Is the Precious Metals Train Changing Speed or Direction?

I suspect the answer to the above question is 'maybe' for the first part and 'no' for the second.

It also may be that this weekend a well-read blogger laid down the Establishment's gauntlet in an important way regarding the inflation story. Dr. Krugman opined on April 16 in "Inflation, Here and There (Wonkish)":

I’ve taken to looking at the Billion Price Index, which looks a lot like the goods-only, but with much higher frequencies. And right now the BPP index is clearly indicating that the big price bump of early 2011 is fading away . . .

Wage growth hasn’t fallen as much as I expected a couple of years ago; it’s now clear to me that I failed to put enough weight on the downward wage rigidity literature. But there’s nothing here to suggest any reason to consider inflation a problem. (Emph. added)

You may look at the chart of the Billion Prices Project at bpp.mit.edu/daily-price-indexes. It shows that as of April 14, the price inflation rate was 0.45% monthly. Even without compounding, that's over 5% yearly. That is down from 0.82% as a monthly price inflation rate on Feb. 18. That's of course about a 10% annual rate without compounding.

I think the average person is completely cynical about the CPI now. After all, if one is just getting by, what is more "core" to one's life than food? In human evolution, eating (and drinking) is of course the most "core" activity possible. It trumps clothing and shelter. And what was fire invented for? Primarily to cook food. Food and energy. Core. Not non-core.

So my point is that we may be nearing a tipping point. Paul Krugman, the representative of the money-printing Establishment, comes out in November with a similar pronouncement that there was to be no price inflation from QE2 (and, let us not forget, the ongoing "QE 1.5" that began, if I remember correctly, in August.

Now that this has been proven wrong, he refuses to accept that the idea of high unemployment and "output gap" has a credibility gap. He doubles down. In that same blog, he merely says that, well, he was wrong, things happen:

March core inflation came in lower than expected, and there’s been a lot of talk about that. But really, when it comes to high-frequency data, stuff happens. People who got all worked up over a bump in prices, seeing it as the harbinger of a big inflationary takeoff, were ignoring the lessons of history, which is that short-run spikes in inflation generally reverse themselves.

Perhaps PK slept through the Carter years.

We also learn today that Dr. Bernanke agrees with his Princeton colleague Dr. Krugman, from Bloomberg.com:

When Federal Reserve Chairman Ben S. Bernanke convenes his first press conference next week, he may emphasize a point the markets seem to have forgotten: He’s serious about keeping interest rates low for an "extended period."

The Mayor of Wall Street's company joins in the supporting chorus by quoting only one commentator on how to invest:

Investors have two routes to profit financially from Bernanke’s determination to keep the federal funds rate near zero for an extended period, said Chris Low, chief economist for FTN Financial in New York.

“Those who think the Fed is making a mistake are tending toward the inflation trade: They’re favoring commodities, favoring TIPS,” Low said. “Those who believe the Fed is right are going for conventional fixed-income and extending in duration.”

Lowe agrees with investors who think the Fed is correct.

“If you’re confident that yields are not going to rise, the return on a five-year note at 2.12 percent is so much higher than the 0.69 percent yield on the two-year,” so extending maturity “can pick up a lot of income,” he said.

Unsurprisingly this is a bull on rates and a bear on "inflation".

What I think is happening is that the people see it one way and the powerful see it another. The people have been deleveraging and paying higher prices for almost everything after the mild price deflation rapidly ran its course. Some of the people have been investing in gold, and more have been investing in "the poor man's gold", which is to say silver.

With both political parties committed to large Federal deficits for years to come, but also committed to tax increases only on "the rich", if that much, the funding for those deficits will either come from savers or from central banks that print new money out of the thin electronic air. To the extent that it is the latter, it does not matter all that much as to whether the creator of the money is the New York Fed or the central bank of a friendly or client state such as Saudi Arabia. The money will find its way into the markets and act like counterfeit money, bidding up the unchanging supply of goods and services.

My sense therefore is that the precious metal bull market remains intact and may strengthen. This is similar to the rise of high-tech to rise from a negligible part of most people's lives to an essential part of mainstream America. Unfortunately, of course, a gold bull market reflects anxiety and panic. It reflects the opposite of virtuous cycle of the disinflationary/deflationary second half of the '90s. It's a thumbs down on the U. S. dollar.

The people and the powerful were on the same side of the tech boom. Now, the Establishment is facing a more difficult challenge. As I have demonstrated above, it is trying to convince people that the tide of rising prices is transient, but it cannot back that assertion up with tight money as it had the resources to do periodically in the 1970s and finally was able to definitively do in the early 1980s with Volckerism/monetarism. Rather than fighting the price inflation it was responsible for with real monetary actions, it is left to fight with words.

I suspect that every day, every week, and every month more and more people are tuning Bernanke-ism out and are taking a fresh look at the world. American investors who do this have been turning to precious metals and foreign currencies as ways to diversify away from the dollar, and I think that the gold train remains a body in motion that will stay in motion in the same direction, and may even hit a downhill grade and pick up speed.

Remember: It took a true dollar crisis, with the U. S. for the first time in the 20th Century issuing bonds denominated in foreign currencies ("Carter bonds") and near-hyperinflation, for the Fed to be forced to raise interest rates well above the rate of price increases. We are not there yet, as the headlines still relate to Greece and Portugal, not the U. K. and the U. S. So I don't see the major trend as being imperiled yet, though of course one truly never knows.

"Don't fight the Fed" is generally a wise strategy. The Fed is holding short-term interest rates way below the rate of price increases. It is increasingly difficult for its acolytes to explain away the reality of what you and I see in our daily lives, and so the Krugmans of the world do what believers in the old paradigm do: they admit small errors (he didn't give enough weight to the "wage rigidity literature" LOL) and tweak formulae. So to not fight the Fed means, to me, not to go short Treasuries but instead to go long assets which tend to appreciate when real interest rates are negative.

