Gold Tsunami V: The $23 Trillion Bailout... and Counting

22 July 2009

The excesses of the post-bailout economy are so expansive in scope that little can be done to capture their enormity.

However, courtesy of Clusterstock, here is one chart that does well at capturing our current fundamental picture. Note that the bar chart below is denominated in trillions of US dollars:

Clusterstock provided the following caption in its July 20, 2009 mailing:

"TARP watchdog Neil Barofsky says the total size of the bailout has now hit $23.7 trillion, when all the guarantees are factored in. Of course, the government doesn't just provide a bailout total, so different parties may come up with different numbers. But one thing's clear: ever since the first bailout, the estimate has grown and grown and grown and grown and grown. Let's hope today's number is as big as it gets."

Jim Sinclair works this figure out to about $80,000 per American.

This will not be repaid in uninflated dollars.

When the dollar is devalued, the price of gold rises.

What happens when the value of the dollar collapses?

We will see a tsunami in gold.

I recently stated that the reversal in the 30-year "long bond" is the seismic event that will trigger the golden tsunami. Of course, the devaluation of the 30-year treasury bond is a consequence of the devaluation of the dollar.

You can't make everybody happy and maintain the value of your currency.

Only a government which can say "no" to the majority of its citizens in a time of crisis - particularly to those who are traditionally most influential - can preserve the integrity of the US dollar.

I predict that at some point a government will be elected which is strong enough to say no to those who make unreasonable demands upon the US Treasury.

The present government is not that government.

We are not there yet.

The necessary national government policy changes will occur post-tsunami.

Man the lifeboats.

Seek the safe haven of the currency that no government can inflate.

Invest in gold now.

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating

Blog Entries I Will Never Write:

I've been meaning to write this one for a while.

Have you noticed that Caterpillar is taken seriously when they release their revenue and earnings reports?

Stop and think about it.

Caterpillar is a North American vehicle manufacturer. They make Caterpillar equipment here. The company pays competitive wages. They sell their products in a competitive marketplace.

How is that different than GM?

Caterpillar makes money, whereas GM bleeds money.

Caterpillar operates its business without government assistance. GM would have sunk beneath the waves years ago without government bailouts.

Why are taxpayer dollars feeding the bloat at GM (and Chrysler) when we have vehicle makers like Caterpillar onshore?

You want to rescue a North American vehicle manufacturer?

My suggestion - put the taxpayer dollars in Caterpillar, not GM!

You'll get something back for your investment....

For goodness sake - put your own dollars in Caterpillar. It's a great company - with great products - that is well-run with the intention of making a profit - for shareholders!

Or in Canada, consider taking shares in Finning at current prices. Price to earnings ratio of about 12:1, and a 3% per year (44 cent) dividend.

Maybe someone at GM should have thought of managing the company for long-term profitability - several decades ago!
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Proust on Suffering and Beauty

16 July 2009

While watching Episode 7 of Torchwood Season Two last night, Susan and I noted that Captain Jack Harkness attributed the following statement to Proust:

"Only in suffering do we recognize beauty."

I have so far been unable to verify this quotation. However, I do note that my web search has uncovered the following remarks by Proust, most of them along this general theme:

"Those whose suffering is due to love are, as we say of certain invalids, their own physicians."

"And this is the artist's source of suffering: to be powerless to turn the eyes of memory, the mind's eye, and reason toward Beauty, Being, or Love."

"In reality, in love there is a permanent suffering which joy neutralizes, renders virtual, delays, but which can at any moment become what it would have become long earlier if one had not obtained what one wanted, atrocious."

"Until I saw Chardin's painting, I never realized how much beauty lay around me in my parents' house, in the half-cleared table, in the corner of a tablecloth left awry, in the knife beside the empty oyster shell."

"Let us leave pretty women to men without imagination."

"The past not merely is not fugitive, it remains present."

"We are healed of a suffering only by experiencing it to the full."

"Everything great in the world comes from neurotics. They alone have founded our religions, and composed our masterpieces. Never will the world know all it owes to them, nor all they have suffered to enrich us."

