceived practice of witchcraft represents the importance of operant conditioning in magnifying broad societal behavioural patterns.

Finally, and most importantly, individuals who felt uneasy about their female neighbour; women who disliked their husband’s interest in another woman; those who envied the success or freedom of a neighbouring woman – all had ample exposure to role-modeled demonstrations of how to resolve their dilemma.

All that was needed was to identify behaviours suggestive of the practice of witchcraft, and these women could be rounded up and tried by the authorities, and then executed in public. Problem resolved. In a gruesome and ultimately horribly shameful way.

Perhaps the obsession of that era with women’s practice of witchcraft had most to do with the growing freedom of women in the emerging industrial age.

Nonetheless, the principles of human learning – particularly role-modeling – strongly drove this disturbing process.

Where are we today with respect to this matter?

Well, we are no longer particularly concerned about witches, are we? At least not so much now as then… and certainly not to the point of rounding up women and publicly executing them!

Today we have other foci of public concern. In my view, these are easily discerned through examination of our public media.

The contemporary media offer us – instead – unceasing images of random and unregulated public assaults on personal safety and privacy, causing us to feel increasingly threatened and fearful.

What specifically am I referring to?

Well, you know and I know all that it is necessary to do to take over the front page headline of our local and national newspapers, how to lead the evening television news, and how to be a top pick on Google News….

What is required is to engage in a horrible and shocking public assault on the safety and privacy of our neighbours.

Today’s media are driven by stories of mass murder, serial killings, child abductions, child sexual abuse and terrorist violence…. or, if you will, of the moral peccadilloes of presidents and celebrities.



Though lacking in innocence (bear in mind that the supposed witches had in fact done no wrong to anyone), the perpetrators of these horrifying acts otherwise function as the witches of our era. They dominate our public consciousness, alter the focus of our attention, drive defensive and fear-driven changes in our behaviour, and – most importantly – serve as reflexive (and profoundly misleading) explanations of what is wrong in our current world.

If today’s headlines were to focus on what I personally believe is causal of our contemporary dilemmas, the above stories would not lead the headline news at all.

From my perspective, stories about central banks expanding the money supply; cabals of military industrialists setting international policy; chief executives sitting on each others’ boards voting each other ever-larger pay and bonus packages; business interests pressuring governments to offer favour to their enterprise or field of business; special interest groups seeking advantage at the public trough by disrupting the social order; and public policies which marginalize families and communities would dominate the (problematic) headline news.

Obviously my stories don't dominate your headlines – but they might if I were managing the media. Fortunately, I can find most of what I need to know through the wonderfully individualized internet-based news services.

And there is a second problem. Were my stories to dominate, they would still be problem-focused.

Do you begin to perceive the fundamental dilemma here?

It has often been said that the media pander to the lowest common denominator. I will not dispute that.

But there is a far more important and more insidious aspect of the media's obsessive emphasis on the recurring disturbing themes I mentioned earlier.

The pernicious focus of the media on these archetypal fear-inducing stories is informing individuals who may already be emotionally disturbed or otherwise unbalanced about what behavioural strategies they can adopt to win the recognition of their peers, while also unleashing their troubled emotions at the devastating expense of others around them.

What I wish to assert is that the daily wash of horror stories flowing through the media and into our consciousness is in fact exposing us to a very negative and dysfunctional cast of undesirable and entirely inappropriate role-models on a daily basis.

My simple proposal is to refocus the media on positive rather than negative role-models.

By the way, I'm not talking about bad news versus good news stories here, but rather stories about how people in all walks of life manage difficult or even tragic circumstances with courage, dignity and imagination. I hope that this distinction is clear.

I don't think we have the option of suppressing stories about multiple killers, child abductors, child abusers, terrorists and lapsed celebrities – but I do suggest that the media adopt a code of conduct by which it is agreed that stories of this kind are not suitable as primary or leading news items.

It’s really that simple. Put these stories back on page 5. Avoid sensationalism in their coverage. Assign them minimal television time. Make the information available for those who truly need to follow it up – but don't allow the supposed witches of our era to dominate our news features in media of all kinds on a day-in and day-out basis.


Instead, let’s consider more stories about positive role-models – individuals who are engaging in constructive action to heal the harms suffered by individuals, families, communities, peoples, nations and our planet itself.

Imagine today’s news headed, for example, by the latest exploits of
Muhammed Yunus rather than Osama bin Laden; by Jean Vanier rather than William Pickton; or by Warren Buffett rather than Conrad Black.