I think that more and more real people are realizing that their Federal Reserve Notes are "unreal" money that is losing value at a rapid and perhaps accelerating rate, and that one of the few places they (we) can go to try to protect our alleged wealth is physical assets, as well as shares of companies that can survive and perhaps even prosper in inflationary times.

A closing "addendum". One of the strange things about blogging in the morning is how much markets can change during the time it takes to write the blog. I was going to comment on how, surprisingly, gold was down over $7 in the futures market. That was the story an hour ago, when I began this blog. I was going to point out how illogical that appeared, given today's headlines. Now gold is up $4. Go figure. Did the market come to the same conclusion I have been propounding here? Dunno, but it's time to find out.

Staying tuned . . .

Copyright (C) Long Lake LLC 2011

QE To Infinity: Not?

Bloomberg.com surprised me this AM with its lead story, as follows:

Fed Policy Makers Signal Abrupt End to Bond Purchases in June

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.

Central bankers, who next meet March 15, are about half way through their second round of bond purchases. To bring the program to a full stop in June, they must be confident that the economy is strong enough to endure higher long-term interest rates and rising expectations of an exit from the most expansive monetary policy in Fed history, said Dan Greenhaus at Miller Tabak & Co. LLC in New York.

“If this is a self-sustaining recovery that can withstand higher interest rates, then why not get the hell out?” said Greenhaus, Miller Tabak’s chief economic strategist. “Still, I am nervous about their ability to withdraw from this policy without broader disruptions.”

The Fed announced in November that it would buy $600 billion of Treasuries through June in a bid to boost the recovery and reduce an unemployment rate lingering near a 26- year high. The program, known as QE2 for the second round of so- called quantitative easing, followed $1.7 trillion of asset purchases that ended in March 2010.

Stock Versus Flow

Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.

“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”

Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”

The bolded paragraphs (my doing) above are key. We can hope that this signals that the parties in Washington have agreed, at least in principle, on significant deficit reduction, so that ordinary debt market mechanisms can finance the Federal deficit without the central bank adding to the money supply as it has been doing with quantitative easing. Presumably, it is a show of confidence in the economy. Of course, a year ago a similar show of confidence gave way to the summer slowdown and QE2. Will past be prologue?

I don't know the answer to that, but we can hope this is a return to prudence, and that in turn there could be reason to abruptly rethink the entire weak dollar investment theme. After all, the markets sometimes are a lot smarter than any individual. "Rethink" does not necessarily mean "alter" or "abandon", however. In the prior economic cycle, the Fed did not overtly monetize the deficits, which of course were much smaller, but the private sector went wild with credit creation. Soaring commodities prices and a weak dollar were the speculative result; then the Fed began withdrawing liquidity, and the whole shebang came tumbling down. For now, leaving the important Mideast disturbance and all the known other issues aside, the cards look increasingly aligned for a traditional "sweet spot" year for economic activity. Low interest rates, lots of labor slack, a good deal of unused manufacturing capacity, and tons of fiscal stimulus. Plus lots of skepticism.

Interesting times.

Copyright (C) Long Lake LLC 2011

Government Misstatements About Billionaires and Other Gold-Friendly Actions

To me, the most important news of the week may well have been the following:

‘Invalid’ Forms by Supposed Billionaires Skew U.S. Wage Figures:

Nov. 2 (Bloomberg) -- The Social Security Administration asked its inspector general to investigate how a $32.3 billion mistake skewed its statistics on 2009 wages in the U.S.

Two people were found to have filed multiple W-2 forms that made them into multibillionaires, an agency official said yesterday. Those reports threw statistical wage tables out of whack and, in figures released Oct. 15, made it appear that top U.S. earners had seen their pay quintuple in 2009 to an average of $519 million.

The agency yesterday released corrected tables that showed the average incomes of the top earners, in fact, declined 7.7 percent to $84 million each.

This was brought to EBR's attention by Zero Hedge. The New York Post added a bit of detail:


The erroneous information inflated total earnings for people who made over $50 million to a total of $38 billion, compared to a mere $12 billion in 2008.

When the data first emerged, it set off a firestorm and created the impression that rich folks lined their pockets at record levels in the midst of the Great Recession.

In other words, did the Obama administration invent, or ask the IRS or Social Security to invent, the numbers for political reasons?

In a similar but less egregious vein. the monthly employment report headlines were of about 150,000 private sector job gains. Ignored by the mainstream press was the Household Survey report showing about 330,000 jobs losses. In fact, the economic analyst Greg Weldon has reported a graph suggesting that the pace of job losses over the past several months as per the Household Survey is now at recessionary (double-dip) levels.

In any case, per the lead-in news above, why bother with government data anyway?

If you look at Gallup.com, there is a minimal trend toward improvement in the hiring/not hiring survey of workers. In the winter and spring of 2008, when the unemployment rate was rising, the difference was about +30 (this has dropped off the screen on the Gallup site). The level was about zero when there were hundreds of thousands of job losses per month at the worst of the recession. Thus average working people are seeing continued job losses, most likely. Certainly the Establishment data is likely skewed, I would hope inadvertently due to "survivor bias" and other factors.

Finally, the 5-year T-note dropped to all-time lows this week and remains there at the Friday close. Given that the 7-year note is around a pitiful 1.7% and the 30-year over 4.1%, we have a record upward-sloping yield curve in percentage terms (30-year yield divided by the 2-year or 5-year yield) and perhaps the 10-30 year absolute difference is at a record as well. Yet think how much can happen in 7 years. Think 1926-33; 2001-2008; 1967-1974; 1915-22. What happens beyond 7 years and definitely beyond 10 years is utter speculation.