"The opinions which we hold of one another, our relations with friends and kinsfolk are in no sense permanent, save in appearance, but are as eternally fluid as the sea itself."

“Happiness serves hardly any other purpose than to make unhappiness possible.”

“Happiness is beneficial for the body, but it is grief that develops the powers of the mind.”

"It has been said that beauty brings a promise of happiness, but it could be otherwise that the possibility of joy is the beginning of beauty."

"We always end up doing the thing we are second best at."
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A Conversation with Larry McDonald of the Globe & Mail

30 May 2009

I recently received an e-mail enquiry from Larry McDonald, co-author of the Globe & Mail's "Me and My Money" column. The following discussion is preliminary only, but I felt that some of the material covered might be of interest to the readers of my blog. My responses to Mr. McDonald's questions follow below:

What investments do you have in your portfolio (name of stocks, mutual funds, etc.)?

Primarily gold and/or silver mining companies, with larger holdings in Goldcorp, Yamana Gold, Minefinders, Northgate Minerals, Pan American Silver and Franco Nevada, and also quite a few smaller cap explorers and miners, such as Rubicon Minerals, Premier Gold, Jaguar Mining, ATAC Resources, etc. I also often invest in warrants in many cases, where they are available, including Goldcorp, Yamana, Minefinders and New Gold, for example.

What is your investment approach?

While I do some active buying and selling depending upon factors of relative valuation and timing, for the most part, I am a long-term buy and hold investor, meaning that my portfolio has varied dramatically in market value over time. For example, the market valuation declined over 65% in the fall of 2008, and now we've gained 130% since the November lows. The market valuation was highest in March 2008, and lowest in November 2008. Also, the majority of my investments are held in registered accounts, meaning that I buy and sell equities rather than physical metal (gold, silver).

Brief history of investing path, e.g. how got started, etc.?

I started out very conservatively, holding bonds through the investment bubble of the late 90s. I was then a late arriver to technology investing, which was of course disastrous, and then began to research why I had become drawn into an investment bubble. I thus missed the real estate bubble, and believe that last year’s commodity blow-out was not a bubble.

In the background, my wife invested primarily in income trusts, and thus I am furious with Carney and Flaherty for blowing up Canadian small investors and forcing the western natural gas trusts in particular onto the international investment market (at depreciated values) at the expense of Canadian small investors. I'm single issue against the Conservative Party on their dismantling of the income trust program, and will never forget the betrayal of trust – as well as stupid and short-sighted policy – on that “single” issue. (Don't get me going!)

What were some of your best and worst investment moves?

Worst – investing in technology companies in the early 2000s. Best – shifting my portfolio to the precious metals sector in 2003.

What advice would you offer to other investors?

Look beneath the surface to secular trends (large trends that span decades). Study history to view these trends in perspective. Be aware that financial markets are undergoing a period of massive manipulation based on misconceived government interventions – almost all of which have been counterproductive. Understand why Federal Reserve policy is now of greater interest to the financial community than analysis of underlying economic fundamentals (the markets have become increasingly distorted by short-sighted and increasingly disastrous government and central bank policies, dating back in particular to the advent of the Greenspan era in 1987). Be wary of efforts at market timing. Invest based on underlying, long-term value against the backdrop of a macro environment of inflation, debt promotion and capital misallocation. For longer-term investors, give greater weight to fundamental value than to market price when making investment decisions. Seek the advice of wise and experienced professionals (I rely on Ed Bugos in Vancouver, Bill Fleckenstein in Seattle, John Doody – the Gold Stock Analyst, in Florida, and the Aden sisters in Costa Rica).

By the way, while I view government policy broadly as unbalanced and disastrous, I'm not a conspiracy theorist. It is simply that government is over-intervening to save the market from itself, which has never once worked in history, and the intervenors operate from a very short-sighted perspective, with no acknowledgement and/or awareness of the consequences of their actions.

