- Currently there is less silver available for investors to buy than there is gold.
- Only enough silver on Earth for every person to have one fourth of an ounce.
- Considered a ‘miracle metal’. It is the world’s most used industrial metal and cannot be replaced by anything else.
- Silver is the most electrically conductive, thermally resistant, and reflective metal on the planet that has no known substitutes.
- Past 30 years the world has used up more silver than has been mined, and today silver inventories are near all time record low levels.
- Experts are retiring leaving a void in the mining of silver because college graduates are not getting degrees in mining and geology.
Friday, 30 March 2012
Why buy Silver?
Thursday, 29 March 2012
A warning to all Gold investors
If we were to idealise the anatomy of a bull market, it would have three phases.
There’s the first (or ‘stealth’ phase) when the canny few get on board, but most are uninterested.
Then there’s the middle phase. This is when institutions and other sophisticated players wake up to it, but many continue to ignore it, because ‘prices have already gone up so much’. This is when you’re climbing your proverbial wall of worry.
Finally, there’s the euphoric mania, when the world and his wife simply can’t get enough.
So when it comes to gold, where are we now?
One feature of the second phase of a bull market, is that the mainstream media, albeit guardedly, start mentioning said bull market.
There have been phases in this current gold bull market where radio and newspapers – I’d say less so television – have got interested in gold. This interest usually seems to come when gold has broken to new highs and is going on one of its mini-exponential runs. I’m thinking in particular about last August-September, but also about April to May 2006 and February 2008.
When those in the mainstream – who, ironically, are often on the outside – do get interested, one of the questions they keep coming back to is: ‘Is gold in a bubble?’ In other words, there is doubt. Prices have already gone up so much, that they’re sceptical and so stay out of the market.
This would suggest that – when it comes to gold – we are somewhere in phase two of our idealised bull market model. There is no guarantee of course that phase three will ever happen – I wonder if too many people are waiting for it – but wouldn’t it be nice if it did?
Don’t fall in love with gold
The fact is, gold is in a historic bull market. It has risen by an average of just under 20% per annum over the last 11 years, outperforming every other asset class. But there is much more to this bull market than meets the eye.
It’s not just about an asset class rising in price. It’s about the on-going breakdown of our financial and monetary systems. It’s about incompetence and perhaps even corruption in our bloated governments and central banks. It's about, believe it or not, freedom, and integrity.
Gold – to many – is so much more than just an asset that is rising in price. Look at the fervour it generates. Look how passionately people feel about it – myself included. Look, for example, at how angry and aggressive those who are long gold can become when someone dismisses it. I’m thinking, in particular, about the slagging off Nouriel Roubini receives on Twitter when he baits gold bugs. (I knocked him myself in one article). Certain pro-gold websites have become almost cultish.
I happen to think the world would be a better place if the free market were to choose which money we use – whether that be gold, pounds, dollars, or Bitcoins - rather than have a government money forced on it. Hayek outlines this idea of competing currencies in his essay The Denationalisation Of Money.
Competition would force better practice onto money issuers – and likely, though by no means certainly, most market participants would prefer to use gold or silver as money, at least until other forms of money pay sufficiently high interest to lure them away from the hard stuff.
Gold, as you can’t print it, is a great regulator. It forces discipline onto governments and banks. They have to rein in their spending. They can’t simply expand the supply of money and inflate their debts away.
But this is just an economic ideal. Gold may well prove to be the route to it, but it is still just an ideal. And it’s one that many have fallen in love with. Falling in love is fun. Falling in love with an investment, however, or confusing an investment with an ideal, can be very dangerous. Your judgement is bound to get clouded.
So this is a kind of note to self, a warning. I have come to, I suppose, love gold – or at least the idea of it, and the glorious, free society it offers at the end of the rainbow.
But I shouldn’t. It’s just an investment. So be warned and take note. Should we ever see that exponential final euphoric bull market phase, then come back and read this, sober up and sell.
Having thrown a wet blanket over you all, I should say that my big picture view for gold is that the end of this bull market is still not within sight. All the main drivers – monetary stress, deficit spending, debt, currency debasement, ballooning money supply, negative real rates and so on – are still in place.
In the shorter term, I feel we are still in consolidation mode after the run up to $1,920 last August-September and remain of the mind that we won’t see new highs before next autumn at the earliest, though I’ll be glad to be wrong on that. And in the very short term, I think we put in a low last week around $1,625 and that we should see a nice run up to the $1,800 mark over the next few weeks.
Dominic Frisby
There’s the first (or ‘stealth’ phase) when the canny few get on board, but most are uninterested.
Then there’s the middle phase. This is when institutions and other sophisticated players wake up to it, but many continue to ignore it, because ‘prices have already gone up so much’. This is when you’re climbing your proverbial wall of worry.
Finally, there’s the euphoric mania, when the world and his wife simply can’t get enough.
So when it comes to gold, where are we now?
One feature of the second phase of a bull market, is that the mainstream media, albeit guardedly, start mentioning said bull market.
There have been phases in this current gold bull market where radio and newspapers – I’d say less so television – have got interested in gold. This interest usually seems to come when gold has broken to new highs and is going on one of its mini-exponential runs. I’m thinking in particular about last August-September, but also about April to May 2006 and February 2008.
When those in the mainstream – who, ironically, are often on the outside – do get interested, one of the questions they keep coming back to is: ‘Is gold in a bubble?’ In other words, there is doubt. Prices have already gone up so much, that they’re sceptical and so stay out of the market.
This would suggest that – when it comes to gold – we are somewhere in phase two of our idealised bull market model. There is no guarantee of course that phase three will ever happen – I wonder if too many people are waiting for it – but wouldn’t it be nice if it did?
Don’t fall in love with gold
The fact is, gold is in a historic bull market. It has risen by an average of just under 20% per annum over the last 11 years, outperforming every other asset class. But there is much more to this bull market than meets the eye.
It’s not just about an asset class rising in price. It’s about the on-going breakdown of our financial and monetary systems. It’s about incompetence and perhaps even corruption in our bloated governments and central banks. It's about, believe it or not, freedom, and integrity.
Gold – to many – is so much more than just an asset that is rising in price. Look at the fervour it generates. Look how passionately people feel about it – myself included. Look, for example, at how angry and aggressive those who are long gold can become when someone dismisses it. I’m thinking, in particular, about the slagging off Nouriel Roubini receives on Twitter when he baits gold bugs. (I knocked him myself in one article). Certain pro-gold websites have become almost cultish.
I happen to think the world would be a better place if the free market were to choose which money we use – whether that be gold, pounds, dollars, or Bitcoins - rather than have a government money forced on it. Hayek outlines this idea of competing currencies in his essay The Denationalisation Of Money.
Competition would force better practice onto money issuers – and likely, though by no means certainly, most market participants would prefer to use gold or silver as money, at least until other forms of money pay sufficiently high interest to lure them away from the hard stuff.
Gold, as you can’t print it, is a great regulator. It forces discipline onto governments and banks. They have to rein in their spending. They can’t simply expand the supply of money and inflate their debts away.
But this is just an economic ideal. Gold may well prove to be the route to it, but it is still just an ideal. And it’s one that many have fallen in love with. Falling in love is fun. Falling in love with an investment, however, or confusing an investment with an ideal, can be very dangerous. Your judgement is bound to get clouded.
So this is a kind of note to self, a warning. I have come to, I suppose, love gold – or at least the idea of it, and the glorious, free society it offers at the end of the rainbow.
But I shouldn’t. It’s just an investment. So be warned and take note. Should we ever see that exponential final euphoric bull market phase, then come back and read this, sober up and sell.
Having thrown a wet blanket over you all, I should say that my big picture view for gold is that the end of this bull market is still not within sight. All the main drivers – monetary stress, deficit spending, debt, currency debasement, ballooning money supply, negative real rates and so on – are still in place.
In the shorter term, I feel we are still in consolidation mode after the run up to $1,920 last August-September and remain of the mind that we won’t see new highs before next autumn at the earliest, though I’ll be glad to be wrong on that. And in the very short term, I think we put in a low last week around $1,625 and that we should see a nice run up to the $1,800 mark over the next few weeks.
Dominic Frisby
Monday, 19 March 2012
Keep a close eye on the fear gauge
The headline says it all. “Fear has vanished from the stock market”, says Steven Russolillo in the Wall Street Journal. “Don’t wake the sleeping giant: the stock market’s so-called ‘fear’ gauge is fast asleep”.
He’s talking about the VIX, or the CBOE Volatility index. It is quoted in percentage points and measures the expected movement in the S&P 500 index over the next 30-day period, which is then annualised.
The S&P 500 is the world’s most watched stock market index. A climbing VIX means that American, and also global, investors are becoming more fretful. Their selling drives the stock market down. The higher the VIX rises, the bigger the crescendo of concern.
The flipside is that the lower the VIX drops, the more the S&P 500 climbs. That’s when investors start to become complacent and the risk of a big sell-off rises as the supply of buyers runs out.
What the VIX is telling us now
Right now investors are becoming dangerously complacent. Analysts have been growing very bullish about official stats. Optimism has spread about the global economy. And all that despite Chinese growth slowing and the eurozone, which is still coping with major debt problems, facing a return to recession.
In fact, fund managers have been ploughing clients’ cash into shares faster than at any time since early-2011. And ‘short interest’ – where traders sell in the hope of buying back lower down – is at its lowest point for four years. All these are signs of fast-falling fear levels in stock markets.
But before we all buy into this bullish bonhomie, let's pause a moment. It's worth looking at what happens when the price of volatility becomes so cheap. And not just in the US. The overall performance of London–listed shares is closely linked to Wall Street. In other words, the VIX is a handy guide to the FTSE 100 too, as this chart shows.
Source: Bloomberg, FSL
You can see how the VIX (the red line) has plunged over the last six months. The FTSE 100 has been a near-mirror image of this. But since the financial crisis began in 2007, such low points in the fear gauge have always been followed by a sharp downswing in the equity market.
OK, this hasn’t always happened straightaway. And current investor complacency might yet take a few more weeks to shatter. There has to be a catalyst, and right now it’s unclear what that will be. But in summary, today’s overall market levels are looking increasingly dangerous.
David Stephenson
He’s talking about the VIX, or the CBOE Volatility index. It is quoted in percentage points and measures the expected movement in the S&P 500 index over the next 30-day period, which is then annualised.
The S&P 500 is the world’s most watched stock market index. A climbing VIX means that American, and also global, investors are becoming more fretful. Their selling drives the stock market down. The higher the VIX rises, the bigger the crescendo of concern.
The flipside is that the lower the VIX drops, the more the S&P 500 climbs. That’s when investors start to become complacent and the risk of a big sell-off rises as the supply of buyers runs out.
What the VIX is telling us now
Right now investors are becoming dangerously complacent. Analysts have been growing very bullish about official stats. Optimism has spread about the global economy. And all that despite Chinese growth slowing and the eurozone, which is still coping with major debt problems, facing a return to recession.
In fact, fund managers have been ploughing clients’ cash into shares faster than at any time since early-2011. And ‘short interest’ – where traders sell in the hope of buying back lower down – is at its lowest point for four years. All these are signs of fast-falling fear levels in stock markets.
But before we all buy into this bullish bonhomie, let's pause a moment. It's worth looking at what happens when the price of volatility becomes so cheap. And not just in the US. The overall performance of London–listed shares is closely linked to Wall Street. In other words, the VIX is a handy guide to the FTSE 100 too, as this chart shows.
Source: Bloomberg, FSL
You can see how the VIX (the red line) has plunged over the last six months. The FTSE 100 has been a near-mirror image of this. But since the financial crisis began in 2007, such low points in the fear gauge have always been followed by a sharp downswing in the equity market.
OK, this hasn’t always happened straightaway. And current investor complacency might yet take a few more weeks to shatter. There has to be a catalyst, and right now it’s unclear what that will be. But in summary, today’s overall market levels are looking increasingly dangerous.
David Stephenson
Thursday, 15 March 2012
100 year Government bonds? You must be kidding!
Less than a week ahead of the Budget, chancellor George Osborne has been given a very clear warning by credit rating agency Fitch. “Keep up the cuts – or else”.
Fitch has put Britain on ‘negative outlook’. The group warned that the UK could lose its AAA-credit rating if the government fails to stick to its plan and debt ends up “peaking later and higher than currently forecast.”
Trouble is, if growth is weaker than hoped, or there’s a eurozone crisis, then we could lose the AAA too.
That leaves Osborne in a bit of a bind. How can he pull any vote-winning rabbits out of the hat if he hasn’t got any spare cash?
It’s small wonder he’s pondering desperate measures – such as issuing 100-year gilts.
A 100-year fixed-rate loan is a great deal – for the borrower
What rate would you charge to lend your money to the British government for the next 100 years?
George Osborne plans to find out. He’s looking at issuing a ‘century’ gilt, or maybe even a ‘perpetual’ (which has no maturity date at all). The benefits for the government are clear.
Britain would get to take advantage of current low lending rates. It would get to extend its average debt maturity even further. This stands at an already healthy 14 years, which is twice the figure of Italy and France. What this means is that we are less vulnerable to short-term spasms of panic in the debt markets, because we don’t need to roll over our debt as regularly.
It would also be a nice publicity stunt. “Look”, the chancellor could say. “Britain is so safe, so credit-worthy, so well-managed, that investors are throwing money at us.”