What is definitely, definitely not in the bond market is that the yield curve over the past couple of years has followed the Japanese example to a 'T' to the best of my (imperfect) knowledge. First, very short term rates go near zero. Then the 6-month bill, then the 1-year note, then the 2-year note succumb and drop to progressively lower lows. Then the 5-year note succumbs. Eventually the 10-year and then the 30-year follow.

Remember that Gentle Ben can say whatever meaningless things he wants about the stock market and expectations. It's all verbiage. As John Mitchell said, watch what he does. That's all that counts. And he happened to announce a monetization quantity about equal to the projected Federal deficit. Thus no foreigners or even American citizens need to add to their Federal debt holdings. I assume that just as Paul Volcker is reported by Martin Mayer in "The Fed" to have promised the Reagan team that he would play ball with a pro-growth agenda in return for renomination as chairman, Dr. Bernanke agreed with Team Obama to monetize as much debt as needed in return for his full term.

The public will now likely add to its already large stock positions, believing the nonsense that more money-printing will stimulate anything except price increases as well as the Bernanke overt statement that the Fed is now targeting higher stock prices. One would think that stocks related to oil and precious metals will now have a new tailwind. I mentioned HP (no, not Hewlett-Packard), the oil driller Helmerich & Payne, several weeks ago. It is a high-quality outfit with technologically very advanced land drilling rigs ("Flexrigs") that is way off its 2008 stock price highs. With oil prices on the rise but historically a bit undervalued vs. gold, we could see much higher prices for this stock and its peers in the months ahead.

Oh- and the Republicrat/Demopublicans shifted some D's for R's. The good news is that tax rates look to be staying down. The bad news is that there is no sign that government spending will be cut to fund the tax cuts. If it plays out that way, that's a lot more $$ of debt for the Fed to monetize and thus gold prices will be goosed yet higher/faster. Further bad news is that the incoming head of a relevant House committee, Spencer Bacchus, wants Big Finance to keep its proprietary trading divisions and thus wants Dodd-Frank ("Finreg") to have a Big Finance-friendly regulatory interpretation. As if Tim Geithner will object to anything for his friends in Manhattan.

With immense uncertainty and relatively limited dollars at risk, I continue to believe that by hook or by crook, the Feds will continue the 29-year downtrend in long-term interest through a captive financial industry as intermediary. In the meantime, stagflation remains my base case and therefore I continue to believe that despite the massive run that gold has had since its summer low, the trend remains upward. This is to say that I believe that the trend of the value of a dollar remains down. As I have said over and over, gold as a store of wealth is boring. It just sits there. The Fed can invent all the excuses it wants to do the opposite of what the Volcker Fed did for almost 3 years (Oct. 1979-August 1982) and keep short-term interest rates inappropriately low. My guess is that unless and until actual declines in consumer prices occur in a sustained manner while the Fed uses its command and control power along with its influence as conductor of the global financial orchestra to be way too easy in its monetary policy, the precious metals market and probably the oil market will remain in meaningful uptrends.

The Dow is up about 12% in the almost 6 1/2 years since the FOMC raised the Fed funds rate in June 2004. Add dividends and perhaps you have 5% per year appreciation with a lot better buy-in points than 2004. Gold meanwhile is up from about $400 to about $1400/ounce. The Fed quelled the price rise of gold in May 2006 when it increased the Fed funds rate to 5.0%. At that time the CPI was peaking around 4% but soon dropped to under 2%. With monetary stimulus on overdrive, bailouts everywhere, politicians pandering to most interest groups except savers, I anticipate negative interest rates on the short end to get even more negative. One of these days, I expect pension funds and the public at large to get gold. Most people just don't "get" how with "inflation" reported as "low" gold can go up so much for so long. But, as Galileo might have whispered under his breath, the correlation of rising gold prices with too much Fed ease just keeps on working.

We are nowhere near a bubble in gold prices. We are however looking at a U. S. government that may have invented tax numbers for political reasons. But it can't invent physical gold.

Copyright (C) Long Lake LLC 2010

Arguing with Mister Market

With the cost of money round the world at or near record lows, so that even the cost of borrowing for highly distressed borrowers is lower than the rates that the strongest countries borrowed at in the 1980s, distortion upon distortion exists in the financial markets.

The many of us who are greatly disappointed with the actions and inactions of the monetary and governmental authorities the past several years think we know better. Not only do we want to "argue" with Mr. Market (who may or may not be rigged beyond the acknowledged rigging of short-term interest rates), but many investors have a numerical target for, say, yield on muni bonds that they simply expect to be there. These muni investors are arguing with Mr. Market.

These people may be "dinosaurs" just as Japanese investors in the 1990s could not conceive of close to zero interest rates for an indefinite period.

In response to the money printing required to force rates near zero, many people have turned to gold as a hedge.

Then the public looks at gold at new nominal price highs and says, oh well, missed that move, the price is too high.

!!!

Yet John and Jane Q. Public probably have no idea that if they want to invest based on reversion to the mean of returns from financial instruments, if they go back 70 years, they will find that the calculated total return from stocks well exceeds the total return from gold, taxes and transaction costs excluded. So even though many people are increasingly comfortable with basically holding their stocks within their broad trading range of the past years, figuring they will rise one day, they are scared to step into the precious metals market, or if they have gotten in at much lower prices, they have not been buyers at higher prices.

Yet if one looks at the structure of large bull markets, which the precious metals market resembles (but of course may be topping out for all I know), gold and its junior partners may be at levels that will look cheap some years from now.

Assuming that gold prices are rising primarily due to free market activity, with governmental/central bank actions affecting the price only secondarily, then the normal psychology is for price breakouts to be tested. The Dow Jones 30 average (DJIA) first hit 800 in 1964. It was 778 in August 1982 when the Fed eased in light of a Mexican financial crisis. So stocks had an 18 year trading range in which P/E's shrank. Then stocks burst to new highs but retested the prior high of the trading range in 1984. But it proved to be morning in America, at least for stocks, and they more than doubled to 2700 in August 1987. From that level, when they fell by a third in that era's version of a flash crash, 1800 looked like a bargain, and then the real excitement began.