Again, I'm not asking for an enlarged emphasis on "feel-good" news stories.

What I am asking for, in brief, is news stories about positive role-models… and more and bigger stories about positive role-models than negative role-models!

It’s that simple.

What, if anything, might be wrong with this simple idea?

The only profound challenge I can presently imagine to my idea is the concern that the concept simply may not be marketable.

This may be a valid objection.

However, I would counter with the following rejoinders:

(1) The idea hasn’t really been tried, so how would we know without testing it first?

(2) Even if news of positive role-models proved to be a niche market, it so far appears to be a largely unexploited niche, the exploration of which may yet prove commercially prospective.

Perhaps you believe that news stories of positive role-models is just not that interesting. If you wish to adopt this argument, first take time to consider your own positive role-models, and tell me how interesting – or uninteresting – their life stories have been to you.

Based on my own life experience, there is little of greater interest than the stories of positive role-models – individuals who may in many ways be flawed and imperfect, but who have nonetheless figured out solutions to problems that are personally meaningful to many of the rest of us.

Therefore, let’s not decide that news stories of positive role-models don't work until we've tried it – OK? OK!

By the way – the role-models may be yours or mine. Just make the case that the person has somehow created a positive solution to a significant problem.

I'm probably willing to listen to your stories if you are willing to listen to mine.


And now we re-enter the retribalized global village – gathering about the community fire to share the exploits of the great people among us. But this time – if I have my way – these stories will begin to be told through the local, regional, national and international media!

It is not good news that we require (though that is certainly welcome). It is news of good role models that is critical to our cultural health and survival.

A Gentle Bull Market in Gold

28 November 2007

Gold's last bull market was in the 1970s. That market's period of greatest strength was from August 1976, where gold had actually fallen by almost 50% (from almost $200 in February 1975) to about $100 per ounce, to January 1980, where gold briefly traded over $800 per ounce in a 3-day spike.


That $800 gold price was not to be revisited for 27 years, as new technologies and industry consolidation made commodity extraction cheaper and cheaper, conservation moderated demand, and economic dynamics strongly favoured increasingly globalized business and industry over commodity production.


During our era, the Dow Jones Industrial average has mounted a 33-year bull market extending from 1974 (or if you prefer, from 1982) through 2007. Our generation has only known rising financial markets. (These charts are available through Adam Hamilton at Zeal.)

In my view, we are therefore ill-prepared for the economic fate that soon awaits us. The present 2001-2007 gold bull market has already extended much longer than the 3-1/2 year bull run of the late 1970s. As already discussed on this site, in inflation-adjusted terms, gold's 1980 high was actually closer to $5000 per ounce.


Our present gold bull market has been very gentle, as the present chart (borrowed from Richard Russell) illustrates. Most citizens are unaware that financial investments are collapsing in value in terms of gold, or that they are soon likely to decline in US dollar terms as well.

From all appearances, the present gold bull market will extend much longer than the 1970s gold bull market, even if we date that historic run from $35 in 1970 to $882.50 in January 1980 (with that dramatic 50% pullback situated almost dead-centre, from 1975-1976).

The present gold bull market remains in its gentle stage, and parabolic growth (of the kind which attracts popular attention) is likely still many years away. It appears that our present gold bull market will be of much longer duration, and that suggests to me that the corresponding inflation-driven economic decline, which is generally associated with gold bull markets, will very likely be of longer duration also.

My advice - take care, and continue investing in gold and silver. It appears that this strategy will work for many more years to come!

Finally, Gold Has Reached a New High in Canadian Dollars!

25 November 2007

It has been a long wait. Gold has been logging new highs in US Dollars for much of the latter half of 2008.


On Friday, gold eked out a new high in Canadian Dollars, at $813.00 (CDN), finally bettering its $807.00 level in February 2007 and its $810.00 level in May 2006.

Gold's recent $848.00 high in US Dollars did not phase the Canadian market, as our dollar had soared to $1.10 US at that time. Since then, the Canadian Dollar (along with the other resource-based global currencies) has retreated, in our case, to parity with the US Dollar.

So, for Canadians, gold's early November 2007 $848.00 US Dollar high was not sufficient to move the precious metal into record territory, but the recent $824.70 US Dollar close on Friday, November 23, 2007 moved us to a 27-year high gold price.