And at the back of his mind, he’s probably thinking, “Maybe the ratings agencies would cut us some slack if we had a longer debt maturity. That means I could spend a bit more money on winning the next election.”
So you can see why Osborne is tempted to explore this. What’s less clear is the upside for anyone who is confused enough to give the government this money.
Why would anyone lend to the government for 100 years?
The initial reaction certainly hasn’t been good. Investors might be dim enough to lend to the government over ten years for a sub-inflation return, but they’re not keen to do it for the next century.
Even those seen as the most natural customers for the product – pension funds, who have to match liabilities to life expectancies – aren’t keen.
The National Association of Pension Funds (NAPF) said “few of its members would find such gilts attractive,” says The Times. Joanne Segars of the NAPF told the paper: “Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the Government issue more of those.”
Well, of course they would. An asset that guarantees to beat inflation with very little risk over the course of 50 years is exactly what a pension fund needs.
But the point of issuing a 100-year bond at minuscule interest rates is to effectively write off the debt via inflation. Index-linking it would render the whole thing pointless.
The War Loan, issued in 1915 to pay for the First World War, was similar to what Osborne seems to be planning now. And it turned out to be a disastrous investment. In 1932, it was ‘restructured’. Indeed, some argue that Britain effectively defaulted. In practical terms, that was the impact on anyone holding the debt. £100 invested in the loan back then is worth less than £2 today, notes Ian King in The Times.
Keep avoiding gilts
What does all this mean for you? The fact that Osborne is seriously considering this, does make you wonder how much longer the gilt bubble has to last. If it wasn’t for the massively sceptical reaction from potential buyers, I’d say this was almost like ringing a bell for the top of the gilts market.
And it’ll be interesting to see the reception they receive if they actually get to market. Pension funds might be slagging them off now, but that’s the equivalent of kicking the tyres and tutting when you walk around a car showroom. They might lap up the 100-year debt when it’s issued.
Make no mistake, you’d have to be mad to buy it. Britain’s status as a ‘safe haven’ relies on two key things.
First, the crisis in Europe. As long as that continues, sterling and the UK are two nice, convenient destinations for wealthy Europeans seeking refuge for their cash. But that can only continue for so long.
Second, the Bank of England. Osborne doesn’t like to mention this, but gilt yields are low because our central bank keeps buying the things with freshly minted money. There’s a guaranteed, price-insensitive buyer in the market. Even the most useless contestant on that Alan Sugar programme,The Apprentice, could make a successful sale under those conditions.
If quantitative easing ends, gilt yields will have to rise. Indeed, that may be one good reason why the government is trying to make hay right now.
Incidentally, if you’re worried about inflation, I’d be comfortable holding on to index-linked gilts. Actively defaulting on these would be a huge step, and so I don’t see it happening, although they might fiddle with the official inflation figures. With headline inflation declining, you may get a better chance to buy later this year, but then again, the stubbornly high oil price may mean Mervyn King is disappointed sooner rather than later. That said, I’d keep hold of gold too as an all-round insurance.
John Stepek
Fitch has put Britain on ‘negative outlook’. The group warned that the UK could lose its AAA-credit rating if the government fails to stick to its plan and debt ends up “peaking later and higher than currently forecast.”
Trouble is, if growth is weaker than hoped, or there’s a eurozone crisis, then we could lose the AAA too.
That leaves Osborne in a bit of a bind. How can he pull any vote-winning rabbits out of the hat if he hasn’t got any spare cash?
It’s small wonder he’s pondering desperate measures – such as issuing 100-year gilts.
A 100-year fixed-rate loan is a great deal – for the borrower
What rate would you charge to lend your money to the British government for the next 100 years?
George Osborne plans to find out. He’s looking at issuing a ‘century’ gilt, or maybe even a ‘perpetual’ (which has no maturity date at all). The benefits for the government are clear.
Britain would get to take advantage of current low lending rates. It would get to extend its average debt maturity even further. This stands at an already healthy 14 years, which is twice the figure of Italy and France. What this means is that we are less vulnerable to short-term spasms of panic in the debt markets, because we don’t need to roll over our debt as regularly.
It would also be a nice publicity stunt. “Look”, the chancellor could say. “Britain is so safe, so credit-worthy, so well-managed, that investors are throwing money at us.”
And at the back of his mind, he’s probably thinking, “Maybe the ratings agencies would cut us some slack if we had a longer debt maturity. That means I could spend a bit more money on winning the next election.”
So you can see why Osborne is tempted to explore this. What’s less clear is the upside for anyone who is confused enough to give the government this money.
Why would anyone lend to the government for 100 years?
The initial reaction certainly hasn’t been good. Investors might be dim enough to lend to the government over ten years for a sub-inflation return, but they’re not keen to do it for the next century.
Even those seen as the most natural customers for the product – pension funds, who have to match liabilities to life expectancies – aren’t keen.
The National Association of Pension Funds (NAPF) said “few of its members would find such gilts attractive,” says The Times. Joanne Segars of the NAPF told the paper: “Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the Government issue more of those.”
Well, of course they would. An asset that guarantees to beat inflation with very little risk over the course of 50 years is exactly what a pension fund needs.
But the point of issuing a 100-year bond at minuscule interest rates is to effectively write off the debt via inflation. Index-linking it would render the whole thing pointless.
The War Loan, issued in 1915 to pay for the First World War, was similar to what Osborne seems to be planning now. And it turned out to be a disastrous investment. In 1932, it was ‘restructured’. Indeed, some argue that Britain effectively defaulted. In practical terms, that was the impact on anyone holding the debt. £100 invested in the loan back then is worth less than £2 today, notes Ian King in The Times.
Keep avoiding gilts
What does all this mean for you? The fact that Osborne is seriously considering this, does make you wonder how much longer the gilt bubble has to last. If it wasn’t for the massively sceptical reaction from potential buyers, I’d say this was almost like ringing a bell for the top of the gilts market.
And it’ll be interesting to see the reception they receive if they actually get to market. Pension funds might be slagging them off now, but that’s the equivalent of kicking the tyres and tutting when you walk around a car showroom. They might lap up the 100-year debt when it’s issued.
Make no mistake, you’d have to be mad to buy it. Britain’s status as a ‘safe haven’ relies on two key things.
First, the crisis in Europe. As long as that continues, sterling and the UK are two nice, convenient destinations for wealthy Europeans seeking refuge for their cash. But that can only continue for so long.
Second, the Bank of England. Osborne doesn’t like to mention this, but gilt yields are low because our central bank keeps buying the things with freshly minted money. There’s a guaranteed, price-insensitive buyer in the market. Even the most useless contestant on that Alan Sugar programme,The Apprentice, could make a successful sale under those conditions.
If quantitative easing ends, gilt yields will have to rise. Indeed, that may be one good reason why the government is trying to make hay right now.
Incidentally, if you’re worried about inflation, I’d be comfortable holding on to index-linked gilts. Actively defaulting on these would be a huge step, and so I don’t see it happening, although they might fiddle with the official inflation figures. With headline inflation declining, you may get a better chance to buy later this year, but then again, the stubbornly high oil price may mean Mervyn King is disappointed sooner rather than later. That said, I’d keep hold of gold too as an all-round insurance.
John Stepek
Wednesday, 14 March 2012
A look at what we were saying in 2006 before the crash
Gold investors who had been holding their breath for weeks had it knocked out of them this week. On Tuesday, the price fell $44 (to around $560), enough to put speculators in a tailspin. Even your editor – usually a rock of unproven opinions and a fountain of imperturbable prejudices – began to wonder.
What if we’re wrong? What if sophisticated, modern financial instruments have reduced gold’s role in modern finance? Wouldn’t gold act exactly as it has – that is, as a commodity? It went up with lead… and came down with it, too. But what kind of commodity has no industrial use? We wondered then why it had bothered to go up in the first place. After a while, we had wandered so deep into the forest of conflicting and ambiguous thoughts we needed a helicopter rescue.
Daily Reckoning readers might be wondering… and getting lost, too. Today’s reflection is meant to provide them with some breadcrumbs.
We begin with two questions:
That second question is the mischievous one. So, we will answer it first: we don’t know. But it is the question itself that is most revealing. Were monetary systems permanent and immutable, there would be no need for them. The present financial system could sit there as unchanging as a harbour light – a sturdy guide to the prudent and a warning to the reckless.
Instead, monetary regimes come and go, like the lanterns of Cornish pirates, luring ships onto the rocks to be looted.
The financial history of Argentina is instructive as well as entertaining. There, hardly a single generation got through life without washing up – either on the rocks of inflation, the shoals of devaluation, or the soft mud of recession. One system brought inflation rates of 2,000% per year. When that sank, in came a peso as strong as the dollar. And then, when the new peso crashed, a new, new peso, with a new monetary regime behind it.
Just when people had learned how to get around the rocks, the rocks were moved. Along came another regime with another set of standards. Out on the pampas, people finally got used to financial change. They learned not merely from the record of the dead, but from their own living experience: don’t put your faith in any financial system; it won’t last.
But Americans can’t have learned much from their mistakes; they haven’t made enough of them. American paper currencies went bad in the Revolutionary War (“not worth a continental,” was the expression that recorded the mistake), and again in the War Between the States (when Lincoln spent more than he could honestly steal from the taxpayers).
The Great Depression, with its devaluation of the dollar against gold, might have taught them a thing or two as well. But there is hardly a single person still alive who learned from it directly. No, in matters of financial calamity, Americans might have been born yesterday. Soft and dewy, they are ready to believe anything – even that their financial system might last forever.
That brings us back to our other question: exactly what faith is it that undergirds our faith-based system?
It is faith, surely, in the dollar, is it not? The dollar is the unit in which Americans measure their wealth. If the dollar were called seriously into question, so would the system itself be. Everyone knows that the dollar is manmade, of course. Like all man’s creations, they accept that it is not without its flaws and is subject to improvement.
Man’s cars get better every year. And although a man may be happily married, still, walking around a dreary college campus or on a sunny beach… he can still imagine how things might be better with a newer model.
In the case of the greenback, it has lost 95% of its value since the Fed was established. It lost 80% of its value while the present financial system has been in effect. That is, since 1971, when the Bretton Woods system, with its limited connection to gold, was abolished by White House decree.
But while everyone knows the dollar gives ground, few believe it is unreliable. It is not the ruination of the dollar that disturbs people; it is ruination at an unforeseen rate. Like the Argentines, Americans have learned to live with a greasy dollar. What they’re not ready for is one that slips away from them too fast. Or even less – one that doesn’t budge.
Their faith is broad. How deep it is, we won’t know until it is tested. For the present, “You gotta believe” is the national anthem. Americans believe that their financial leaders have triumphed over sin and science, too. An Argentine recognizes that government will destroy its own currency in order to win votes and power. An American readily agrees that the Bank of Argentina would do such a thing, but of the Bank of Ben Bernanke, he can’t believe it. His faith stops at the metal detectors.
Yes, theoretically, government and its central bank may be tempted to try to create more liquidity than necessary, but no, they won’t give into it. Why not? Because the markets won’t let them, comes the unwavering reply. Ah yes, their faith stretches to cover free market speculators as well as government bureaucrats.
Should the feds create too much “money”, it is believed, investors will dump treasury bonds and force up interest rates, thereby reducing liquidity naturally. But for the last 10 years, a huge tide of cash, credit and credit derivatives has flooded the world without a word of complaint from the speculators.
Instead, they got rich and built gaudy houses in Greenwich, Connecticut. They figured out how to snooker the system… shuffling and reshuffling money, slipping an ace up their sleeves when no one was looking. Liquidity – money in all its forms – was lapping around them, but who was going to complain? House prices rose. Stocks rose. Bonds rose. What’s not to like?
And finally, the head of the most successful money shuffler of all time – Goldman Sachs – has just been invited to Washington to take charge of national finances. Could anything be clearer? The speculators are not watching over the feds; they’re watching out for them… and for themselves.
Meanwhile, in the popular imagination at least, great strides in the science of central banking have been made since the days of John Law. Asked what exactly those strides are, the modern economist shifts uneasily in his chair and mumbles something about improvements in data available to policy makers.
And this is where we begin to make faces. Our eyes roll toward the heavens.
We think of the improved “data” itself – of job numbers perverted by seasonal adjustments and changing definitions of employment that flatter the policymakers… of inflation figures shrunk by taking out inconvenient prices for food and energy and then hedonically act as a prestidigitator, so that they practically disappear from the stage of GDP calculations that have undergone so much cosmetic surgery that they no longer resemble anything familiar or even human. And we wonder what kind of jackass would take it seriously, let alone rely on such conniving rubbish to formulate public financial policy.
In the past, the detailed information wouldn’t have been of much use to bankers, even if they had had it. Their job was simpler. All they had to do was to make sure they could pay their debts – in gold. When they couldn’t, they went broke. If they were central banks, the whole nation went broke. As simple as the job was, many still couldn’t do it. Shady countries in sunny places routinely went belly up. Even in America, during the Great Depression, 10,000 banks went bust.
The Bank of the United States of America, run by the former chairman of the Princeton economics department, needs data because its mission has crept far beyond policing the value of the dollar. Expectations have inflated, too. Now, the Fed is expected to control the rate of decline of the dollar – a decline of about 2% per year is considered optimal.
And if that weren’t hard enough, the Fed is also asked to control the economy itself – regulating the availability of credit so as to avoid serious downturns. That is why the Fed lowered interest rates to 1% following the deflation scare of 2001. It had nothing to do with protecting the value of the dollar and everything to do with avoiding a deep recession.