Arithmetically, recent numbers for the price of gold per ounce, which broke out past $1000 last year after falling into the $700s the prior year, are uncannily similar to that for the Dow, which was blocked for years around 1000, fell into the 700s in 1982, then burst out, never to drop under 1000 again once it quickly surpassed it a few months after the August 1982 bottom. Might gold's ultimate price peak be found within as long and strong an up-market as stocks experienced?

The many people who argued with Mister Stock Market in the 1980s, expecting the bear market to resurface, missed what was at first a rational bull market that had not yet gone to excess. My suspicion is that people who are arguing both with what I view as a rational precious metals bull market because they think prices are "too high" now are engaging in similar thinking as those who, scarred by a prolonged stock bear market, missed out on some excess returns available to buy-and-hold stock market investors who bought in after the break-out to new highs in 1983-85.

Of course, there are different ways to skin cats, financially speaking. People had plenty of ways to grow their capital in real terms in the 1980s and 1990s, or at least keep up with the rate of general price increases. Common stocks were not the only vehicle. Looking backwards from the future, we will likely see that even if gold meets or exceeds the goals of those investors who look to it to at least preserve real purchasing power, there will be other vehicles that will prove to have done the same thing.

For investors with little accumulated capital, such as young adults starting a career who cannot diversify, gold may be a sensible one-decision asset for all their eggs, for now. For retirees with more than a little capital, it's hard to see going all-in on gold or other similar assets.

The gold market has moved a great deal the past year, yet many gold stocks and gold ETFs show a remarkable apathy. I like this. It indicates that the public is not chasing investment-grade gold vehicles (though it may be chasing penny gold stocks).

Seasonally, not only is September a typically strong month for gold prices, but on average so is the rest of the calendar year. But in addition, there is the phenomenon that as with stocks in 1929, gold and oil 1979, stocks 1999, and in other cases, we have seen trends that have lasted a calendar decade reverse after the decade. (These include the deflationary 1930s giving way to the inflationary '40s and the booming 1960s yielding suddenly to the stagflationary '70s.)

No one knew in summer-fall 1979 that gold would skyrocket for the rest of the year and peak much higher in January 1980. No one knew at the end of a turbulent 1998 what would happen in 1999. So I want to sell gold only either when there is clear over-enthusiasm amongst the public or when my view of the fundamentals of fiat currency somehow change. I don't want to lose the upside potential of an unexpected massive further surge in gold prices.

Gold may falter in price for more than the typical correction that follows a large move, which it has had very recently. If that happens because central banks adopt prudent policies, great. Unfortunately, in my view, the U. S. authorities want more money printing. As the sole military and financial superpower, their printing press is more powerful than any other country's. Thus I want to hedge against the likely success of their policies by owning, one way or another, the one form of money the U. S. cannot create at will, and that Mr. Market has been favoring for some time, but not yet to excess.

To expect gold prices to enter a serious, sustained decline soon against the U. S. dollar is to argue both against Ben Bernanke and Mister Market.

Copyright (C) Long Lake LLC 2010

Sound Money Gaining Important Media Mindshare

Ambrose Evans-Pritchard, the influential British financial columnist, has issued perhaps the most thorough apology anyone can write in his piece today titled Shut Down the Fed (Part II). Here are some choice excerpts:
I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.

My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.

NO, NO, NO, this cannot possibly be true.

Ben Bernanke has not only refused to abandon his idee fixe of an “inflation target”, a key cause of the global central banking catastrophe of the last twenty years (because it can and did allow asset booms to run amok, and let credit levels reach dangerous extremes).

Worse still, he seems determined to print trillions of emergency stimulus without commensurate emergency justification to test his Princeton theories, which by the way are as old as the hills. Keynes ridiculed the “tyranny of the general price level” in the early 1930s, and quite rightly so. Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago. . .

Are the Chinese right? Are the Americans and the British now so decadent that they will refuse to take their punishment, opting to default on their debts by stealth?

Sooner or later we may learn what the Fed’s hawkish bloc of Fisher, Lacker, Plosser, Hoenig, Warsh, and Kocherlakota really think about this latest lurch into monetary la la land, with all that it implies for moral hazard and debt contracts.

If I have written harsh words about these heroic resisters, I apologise for that too.

Are the Chinese right? You bet.

Here's Professor Krugman's preferred solution, in a brilliantly-titled blog yesterday, Default Is In Our Stars:

So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt . . .

While his brief blog is a bit noncommittal, it is known that he prefers the inflationary solution rather than the free-market solution of debtors actually paying lenders back their capital according to sound money principles as best as said debtors can. Some debts cannot be paid, just as some (many) equity investments in risky enterprises will fail. So be it. If a lender lends unwisely or unluckily, that's his or her business. But it should be the lender and the borrower who in general is the sympathetic figure. The lender worked, earned money and did not get to enjoy that money. Instead, he/she deferred gratification and let the borrower enjoy/make use of the capital. Why should the borrower benefit from official policy to debase the capital which the lender earned but never used personally/

More and more serious thinkers are moving away from the policies of those who claim the mantle of Keynes (in Evans-Pritchard's case, he wraps himself in something he says Keynes got right) but who are perhaps even more Keynesian than Keynes. They are moving in favor of sound money. If you are thinking gold, you have it right.

Because the Evans-Pritchard view remains an insurgent one, I thus continue to favor gold, which is really to say that I believe that the dollar will continue to lose value faster than the discounting rate, which sadly the Fed has determined is 0.44% or so yearly for 2-year money.