I do also buy into the notion of a power shift away from the United States towards Asia, and this is due moreso to the departure of Americans from their long-term commitment to free market policy than to the inherent strength of Asian economies. In brief, Asians have been saving while Americans have been borrowing, and, as Warren Buffett illustrated in his classic “Squanderville” story (published in Fortune and other places), the long-term consequence is to shift wealth from borrowers to savers. This is what is now happening globally.

Finally, I view Canada as uniquely well-positioned due to the balance of our economy towards commodity production. However, I view our national Conservative Party leadership as largely blind to the implications of this reality, with the result that they are attacking small investors (through their anti-small investor income trust policy) and throwing money at declining industries (obviously but not only autos), rather than providing support to small investors and to investment in Canada’s capacity to lead the world in commodity production (I once read that we have more mining and mineral exploration companies in Canada than in the rest of the world combined, though I've never verified that statement by “counting”). That is, Canada has everything we need to be global leaders in the 21st century, but our elected officials are looking backwards rather than forwards.
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Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

27 May 2009 - Updated 9 August 2009

It is no secret to investors that the US 30-year "long" bond has risen in value for 28 years.

It has certainly also been noticed that this almost one-third century trend has recently reversed - with the reversal confirmed by a break in the long-term-trend-defining 65-week moving average this very week.

The implication is that bond prices could now fall, and interest rates rise, for the next one-third century or so.

The cause, of course, is the massively inflated, bloated, still over-valued US dollar and the floundering US economy.

The rate of change in the bond market is typically glacial, though do remember that even glaciers have periods of rapid movement - when the weather is very cold or very hot.

However, the key point here is that bonds will soon cease to be the outperforming investments that they have been for the past 3 decades. Additionally, it has grown increasingly obvious that general equities are in a long-term bear market.

What then will investors turn to for preservation of the value of their holdings?

You know and I know that gold is a store of value in uncertain times.

The reversal in the long-bond trend is a seismic event in the investment world. The tremors will be felt far and wide for decades to come.

The falling bond price is the seismic shift that will ignite the gold tsunami.

With both bonds and equities in decline, gold remains the only secure vehicle in the investment world. Other investments may rise, but only gold possesses the combined qualities of relative strength (its time is now) and security (gold is no one else's obligation and thus is not subject to possible default).

Tsunamis begin with a deep undersea earthquake. The disruption in the ocean depths is transmitted to the surface, giving force to the giant waves that later crash to shore at the ocean's perimeter.

The collapse of the 30-year bond price is the earthquake.

The price of gold is the tsunami.

There is a tsunami coming in gold.

9 August 2009: My charting site allows me to create a chart of the 30-Year Treasury yield from 1990, so let's have a look at that here.

As you can see, the change in trend is most notable on a short-term basis only. The yield bottomed at an amount of 2.519% on Friday, December 19, 2008. This subtle transition can be observed on the following chart.

Though this may look like yet one more dip on a 3-decade journey downwards, don't be deceived. The long-term trend of the 30-year yield is defined by the 65-week (325-day) moving average, and that is the line that was crossed during the first week of May 2009, and again more decisively (after a retest) during the week of May 25-29, 2009.

The 65-week moving average has been crossed before, in fact, many times since 1990. But in this case, the rate plunged to an atypical low near 2.5% before almost doubling to 5.066% in June 1990. Each time the 65-week moving average has been violated to the upside, it has appeared that a trend reversal was in the offing.

This time, however, the move appears more definite for several reasons. To begin, this is the first time we've seen a doubling of the yield. Further, the dramatic turnaround of the rate in a "double" in a matter of 6 months is also unprecedented. Given macroeconomic factors, it is also difficult to see how the yield can again fall below 2.5% (a retest of this low in a "double bottom" is certainly possible at some point, particularly if another financial crisis akin to that of 2008 should occur), as foreigners are displaying a markedly diminished appetite for US treasuries, and the US government is running a $2 trillion deficit this year which will not be recouped by increased tax receipts at any foreseeable future time.