I note that gold has also attained a 27-year high in Australian Dollars.

The gold bull market continues to unfold.

It is most meaningful when gold rises in all currencies, and finally, that is now happening. Gold's ascending move as the resource-based currencies consolidate is particulalry meaningful, as this development reinforces the message that gold is a currency, not a commodity.

A Better Way to Understand Excess Liquidity

23 November 2007


Excess liquidity is a difficult concept to grasp.

Let’s try this explanation for simplicity:

In 1980, there were 1.8 trillion US dollars in circulation.

Now there are 13 trillion US dollars in circulation.


That is an increase of 722% in 27 years.

Is the US producing 7.2 times as many goods and services now as in 1980?

Of course not – the economy has grown, but not that much.

This means that, in fact, too many extra dollars have been produced during the past 27 years.

Who dishes out the extra dollars?

This is the designated role of the US Federal Reserve Board.

Who, therefore, do you conclude that Wall Street watches most closely? (a) The US consumer? (b) US business leaders? (c) The Chairman of the Federal Reserve Board?

If you guessed “c,” move to the head of the class!

The Federal Reserve Board is more important than either the US consumer or US business leaders in creating a flow of money in the country. And, by producing so many US dollars, the Federal Reserve Board has had a major role in enhancing the flow of US dollars around the world at large as well.

Now, what do you think happens when too many US dollars chase too few goods and services?

Great! You’ve got it again! It now takes more US dollars to buy the equivalent goods and services, and we call this “monetary inflation.” No wealth whatsoever has been created, we have just increased the number of dollars that are required to purchase more or less the same quantity of goods and services.

Are you ready for the next question?

How do these new dollars get distributed – after the Federal Reserve Board has dropped them out of a metaphorical helicopter?

You’ve guessed it again!

Everybody who is alert to this game scrambles to get their hands on them first!

And who watches this game most closely? You guessed it – the professional investment community!

Now – who do you think actually lays their hands on these excess dollars before anyone else?

If you guessed “Wall Street financial firms,” then keep your seat at the head of the class.

The denizens of Wall Street watch every move that Ben Bernanke (the current chairman of the Federal Reserve Board) makes, and every breath he takes. They read tea leaves to divine his every move!

Why?

Mr. Bernanke dishes out the excess dollars that the Wall Street players desire to get their hands on first – ahead of you, me, or anyone else.


Do you imagine that this is an orderly process?

Aha! You’ve guessed correctly again! The process is in fact quite disorderly – in fact, it is a mad scramble.

The financial professionals on Wall Street (figuratively – really the US and global financial services industry) engage in inventive processes to rake in the new funds as fast as they flow out of central banks around the globe (as central bankers almost everywhere engage in more or less the same process as the US Federal Reserve Board).

In the late 1990s, these “financial innovators” promoted IPOs (initial public offerings) of technology and internet stocks. More recently, they have capitalized on the liquidity-inflated housing market, creating “mortgage-backed securities,” “collateralized debt obligations” and off-balance-sheet “structured investment vehicles.”

They sell them to second, third and fourth parties down the line, charging significant fees in each case. Ultimately, the money that we invest in housing and mortgage payments flows through these vehicles. It is a game of hot potato – as the last one holding the hot potato (yet another over-valued and over-hyped Wall Street investment product) loses the game.

How do human beings feel – psychologically – when the quantity of money keeps increasing – and as the value of the money we hold in our pockets inevitably dwindles?

You’ve got it right! We feel insecure.

Case in point – the real rate of inflation is on the order of 10%. Let’s say your bank is paying 3-4% interest on savings. If you are a saver, you are losing, say, 6-7% per year. On a long-term basis, your savings will so substantially dwindle in value that you will not be able to guarantee a secure retirement.

Add to that the fact that your take-home pay is probably not increasing at a 10% per year rate to match the rising real cost of living.

How do humans respond to such a guaranteed losing game?

We enter into higher-risk games, attempting to protect and enhance the value of our diminishing (due to monetary inflation) assets.

In the 1990s and early 2000s, we bought internet and technology stocks.

Then as the technology and internet bubble faded, we increasingly bought homes (as a “real investment”) and risky investment products based on questionable mortgage loans to unqualified buyers.

Many Americans (in particular) pulled equity out of their supposedly ever more valuable homes in order to pay down other debts and to purchase consumer products (as saving had become increasingly counter-productive, spending was the remaining alternative for many).