It is further my empirical observation over 30 years of following gold (but not owning it or gold shares till 2001 or 2002, when the Fed went all in for allegedly anti-deflationary policies) that when the discount rate is below the consumer price inflation rate, gold prices rise; otherwise they fall or hold steady.

If the general price level actually starts declining and there is a semi-credible plan for the government to actually repay its debts, then I will say, as Keynes did, that the facts have changed and I will change my investment views.

Gold looks to be on the move. One can look at that as bad, as it reflects a declining value of the dollar. I prefer to look at it as a positive, in that the desire of an increasing number of people for sound money is being voted on in an even more legitimate "poll" (the free market) than an off-year election.

Somehow the view has taken hold in many minds that owning or investing in gold is un-American. Au contraire. The Coinage Act of 1792, signed by President Washington, provided as follows:

SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.

The Founders took their money seriously, it would seem.

Gradually, momentum is building for a return to financial sanity. The Krugmanites appear to have peaked. The rise of the Tea Party (Tea Parties, to be technical), which in core financial ideology appears to me to mirror the Perot movement, reflects the thinking of the center of gravity of America.

Stay tuned. Something good just may be coming. Converts such as Mr. Evans-Pritchard are valuable and do not come easily. Unfortunately Dr. Bernanke and President Obama can do lots of "stimulatory" damage before their influence wanes, but the cavalry may be out there just beyond the horizon to rescue us from the slings and arrows of their outrageous policies.

Copright (C) Long Lake LLC 2010

Short-Term Market Comments: Tear Down These Policies

Recently I have posted some strategic thoughts about changing relative investment merits given the huge move down recently in bond rates.

On a more tactical basis, I have been commenting for many months about the technical deterioration in the financials. This continues and is worsening. In addition, the general stock market as judged by the SPY looks terrible based on moving averages, with the SPY now below a down-sloping 50-day simple moving average (SMA) and a down-sloping 150 day sma about to drop below a flat 200 day sma. Ugly, to the point of being fugly.


One of my favorite relatively unknown financials, UMBF, has moved below its 2009 low despite rising earnings estimates. NTRS (banker to young Barack Obama back in Chicago when a crook named Rezko helped enlarge Mr. Obama's backyard) also is one of the non-Big 5 (or whatever the number is) financial firms I have followed to see what the real world is doing, and its chart is definitely fugly. And NTRS's earnings estimates have been declining, and it still sells for over 13X projected 2011 earnings; and who knows what they will really be?

The bigger bellwethers of JPM and WFC have ugly and fugly charts, respectively. Uh-oh.


In the meantime, though, if the American consumer is so badly off, why is DLTR going to new highs and Tractor Supply (TSCO) holding up so well?

Other stocks holding up well so far in this decline are CB and RE, which are an insurer and a reinsurer; and McDonald's, which has a picture-perfect chart.

So there are lots of cross-currents now.

Meanwhile, gold has an even more picture-perfect chart than MCD or CB, and silver looks OK as well.

The dean of stock analysts in America is probably Richard Russell, and he is uber-bearish on stocks. His view deserves respect; I do not look at him as someone to be contrary against.

Putting matters together with seasonality, matters are setting up as I projected in May when I stated that stock rallies should be sold. I am concerned about the tw0-year pattern in stocks.

Two years after the 1987 stock collapse, a mini-collapse occurred in fall 1989; that did not take the averages to the 1987 lows, as in retrospect the stock market was only partly through its structural multi-year bull market. Stocks are certainly acting as if they could reprise 2008, just as 1989 reprised 1987. Now, however, stocks are mired in what I believe to be a structural bear market. Any collapse, I believe, carries with it real risk of new lows, given that the 2008 low fell below the 2002 low in nominal terms (worse in inflation-adjusted terms).

The U. S. and the world are in more unusually uncertain times than usual. Regular readers of my blog know that I have excoriated Ben Bernanke as amongst the worst Fed chairmen of all time, and perhaps the single worst. For all the blame Sir Alan deserves, he left when the leaving was good, and who knows whether what he would have done when the rubber was hitting the road in 2007-8? This is Helicopter Ben's Fed and Barack Obama's government, and IMVHO they are and have been stinking up the joint with ineffective and harmful policies.


Just as I believed at the time that Paul Volcker (a Dem) and Ronald Reagan (a former Dem) were the right men for the problems facing the country, and invested accordingly, I want them back! I think that we have just the wrong men for today's problems in these key offices. If Mr. Obama were to give Tall Paul real authority, wouldn't that make a statement that the President is willing to face up to our very solvable financial and economic problems and overcome them? But he didn't do so, and he won't. So we have a tax fiddler running Treasury (and IRS) and a Wall Street hanger-on sitting by the President advising him to make Big Finance happy as a way to help Main Street (assuming LS really cares about Main Street).

Historically the stock market has gone up more under Dems than Repubs, but the ineffective inflationist with two inflationist Fed chairmen named Jimmy Carter was an exception. Mr. Obama may be following in Mr. Carter's footsteps.

The path of least resistance for the stock averages is down. Fundamentally the S&P 500 can be considered to be a massive 40+% above fair value. The experience of the 1930s and 1940s prove that low Treasury rates can easily coexist with depressed stock market values. Japan for the last many years proves that as well.

America is blessed with a hard-working population and a lot of smart businesspeople who want to make money the old-fashioned way, which unfortunately is neither the Chicago way nor the modern Big Finance way. What the old-fashioned types need is for government and the Fed to be old-fashioned as well. No matter how pure the motives, statism in very large, complicated economies is very different from statism in small Scandinavian countries where "everyone" is related to each other.

Money should be treated with respect, not with zero interest rates. And the standard financial principles that failure should not be rewarded with bailouts should be restored post-haste. If Citigroup is still insolvent after all that has been done (unfairly, IMO) to assist it, so be it.