If there is an argument against higher long-term rates, it is a weak one based on quantitative easing. This is the practice of the Federal Reserve Bank under Chairman Bernanke to "print money." That is, the Federal Reserve is now creating money "out of thin air" to purchase the 30-year Treasury Bonds that literally no one else wants. While Fed purchases keep the rate artificially low, this is also the same policy followed by such governments as that of Zimbabwe. It is no secret that while the practice may temporarily restrain bond yields, wary investors will be more circumspect about purchasing bonds whose value is being artificially supported by money creation "ex nihilo."

Wikipedia describes the following as the primary risk of quantitative easing:

"Quantitative easing runs the risk of going too far. An increase in money supply to a system has an inflationary effect by diluting the value of a unit of currency. People who have saved money will find it is devalued by inflation; this combined with the associated low interest rates will put people who rely on their savings in difficulty. If devaluation of a currency is seen externally to the country it can affect the international credit rating of the country which in turn can lower the likelihood of foreign investment. Like old-fashioned money printing, Zimbabwe suffered an extreme case of a process that has the same risks as quantitative easing, printing money, making its currency virtually worthless. ^[13]"

So, yes, quantitative easing may temporarily sustain the market for the now-unloved 30-year US Treasury, but the greater risk is that the US will follow in the footsteps of Weimar Germany, Japan, Argentina (in the past), and most recently Zimbabwe, by "shredding" its currency in the court of international public opinion.

For more information on how the Fed carries out quantitative easing, click here, here or here.

So, will quantitative easing support the long-term value of the US 30-Year Treasury Bond?

Unlikely.

The greater chance is that such central bank recklessness will drive international investors to more secure alternatives. For example, the Chinese are now using their stores of foreign capital (mostly US dollars) to stock up on such real-world necessities as copper, as well as to purchase productive assets (mostly commodity-producing investments) around the world.

As you have heard me say before, when paper money is devalued, gold is the historically-favoured alternative place to go to avoid devaluation of your savings. That has not changed in the third millennium.

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating
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The Bailouts Are Above All a Moral Problem

27 May 2009

John Hussman, President of Hussman Investment Trust, has stated in simple terms what is wrong with the bailout process.

It has diverted funds from hopeful and productive enterprises to wasteful and inefficient activities. The cost? Our future wealth, health, productivity and morality.

Mr. Hussman states:

"The bailout is not something "neutral" that cancels itself out, but instead amounts to a transfer of trillions of dollars of purchasing power directly and indirectly from those who didn't finance reckless mortgage loans to those who did. Farewell to the projects, innovation, research, investment, and growth that might have been financed by the savings and retained earnings of good stewards of capital. Those funds are being diverted to the careless stewards who now stand to be made whole.

"In short, these bailouts are emphatically not neutral to society as a whole, because they damage incentives and divert productive resources into hands that have proven themselves to be reckless and incapable. To believe that the bailouts are just money we owe to ourselves is to overlook serious ethical implications, as well as distributional and incentive effects."

What else is there to say?

Well, perhaps I do have one point to add....

Now that we are funding vice rather than virtue, what becomes of the bigger issues at stake in the world? How does waste on this scale impact the chances of war versus peace? International cooperation versus conflict? Responsible government versus cronyism and promotion of special interests? Opportunity for all versus inequality? Hope versus cynicism? Moral progress versus moral dissolution?

We have not yet begun to count the costs, both financial and non-financial, of the greatest bailout of the reckless by the responsible in world history. The costs will inevitably be greater than those that are presently being reckoned.
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Rescue deCODE Genetics, not GM!

21 April 2009

I have posted previously about the landmark work that deCODE Genetics is carrying out in Iceland.

Unfortunately, this trailblazing company has overextended itself by taking on far-reaching research projects based on the analysis of genetic factors linked to the development of a wide range of human diseases.

deCODE announced on March 31, 2009 that it has run out of funds, is probably no longer a "going concern," and that it will now be divesting its various business units if possible.

Let me make a simple point.

deCODE Genetics is carrying out work that will benefit all of humanity for millennia to come.

General Motors has overextended itself by paying premium salaries to its employees and offering excessive bonuses and other perks to its executives and managers for decades, leading it into an unsustainable business situation.

deCODE Genetics and General Motors are thus in similar circumstances.