Not only do central-bank scientists have more data at their fingertips, they have more theories, too. Liberalism. Keynesianism. Monetarism. There’s one for every purpose under heaven. It doesn’t matter that they are contradictory. The banker is merely expected to choose the one that suits the situation and use it like a socket wrench. Crank. Crank. Problem solved.
And so, drawing on twisted data and convenient theories, the banker adjusts rates by quarter points. The prevailing theory in all the Western nations is that centralized planning is ineffective, troublesome, unethical and stupid. There’s hardly a serious economist over the age of 18 who will not point to the former Soviet Union and sneer.
“The market,” they will tell you with a superior tone, “does a better job of regulating supply, demand and price than bureaucrats.” And yet, the operating theory of every central bank is that a group of civil servants, working with government data, can fix the price of the key set of components in the entire economic system: credit.
The economists may have their theories, their insights, their models, we allow, but how do they know that what the world needs is a fed funds rate of 3.75% rather than one of 4.0%? And how do they know whether they should be tamping down on inflation… or goosing up a business downturn? They may have mountains of data, but they are still lost on the slopes. They cannot tell us what the price of oil will be tomorrow… or the price of sugar… or the price of gold. They take their guesses along with everyone else.
Because the numbers are corrupted, the theories are a hodge-podge of wishful thinking, myth and delusion. And the practice is that both officials and speculators collude to take advantage of the corruption and the delusion. Speak the truth to this kind of power? You might as well save your breath… and buy gold.
Bill Bonner
What if we’re wrong? What if sophisticated, modern financial instruments have reduced gold’s role in modern finance? Wouldn’t gold act exactly as it has – that is, as a commodity? It went up with lead… and came down with it, too. But what kind of commodity has no industrial use? We wondered then why it had bothered to go up in the first place. After a while, we had wandered so deep into the forest of conflicting and ambiguous thoughts we needed a helicopter rescue.
Daily Reckoning readers might be wondering… and getting lost, too. Today’s reflection is meant to provide them with some breadcrumbs.
We begin with two questions:
- If we have a faith-based monetary system, what do we have faith in?
- When this, too, passes, what will take its place?
That second question is the mischievous one. So, we will answer it first: we don’t know. But it is the question itself that is most revealing. Were monetary systems permanent and immutable, there would be no need for them. The present financial system could sit there as unchanging as a harbour light – a sturdy guide to the prudent and a warning to the reckless.
Instead, monetary regimes come and go, like the lanterns of Cornish pirates, luring ships onto the rocks to be looted.
The financial history of Argentina is instructive as well as entertaining. There, hardly a single generation got through life without washing up – either on the rocks of inflation, the shoals of devaluation, or the soft mud of recession. One system brought inflation rates of 2,000% per year. When that sank, in came a peso as strong as the dollar. And then, when the new peso crashed, a new, new peso, with a new monetary regime behind it.
Just when people had learned how to get around the rocks, the rocks were moved. Along came another regime with another set of standards. Out on the pampas, people finally got used to financial change. They learned not merely from the record of the dead, but from their own living experience: don’t put your faith in any financial system; it won’t last.
But Americans can’t have learned much from their mistakes; they haven’t made enough of them. American paper currencies went bad in the Revolutionary War (“not worth a continental,” was the expression that recorded the mistake), and again in the War Between the States (when Lincoln spent more than he could honestly steal from the taxpayers).
The Great Depression, with its devaluation of the dollar against gold, might have taught them a thing or two as well. But there is hardly a single person still alive who learned from it directly. No, in matters of financial calamity, Americans might have been born yesterday. Soft and dewy, they are ready to believe anything – even that their financial system might last forever.
That brings us back to our other question: exactly what faith is it that undergirds our faith-based system?
It is faith, surely, in the dollar, is it not? The dollar is the unit in which Americans measure their wealth. If the dollar were called seriously into question, so would the system itself be. Everyone knows that the dollar is manmade, of course. Like all man’s creations, they accept that it is not without its flaws and is subject to improvement.
Man’s cars get better every year. And although a man may be happily married, still, walking around a dreary college campus or on a sunny beach… he can still imagine how things might be better with a newer model.
In the case of the greenback, it has lost 95% of its value since the Fed was established. It lost 80% of its value while the present financial system has been in effect. That is, since 1971, when the Bretton Woods system, with its limited connection to gold, was abolished by White House decree.
But while everyone knows the dollar gives ground, few believe it is unreliable. It is not the ruination of the dollar that disturbs people; it is ruination at an unforeseen rate. Like the Argentines, Americans have learned to live with a greasy dollar. What they’re not ready for is one that slips away from them too fast. Or even less – one that doesn’t budge.
Their faith is broad. How deep it is, we won’t know until it is tested. For the present, “You gotta believe” is the national anthem. Americans believe that their financial leaders have triumphed over sin and science, too. An Argentine recognizes that government will destroy its own currency in order to win votes and power. An American readily agrees that the Bank of Argentina would do such a thing, but of the Bank of Ben Bernanke, he can’t believe it. His faith stops at the metal detectors.
Yes, theoretically, government and its central bank may be tempted to try to create more liquidity than necessary, but no, they won’t give into it. Why not? Because the markets won’t let them, comes the unwavering reply. Ah yes, their faith stretches to cover free market speculators as well as government bureaucrats.
Should the feds create too much “money”, it is believed, investors will dump treasury bonds and force up interest rates, thereby reducing liquidity naturally. But for the last 10 years, a huge tide of cash, credit and credit derivatives has flooded the world without a word of complaint from the speculators.
Instead, they got rich and built gaudy houses in Greenwich, Connecticut. They figured out how to snooker the system… shuffling and reshuffling money, slipping an ace up their sleeves when no one was looking. Liquidity – money in all its forms – was lapping around them, but who was going to complain? House prices rose. Stocks rose. Bonds rose. What’s not to like?
And finally, the head of the most successful money shuffler of all time – Goldman Sachs – has just been invited to Washington to take charge of national finances. Could anything be clearer? The speculators are not watching over the feds; they’re watching out for them… and for themselves.
Meanwhile, in the popular imagination at least, great strides in the science of central banking have been made since the days of John Law. Asked what exactly those strides are, the modern economist shifts uneasily in his chair and mumbles something about improvements in data available to policy makers.
And this is where we begin to make faces. Our eyes roll toward the heavens.
We think of the improved “data” itself – of job numbers perverted by seasonal adjustments and changing definitions of employment that flatter the policymakers… of inflation figures shrunk by taking out inconvenient prices for food and energy and then hedonically act as a prestidigitator, so that they practically disappear from the stage of GDP calculations that have undergone so much cosmetic surgery that they no longer resemble anything familiar or even human. And we wonder what kind of jackass would take it seriously, let alone rely on such conniving rubbish to formulate public financial policy.
In the past, the detailed information wouldn’t have been of much use to bankers, even if they had had it. Their job was simpler. All they had to do was to make sure they could pay their debts – in gold. When they couldn’t, they went broke. If they were central banks, the whole nation went broke. As simple as the job was, many still couldn’t do it. Shady countries in sunny places routinely went belly up. Even in America, during the Great Depression, 10,000 banks went bust.
The Bank of the United States of America, run by the former chairman of the Princeton economics department, needs data because its mission has crept far beyond policing the value of the dollar. Expectations have inflated, too. Now, the Fed is expected to control the rate of decline of the dollar – a decline of about 2% per year is considered optimal.
And if that weren’t hard enough, the Fed is also asked to control the economy itself – regulating the availability of credit so as to avoid serious downturns. That is why the Fed lowered interest rates to 1% following the deflation scare of 2001. It had nothing to do with protecting the value of the dollar and everything to do with avoiding a deep recession.
Not only do central-bank scientists have more data at their fingertips, they have more theories, too. Liberalism. Keynesianism. Monetarism. There’s one for every purpose under heaven. It doesn’t matter that they are contradictory. The banker is merely expected to choose the one that suits the situation and use it like a socket wrench. Crank. Crank. Problem solved.
And so, drawing on twisted data and convenient theories, the banker adjusts rates by quarter points. The prevailing theory in all the Western nations is that centralized planning is ineffective, troublesome, unethical and stupid. There’s hardly a serious economist over the age of 18 who will not point to the former Soviet Union and sneer.
“The market,” they will tell you with a superior tone, “does a better job of regulating supply, demand and price than bureaucrats.” And yet, the operating theory of every central bank is that a group of civil servants, working with government data, can fix the price of the key set of components in the entire economic system: credit.
The economists may have their theories, their insights, their models, we allow, but how do they know that what the world needs is a fed funds rate of 3.75% rather than one of 4.0%? And how do they know whether they should be tamping down on inflation… or goosing up a business downturn? They may have mountains of data, but they are still lost on the slopes. They cannot tell us what the price of oil will be tomorrow… or the price of sugar… or the price of gold. They take their guesses along with everyone else.
Because the numbers are corrupted, the theories are a hodge-podge of wishful thinking, myth and delusion. And the practice is that both officials and speculators collude to take advantage of the corruption and the delusion. Speak the truth to this kind of power? You might as well save your breath… and buy gold.
Bill Bonner
Monday, 12 March 2012
What the new lending crackdown means for house prices
The property sections are outraged.
Banks have decided that they’re going to be more careful about writing interest-only loans (where you only pay the interest on your loan, then pay the capital in one go at the end of the period).
In the good old days before the bust, you could get an interest-only loan with only the vaguest notion of how you’d repay the capital. You’d mutter something along the lines of, “house prices never fall – the government won’t let them”, and the computer would cheerfully say ‘yes’.
Now the answer is a resounding ‘no’. Santander for example, won’t lend interest-only on anything above a 50% loan-to-value. In other words, you need to own half the house already before the bank will even think about interest-only. Others have followed suit with similar restrictions.
Of course, unless you’re a mortgage broker, the only shocking thing about these rules is that they weren’t in place before the financial crash.
But the big question is: why the crackdown now?
The horses bolted ages ago – why shut the stable doors now?
New, tighter rules on interest-only home loans are being blamed on the Mortgage Market Review (MMR). In short, this is the usual story of regulators tackling yesterday’s problem.
The rules on interest-only lending were clearly too lax before the crisis. Rather than change them when they needed to, and take the flak from the property lobbyists, regulators have left it until now, when all the damage has been done.
The review basically puts the onus on lenders to make sure their customers can repay their loans (you’d think that would be a basic function of sensible lending). Trade bodies argue that banks are now reining in interest-only lending for fear of being sued if people suffer a shortfall.
But I don’t think that’s the whole story. Banks are past masters at evading regulations they don’t like. I think the MMR is an excuse for the banks to tighten up. Here’s why.
Banks haven’t been snatching back brollies
Throughout the aftermath of this financial crisis, everyone has been amazed at the leniency of the banks.
Usually a banker is defined as someone who tries to force an umbrella on you when it’s sunny, then wants it back when it starts to rain. In the current crisis, that’s not been the case.
Banks have been slower to repossess houses, and to shut down struggling businesses. That’s helped the economy to wobble along, albeit with a depressing, lurching, zombie-like gait.
Have they learned some lessons from previous crises?
Not at all. It’s just that in previous crises, banks haven’t been as fragile as they were this time around.
In the lead up to 2008, western banks overstretched themselves to the point where it would only have taken some very small losses to tip them into technical bankruptcy. In the event, we got huge losses that threatened to wipe out almost every major bank standing.
The central banks stepped in to keep the banks afloat and functioning. They dealt with the ’liquidity’ problem. And in the case of the very worst banks, they tackled the solvency problem by nationalising them.
But banks in general were still left with a lot of those dodgy loans on their books. They couldn’t dump them all at once – their balance sheets couldn’t take the stress.
Instead, what tends to happen with a banking crisis is that banks ‘deleverage’ in fits and starts.
When the crisis first happens, banks are bankrupt. So they pretend not to be, by avoiding writing down any of their bad loans. Instead, they start calling in any good loans they can, in order to ‘de-risk’ their portfolios.
What happens to the bad loans? It’s called ’extend and pretend’. Companies are given a longer time to repay loans – the debt is ’rolled over’. People struggling with their home loans negotiate lower payments – or are moved from repayment loans to interest-only ones. That’s called ’lender forbearance’.
As time wears on, the banks start to stabilise their balance sheets, aided and abetted by central banks making life easy for them. Meanwhile, regulators are pressing them to start behaving more responsibly (always after the event, of course).
So eventually, the banks get to the point where they feel they need to start addressing some of those dud loans. That’s when they decide they want their umbrellas back.
The end of forbearance
Last week, Paul Diggle at Capital Economics tried to put a figure on how important a role forbearance has played in propping up the UK housing market. “The most common forms of forbearance are a switch to interest-only or a reduction in the interest rate charged.”
Lenders have also taken arrears and added them to the outstanding balance of the home loan. Interestingly, when this happens, “a borrower is no longer counted as being behind, removing them from the arrears statistics”.
The Bank of England estimates that 11.8% of borrowers have benefited from some form of forbearance. Of these, roughly a third thought they’d be in arrears if they hadn’t been given a break by their banks (and the other two-thirds were clearly chronic over-optimists).
In short, says Diggle, if banks had been less forgiving, then the proportion of home loans currently in arrears of three months or more would probably be around 5-6%. That’s “in line with the peak reached in the 1990s”.