There is no surprise in this observer that the stock market is acting badly. An economy that creates neither jobs nor optimism amongst small businessmen is a very troubled one. "Don't fight the Fed" worked when the Fed could engineer lower rates and the real world extended more and more (imaginary, to be sure) credit.


In this era of all-time record low interest rates, the Japan scenario shows that the next shoe to drop after a credit collapse is equity valuations if prices don't rise. While longer term I vote for stagflation, in the very short term a rerun of 2008 with collapsing commodity prices could occur. There's no way to even guess. And to be sure, I agree once in a while with Keynes: as he said, if the facts change, I do adjust my thinking.


The stock market is voting lately against the policies of appeasing the titans of Wall Street. Where it goes nobody knows, of course; at least I don't know; but I do know what I think about freedom-friendly and economy-friendly governmental and Fed policies.

What ails the economy is not all that complicated. The money-printing has stayed almost hermetically sealed within the Street. The statist and Big Finance-friendly policies of the Bushbama Continuity just aren't allowing the inherent dynamism of the American worker and business community to do what comes naturally.

Money should be treated with respect, not zero return (while lenders charge crazy high rates on credit card debt even to credit-worthy borrowers).

Mr. Bernanke and Mr. Obama, tear down these policies. You have nothing to lose but your failures.

Copyright (C) Long Lake LLC 2010

Larry Kudlow Gets It Right: Monetary Policy Over Easy Needs to Come Off the Griddle

King Dollar claptrap aside, I actually just found a Larry Kudlow article which I like! Will wonders never cease:
Obamacon Doves vs. Hard-Money Heartland Hawks. Here's a nice thought:

My own view is that we need a dose of what I call cowboy monetarism. By that, I mean the Fed should surprise Wall Street traders with unexpected policy restraint in order to keep them from taking excessive risks in their financial dealings. Like the cowboys of the Old West, who would act in their own defense at a moment's notice, the Fed should not be afraid to pull the trigger on some small restraining moves now to prevent new financial bubbles and an outbreak of inflation down the road.

Not that cowboys are/were really unpredictable, but the thought is good. The old (younger) Greenspan of the 1990's really shook them up with large interest rate moves down and up following the 1990 recession. Gentle Ben can do it again.

Copyright (C) Long Lake LLC 2010

Marc Faber Accuses the Obama Administration of Anti-Semitism

In an interview with Kitco News titled Gold Run Not Over, the Swiss economist Marc Faber (whose business base is, I believe, Hong Kong) states about the Goldman Sachs case in specific and Barack Obama in general that politics rules the roost now in a very substantial way:

Faber does not think the SEC charges against Goldman Sachs will have a very significant impact on the markets since the accusations are “purely politically motivated.”

“Obama has lost the trust of the people; his approval rating is worse than Bush at this stage in the presidency. When people are dissatisfied in a democracy - you go after a minority to target – in the case of America you go after Goldman Sachs because it is the symbol of Wall Street and excessive money creation and there is also a tone of anti-Semitism there.”

He implicitly compares the president to Hugo Chavez or a corrupt ruler of old:

“Mr. Obama will do everything he can to get re-elected and that may involve some very bad decisions. He is like a roman emperor; he just gives out bread to the mob and produces games and circuses.”

Faber has made some great calls. These include being bearish before the bursting of the Japan and NASDAQ bubble peaks, and the 2007-8 collapse; being bullish on gold for quite some time, and near the bottom of the bear market in 2008-9 for a substantial stock market rally within the confines of a longer-term bear market.
He remains bearish on paper currencies. He is contemptuous of the Fed:

Faber said that "as far as the eye can see, interest rates under Bernanke will stay at zero and below." He noted that the current Vice Chairman of the Fed , "Janet Yellen, another totally, ignorant economist, removed from any reality, said herself six months ago, ‘if I could implement interest rates below zero, I would do it.’ So now you know what the policy in the US will be,” Faber said.

Finally, he points out that as in FDR's administration, ownership of gold may not get an individual anywhere:

He also said that if gold prices substantially rise one day, there could be expropriation. “The Americans could force the Europeans to do the same – once they have all the gold in the world they would re-value it at $10,000 an ounce," Faber said.

It took about four decades after FDR stole the people's gold and defaulted on the U. S. government's WW I gold bonds for gold ownership to become legal in the U. S. (Ownership of numismatic gold coins and gold-related stocks remained legal.)

There's a lot to think about in this interview.

Copyright (C) Long Lake LLC 2010

Bernanke Must Be Joking

Bernanke Says Bailouts of Banks ‘Unconscionable’ .

I say "Ha!"

Per the Bloomberg.com article:

Federal Reserve Chairman Ben S. Bernanke said government bailouts of large financial firms are “unconscionable” and must be ended as part of a regulatory overhaul following the worst financial crisis since the 1930s.

“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms,” Bernanke said today in a speech in Orlando, Florida. “If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.”

It was really Paul Volcker who started the bailout tradition at the Fed, most famously in the Continental Illinois mess back in 1984 (though something came earlier, the details of which I forget). The Fed exists as a public-private enterprise, dedicated to the big banking companies it allegedly regulates. Dr. Bernanke was about the head cheerleader for the Fed and Federal government bailouts rather than the clearly fairer strategy of requiring shareholders and bondholders to take the losses, and for any governmental or Fed bailers-outers to make unconsionable profits on said largesse.

The Fed is ahttp://www.bloomberg.com/apps/news?pid=20601087&sid=aieJo0_AzxoI&pos=1 destructive organism, based on Gentle Ben's testimony to the House on Feb. 10, 2010 (point 9):

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Huh? No minimum reserves? Is that the same as zero reserves? In other words, depositors put $100,000 into a bank, which loans out that $100,000? When some of the depositors want their money back, does the bank call in a loan? Is the bank equivalent to the Fed, and just creates the cash if that's what the depositor wants? Does it keep a printing press on site? How does bank capital figure in this? How does it distort anything for a depository institution to hold onto some of its deposits and not loan them all out?