However, here is the difference. deCODE Genetics overextended itself doing work that will potentially aid every human being on this planet.

General Motors overextended itself by diverting its revenues to its executives and frontline workers at the expense of operating a profitable business for the benefit of its shareholders.

Rescuing deCODE Genetics would provide lasting benefits to every one of us and all of our descendants.

Rescuing GM will preserve a corporate dinosaur with a legacy of decades of horrible business practices.

I'm serious, let's reorganize the multi-trillion dollar financial rescue programs now being advanced by every Western government and fund the continuing operations of deCODE Genetics - thereby permitting GM to bear the natural consequences of its lengthy and well-documented history of mismanagement.

Somebody else will manufacture the cars and trucks we need if the inefficient automakers are let go.

By way of contrast, if deCODE Genetics goes out of business, important work to promote human health and wellbeing will be delayed for years if not decades to come.

Our priorities are simply wrong.

Here's a desperate suggestion to save deCODE, as no politician in any party is likely to adopt the rational course of action that I am proposing.

Let's set deCODE Genetics up as a registered international charitable foundation. I for one would contribute voluntarily to preserve and promote the work of this wonderful company. deCODE Genetics stands head and shoulders above General Motors by every standard that I can think of. I would rescue this company personally if I only had the means to do so! I wish a few more politicians thought in the same way that I do....

In the interim, I urge those who are interested to consider taking advantage of the innovative "deCODE Me" personal genome scan service now being offered by this company. Believe me, science fiction has now come to life, and the deCODE team are perhaps the leading pioneers in the visionary and critically important field of personal genetic analysis!

(On a side note - I received a personal notice from deCODE today that they have received the personal genetic samples necessary to begin my personal Cardio Scan. I'll be receiving my results very soon!)
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Geithner's Plan Shreds the Next Layer of "Mark to Fantasy" - Look for Further Bank Writedowns - or Bankruptcies!

25 March 2009

I'm still busy while travelling.

However, I came across this interesting piece by Henry Blodget, referenced on Jim Sinclair's website.

What Mr. Blodget points out very succinctly is that the next stage of taxpayer-funded government bailouts of the financial industry will be a great boon to the banks - if you are concerned about the real value of their assets, as Mr. Geithner is.

The problem is that the bank's books are shrouded in level upon level of fantasy. While Mr. Geithner's plan may potentially aid the banks - in terms of their real asset value - it removes their next layer of protective camouflage - and that could send them into Chapter 11, as the actual situation of the banks remains more problematic than has even yet been revealed.

What is the next layer of fantasy to be uncovered?

Banks are permitted to declare investments that they do not intend to sell as having asset values equivalent to their face value. Thus, the banks can declare these so-called assets at the prices at which they were originally written until forced to sell them at their maturity dates - at which time it is well known that the market will prove them to be of lesser worth.

Under the new Geithner plan, the banks could now be forced - through stress testing or through regulatory compulsion - to begin marking these "hold to maturity" assets at their real market value - that is - at values much lower than those now on the books.

Uh oh! This is a major tear in the fabric of the years of "mark to fantasy" bookkeeping that have sustained the US banks (and their allied international brethren) in the "pretend game" of being profitable up until the present time. (Note that this game also allowed the banks to play the quite fun game of awarding hundreds of millions of dollars in bonuses to senior staff, etc.)

When the banks tell us that their books are sound, it is this next layer of fantasy on which these seemingly reassuring statements are made.

Legally, the banks have been able to make this claim --- until now, But Mr. Geithner's plan has the potential to explode this loophole.

The implication?

According to Mr. Blodget, there is "one small problem with Geithner's plan - it will bankrupt the banks!"

The following chart (see Mr. Blodget's article below) illustrates clearly the historically unprecedented debt levels of US consumers at present. Why is this important? The chart reaffirms that we are presently dealing with a debt crisis, not a liquidity crisis:

Read all about it here.