In other words, if the banks decide it’s “no more Mr Nice Guy”, then the UK property market could run into some serious turbulence in the months ahead. And this crackdown on interest-only might be the signal that forbearance is at an end.
After all, who are likely to be your riskiest home loan customers? The ones on interest-only deals. If you can offload these people on to another lender while the going is good – or even repossess their home while the market is still defying gravity – then maybe that’s starting to look attractive to the banks.
Of course, if the banks kick off another downward turn in the housing market, pushing prices lower, it’ll hurt them too. But that’s how a banking crisis plays out – in fits and starts. The next dip in the rollercoaster could be right ahead of us.
Banks have decided that they’re going to be more careful about writing interest-only loans (where you only pay the interest on your loan, then pay the capital in one go at the end of the period).
In the good old days before the bust, you could get an interest-only loan with only the vaguest notion of how you’d repay the capital. You’d mutter something along the lines of, “house prices never fall – the government won’t let them”, and the computer would cheerfully say ‘yes’.
Now the answer is a resounding ‘no’. Santander for example, won’t lend interest-only on anything above a 50% loan-to-value. In other words, you need to own half the house already before the bank will even think about interest-only. Others have followed suit with similar restrictions.
Of course, unless you’re a mortgage broker, the only shocking thing about these rules is that they weren’t in place before the financial crash.
But the big question is: why the crackdown now?
The horses bolted ages ago – why shut the stable doors now?
New, tighter rules on interest-only home loans are being blamed on the Mortgage Market Review (MMR). In short, this is the usual story of regulators tackling yesterday’s problem.
The rules on interest-only lending were clearly too lax before the crisis. Rather than change them when they needed to, and take the flak from the property lobbyists, regulators have left it until now, when all the damage has been done.
The review basically puts the onus on lenders to make sure their customers can repay their loans (you’d think that would be a basic function of sensible lending). Trade bodies argue that banks are now reining in interest-only lending for fear of being sued if people suffer a shortfall.
But I don’t think that’s the whole story. Banks are past masters at evading regulations they don’t like. I think the MMR is an excuse for the banks to tighten up. Here’s why.
Banks haven’t been snatching back brollies
Throughout the aftermath of this financial crisis, everyone has been amazed at the leniency of the banks.
Usually a banker is defined as someone who tries to force an umbrella on you when it’s sunny, then wants it back when it starts to rain. In the current crisis, that’s not been the case.
Banks have been slower to repossess houses, and to shut down struggling businesses. That’s helped the economy to wobble along, albeit with a depressing, lurching, zombie-like gait.
Have they learned some lessons from previous crises?
Not at all. It’s just that in previous crises, banks haven’t been as fragile as they were this time around.
In the lead up to 2008, western banks overstretched themselves to the point where it would only have taken some very small losses to tip them into technical bankruptcy. In the event, we got huge losses that threatened to wipe out almost every major bank standing.
The central banks stepped in to keep the banks afloat and functioning. They dealt with the ’liquidity’ problem. And in the case of the very worst banks, they tackled the solvency problem by nationalising them.
But banks in general were still left with a lot of those dodgy loans on their books. They couldn’t dump them all at once – their balance sheets couldn’t take the stress.
Instead, what tends to happen with a banking crisis is that banks ‘deleverage’ in fits and starts.
When the crisis first happens, banks are bankrupt. So they pretend not to be, by avoiding writing down any of their bad loans. Instead, they start calling in any good loans they can, in order to ‘de-risk’ their portfolios.
What happens to the bad loans? It’s called ’extend and pretend’. Companies are given a longer time to repay loans – the debt is ’rolled over’. People struggling with their home loans negotiate lower payments – or are moved from repayment loans to interest-only ones. That’s called ’lender forbearance’.
As time wears on, the banks start to stabilise their balance sheets, aided and abetted by central banks making life easy for them. Meanwhile, regulators are pressing them to start behaving more responsibly (always after the event, of course).
So eventually, the banks get to the point where they feel they need to start addressing some of those dud loans. That’s when they decide they want their umbrellas back.
The end of forbearance
Last week, Paul Diggle at Capital Economics tried to put a figure on how important a role forbearance has played in propping up the UK housing market. “The most common forms of forbearance are a switch to interest-only or a reduction in the interest rate charged.”
Lenders have also taken arrears and added them to the outstanding balance of the home loan. Interestingly, when this happens, “a borrower is no longer counted as being behind, removing them from the arrears statistics”.
The Bank of England estimates that 11.8% of borrowers have benefited from some form of forbearance. Of these, roughly a third thought they’d be in arrears if they hadn’t been given a break by their banks (and the other two-thirds were clearly chronic over-optimists).
In short, says Diggle, if banks had been less forgiving, then the proportion of home loans currently in arrears of three months or more would probably be around 5-6%. That’s “in line with the peak reached in the 1990s”.
In other words, if the banks decide it’s “no more Mr Nice Guy”, then the UK property market could run into some serious turbulence in the months ahead. And this crackdown on interest-only might be the signal that forbearance is at an end.
After all, who are likely to be your riskiest home loan customers? The ones on interest-only deals. If you can offload these people on to another lender while the going is good – or even repossess their home while the market is still defying gravity – then maybe that’s starting to look attractive to the banks.
Of course, if the banks kick off another downward turn in the housing market, pushing prices lower, it’ll hurt them too. But that’s how a banking crisis plays out – in fits and starts. The next dip in the rollercoaster could be right ahead of us.
Sunday, 11 March 2012
Gold, the best is yet to come
Stock markets have enjoyed a cracking start to 2012. The riskier the share, the more likely it's been to surge. Commodities have joined in the fun too. And the ever-growing band of bulls will tell you there's plenty more to go for.
But I’m starting to get nervous about this advance in equity prices. Further, I’m not confident the commodity rally can be maintained.
What is making me fret about the rally?
In Europe, shares have risen on hopes that Greek debt woes have now been 'sorted'. But even after another €130bn mega-bailout, little has been done to deal with the Greek problem. Foreign bondholders will lose a massive amount of the value of their investment. That's just one of several ongoing worries for eurozone banks.
At the end of the day, Greece is still bust. And it's unlikely to become less broke. As Alen Mattich notes in the Wall Street Journal, the country is now “deeply competitive” while the government is “close to dysfunctional, certainly in terms of gathering taxes”.
Meanwhile the whole country is up in arms about austerity measures being imposed by the so-called 'Troika' of the IMF, European Commission and ECB.
In other words, regardless of what Greek politicians promise the Troika, the populace may not tolerate more state spending cutbacks. Greece leaving the euro in a 'disorderly default' would be the likely end result. And equity markets wouldn't like that one iota.
As ever, though, the global market upswing has been powered by Wall Street. But does this make sense? Let’s examine how much more money – or not - US firms are likely to make this year.
The S&P 500 is the world's most closely-watched stock market barometer. That's why I keep a close eye on analysts' quarterly earnings estimates for it.
But most company analysts get too close to the firms they follow. They don't see earnings downturns until too late. So their 'bottom-up' expectations are more of a lagging than a leading indicator.
That's why I prefer to monitor 'top-down' estimates, i.e. those compiled by the big picture brigade. And I focus on forecast 'reported' earnings. These are the actual hard numbers that companies are expected to produce, rather than 'operating' earnings which ignore nasty bits like write-offs, etc.
Again, most strategists tend to be bulls – it's better for business. Yet the S&P stats are useful for gauging trends in analysts’ thinking.
And an interesting trend is developing. Top-down reported estimates are some way lower than bottom-up. Further, despite the overall US economic picture looking slightly brighter, top-down analysts are now forecasting a 4% dip in American company earnings between April and December 2012.
On those reported estimates, the S&P 500 isn't particularly cheap on a prospective p/e of 13.7. And an overall reported profits drop over the rest of 2012 doesn't sit well with the index climbing higher in the near future. In fact, the potential earnings trend makes a near-term Wall Street pullback more likely.
And when I see headlines appearing on Bloomberg proclaiming “Global Equities set for Bull Market”, and when I see former perma-bears like Prof. Nouriel Roubini – the 'Dr Doom' who forecast the US subprime mortgage meltdown - turning bullish, I get even more concerned.
Here’s the antidote
There is one investment that every investor needs to own right now. And that’s gold.
This is simply a 'must have' holding in your portfolio – despite the recent fall.
Because authorities will do everything they can to worm their way out of this crisis. And the traditional means of doing this is to print money (though they won’t stop there. I’ve been writing a lot recently about three other very devious plans that the UK government are launching on unsuspecting taxpayers.).
In Europe, the Long Term Refinancing Operation (LTRO) has handed out cheap cash to eurozone banks to cover their borrowing needs. In turn, a fair chunk of this money has been used to buy sovereign bonds around the single currency region.
The ECB denies it's descending into quantitative easing (QE). But ten-year sovereign bond yields on the eurozone’s periphery have tumbled since the LTRO kicked in. In effect, the LTRO is the ECB doing QE through the back door.
Why does this matter for gold? When you strip away all the jargon, QE means printing more money by pressing a computer key.To begin with, that extra cash doesn't show up in the wider monetary aggregates or the real economy. It sits around in bank vaults. But at some stage in the future, it could leak out and drive up prices – as with commodities in 2009.
Fear of inflation is the ultimate driver for gold buyers. They want a currency that will keep its value. That’s why they watch central bank balance sheets. If these start growing fast, it means QE is underway. And it's the first sign of potential inflation trouble.
Here's the growth in the ECB balance sheet since 2006. The blue line show the first major injection of liquidity into the system as the financial crisis hit in 2008. And over the last six months, the ECB’s balance sheet has surged in size again.
No wonder gold priced in euros is on a strong upward march. If the ECB officially sanctions QE – which may well be needed for bailing out the eurozone – gold in euros will climb much higher still.
Source: Bloomberg, FSL
In Britain of course, QE is official Bank of England policy. £275bn has already been created. By the time you read this, at least £50bn more could be joining it. It’s no surprise the UK chart looks similar.
Source: Bloomberg, FSL
Gold may have dipped in sterling terms from last year’s peak. And plenty of sceptics will tell you it’ll never get back there.
But the fact is that sentiment is so poor with gold at these levels just indicates that people don’t realise what’s really unfolding.
I think this is going be the finest year we’ve ever had in this bull market.The best up year so far in this gold bull was 36%. I would be surprised if that number were not obliterated this year.
In any case, as I’ve been telling our readers at The Fleet Street Letter, the authorities won’t stop at money printing to save their hides. The reality is that the UK is carrying a massive debt burden. And, the government is going to have to do a hell of a lot more to deal with this problem in the coming months.
Basically the bill for the financial crisis is about to come due. And it’ll be the taxpayer paying out.
David Stevenson
But I’m starting to get nervous about this advance in equity prices. Further, I’m not confident the commodity rally can be maintained.
What is making me fret about the rally?
In Europe, shares have risen on hopes that Greek debt woes have now been 'sorted'. But even after another €130bn mega-bailout, little has been done to deal with the Greek problem. Foreign bondholders will lose a massive amount of the value of their investment. That's just one of several ongoing worries for eurozone banks.
At the end of the day, Greece is still bust. And it's unlikely to become less broke. As Alen Mattich notes in the Wall Street Journal, the country is now “deeply competitive” while the government is “close to dysfunctional, certainly in terms of gathering taxes”.
Meanwhile the whole country is up in arms about austerity measures being imposed by the so-called 'Troika' of the IMF, European Commission and ECB.
In other words, regardless of what Greek politicians promise the Troika, the populace may not tolerate more state spending cutbacks. Greece leaving the euro in a 'disorderly default' would be the likely end result. And equity markets wouldn't like that one iota.
As ever, though, the global market upswing has been powered by Wall Street. But does this make sense? Let’s examine how much more money – or not - US firms are likely to make this year.
The S&P 500 is the world's most closely-watched stock market barometer. That's why I keep a close eye on analysts' quarterly earnings estimates for it.
But most company analysts get too close to the firms they follow. They don't see earnings downturns until too late. So their 'bottom-up' expectations are more of a lagging than a leading indicator.
That's why I prefer to monitor 'top-down' estimates, i.e. those compiled by the big picture brigade. And I focus on forecast 'reported' earnings. These are the actual hard numbers that companies are expected to produce, rather than 'operating' earnings which ignore nasty bits like write-offs, etc.
Again, most strategists tend to be bulls – it's better for business. Yet the S&P stats are useful for gauging trends in analysts’ thinking.
And an interesting trend is developing. Top-down reported estimates are some way lower than bottom-up. Further, despite the overall US economic picture looking slightly brighter, top-down analysts are now forecasting a 4% dip in American company earnings between April and December 2012.
On those reported estimates, the S&P 500 isn't particularly cheap on a prospective p/e of 13.7. And an overall reported profits drop over the rest of 2012 doesn't sit well with the index climbing higher in the near future. In fact, the potential earnings trend makes a near-term Wall Street pullback more likely.
And when I see headlines appearing on Bloomberg proclaiming “Global Equities set for Bull Market”, and when I see former perma-bears like Prof. Nouriel Roubini – the 'Dr Doom' who forecast the US subprime mortgage meltdown - turning bullish, I get even more concerned.
Here’s the antidote
There is one investment that every investor needs to own right now. And that’s gold.
This is simply a 'must have' holding in your portfolio – despite the recent fall.
Because authorities will do everything they can to worm their way out of this crisis. And the traditional means of doing this is to print money (though they won’t stop there. I’ve been writing a lot recently about three other very devious plans that the UK government are launching on unsuspecting taxpayers.).
