Deja Vu: Depression Era Cartoons

14 August 2009

This is too valuable not to share. The "Bearish News Blog" has published a set of depression era political cartoons that patently reflect the issues of our own era along with those of the 1930s.

Why do events turn in this direction once in a lifetime? Because few alive today remember the last time that things were more or less the same.... We now face similar problems with similar causes and similarly misdirected government interventions as did our predecessors during the 1930s.

For more, visit the Bearish News Blog, now added to my blog list!

And what is my answer to the economic dilemmas of our age?

In short, don't bail out the reckless with the savings and tax dollars of the prudent.

Is that clear enough for you?

And if times get tougher for a while? Tough it out. Intervention makes it worse. Allow the financially responsible to set our future economic direction. The hard times will pass. It will get better if we do less rescuing of the reckless, and simply get out of the way of the cautious, the prudent and the planful.
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Bond Price Post Updated - More on Quantitative Easing

9 August 2009, 14 August 2009

For interested readers, I have updated my May 27, 2009 post on bond prices.

Click here for more information about the breakout above the 65-week moving average, which is the confirming signal for the turnaround in 30-year interest rates - and thus for the credibility of the financially irresponsible American government.

For now, the trend reversal in interest rates (and the market value) of the 30-Year US Treasury Bond is holding.

In my Weltanschauung, that signals the onset of the gold tsunami.

How much has the US Federal Reserve spent on quantitative easing (purchasing US Government Bonds with newly-printed money "out of thin air") since March 25, 2009?

According to Bloomberg Financial, as of August 8, 2009, that amount stands at over $243 billion US dollars (shall we now just refer to the US dollar as play money?):

"The Fed announced on March 18 a plan to cap consumer borrowing costs by purchasing up to $300 billion of U.S. debt over six months, a policy known as quantitative easing. The central bank bought $243.463 billion since the purchases began on March 25."

A gentle reminder. The purpose of quantitative easing is that the new dollars released into the economy will be multiplied through redeployment and leverage. Thus the impact on money in circulation may be greater than the amount of new dollars created. Be prepared for continued strength in the gold market over the next several months, and for long-term strength in the gold market for at least another decade!

Note that gold is getting impatient sitting under $1000, a market price it has been nudging at from underneath for almost two years now. $1000 gold will soon be a receding memory:

Especially when you look at the price of gold in inflation-adjusted terms:

(And the official government-sanctioned inflation adjustment in the above chart doesn't begin to consider John Williams' restoration of cost of living methodology to traditional measures. Remember, the government introduces "hedonic" adjustments that drastically understate the true rate of inflation!)

The chart below is closer to how John Williams saw the inflation-adjusted price of gold (in 2007). How would we adjust the following chart for 2009? Well, the 1980 gold price would be closer to $6000, and the gold price on the right would be elevated by one more inconsequential increment, from the $700 range to the $900 range.

No matter how you look at it, gold has a long way to go - in the upwards direction.... This chart is courtesy of Pamela and Mary Ann Aden:

So how do these trends show up in government budgets, particularly in the area of receipts versus expenditures? EconomPic offers the following very sobering illustration. (Note: Only money printing will fund the increasing government outlays, and that spells more inflation - much more!)

I hope you can see that the price of gold, at its present $1000 level, remains quiescent in historical terms. This is still a very early stage bull market in gold, and $1000 is a bargain price that we won't be seeing for very much longer! Gold was cheap in the $250 range in 1999-2001, and it remains cheap in the $1000 range today. Really, the 300% gain of the past decade is just a blip in terms of gold's multi-millennial history....

In my book, play money may prove a better long-term holding than the US dollar.

Gold remains the place to be.

And, if you're interested in following news of gold's price more closely, try this link (Bob's Gold Price Column).

14 August 2009: I think I have found the answer to the inflation versus deflation debate, courtesy of a reader of Bill Fleckenstein's online site.

When you think about it, the present inflationary processes are very simple.

1. We know inflation is afoot, because of the vast increases in money supply across most leading economies of the globe. The increase in money is dramatically outpacing the supply of goods and services available.

2. What prices are rising? The costs of those things we have to have: staple food items, energy and fuel, insurance, taxes, government services, delivery costs, materials and commodities, almost all manufacturing and production inputs, health care, bankruptcy services (for goodness sake!)....

3. What prices are falling? Those for items and services that are discretionary... Houses that are larger and more luxurious than we need, restaurant meals, cellular telephones and computer upgrades, vacation accommodations, etc. You've got it - the kinds of things that cash-strapped and newly-unemployed consumers have stopped purchasing - out of necessity!

Fleck's reader perhaps says it better:

"It seems that an extremely important point is being missed in all of this talk of deflation: when evaluating the price (or price change) for a purchased product or service, one must first determine if the spending is essential or discretionary. Is it a coincidence that the items mentioned by the writer of the last post as examples of price going down - a new harp, KFC, Applebee's, cell phone minutes and a DVD for his kids - all represent discretionary spending?

"On the other hand, essential spending items such as food, fuel, taxes and utilities are all on the rise for everyone, whether we like it or not. The sad reality is that demand is WAY off, despite the immediate effect of the stimulus program which was specifically in the auto sector.

"In fact, costs keep rising: raw materials, freight, taxes, insurance, utilities, etc. I should also add, with regret, that one cost center in my business is half of what it was a few years ago: labor.

"I know for fact that I am not the exception. It is not good out here in the heart of industry so it is no surprise that one can find goods for cheap when they are in someone's inventory. I'll sell you anything that I have in stock for less than my replacement cost because I need the cash flow.

"Conversely, if you need something that has to be produced because inventory ran out, there is NO way that you'll pay as little as you did a year ago.I assure you that this is the case with virtually anything being made; therefore KFC giving away chickens is simply because they cannot sell enough of them to make ends meet. There aren't enough of us going into their stores anymore. And if that weren't bad enough, their operating costs are on the rise. The DVD retailer and Hollywood are discounting "Coraline" on release day because some OTHER guy is NOT buying it for his kids. Why not? Because his credit card is loaded and he just lost his job from my company."

Are prices going down because the seller has no pricing power evidence of deflation? No - that is evidence of recession - of a business downturn - of a period of recovery following a period of excess.

Are rising prices of necessary items and services evidence of inflation? Yes, absolutely. That is what inflation is - when we have no choice but to pay higher prices for almost everything that we need.

Inflation versus deflation debate: Ended here.

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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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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