International interest in casinos and other forms of gambling has exploded as the money supply has ballooned out of all proportion to the real growth of the domestic and global economies.

Result?

The gap between the rich and the poor in the US has increased to its greatest level in history.

The middle class has stopped participating in the wealth creation process.

Many speculators, borrowers and risk takers have lost much or all of their risk capital – and in too many cases, their life savings.


Chief executives of Wall Street firms have recently lost their jobs due to the emerging discovery of the worthlessness of the investment products they have been buying and selling (taking with them $150 million compensation packages, as well as the proceeds from commissions on the worthless pieces of paper that they had been buying and selling, often many times over).

Where did the $150 million packages come from?

Remember – that was the money that Mr. Bernanke – and before him, Mr. Greenspan – handed out – and which came back to Wall Street through mainstream investors’ purchases of hotly-promoted financial products (most recently, “creative” mortgages and home equity lines of credit, etc.).

What is the solution?

The increase in the money supply should not exceed the increase in production of goods and services – period.

Reining in money supply growth would bring the current madness to a screeching halt – initially creating substantial economic disruption – but ultimately allowing for the restabilization of financial, real estate and other markets, thereby – somewhere down the road – making saving worthwhile again – and financial speculation and risk-taking considerably less attractive.

What would it be like on Wall Street in such an environment?

At first, it would be like watching paint dry, there would be almost nothing for the Wall Street professionals to do, and many would leave the business as the commissions and speculative gains evaporated. But gradually, over time, there would re-emerge an honest business in selling much more modest and straightforward investment products of real value to American and global investors.

But that is not here or now. Not yet. Not for many years to come.

We have to wring out the excesses of the current glut of North American and global liquidity.

This wringing out will be a lengthy and painful process. But its eventual outcome will be positive – normalizing and restabilizing our economic system – at a much scaled down pace and scope of operations.

What to do here and now?

Gold and silver remain wise investments when the financial system is insecure, though their volatility (in terms of unstable US and other world currencies) will continue to reflect the vagaries of wide-ranging and often irrational human sentiment.

Buy gold and silver and diversified shares of the mining companies that produce them, gradually, fewer ounces and shares when prices rise, and more ounces and shares when prices fall. Over time, the value of precious metals and mining companies will certainly rise, and you will be well-rewarded for your self discipline and longer-term vision.

I am hopeful that this brief lesson may prove of value to you…………………

The Swiss Franc Continues to Climb in Canadian Dollars

21 November 2007

Just an update from my November 9, 2007 post.

The Swiss Franc has continued to climb steadily since I recommended it as a purchase for Canadians on November 9.


As you can see, this one has legs. There is still further room to move just for the Swiss Franc to get flat for the year (2007) against the Canadian Dollar.

The Swiss Franc is still a good buy, even here, though most of the quick and easy gains have been taken.

See my more recent Swiss Franc comments here, here and here (9 February 2008).

My July 14, 2008 analysis of the Swiss Franc (based on conservative money supply growth in Switzerland) is here: "All You Need to Know About Global Money Supply in One Place."

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.
_

Canadians: Buy the Swiss Franc Now!

9 November 2007, edited 27 July 2008

The Canadian Dollar "bubble" is now winding down. (We bought our US Dollars for travel on Wednesday, when the Canadian Dollar hit its peak. It's lost its bloom for now.)

The Swiss Franc has been traded much more conservatively this year, as it is a low-interest carry trade currency, similar to the Japanese Yen, but with better fundamentals in my view.

Carry trades are gradually unwinding, meaning that the carry trade currencies are rising.


The Swiss Franc is now taking off relative to the Canadian Dollar.

Canadians - buy the Swiss Franc now!

You heard it here on November 9, 2007!

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.
_

Social Stability, Population Regulation and Global Warming

4 November 2007

A brief comment.

In my view, the global warming debate boils down (no pun intended) to a question of how we regulate the size of our planet's human population.

I don't see how our planet stands a chance if population continues to grow vigorously from its present base of 6.75 billion souls.

But there is a deeper conundrum.

How can we go about answering the questions of regulating population size and carbon and greenhouse gas emissions and promoting resource conservation, etc., without first answering a far more fundamental question?

The fundamental question is, what kind of society do we wish to inhabit?

Specifically, how do we wish to balance the competing demands of civil freedom, economic freedom, the rule of law, security of title/ownership, limits on license, protection of the vulnerable, restraint on the powerful, etc.?