In Europe, the Long Term Refinancing Operation (LTRO) has handed out cheap cash to eurozone banks to cover their borrowing needs. In turn, a fair chunk of this money has been used to buy sovereign bonds around the single currency region.
The ECB denies it's descending into quantitative easing (QE). But ten-year sovereign bond yields on the eurozone’s periphery have tumbled since the LTRO kicked in. In effect, the LTRO is the ECB doing QE through the back door.
Why does this matter for gold? When you strip away all the jargon, QE means printing more money by pressing a computer key.To begin with, that extra cash doesn't show up in the wider monetary aggregates or the real economy. It sits around in bank vaults. But at some stage in the future, it could leak out and drive up prices – as with commodities in 2009.
Fear of inflation is the ultimate driver for gold buyers. They want a currency that will keep its value. That’s why they watch central bank balance sheets. If these start growing fast, it means QE is underway. And it's the first sign of potential inflation trouble.
Here's the growth in the ECB balance sheet since 2006. The blue line show the first major injection of liquidity into the system as the financial crisis hit in 2008. And over the last six months, the ECB’s balance sheet has surged in size again.
No wonder gold priced in euros is on a strong upward march. If the ECB officially sanctions QE – which may well be needed for bailing out the eurozone – gold in euros will climb much higher still.
Source: Bloomberg, FSLIn Britain of course, QE is official Bank of England policy. £275bn has already been created. By the time you read this, at least £50bn more could be joining it. It’s no surprise the UK chart looks similar.
Source: Bloomberg, FSL
Gold may have dipped in sterling terms from last year’s peak. And plenty of sceptics will tell you it’ll never get back there.
But the fact is that sentiment is so poor with gold at these levels just indicates that people don’t realise what’s really unfolding.
I think this is going be the finest year we’ve ever had in this bull market.The best up year so far in this gold bull was 36%. I would be surprised if that number were not obliterated this year.
In any case, as I’ve been telling our readers at The Fleet Street Letter, the authorities won’t stop at money printing to save their hides. The reality is that the UK is carrying a massive debt burden. And, the government is going to have to do a hell of a lot more to deal with this problem in the coming months.
Basically the bill for the financial crisis is about to come due. And it’ll be the taxpayer paying out.
David Stevenson
Friday, 9 March 2012
Sooner or later a day of reckoning must come for the dollar
Everything that lives also dies. It is just an observation, but it seems to apply to everything – trees, governments, financial systems, bubbles, empires, and people themselves. There is a life cycle to all things – institutions, insects, and insurrections. They begin small... they grow... they mature... they get taken over by parasites... and they die. Tout casse... et tout passe, as the French say. Everything breaks up... and everything goes away.
In the stock market there is a life cycle of from 30-40 years from one peak to the next.
These cycles of up and down... bull and bear... are well known. What you can never know for sure is where you are in the cycle. “Markets always do what they’re supposed to do,” say the old timers, “but never when they’re supposed to do it.
While the Dow, U.S. bonds, and U.S. housing are probably going down, some things are probably going up. Japan has been in a slump for 16 years; it now looks like a good bet to change direction.
And gold suffered a bear market that lasted for the last two decades of the 20th century. Since George W. Bush entered the Oval Office, gold has more than doubled. It seems to be in a long-term bull market.
But there’s nothing like a 20-year bear market in his favourite metal to give a man a sense of modesty. As your author’s gold coins fell in value; his stock of modesty increased. Now, at least, he knows what he doesn’t know.
That still leaves the things about which he knows nothing at all.
Here we are in terra incognita. Since 1971, for example, the world financial system has looked to dollars to store and measure its wealth. But to what does the dollar look? Nothing at all. It merely floats on its full faith in empty promises and the credit of the biggest debtor in the world – the U.S.A. We’ve never seen anything like it. People work all their lives to lay in a store of a pure-paper money that lost half its value in the last 20 years... and could lose the other half any time. Foreign governments, pension plans, insurance companies, hedge funds too stake their financial futures on this same paper money, whose value is uncertain and whose future is unknown.
Never before have so many people had so much wealth tied up in so many dubious propositions. During the 20 years from 1980 to 2000, the capital value of America’s stocks rose more than 1000%... and the value of America’s residential housing approximately doubled. Meanwhile, so has the American government’s ‘financing gap’ gotten so large it will likely never be bridged. Between the financial obligations of the U.S. federal government and its anticipated revenues is a canyon of $65 trillion, in present U.S. dollars. No nation ever faced such a huge economic challenge.
Nor have the western economies – including Japan – ever been threatened by the competition they’re now getting from three billion Asians. Nor has any country ever run a trade deficit on the scale of the current U.S. shortfall of $800 billion. Nor has any country had anything like the dollar reserves now in the hands of the Chinese – more than $1 trillion of them.
Also unprecedented is the derivatives market. As recently as ten years ago it barely existed. Now, the latest news tells us it has swollen to more than $300 trillion. What kind of shock would it take to bring it down? Even if it only shivers and shakes, what will happen to the financial system when it does?
Against all this kudzu of dollar-based wealth, debt and delusions is a solid, slow-growing oak of gold – man’s traditional way of keeping score in financial affairs – getting larger at the almost invisible rate of 1.7% per year.
How will it all turn out? We don’t know. All we do know is that every previous monetary system has washed up. And every paper currency every previous experiment with paper money has ended in regret and recrimination. All bubbles end. All of them. And when a bubble in paper money comes to end, typically people abandon the paper and rush back to gold.
Sooner or later a day of reckoning must come for the dollar, America’s trade deficit, and the world’s faith-based monetary system. We don’t know how. We don’t know when. But it is a pretty good bet that it will happen.
Of course, if you knew how it would turn out... if you could look into the future... you could take just the right action at just the right moment to take advantage of it. But we are profoundly ignorant. All we know is that, however it ends, it would probably be a good idea to have a few gold coins in your pocket when it does.
Bill Bonner
In the stock market there is a life cycle of from 30-40 years from one peak to the next.
These cycles of up and down... bull and bear... are well known. What you can never know for sure is where you are in the cycle. “Markets always do what they’re supposed to do,” say the old timers, “but never when they’re supposed to do it.
While the Dow, U.S. bonds, and U.S. housing are probably going down, some things are probably going up. Japan has been in a slump for 16 years; it now looks like a good bet to change direction.
And gold suffered a bear market that lasted for the last two decades of the 20th century. Since George W. Bush entered the Oval Office, gold has more than doubled. It seems to be in a long-term bull market.
But there’s nothing like a 20-year bear market in his favourite metal to give a man a sense of modesty. As your author’s gold coins fell in value; his stock of modesty increased. Now, at least, he knows what he doesn’t know.
That still leaves the things about which he knows nothing at all.
Here we are in terra incognita. Since 1971, for example, the world financial system has looked to dollars to store and measure its wealth. But to what does the dollar look? Nothing at all. It merely floats on its full faith in empty promises and the credit of the biggest debtor in the world – the U.S.A. We’ve never seen anything like it. People work all their lives to lay in a store of a pure-paper money that lost half its value in the last 20 years... and could lose the other half any time. Foreign governments, pension plans, insurance companies, hedge funds too stake their financial futures on this same paper money, whose value is uncertain and whose future is unknown.
Never before have so many people had so much wealth tied up in so many dubious propositions. During the 20 years from 1980 to 2000, the capital value of America’s stocks rose more than 1000%... and the value of America’s residential housing approximately doubled. Meanwhile, so has the American government’s ‘financing gap’ gotten so large it will likely never be bridged. Between the financial obligations of the U.S. federal government and its anticipated revenues is a canyon of $65 trillion, in present U.S. dollars. No nation ever faced such a huge economic challenge.
Nor have the western economies – including Japan – ever been threatened by the competition they’re now getting from three billion Asians. Nor has any country ever run a trade deficit on the scale of the current U.S. shortfall of $800 billion. Nor has any country had anything like the dollar reserves now in the hands of the Chinese – more than $1 trillion of them.
Also unprecedented is the derivatives market. As recently as ten years ago it barely existed. Now, the latest news tells us it has swollen to more than $300 trillion. What kind of shock would it take to bring it down? Even if it only shivers and shakes, what will happen to the financial system when it does?
Against all this kudzu of dollar-based wealth, debt and delusions is a solid, slow-growing oak of gold – man’s traditional way of keeping score in financial affairs – getting larger at the almost invisible rate of 1.7% per year.
How will it all turn out? We don’t know. All we do know is that every previous monetary system has washed up. And every paper currency every previous experiment with paper money has ended in regret and recrimination. All bubbles end. All of them. And when a bubble in paper money comes to end, typically people abandon the paper and rush back to gold.
Sooner or later a day of reckoning must come for the dollar, America’s trade deficit, and the world’s faith-based monetary system. We don’t know how. We don’t know when. But it is a pretty good bet that it will happen.
Of course, if you knew how it would turn out... if you could look into the future... you could take just the right action at just the right moment to take advantage of it. But we are profoundly ignorant. All we know is that, however it ends, it would probably be a good idea to have a few gold coins in your pocket when it does.
Bill Bonner
Wednesday, 7 March 2012
Why are home loan rates ticking higher?
House prices fell by 0.5% during February, according to the Halifax. That leaves prices down 1.9% on the same time last year.
The average UK house price is now £160,118. Judging by Halifax’s figures, that’s nearly 20% below the August 2007 peak of just under £200,000. That’s quite a fall – throw in inflation, and it’s even more significant.
Yet it might not feel like that to anyone who had hoped to buy a home post-bubble. With sales low, sellers reluctant to move, and home loans hard to come by, the housing market hasn’t so much crashed as been put in the deep freeze.
But something else that the Halifax announced earlier this week just might help to thaw the market out.
Halifax is raising its standard variable rate (SVR) to 3.99% from 3.5% on 1 May. That doesn’t sound like much. And in the big scheme of things it isn’t. It’s about £40 a month extra on a £150,000 repayment mortgage. According to thisismoney.co.uk, roughly 850,000 borrowers will see their payments rise.
But Halifax isn’t the only one. Santander and RBS/Natwest have raised some of their rates too.
And what’s significant here – for now at least – isn’t the amount of money we’re talking about. It’s the direction of the rate change.
After all, the Bank of England rate hasn’t altered. It’s still 0.5%. In fact, the Bank’s most recent move was to loosen monetary policy further, via another bout of quantitative easing.
The Bank is also sanguine about inflation. There’s no sign of any desire on its part to put rates up any time soon. So what are Halifax and its rivals up to?
Well, this is where we have to remind ourselves that it’s not actually the Bank of England rate that matters when it comes to how much banks charge you to borrow money.
At its most basic level, a bank gets money from one place at one price, and lends it out at another, higher price. If the banks’ funding costs are rising, then what they charge us will rise too.
It has become more expensive for banks to raise money in the wholesale markets in recent months (although it’s eased off a little in recent weeks). It’s also getting more expensive to raise money from savers. Fed up with inflation eating their cash savings, people are increasingly investing, rather than saving.
That’s risky of course, but it’s a direct result of Bank of England policy – people are doing what the Bank wants them to do. The trouble is, once savers have made that psychological jump, it means banks have to work harder to attract them back.
How will this affect the housing market?
But it’s not just higher funding costs. That makes it sound as though the banks are poor wee things, subject to the whims of the cruel money markets. They are just ‘passing on costs’, is how they sell it.
Nonsense. Banks have to make a profit too. And the fact is that Halifax had one of the lower SVRs. This move merely brings it more in line with its rivals. So it makes sense – from the bank’s point of view at least – to improve its margins where the market will bear it.
This is all part of the banking sector’s attempts to return to ‘business as usual’. We’ve already seen lenders cracking down on interest-only home loans. Now we’re seeing them tighten up on SVRs.
The fact is, banks are taking advantage of a lull to make life that bit harder for marginal customers. Some people will have stayed with the SVR because at 3.5%, it’s reasonable value. They’ll go elsewhere. But others will have stuck with it because they can’t really afford to go anywhere else. Perhaps they’re in negative equity, or perhaps no one else will have them.
Even with a rise in rates as small as this one, as Ed Stansfield of Capital Economics points out, “some reports suggest that as many as one-in-six borrowers regularly have problems meeting their… payments. So for some this could be the final straw especially if… unemployment continues to rise”.
In 2011 there were just over 36,000 repossessions, the lowest level since 2007. I suspect that will start to rise again in 2012. As Stansfield puts it, “expect further house price falls this year”.
John Stepek
The average UK house price is now £160,118. Judging by Halifax’s figures, that’s nearly 20% below the August 2007 peak of just under £200,000. That’s quite a fall – throw in inflation, and it’s even more significant.
Yet it might not feel like that to anyone who had hoped to buy a home post-bubble. With sales low, sellers reluctant to move, and home loans hard to come by, the housing market hasn’t so much crashed as been put in the deep freeze.
But something else that the Halifax announced earlier this week just might help to thaw the market out.
Halifax is raising its standard variable rate (SVR) to 3.99% from 3.5% on 1 May. That doesn’t sound like much. And in the big scheme of things it isn’t. It’s about £40 a month extra on a £150,000 repayment mortgage. According to thisismoney.co.uk, roughly 850,000 borrowers will see their payments rise.
But Halifax isn’t the only one. Santander and RBS/Natwest have raised some of their rates too.
And what’s significant here – for now at least – isn’t the amount of money we’re talking about. It’s the direction of the rate change.