For the avid reader - additional links on the PPIP (Public-Private Investment Partnership):

• Dr. Housing Bubble.
• Finance Trends Matter.
• Geithner's Five Big Misconceptions (Blodget).
• Table summarizing high levels at which banks mark their toxic assets (when permissible).
• The "Ridiculous Marks" of Toxic Assets.
  

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The Kenora March Palette: 2009

15 March 2009

I began to publish the Kenora Palette Series in March 2008.

March is a magical time of year in Northwest Ontario, though you have to wander the back country trails to appreciate the beauty of our region in its fullest flourish. The magic is not usually visible from the highways, as it is too subtle and delicate to be captured by this method.

We are travelling out of town for several weeks at the end of this week, so I selected today as the last opportunity to capture the waning winter magic of our surrounding trail system.

Most of today's photos were taken on a network of local trails which Susan and her friend Linda Moncrief helped to clear, beginning this time of year in 2008.

What creates the magic of the Kenora March Palette? Certainly the gently receding blanket of winter snow is a key ingredient, but there is more. Another required component is the evening sun - now venturing further north - which highlights the subtle and always muted tones of bare trees and stark granite against the crystal white layerings of now soft and gradually disappearing snow.

The temperatures this time of year can be quite variable. One day will see -28 degrees Celsius, and the next will register -4 degrees Celsius. The, out of nowhere, as has occurred the past two days, the temperatures will jump well above zero, and the crystalline fabric of winter will recede so rapidly as almost to disintegrate.

Come with me now for an evening walk along the winter trails northwest of Kenora.

The following photo illustrates well the principle of the subtle glint of light illuminating the diffusely pigmented surface of the birch in the darkening forest.

The following closeup of the same tree makes clearer still the ephemeral nature of the evening light as it yields to the darkness that until recently has ruled and dominated our landscape, challenged only by the fleeting dash of the winter sun across the southern horizon.

Occasionally our pathway is framed by fallen trees or other markers offered by nature. This particular fallen red pine, almost exactly horizontal, is my favourite of them all, though the opening created is somewhat lower than head height.

A glimpse to the side almost anywhere along the trail will reveal the irregularities of the natural world softened by thick blankets of downy northern snow. These views are almost always pleasing, despite their ubiquity.

Here is another similar view, though at an entirely different location along the trail system.

I also enjoy the delicate textures created by contrasting elements on a much smaller scale, in this case a balsam branch fallen into the snow cover on the trail.

It would be neglectful, of course, not to illustrate the trail itself. This is a typical view.

This large granite boulder, left behind by retreating glaciers, remains a favourite landmark of Susan's and mine.

There are complex, fractal, infinitely complex textures overhead in addition to those layering the forest floor.

I am also drawn to simple images, though even a single birch against the snow is not as simple as it at first appears.

From simplicity to complexity... again. Note that the tongues of snow cover are clearly giving way to the resurgent forest.

Though following rules which remain fully submitted to randomness, the following image of a young grove of birch trees certainly offers the illusion of order and deliberateness.

I entered this image not for the composition of its visual elements, but for its almost flawless representation of the full palette of March, though the fresher tones of green are not so obvious here.

This naturally occurring arbour is just as intimate and nurturing in life as it appears in the image below.

Another image which captures the palette of March almost perfectly.

And here are some of the umbers and greens which were neglected in previous palette photos.

The trail itself, traversed by dogsled more than by motorized vehicle.

The bare forest against the sky.

Here is the perfect photo to close our review of the current March Palette series. The vapour trails of the technological world remind us that the sphere of the natural world is finite in scope. However, there is more to explore here near our home than we can exhaust in the time available to us. Wilderness, though often intersected by the marks and scratchings of men and machines, seems here still to stretch without end in every direction.

Thank you for joining me again for this review of the palette of Kenora (Northwest Ontario) in March 2009.

The Kenora palette series:

The Kenora March Palette: 2009

The Kenora Palette: After the June Rain

The Kenora May Palette Erupts into Green Tones, but also into Unexpected Hues

The Kenora Palette in May

The Kenora March Palette
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