The regulators must be desperate when something as liberal as small, mandatory reserve requirements may get junked in order to allow the system to perform yet more frenetically.

Got gold?

Copyright (C) Long Lake LLC 2010

Evidence of Slowing Growth Momentum

Bloomberg.com has 3 articles on its front page pointing in the same direction of decline in the rate of growth, which is generally not good for stock prices:

U.S. Trade Deals Falter as Unemployment, Democrats Mute Obama;

Credit-Default Swaps Rising to Five-Week High ;

Stocks, Commodities Fall as China Curbs Lending; Dollar Rises.

Then you have what has become the typical incoherence out of Washington with the following two offsetting headlines:

Senate Democrats Said to Consider $80 Billion Jobs Legislation

Obama to Call for Three-Year Freeze on Some Federal Spending.

In addition, BB reports a marginal GDP change in Britain for Q4 last year:

Jan. 26 (Bloomberg) -- The U.K. economy resumed growth by less than economists forecast in the fourth quarter as service industries and manufacturing expanded just enough to pull Britain out of its longest recession on record.

Gross domestic product rose 0.1 percent from the third quarter, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 33 economists was for a 0.4 percent increase and the lowest prediction was for a result of 0.2 percent. . .

“It’s clearly disappointing,” Simon Hayes, chief U.K. economist at Barclays Capital and a former Bank of England official, said in a telephone interview. “The recovery is going to be uneven. I think the Bank of England will halt quantitative easing in February, but if we don’t see sustained growth it’s likely we may see them extend it in the middle of the year.” . . .

The recession, which lasted for six consecutive quarters, has shaved 6 percent off GDP, the statistics office said. The economy shrank 4.8 percent in 2009, the biggest annual drop since records began in 1949, officials said.

The economy contracted 3.2 percent from a year earlier in the fourth quarter, compared with a median decline of 3 percent forecast in a Bloomberg News survey of 30 economists.

The evidence is growing that in the developed countries, we have reach a period where simply fiddling with the cost and quantity of borrowed funds is not enough to have a big effect on the economy. It now takes special giveaways such as were embodied in cash-for-clunkers and a first-time home buyers credit to goose sales; but these largely simply bring demand forward.

I do not believe that the credit crisis is finished.

Those who cheerlead for Ben Bernanke should consider the following analogy.

Dr. Bernanke committed malpractice by not treating the risk factors for an economic heart attack, instead encouraging the patient to smoke and eat rich, sugary foods. He did not order an angiogram when angioplasty or a bypass might have prevented a heart attack. When the heart attack arrived, he was part of a team that threw everything modern medicine had, and the patient suffered a cardiac arrest as part of the event but survived. The patient is now engaged in a prolonged recovery with uncertain prospects and has resumed his bad lifestyle habits, having resumed smoking and eating the wrong foods, without the doctor's opposition. The doctor is continuing intravenous therapy long after the event, which is a sign of weakness in the patient's condition.

Meanwhile, on CNBC today, the commentators were dismissive of the opposition to the doctor staying on the case. "Fringe" was Joe Kernan's characterization of the opposition.

It's time for a change at the Fed. It's also time for a true Straight Talk Express to advise the American people that an equity culture trumps a credit-based one. The focus needs to be on a truly sustainable economy.

As the above Bloomberg headlines demonstrate, monetary policy cuts both ways. It in fact may be in the government's interest for stocks to fall so that people get scared and rush to the "safety" of Federal debt so that the massive deficits can continue to be financed cheaply, a la Japan (which is on its way to be rated not much above California if above it at all).

These are truly unprecedented times, with the over 400-year old Bank of England having its lowest borrowing rates in its entire history (see EBR's 1694 and all that from one year ago).

Thus the past is an uncertain guide to the future. As with a frail patient, even a small gust of wind can cause a fall.

Thus the emphasis at EBR on high-quality assets.

Copyright (C) Long Lake LLC 2010

Shalom Also Means Goodbye

Dr. Steve Keen of Australia, one of the few economists who predicted the financial crisis, has a concise post out titled The Economic Case Against Bernanke. Mish has also posted on this. Please read this, as it is not lengthy. The focus is debt levels; Dr. Keen correlates the 1920s and Great Depression to the recent past and current situation.

In my very humble opinion, there has to be a reason why the current downturn has lasted so long and why in December, 24 months after the first official recession month, the better part of one million people are reported to have left the job force.

They did not leave because they had successfully played the stock market rally in 2009!

Large companies, which often have 90%+ gross margins on their products, can show rising profits without sales gains simply by cutting a variety of costs, but it is the continued decline in the labor force that argues that the downturn is not truly over. And this is occurring as government has taken on more debt than the private sector has shed.

It would appear that either governments at all levels of this country need to suddenly find very productive uses of their debt spending, or we are simply going to have to get serious about canceling a number of the debts.

Also, it is time that all financial institutions perform accurate accounting of their assets. If the companies have no equity with proper accounting, their stocks should go to or near zero and the bondholders need to engage in a debt-for-equity swap. If the companies are solvent, then the Fed can cease trying to create inflation by penalizing savers.

One of the relatively subtle Big Lies extant is that the steep yield curve is bullish. Actually, a zero short-term interest rate is bizarre. A 10-year Treasury yield of about 3.7% is hardly predictive of a booming economy.
It is this sort of financial situation along with a rising stock market that has played the dominant role in the economic models such as the Index of Leading Economic Indicators and ECRI's analysis.

At very high and very low temperatures, matter acts strangely. The same is true at extremes of interest rates.