After all, the Bank of England rate hasn’t altered. It’s still 0.5%. In fact, the Bank’s most recent move was to loosen monetary policy further, via another bout of quantitative easing.
The Bank is also sanguine about inflation. There’s no sign of any desire on its part to put rates up any time soon. So what are Halifax and its rivals up to?
Well, this is where we have to remind ourselves that it’s not actually the Bank of England rate that matters when it comes to how much banks charge you to borrow money.
At its most basic level, a bank gets money from one place at one price, and lends it out at another, higher price. If the banks’ funding costs are rising, then what they charge us will rise too.
It has become more expensive for banks to raise money in the wholesale markets in recent months (although it’s eased off a little in recent weeks). It’s also getting more expensive to raise money from savers. Fed up with inflation eating their cash savings, people are increasingly investing, rather than saving.
That’s risky of course, but it’s a direct result of Bank of England policy – people are doing what the Bank wants them to do. The trouble is, once savers have made that psychological jump, it means banks have to work harder to attract them back.
How will this affect the housing market?
But it’s not just higher funding costs. That makes it sound as though the banks are poor wee things, subject to the whims of the cruel money markets. They are just ‘passing on costs’, is how they sell it.
Nonsense. Banks have to make a profit too. And the fact is that Halifax had one of the lower SVRs. This move merely brings it more in line with its rivals. So it makes sense – from the bank’s point of view at least – to improve its margins where the market will bear it.
This is all part of the banking sector’s attempts to return to ‘business as usual’. We’ve already seen lenders cracking down on interest-only home loans. Now we’re seeing them tighten up on SVRs.
The fact is, banks are taking advantage of a lull to make life that bit harder for marginal customers. Some people will have stayed with the SVR because at 3.5%, it’s reasonable value. They’ll go elsewhere. But others will have stuck with it because they can’t really afford to go anywhere else. Perhaps they’re in negative equity, or perhaps no one else will have them.
Even with a rise in rates as small as this one, as Ed Stansfield of Capital Economics points out, “some reports suggest that as many as one-in-six borrowers regularly have problems meeting their… payments. So for some this could be the final straw especially if… unemployment continues to rise”.
In 2011 there were just over 36,000 repossessions, the lowest level since 2007. I suspect that will start to rise again in 2012. As Stansfield puts it, “expect further house price falls this year”.
John Stepek
Tuesday, 6 March 2012
Why are central banks treating savers with such contempt?
There are two answers to this question. The first is that they are more concerned with keeping their banking systems afloat.
The primary objective of any central bank, our own included, is to maintain the stability of the financial system. They may have failed catastrophically to do that since the crisis began, but nevertheless we are where we are.
The second is that they have become lenders of last resort to their own governments. All roads ultimately lead back to the terrifying issuance of government debt throughout the western economies. How is all that government debt going to be funded? The answer, whether we like it or not, is that governments and central banks will effectively force us to buy.
The Bank of England and the US Federal Reserve are debasing their money like crazy – and they’re doing everything by the book. If you’re interested in knowing which book, the answer is ‘The liquidation of government debt’, a research piece by Carmen Reinhart and M. Belen Sbrancia, which you can read in its entirety here.
Western governments have issued more debt over the last 40 years than they will ever be able to repay. That leaves three options. One is to formally default on that debt and repudiate it. You can call that option Armageddon.
The second is to force austerity on the entirety of the economy, slowly rein in the issuance of further debt, and endure a long and painful depression as national debts and deficits are slowly reduced. You can call that option Greece, at least for the moment, until it implodes.
The third option is to inflate it away and to coerce investors to buy it through financial repression.
You can call that option Where We Are Now.
Ms Reinhart describes the various forms of financial repression as follows:
The government has already orchestrated the first and the fourth mechanisms. Under ‘captive domestic audiences’ you can include the banks, given that the likes of RBS and Lloyds are already largely under the control of the state.
That brings us to the second mechanism – implicit caps on interest rates. With cash in the bank yielding next to nothing, and the central bank pledging to keep base rates at current levels for the next three years, suddenly parking money in “riskless” government bonds yielding just a smidgeon more doesn’t seem like such a bad deal, does it?
The third mechanism – the reintroduction of capital controls – is one that I have been concerned about for some time. It’s the logical next step in the financial repression playbook. But given the success of the other mechanisms to date, perhaps the authorities never need resort to it.
CLSA analyst Russell Napier wrote a report last year entitled ‘Darkness on the edge of town’. He pointed that out last summer:
“...a terrible burden fell upon the people of the USA. For the first time in 15 years, those who had money (savers) began to fund their government, rather than the printers of money (central banks).”
In other words, in the summer of 2011, the US government was no longer able to sell its new debt to foreign central banks. It was reliant upon domestic investors to get its debt away.
The next point is crucial in understanding what may drive financial markets over the coming decade. Central banks can simply print money to buy government bonds issued by other sovereign borrowers. Since they control the printing press, they can be almost completely price-insensitive to what those government bonds yield, and how they perform.
But the private sector is different. The private sector cares about the return it makes on its investments and savings. Secondly, the private sector cannot just conjure money out of thin air. To buy government bonds, the private sector needs first to raise money by selling something else. That ‘something else’ is likely to be common stocks.
There is now over $10 trillion in marketable US government debt. Notwithstanding the enormity of Treasury securities in issuance, the average yield across all the different maturities of that debt is just 0.9%. No surprise that foreign central banks (including the most important, the People’s Bank of China) have lost their appetite for the stuff. If central banks aren’t willing or able to fund the US government, then who will? Answer: the private sector, but the arrangement may not be that voluntary. See Ms Reinhart’s list of coercions for more.
The same holds here in the UK. There will surely come a point when foreign investors lose their appetite for UK gilts (which I have long written about disdainfully). five year UK government bonds yield just over 1%. That is some 3% or so adrift from inflation – so they do not make sense for anyone to hold, except for those terrified of credit risks in the private sector. Even ten-year UK government paper yields just over 2%, still a negative real return.
The private sector may increasingly be coerced into buying UK government debt. Large institutional pension funds will be encouraged to invest in gilts as “riskless” assets, supported by “macro prudential regulation”. But remember: if the private sector is going to be forced to buy gilts, they will equally be forced to sell other assets in order to pay for them. I think those assets are likely to be stocks.
Don’t believe the hype about stocks
Do I think the latest rally in the stock market is sustainable over the longer term? Of course not. There is another reason to keep an open mind about equity market valuation. US corporate profits are currently at record levels as a percentage of US GDP. They are unlikely to remain there.
Why? The US corporate tax take as a percentage of GDP is currently near its 30 year average (roughly 3% or so). In the 1960s, for example, the average federal debt to GDP ratio was 46%. Over the coming decade, as Russell Napier points out, the corporate tax take will have to be large enough to support an average federal debt to GDP ratio of some 100%. The US government will ensure that somebody buys its debt. It can either force the private sector to buy it – or it can impose higher taxes on corporations. Higher taxes on corporations mean lower net profits. US corporate profits as a percentage of GDP are, I think, going to fall.
By the same logic, so will US equities. My take is that the stock market rally of the last few months has been driven by a combination of quantitative easing and wishful thinking. Now that central banks are less willing to fund over-borrowed foreign governments, there will be implications for stock markets, and they will not be positive.
This is another reason why I believe in asset class diversification across: high quality bonds (expresslyNOT US or UK government debt); high quality equities; ‘absolute return’ funds; and real assets, which will ideally give us protection against currency depreciation and state-sponsored inflationism.
The European Central Bank was expected to swap billions of bonds issued by Greece for new bonds that will shield the central bank from any losses. Private sector Greek bondholders (the likes of private individuals and hedge funds), on the other hand, will be exposed to massive losses.
If that doesn’t seem fair, it’s because it isn’t fair. The ECB is driving a coach and horses through traditional bond market practice – and the rule of law – in order to avoid its own bankruptcy. The free market can be left to those poor saps from the private sector that were silly enough to be left holding the bag, and all those Greek bonds, when the music stopped.
The ECB’s own “fraud” is bad enough. But the greater “fraud” is the one occurring even now, practically on a daily basis – central banks conjuring money out of thin air.
This fraud works against anyone who holds cash, since those deposits are going to be worth less and less in real terms. Both the US Federal Reserve and the Bank of England have pledged to keep interest rates at artificially low (and for private savers, loss-making in real terms) levels until 2014.
The system is rigged. There is no other way to describe it. Happily, I believe there are investment solutions out there that offer some protection against the malign workings of the state, and the central banks who represent it.
Tim Price
The primary objective of any central bank, our own included, is to maintain the stability of the financial system. They may have failed catastrophically to do that since the crisis began, but nevertheless we are where we are.
The second is that they have become lenders of last resort to their own governments. All roads ultimately lead back to the terrifying issuance of government debt throughout the western economies. How is all that government debt going to be funded? The answer, whether we like it or not, is that governments and central banks will effectively force us to buy.
The Bank of England and the US Federal Reserve are debasing their money like crazy – and they’re doing everything by the book. If you’re interested in knowing which book, the answer is ‘The liquidation of government debt’, a research piece by Carmen Reinhart and M. Belen Sbrancia, which you can read in its entirety here.
Western governments have issued more debt over the last 40 years than they will ever be able to repay. That leaves three options. One is to formally default on that debt and repudiate it. You can call that option Armageddon.
The second is to force austerity on the entirety of the economy, slowly rein in the issuance of further debt, and endure a long and painful depression as national debts and deficits are slowly reduced. You can call that option Greece, at least for the moment, until it implodes.
The third option is to inflate it away and to coerce investors to buy it through financial repression.
You can call that option Where We Are Now.
Ms Reinhart describes the various forms of financial repression as follows:
- Directed lending to government by captive domestic audiences, such as pension funds;
- Explicit or implicit caps on interest rates;
- Regulation of cross-border capital movements;
- A tighter connection between government and banks.
The government has already orchestrated the first and the fourth mechanisms. Under ‘captive domestic audiences’ you can include the banks, given that the likes of RBS and Lloyds are already largely under the control of the state.
That brings us to the second mechanism – implicit caps on interest rates. With cash in the bank yielding next to nothing, and the central bank pledging to keep base rates at current levels for the next three years, suddenly parking money in “riskless” government bonds yielding just a smidgeon more doesn’t seem like such a bad deal, does it?
The third mechanism – the reintroduction of capital controls – is one that I have been concerned about for some time. It’s the logical next step in the financial repression playbook. But given the success of the other mechanisms to date, perhaps the authorities never need resort to it.
CLSA analyst Russell Napier wrote a report last year entitled ‘Darkness on the edge of town’. He pointed that out last summer:
“...a terrible burden fell upon the people of the USA. For the first time in 15 years, those who had money (savers) began to fund their government, rather than the printers of money (central banks).”
In other words, in the summer of 2011, the US government was no longer able to sell its new debt to foreign central banks. It was reliant upon domestic investors to get its debt away.
The next point is crucial in understanding what may drive financial markets over the coming decade. Central banks can simply print money to buy government bonds issued by other sovereign borrowers. Since they control the printing press, they can be almost completely price-insensitive to what those government bonds yield, and how they perform.
But the private sector is different. The private sector cares about the return it makes on its investments and savings. Secondly, the private sector cannot just conjure money out of thin air. To buy government bonds, the private sector needs first to raise money by selling something else. That ‘something else’ is likely to be common stocks.
There is now over $10 trillion in marketable US government debt. Notwithstanding the enormity of Treasury securities in issuance, the average yield across all the different maturities of that debt is just 0.9%. No surprise that foreign central banks (including the most important, the People’s Bank of China) have lost their appetite for the stuff. If central banks aren’t willing or able to fund the US government, then who will? Answer: the private sector, but the arrangement may not be that voluntary. See Ms Reinhart’s list of coercions for more.
The same holds here in the UK. There will surely come a point when foreign investors lose their appetite for UK gilts (which I have long written about disdainfully). five year UK government bonds yield just over 1%. That is some 3% or so adrift from inflation – so they do not make sense for anyone to hold, except for those terrified of credit risks in the private sector. Even ten-year UK government paper yields just over 2%, still a negative real return.
The private sector may increasingly be coerced into buying UK government debt. Large institutional pension funds will be encouraged to invest in gilts as “riskless” assets, supported by “macro prudential regulation”. But remember: if the private sector is going to be forced to buy gilts, they will equally be forced to sell other assets in order to pay for them. I think those assets are likely to be stocks.
Don’t believe the hype about stocks
Do I think the latest rally in the stock market is sustainable over the longer term? Of course not. There is another reason to keep an open mind about equity market valuation. US corporate profits are currently at record levels as a percentage of US GDP. They are unlikely to remain there.
Why? The US corporate tax take as a percentage of GDP is currently near its 30 year average (roughly 3% or so). In the 1960s, for example, the average federal debt to GDP ratio was 46%. Over the coming decade, as Russell Napier points out, the corporate tax take will have to be large enough to support an average federal debt to GDP ratio of some 100%. The US government will ensure that somebody buys its debt. It can either force the private sector to buy it – or it can impose higher taxes on corporations. Higher taxes on corporations mean lower net profits. US corporate profits as a percentage of GDP are, I think, going to fall.
By the same logic, so will US equities. My take is that the stock market rally of the last few months has been driven by a combination of quantitative easing and wishful thinking. Now that central banks are less willing to fund over-borrowed foreign governments, there will be implications for stock markets, and they will not be positive.