Until we have decided what kind of society we desire to share with our fellow homo sapiens, there is literally no hope of resolving the critical questions of human population regulation, environmental degradation, resource conservation, global warming, species diversity, ecosystem preservation, etc.

In the interim, I favour a single strategy: role-modeling.

What do I mean?

Those who think they have a better idea for how we should resolve these fundamental and vexing problems should demonstrate the solutions by living them out in their own lives.

I am intolerant, for example, of demonstrations, activism, continental campaigns mounted in diesel-spewing busses (even if it is bio-diesel), attack ads, public griping and complaining, and blaming the villain of your choice (indolent citizens, greedy corporations, short-sighted governments, Islamic extremists, religious fundamentalists of all stripes, heathens, scheming and manipulative US or Chinese totalitarians, the military industrial complex, bureaucracies at all levels (including the UN), resurgent Venezuelan, Bolivian and Russian Communists, emerging and unstable nuclear powers, oppressive dictators, etc.).

If you think you have a better idea, do it.

If it’s more than you can do alone, find some others to join you, and do it with them.

Don't talk about it. Don't complain about it. Don't blame others for the problem. Just do it.

Live your dream and vision.

Inspire others.


My own role-models remain Helen and Scott Nearing. They wrote about their thoughts and ideas, but simply lived the lifestyle they thought was necessary to make human survival possible. I also believe that Ivan Illich did this well. Ludwig von Mises laid out the theoretical basis for how societies can work in terms of social and economic freedom, and accomplished this from a psychologically enlightened perspective. Hernando de Soto and Muhammad Yunus have articulated how these solutions can be applied to disadvantaged third and fourth world societies.


Therefore, don't be a global griper. Be a global role-model.

$800 Gold, No Headlines

2 November 2007

My wife Susan and I watched as gold crossed over from $799 to $800 per ounce at midday today. Gold has previously traded above $800.00 on only two days in January 1980.

As this is a historic milestone, I immediately checked the news services for the headlines trumpeting $800 gold. I looked all over Yahoo.com's news feeds. Nothing.

In all fairness, both Bloomberg and Reuters UK carried stories, posted at 1:50 and 2:16 pm. Eastern time respectively. Marketwatch picked up the story at 3:21 p.m., and this briefly surfaced on Yahoo’s specialty Marketwatch section for about half an hour before disappearing again. This story didn't make the top ten in either Yahoo business or Canadian business news, let alone “Top Stories” or “World News.” I had to go to Kitco (a specialty precious metals investing site) to find the Reuters and Bloomberg versions of the story.

What does this tell me?

Gold is going much higher than $800.00 this time around. This gold bull market won't slow until virtually everyone has noticed. And it appears that this development will be many years in the future.

At the present juncture in history, gold’s trading in all-time record high territory is news only for those with a special interest in its coverage.


Gold did trade briefly at $887.50 on January 21, 1980 before collapsing in the 21-year bear market that took it to its dismal February 20, 2001 low at $255.00.

Now let’s see if anyone notices when gold reaches $875.00 per ounce.

By the way, on February 20, 2001, the US dollar index traded at .4424 times the price of gold. On October 31, 2007, this same ratio stood at .0961. That is, the US dollar index has lost 77.3% of its value against gold during the relatively short interval from February 20, 2001 to October 31, 2007 (a brief 6-1/2 year period).

My advice – don't let the news pass you by any longer. If you have not already done so, do consider investing in gold in the near future. (By the way, I am not a registered investment adviser, and I can offer no predictions about short-term trends in the gold price, which is very volatile.)

Haven't I suggested investing in gold on this blogsite before – on July 28, 2005, when gold was trading at $425 per ounce?

Susan and I purchased our first gold mining stocks (Northgate Minerals and Bema Gold Corporation) on August 26, 2003. On that date, gold was trading at a price of $362.00 per ounce. Now, 4 years later, gold has gained $444 in added value, in US dollar terms. That is a 123% gain over this period (though the gain is much more modest in Canadian dollar terms, due to the soaring international value of the Canadian Loonie).

With a closing price today of $806.00, the price of gold is still attracting little notice in the mainstream media.

Figure it out – it’s still not too late to be an owner of gold!

I'll meet you here again when gold tops $887.50 per ounce, and moves into all-time record territory. And we'll again examine the headlines on that day. My best guess – our next meeting will be only a few short months away.