Meanwhile, of course the same Establishment that let TARP pass only after the Senate got to lard it up with a large spending bill that was languishing there, that changed the focus at the last minute when it got back to the House, that predicted a Depression if TARP did not pass and has not explained why the economy promptly imploded, and that hid the final large AIG payout to counterparties at 100 cents on the dollar by the distraction of some relatively small bonuses to the remaining staff at AIGFP has rallied the troops and appears poised to push the second coming of the Maestro to a second term as chairman of the Fed, no matter how abysmal his performance has been as Sir Alan's lieutenant and then as chief enabler of the reckless boom.

I see no reason why gold and low-end retailers will not continue to thrive, given that the same people can be reasonably expected to follow the same policies that brought them to the power to which they tenaciously cling.

Ben Shalom Bernanke should in good conscience say thanks but no thanks and let someone with clean hands guide the Fed.

Copyright (C) Long Lake LLC 2010

Double Bubble (Or, Make That a Triple! Oh, I've Lost Count)

An E-journal I receive (Eurointelligence, free sign-up required) had this today:

Credit derivatives are back in force

The FT has a nice report from New York according to which dangerous credit derivates with weak obligations on the debtors are back in force, as if the credit crisis had never happened. With interest rates close to zero, it is not surprising that company are once again plugging the seedier side of the credit market,with instruments such covenant light (in which collateral and other rules are watered down), or instruments where a debtor can make payments in kind, instead of cash. Another form are dividend caps which allows investors receive excessive dividend, while the company gets over-indebted.

It would appear that bubblenomics is back. All courtesy of Maestro II, Dr. Ben Bernanke and allies, and the bailed-out ones.

Copyright (C) Long Lake LLC 2009

Wherein the Media Gets Things Wrong

Bloomberg.com wants us to believe that the current post-bubble deflationary, weak economy state of this country that has led to record low Treasury rates is due to the great job that Tim Geithner is doing running Treasury (and note how little credit his boss or Gentle Ben get), in te sycophantic In-Geithner-We-Trust Bond Market Gets Lowest Yield:

Less than a week after deflecting calls for his resignation, Timothy Geithner sold bonds on behalf of U.S. taxpayers at the lowest yields on record in a show of confidence in the Treasury Secretary’s policies.

Even as the nation’s debt increased by $1.15 trillion this year to $6.95 trillion in October, the government’s interest expense under Geithner dropped 15 percent, the biggest decrease since before 1989, according to data compiled by Bloomberg. The Treasury auctioned $44 billion of two-year notes Nov. 23 at a yield of 0.802 percent, the lowest on record.

Rising demand shows investors believe Geithner, 48, is striking a balance between policies to promote growth and the borrowing needed to finance a $1 trillion deficit.

DoctoRx here. Wait! TG has no role in setting the budget. Where is the credit to Congress and the President for these wise policies? The conclusion here is that this article is a plant to fight back against calls for Mr. Geithner to leave (a position that EBR advocated before he was confirmed).

There is much more sycophancy in between the below-the-fold criticism from what we are led to believe are only Republicans:

For Representative Kevin Brady of Texas, the senior House Republican on the Joint Economic Committee, rising demand for bonds reflects the state of the economy and the inability of the Obama administration to turn it around. Former Connecticut Republican congressman Rob Simmons, who is seeking to unseat Democratic incumbent and Senate Banking Committee Chairman Christopher Dodd in the 2010 election, said earlier this month that Geithner should resign over his role in the AIG bailout.

Simmons cited a Nov. 16 report by the Troubled Assets Relief Program special inspector general that faulted the New York Fed, with Geithner at its helm, for making “limited efforts” to protect taxpayer funds during the rescue of AIG. . .

“For the sake of our jobs, will you step down from your post?” Brady asked Geithner at a hearing of Congress’ Joint Economic Committee on Nov. 19. “The public has lost all confidence in your ability to do the job,” and that “is reflecting on your president,” he said.

Geithner dismissed the suggestion and blamed policies of President George W. Bush for the financial crisis. Republicans “gave this president an economy falling off the cliff,” he told Brady. “I can’t take responsibility for the legacy of crises you bequeathed the country.” . . .

Actually, criticism of Mr. Geithner, both in his role as head of the N. Y. Fed and as Treasury Sec'y has come from many quarters. Yet this article transitions promptly from the above quotes to pointing out the good stuff:

Lower Treasury yields have helped to push down borrowing costs for companies, local governments and consumers.

No mention that banks and credit card companies nowadays primarily want to lend to those who don't need to borrow. You, I and small businesses hardly have the Treasury's borrowing costs.

The truth is that the Administration and Congress told the public 9 months ago that just give us "stimulus", and the unemployment rate would peak at 8.0%. It is this slack in the economy, with labor, real estate and industrial capacity currently in oversupply relative to demand, that has led by default to "demand" for Treasuries.

If there were really confidence in our economic policy, the dollar would not have been weakening against gold, and the 10-30 year part of the curve would be much lower.

This article is a disgrace.

Also misguided, though not a disgrace, is A world awash in debt by Canada's Globe and Mail. It somehow finds that the possibility that governments will shrink their deficits to be calamitous:

The financial crisis provoked a global front to stimulate economies through massive spending. But this was fuelled by a staggering amount of borrowing. Now governments are realizing that a new calamity looms - higher taxes and slashed social programs.

If you believe that per capita GDP of over $40,000 in the U. S. and Canada is a calamity and that people living longer and healthier lives is a calamity, well then, the Globe and Mail has it right.

The Globe and Mail is just scaring you. We have plenty of capacity to provide for the elderly, but yes, more retirees as a percent of the population has obvious implications for GDP. But what of it?

Maybe we should work either less hard or for fewer years, or some combination of the both.

The great achievements of the modern world in bringing longevity to the masses of course provide new challenges, but calamity? Hardly.

Copyright (C) Long Lake LLC 2009