This is another reason why I believe in asset class diversification across: high quality bonds (expresslyNOT US or UK government debt); high quality equities; ‘absolute return’ funds; and real assets, which will ideally give us protection against currency depreciation and state-sponsored inflationism.
The European Central Bank was expected to swap billions of bonds issued by Greece for new bonds that will shield the central bank from any losses. Private sector Greek bondholders (the likes of private individuals and hedge funds), on the other hand, will be exposed to massive losses.
If that doesn’t seem fair, it’s because it isn’t fair. The ECB is driving a coach and horses through traditional bond market practice – and the rule of law – in order to avoid its own bankruptcy. The free market can be left to those poor saps from the private sector that were silly enough to be left holding the bag, and all those Greek bonds, when the music stopped.
The ECB’s own “fraud” is bad enough. But the greater “fraud” is the one occurring even now, practically on a daily basis – central banks conjuring money out of thin air.
This fraud works against anyone who holds cash, since those deposits are going to be worth less and less in real terms. Both the US Federal Reserve and the Bank of England have pledged to keep interest rates at artificially low (and for private savers, loss-making in real terms) levels until 2014.
The system is rigged. There is no other way to describe it. Happily, I believe there are investment solutions out there that offer some protection against the malign workings of the state, and the central banks who represent it.
Tim Price
Monday, 5 March 2012
Government bonds are a bubble waiting for a pin
Three cheers for the European Central Bank (ECB).
Mario Draghi and chums are set to pump another load of free money into the European banking system tomorrow. This is happening via the ECB’s answer to quantitative easing (QE) – the LTRO (long-term refinancing operation).
I reckon banks will swallow up all they can, and that the bigger the number, the more cheerful markets will be. After all, the more money banks take, the more that will be pumped into dodgy eurozone debt, and on into broader markets.
But governments should take advantage of the ECB’s largesse while they can. Because after the Greek bail-out, investors are likely to be far more wary of ever investing in sovereign debt again.
The ECB is printing money too
Banks are queuing up for their next batch of cheap money from the ECB. Analysts have no idea how much banks are going to ask for. According to Marketwatch, estimates range from around €200bn to around €1 trillion.
I suspect investors take all they can get. And I reckon that the bigger the batch of dosh they order in, the happier investors will be. Who cares if more money suggests more problems with banks’ balance sheets? A big figure will be seen as more inflationary, and better for asset prices.
And make no mistake, the ECB’s version of QE is helping with the eurozone’s immediate problems. Italy and Spain have both seen their borrowing costs come down. Figures from the ECB show that this is down to Italian and Spanish banks piling into their sovereigns’ debt in January. The ECB hasn’t had to buy any government bonds itself for the past two weeks.
This all has a knock-on effect. As a result of improving sentiment, other investors have been happier to buy the European Union bonds that will be used to pay for the already-agreed Irish bail-out.
In short, the ECB is doing just what the Federal Reserve and the Bank of England are doing. It’s slackening monetary policy. Indeed, as James Mackintosh points out in the Financial Times, “monetary policy is as easy as it has ever been”.
That’s great news for markets in the short term. And governments should take advantage. Because in the longer run, investors aren’t going to be so keen to pick up their debt.
Government bonds are a bubble waiting for a pin
Why not? For that, we have to go back to the Greek deal. As James Saft point out on Reuters, “if the Greek bail-out has proved one thing it is this: we are now all creatures of government”.
The rescue isn’t important, as Saft notes. “It won’t be the last and Greece’s virtual default will become real one of these days.” The real problem is the way that private investors have been treated differently to public sector investors. The ECB didn’t have to take a haircut on its holding of Greek debt. Private holders did.
Saft notes that this sort of thing shouldn’t be news to investors: after all, the banking sector is now subject to governmental whim. But changing the rules on government debt sets a far more wide-reaching precedent. Because “if this is the way business is done in Europe, with the co-operation of the IMF, why would Britain or the US be any different?”
So what’s the end result? Technically speaking, investors should start to demand higher returns on government debt to compensate them for these risks. I say ‘technically speaking’, because if bond investors were as smart as everyone makes them out to be, you have to wonder why anyone ever lends money to Argentina.
This won’t necessarily be a problem just now. In the short term, no one wants to stand in the way of central banks – that’s one lesson we should all have learned from the crisis by now – but in the longer run, there could be real problems if inflation makes a serious comeback. As Saft notes: “one hint of inflation, one tremor of a financing scare outside of the euro zone, however, and the cost of mistreating investors will rapidly mount”.
It’s easy to dismiss the forces of inflation just now. Yes, we’re all being squeezed by rising prices. But at the moment, these are acting more like taxes.
However, if central banks get their way, and manage to spur a recovery, then the inflation that could go along with that would wipe out holders of government bonds. Already, as Mackintosh points out, “rates are far too low in Germany – they should be more than doubled, according to BNP Paribas calculations”.
As Jeremy Grantham of GMO notes in his most recent quarterly letter, inflation can be painful for lots of asset classes, but stocks tend to get over it after the initial short-term surge. But for bonds, inflation is pure poison. On a ten-year basis, says Grantham, “surges in inflation have been a very slight issue for holders of equities (and gold)… but a very serious one for bond holders”.
I’m not even going to try to put a date on when the great bond blow-out might happen. It’s like trying to call the top of the tech bubble in the 1990s. But I do know that I don’t fancy having a lot of my money – any of it, in fact – sitting around in government bonds while I’m waiting for the day to arrive. That’s not to say that all bonds are a waste of time – but developed world sovereign debt certainly looks too risky to me.
John Stepek
Mario Draghi and chums are set to pump another load of free money into the European banking system tomorrow. This is happening via the ECB’s answer to quantitative easing (QE) – the LTRO (long-term refinancing operation).
I reckon banks will swallow up all they can, and that the bigger the number, the more cheerful markets will be. After all, the more money banks take, the more that will be pumped into dodgy eurozone debt, and on into broader markets.
But governments should take advantage of the ECB’s largesse while they can. Because after the Greek bail-out, investors are likely to be far more wary of ever investing in sovereign debt again.
The ECB is printing money too
Banks are queuing up for their next batch of cheap money from the ECB. Analysts have no idea how much banks are going to ask for. According to Marketwatch, estimates range from around €200bn to around €1 trillion.
I suspect investors take all they can get. And I reckon that the bigger the batch of dosh they order in, the happier investors will be. Who cares if more money suggests more problems with banks’ balance sheets? A big figure will be seen as more inflationary, and better for asset prices.
And make no mistake, the ECB’s version of QE is helping with the eurozone’s immediate problems. Italy and Spain have both seen their borrowing costs come down. Figures from the ECB show that this is down to Italian and Spanish banks piling into their sovereigns’ debt in January. The ECB hasn’t had to buy any government bonds itself for the past two weeks.
This all has a knock-on effect. As a result of improving sentiment, other investors have been happier to buy the European Union bonds that will be used to pay for the already-agreed Irish bail-out.
In short, the ECB is doing just what the Federal Reserve and the Bank of England are doing. It’s slackening monetary policy. Indeed, as James Mackintosh points out in the Financial Times, “monetary policy is as easy as it has ever been”.
That’s great news for markets in the short term. And governments should take advantage. Because in the longer run, investors aren’t going to be so keen to pick up their debt.
Government bonds are a bubble waiting for a pin
Why not? For that, we have to go back to the Greek deal. As James Saft point out on Reuters, “if the Greek bail-out has proved one thing it is this: we are now all creatures of government”.
The rescue isn’t important, as Saft notes. “It won’t be the last and Greece’s virtual default will become real one of these days.” The real problem is the way that private investors have been treated differently to public sector investors. The ECB didn’t have to take a haircut on its holding of Greek debt. Private holders did.
Saft notes that this sort of thing shouldn’t be news to investors: after all, the banking sector is now subject to governmental whim. But changing the rules on government debt sets a far more wide-reaching precedent. Because “if this is the way business is done in Europe, with the co-operation of the IMF, why would Britain or the US be any different?”
So what’s the end result? Technically speaking, investors should start to demand higher returns on government debt to compensate them for these risks. I say ‘technically speaking’, because if bond investors were as smart as everyone makes them out to be, you have to wonder why anyone ever lends money to Argentina.
This won’t necessarily be a problem just now. In the short term, no one wants to stand in the way of central banks – that’s one lesson we should all have learned from the crisis by now – but in the longer run, there could be real problems if inflation makes a serious comeback. As Saft notes: “one hint of inflation, one tremor of a financing scare outside of the euro zone, however, and the cost of mistreating investors will rapidly mount”.
It’s easy to dismiss the forces of inflation just now. Yes, we’re all being squeezed by rising prices. But at the moment, these are acting more like taxes.
However, if central banks get their way, and manage to spur a recovery, then the inflation that could go along with that would wipe out holders of government bonds. Already, as Mackintosh points out, “rates are far too low in Germany – they should be more than doubled, according to BNP Paribas calculations”.
As Jeremy Grantham of GMO notes in his most recent quarterly letter, inflation can be painful for lots of asset classes, but stocks tend to get over it after the initial short-term surge. But for bonds, inflation is pure poison. On a ten-year basis, says Grantham, “surges in inflation have been a very slight issue for holders of equities (and gold)… but a very serious one for bond holders”.
I’m not even going to try to put a date on when the great bond blow-out might happen. It’s like trying to call the top of the tech bubble in the 1990s. But I do know that I don’t fancy having a lot of my money – any of it, in fact – sitting around in government bonds while I’m waiting for the day to arrive. That’s not to say that all bonds are a waste of time – but developed world sovereign debt certainly looks too risky to me.
John Stepek
Buffett’s top indicator is warning of slower growth
Warren Buffett has to be one of the top investors of all time.
Even those who question whether his best days are behind him have to admit that he’s one of the most influential movers and shakers in the markets.
That’s why it’s worth keeping an eye on what Buffett is doing – and on what he’s watching.
So today we want to take a look at Buffett’s favourite economic indicator. It’s the one that tells him all he needs to know about the US economy.
And right now, it’s not looking good…
Warren Buffett’s ‘desert-island’ indicator
In a 2010 interview with CNBC, Warren Buffett was asked which single set of economic data he’d request access to if he were stranded on a desert island.
Buffett’s response? Freight car loadings. These show the volume of raw materials and industrial supplies being moved by rail around the US every week.
Why is Buffett so keen on such an old-fashioned sounding indicator?
Because all the stuff that’s being transported by America’s railways will at some stage get used. It will either be processed into finished goods for sale, or stored as inventory. In the latter case it should be pressed into service at a later date.
As inventory levels drop, more raw materials are likely to be ordered by manufacturers to plug the gaps in the stock warehouse shelves. That will be reflected in future freight car loading figures.
In other words, freight car loadings are a useful and very accurate early warning guide to the future direction of the US economy. They are, if you like, the American land-based equivalent of the Baltic Dry shipping rate index that
The other handy thing about freight car loadings is that you can easily find out what’s going on. Up-to-date information is published every week on the Association of American Railroads (AAR) website.
Buffett’s top indicator is warning of slower growth
So what’s the latest from the AAR? Last Thursday’s report didn’t make very encouraging reading at all.
For the week ending 25 February, the number of carloads moved by US railways dropped by 5% year-on-year. ‘Intermodal’ volumes – ie for trailers and containers where the form of transport is switched, say between road and rail – dropped by 2.8% on the year.
This slowdown seems to be gathering pace. For the first eight weeks of 2012, US railways reported that cumulative carload volumes were down 0.3% on last year.
These numbers in isolation, of course, don’t give us the full picture. For that we need to see how freight car loadings have performed compared with the overall US economy over a lengthy period of time.
When we look at the chart below, we can see why Warren Buffett is such a big fan of the AAR numbers.
Source: Bloomberg
The black line shows the AAR figure for overall North American carload units shifted. This includes Canadian and Mexican rail shipments, though the US accounts for around 75% of the total. Because the numbers jag around week by week, I’ve smoothed the stats using a ten-week moving average.
The blue line is the year-on-year change in US GDP. As you can see, this has been turning up recently. But as the latest drop in the black line shows, this improvement may well not last. If Buffett’s favourite indicator is anything to go by, America’s economy could soon be slowing down again.
The stock market is warning of a slowdown too
Importantly for investors, there’s confirmation of the above trend in America’s stock market.
The Dow Jones Transportation Average (TRAN) consists of shares in firms that shift people or products around, like truckers, airlines, railways, shippers and delivery service providers.
History shows that if the TRAN takes a tumble, the rest of the stock market is likely to follow. And right now, the TRAN is heading down.
But for now, these trends in both freight car loadings and the TRAN point to our long-standing advice to hold defensive stocks. These don’t require economic growth to make their money.
David Stevenson
Even those who question whether his best days are behind him have to admit that he’s one of the most influential movers and shakers in the markets.
That’s why it’s worth keeping an eye on what Buffett is doing – and on what he’s watching.
So today we want to take a look at Buffett’s favourite economic indicator. It’s the one that tells him all he needs to know about the US economy.
And right now, it’s not looking good…
Warren Buffett’s ‘desert-island’ indicator
In a 2010 interview with CNBC, Warren Buffett was asked which single set of economic data he’d request access to if he were stranded on a desert island.
Buffett’s response? Freight car loadings. These show the volume of raw materials and industrial supplies being moved by rail around the US every week.
Why is Buffett so keen on such an old-fashioned sounding indicator?
Because all the stuff that’s being transported by America’s railways will at some stage get used. It will either be processed into finished goods for sale, or stored as inventory. In the latter case it should be pressed into service at a later date.
As inventory levels drop, more raw materials are likely to be ordered by manufacturers to plug the gaps in the stock warehouse shelves. That will be reflected in future freight car loading figures.
In other words, freight car loadings are a useful and very accurate early warning guide to the future direction of the US economy. They are, if you like, the American land-based equivalent of the Baltic Dry shipping rate index that
The other handy thing about freight car loadings is that you can easily find out what’s going on. Up-to-date information is published every week on the Association of American Railroads (AAR) website.
Buffett’s top indicator is warning of slower growth
So what’s the latest from the AAR? Last Thursday’s report didn’t make very encouraging reading at all.
For the week ending 25 February, the number of carloads moved by US railways dropped by 5% year-on-year. ‘Intermodal’ volumes – ie for trailers and containers where the form of transport is switched, say between road and rail – dropped by 2.8% on the year.
This slowdown seems to be gathering pace. For the first eight weeks of 2012, US railways reported that cumulative carload volumes were down 0.3% on last year.
These numbers in isolation, of course, don’t give us the full picture. For that we need to see how freight car loadings have performed compared with the overall US economy over a lengthy period of time.
When we look at the chart below, we can see why Warren Buffett is such a big fan of the AAR numbers.
Source: Bloomberg
The black line shows the AAR figure for overall North American carload units shifted. This includes Canadian and Mexican rail shipments, though the US accounts for around 75% of the total. Because the numbers jag around week by week, I’ve smoothed the stats using a ten-week moving average.
The blue line is the year-on-year change in US GDP. As you can see, this has been turning up recently. But as the latest drop in the black line shows, this improvement may well not last. If Buffett’s favourite indicator is anything to go by, America’s economy could soon be slowing down again.
The stock market is warning of a slowdown too
Importantly for investors, there’s confirmation of the above trend in America’s stock market.
The Dow Jones Transportation Average (TRAN) consists of shares in firms that shift people or products around, like truckers, airlines, railways, shippers and delivery service providers.
History shows that if the TRAN takes a tumble, the rest of the stock market is likely to follow. And right now, the TRAN is heading down.
But for now, these trends in both freight car loadings and the TRAN point to our long-standing advice to hold defensive stocks. These don’t require economic growth to make their money.
David Stevenson
Thursday, 1 March 2012
Will there still be a world left to reckon about?
if everything continues to clunk along as it is doing today… maybe the world financial system will hold together until we get back.
We certainly hope so. We’ve been waiting years to watch the final crack up of the phoney-money system. We don’t want to miss it!
But you never know. For all we know, the system is cracking up now… right before our eyes. We just don’t recognise it.
Take this item Washington news. It proves that Lent is bad for you:
Europe has endured the pain of layoffs, wage cuts and tax increases designed to bring government debt under control.
So where’s the gain?
Far from falling, debt burdens are rising fastest in European countries that have enacted the most draconian austerity programs, according to The Associated Press’ Global Economy Tracker, which monitors the performance of 30 major economies. The numbers back up what many analysts say: austerity isn’t just painful. It can be counterproductive and even make a country’s debt load grow.
Many fear the cutbacks will cause Europe to sink into a self-defeating spiral: Higher debt leads to harsher austerity, growing social instability and deeper economic problems. Governments could find it even harder to pay their bills.
The pain is already intense. Portugal’s unemployment rate hit a record 14 percent at the end of last year. Ireland’s economy contracted a worse-than-expected 1.9 percent in the July-September quarter of 2011. And Greece reported that its already basket-case economy shrank 7 percent in the October-December quarter of last year.
“This isn’t a healthy situation,” says Peter Morici, an economist at the University of Maryland.
Under a deal approved Tuesday by the 17 countries that use the euro and the International Monetary Fund, Greece will get a $172 billion bailout in exchange for accepting another dose of austerity that includes laying off 15,000 civil servants and slashing the minimum wage by 22 percent.
— Portugal cut pensions, reduced public servants’ wages and raised taxes starting in 2010. Yet in the third quarter of 2011, government debt equaled 110 percent of GDP. That was up from 91 percent a year earlier.
— In Ireland, middle-class wages have been reduced 15 percent and the sales tax boosted to 23 percent (the highest in the European Union). But its debt amounted to 105 percent of economic output in the third quarter of last year; a year earlier, it was 88 percent.
— In Britain, Prime Minister David Cameron staked his political future on his austerity plan. Government debt ratios, though, reached 80 percent in third-quarter 2011, up from 74 percent a year earlier. And Moody’s this month cut its outlook on Britain’s prized AAA credit rating from “stable” to “negative”.
— In Greece, two years of austerity programs have devastated the economy and triggered riots. Still, the government’s debt equaled an alarming 159 percent of the country’s GDP in the July-September quarter of 2011. That was up from 139 percent a year earlier.
Oh, what luck! Now Paul Krugman and other spend-spend-spend economists and policymakers have the argument sewn up.
Before, they argued that a) additional spending and big deficits were “stimulus” measures. They were supposed to make things better.
Now they can prove that b) cutting spending is bad for an economy. It makes the economy worse off…without actually reducing debt.
If they can’t win on A, they can’t lose on B.
We don’t want to exaggerate the importance of this. But it is as if Mardi Gras is good for you. But Lent is bad for you. Austerity doesn’t work. Spending makes things better. Not spending makes them worse. It is as if the debit side of the balance sheet has been cut off. All credits, in other words. Forget the debits. It is as if we could all have everlasting life without ever dying.
Maybe they could show that it works the same for dieters. Maybe they could prove that cutting back on their eating actually causes them to gain weight. From there it would be only a hop-skip-and-jump to concluding that they should eat more!
Sometimes it seems as the whole progress of the 21st century has been used to remove the impediments to catastrophe – good sense, prudence, tradition, rules, principles and the lessons – learned at such great cost over so many centuries. Like unread copies of The Wealth of Nations or The History of the Decline and Fall of the Roman Empire, they are tossed into the trash bin. No stain of history is left on the spotless mind of the new century.
The century began with George W Bush’s ‘pre-emptive war’ doctrine – contradicting everything nations had learned over at least 2,000 years. Even the Romans new better than to go to war unprovoked. Not that the attacker can’t win from time to time. But an aggressor nation sets the gods against himself; eventually, he is punished…often brutally. We saw that as recently as seven decades ago, when the aggressor nations of WWII – Germany, Italy and Japan – were crushed.
But now the US is the aggressor. Can good guys be bad guys? We don’t know, but we think we see the gods edging over to the other side.
So too was it long established that the rule of law was more comfortable and agreeable than the rule of men. Law was predictable. Law was fair.
Men were given to prejudice, perfidy and power-struggles. Especially in a matter as important as war, the highest authority in the US – the Constitution – makes it clear that the law must be followed. Congress had to consider, debate and decide.
But that law went out the window long ago. In the 21st century it was forgotten altogether. Now, the president can decide for himself how and when to waste the nation’s treasure and the lives of its young men and women. Iraq, Afghanistan, Libya…Sudan…Pakistan…where were the declarations of war?
Who needs them? Besides, they just got in the way of catastrophe.
And what about habeas corpus? That’s gone too. Established hundreds of years ago to protect citizens from the arbitrary power of their own government, habeas corpus is…well…history. Now, the president can decide who lives and who dies…who gets sent to jail…and who lives at taxpayer expense.
But our beat is money. And in the world of money, too, the constraints that kept people from going into bankruptcy and ruin have been removed.
Once government leaders were ashamed of deficits. Now they’re proud of them.
Once, economists, finance ministers and heads of households tried to avoid debt. Now they welcome it.
Once, a central banker who created money ‘out of thin air’ had his private parts cut off. Now his manhood grows with the money supply.
Once, a banker who lent money at less than the inflation rate was regarded as a fool. Now he is seen as a hero.
Once, we were happy…young…handsome…and now…oh, never mind.
That’s all for us… we’re headed for the hills.
Bill Bonner
We certainly hope so. We’ve been waiting years to watch the final crack up of the phoney-money system. We don’t want to miss it!
But you never know. For all we know, the system is cracking up now… right before our eyes. We just don’t recognise it.
Take this item Washington news. It proves that Lent is bad for you:
Europe has endured the pain of layoffs, wage cuts and tax increases designed to bring government debt under control.
So where’s the gain?
Far from falling, debt burdens are rising fastest in European countries that have enacted the most draconian austerity programs, according to The Associated Press’ Global Economy Tracker, which monitors the performance of 30 major economies. The numbers back up what many analysts say: austerity isn’t just painful. It can be counterproductive and even make a country’s debt load grow.
Many fear the cutbacks will cause Europe to sink into a self-defeating spiral: Higher debt leads to harsher austerity, growing social instability and deeper economic problems. Governments could find it even harder to pay their bills.
The pain is already intense. Portugal’s unemployment rate hit a record 14 percent at the end of last year. Ireland’s economy contracted a worse-than-expected 1.9 percent in the July-September quarter of 2011. And Greece reported that its already basket-case economy shrank 7 percent in the October-December quarter of last year.
“This isn’t a healthy situation,” says Peter Morici, an economist at the University of Maryland.
Under a deal approved Tuesday by the 17 countries that use the euro and the International Monetary Fund, Greece will get a $172 billion bailout in exchange for accepting another dose of austerity that includes laying off 15,000 civil servants and slashing the minimum wage by 22 percent.
— Portugal cut pensions, reduced public servants’ wages and raised taxes starting in 2010. Yet in the third quarter of 2011, government debt equaled 110 percent of GDP. That was up from 91 percent a year earlier.
— In Ireland, middle-class wages have been reduced 15 percent and the sales tax boosted to 23 percent (the highest in the European Union). But its debt amounted to 105 percent of economic output in the third quarter of last year; a year earlier, it was 88 percent.
— In Britain, Prime Minister David Cameron staked his political future on his austerity plan. Government debt ratios, though, reached 80 percent in third-quarter 2011, up from 74 percent a year earlier. And Moody’s this month cut its outlook on Britain’s prized AAA credit rating from “stable” to “negative”.
— In Greece, two years of austerity programs have devastated the economy and triggered riots. Still, the government’s debt equaled an alarming 159 percent of the country’s GDP in the July-September quarter of 2011. That was up from 139 percent a year earlier.
Oh, what luck! Now Paul Krugman and other spend-spend-spend economists and policymakers have the argument sewn up.
Before, they argued that a) additional spending and big deficits were “stimulus” measures. They were supposed to make things better.
Now they can prove that b) cutting spending is bad for an economy. It makes the economy worse off…without actually reducing debt.
If they can’t win on A, they can’t lose on B.
We don’t want to exaggerate the importance of this. But it is as if Mardi Gras is good for you. But Lent is bad for you. Austerity doesn’t work. Spending makes things better. Not spending makes them worse. It is as if the debit side of the balance sheet has been cut off. All credits, in other words. Forget the debits. It is as if we could all have everlasting life without ever dying.
Maybe they could show that it works the same for dieters. Maybe they could prove that cutting back on their eating actually causes them to gain weight. From there it would be only a hop-skip-and-jump to concluding that they should eat more!
Sometimes it seems as the whole progress of the 21st century has been used to remove the impediments to catastrophe – good sense, prudence, tradition, rules, principles and the lessons – learned at such great cost over so many centuries. Like unread copies of The Wealth of Nations or The History of the Decline and Fall of the Roman Empire, they are tossed into the trash bin. No stain of history is left on the spotless mind of the new century.
The century began with George W Bush’s ‘pre-emptive war’ doctrine – contradicting everything nations had learned over at least 2,000 years. Even the Romans new better than to go to war unprovoked. Not that the attacker can’t win from time to time. But an aggressor nation sets the gods against himself; eventually, he is punished…often brutally. We saw that as recently as seven decades ago, when the aggressor nations of WWII – Germany, Italy and Japan – were crushed.
But now the US is the aggressor. Can good guys be bad guys? We don’t know, but we think we see the gods edging over to the other side.
So too was it long established that the rule of law was more comfortable and agreeable than the rule of men. Law was predictable. Law was fair.
Men were given to prejudice, perfidy and power-struggles. Especially in a matter as important as war, the highest authority in the US – the Constitution – makes it clear that the law must be followed. Congress had to consider, debate and decide.
But that law went out the window long ago. In the 21st century it was forgotten altogether. Now, the president can decide for himself how and when to waste the nation’s treasure and the lives of its young men and women. Iraq, Afghanistan, Libya…Sudan…Pakistan…where were the declarations of war?
Who needs them? Besides, they just got in the way of catastrophe.
And what about habeas corpus? That’s gone too. Established hundreds of years ago to protect citizens from the arbitrary power of their own government, habeas corpus is…well…history. Now, the president can decide who lives and who dies…who gets sent to jail…and who lives at taxpayer expense.
But our beat is money. And in the world of money, too, the constraints that kept people from going into bankruptcy and ruin have been removed.
Once government leaders were ashamed of deficits. Now they’re proud of them.
Once, economists, finance ministers and heads of households tried to avoid debt. Now they welcome it.
Once, a central banker who created money ‘out of thin air’ had his private parts cut off. Now his manhood grows with the money supply.
Once, a banker who lent money at less than the inflation rate was regarded as a fool. Now he is seen as a hero.
Once, we were happy…young…handsome…and now…oh, never mind.
That’s all for us… we’re headed for the hills.
Bill Bonner
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