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January 29, 2009 by Leave a Comment

An $800 Billion Mistake

As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised. In its current form, it does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that’s what it takes to produce a much better bill. We cannot afford an $800 billion mistake.

Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.

The proposed business tax cuts are also likely to do little to increase business investment and employment.

The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.

The same politicians who are telling us that the stimulus package must be enacted ASAP are the same ones who did not see the financial crisis coming and then tried to deny it.  We are being told that we face disaster if we do not act quickly.

The world will not end if this spending bill is not passed this week.  We heard the same “we must act now” warnings last year with the $750 billion TARP disaster.  The politics of fear is wearing thin.   The so called stimulus act should be debated and time given to the American public to decide if this massive expenditure of money will accomplish anything other than running up more debt.

My advice to Congress and the President

How about this?  Come clean with the American public about the problems we face as a nation.  Admit that we have indebted ourselves to such an extent that our economic future is now at risk.  Stop trying to sell the idea that spending and borrower will fix the problem.   The problem caused by too much debt cannot be cured by more borrowing.  How about admitting that we are overextended financially and need to face sacrifices instead of passing the problem on to our children?  If the politicians can’t put these thoughts into words, they can simply hold up a picture of the chart below.

Courtesy:  http://mwhodges.home.att.net/

The Real Long-Run Value of Gold

To match its inflation-adjusted peak of $850 an ounce – as recorded by the London PM Gold Fix of 21st Jan. 1980 – the price of gold should now stand nearer $2,615.

“Ask the investor who rushed out to Buy Gold precisely 29 years ago, at $845 an ounce, about gold as an inflation hedge,” as Jon Nadler – senior analyst at Kitco Inc. of Montreal, the Canadian dealers and smelters – said on the 29th anniversary of gold’s infamous peak last week.

“They could sell it for about $845 today…[but] they would need to sell it for something near $2,200 just to break even, when adjusted for inflation.”

Because for gold to reach $2,200 an ounce in today’s money (if not $2,615…) would mean something truly remarkable in terms of its real long-run value.

  • Inflation-adjusted, that peak gold price of 21 Jan. 1980 saw the metal worth more than 5 times its purchasing power of 1913;
  • In March 2008, just as Bear Stearns collapsed and gold touched a new all-time peak of $1,032 in the spot market, the metal stood at its best level – in terms of US consumer purchasing power – since December 1982;
  • Touching $2,200 an ounce (without sharply higher inflation undermining that peak), gold would be worth almost 6 times as much as it was before the Federal Reserve was established in real terms of domestic US purchasing power.

Is gold a smart investment in terms of preserving purchasing power?  Depends on when you purchased it as the article explains.  Virtually every asset class except gold has seen a major drop in value over the past two years – something to think about.

TURNING JAPANESE – THE AUDACITY OF REALITY

Every day seems worse than the previous day. Five hundred thousand people are getting laid off every month. Our banking system is on life support. Retailers are going bankrupt in record numbers. The stock market keeps descending. Home prices continue to plummet. Home foreclosures keep mounting. Consumer confidence is at record lows. You would like to close your eyes and make it go away. Not only is the news not going away, it is going to get worse and last longer than most people can comprehend.

These “experts” fail to see the big picture and have no sense of history. It took 28 years to get to this point and it will take at least a decade to repair the damage. If the politicians running this country try to take the easy way out (very likely), add another decade to the recovery timeframe. Some indisputable facts will put our current predicament in perspective:

Another great article by James Quinn who assesses America’s economic future.  A very sobering and detailed analysis well worth reading.

Filed Under: Bailout, Economy, Gold Tagged With: , ,

Is Burying Your Cash The Answer?

December 15, 2008 by 3 Comments

Fear and loss of confidence in our economic future due to over leverage can be seen in many areas.  There have been many stories lately about individuals attempting to secure their future by burying cash in their backyards.  Those of presumably greater means with the same idea have propelled safe manufacturers into one of the few industries showing sales growth today.

Burying cash is an old idea born of the depression years prior to the FDIC when if a bank went under you lost your money.   Under the current Federal guarantee of bank deposits, the failure of a depositor to be made whole would be equivalent to a default by the Federal Treasury.

Those inclined to burying cash should ponder the baseball card craze of years past.   Baseball card “investors” would fill their garages and basements with boxes of unopened cards and dream of the day when their value would skyrocket.  The card sellers made money but the buyers failed to realize that the cards they were buying as collectibles were being produced in massive quantities, almost guaranteeing little scarcity value in the future.  Paper cards could also be flawlessly produced in quantity by counterfeit card operators.  While individually graded cards merited an investment consideration, holding boxful’s of ordinary cards did not seem wise.

The cash dollars of today are the baseball cards of yesterday.   Dollars can be produced cheaply and in infinite quantities as deemed necessary by the Federal Reserve.  There is a risk of buried cash being lost or stolen.  There is no risk betting that the Government will print as many dollars as necessary should the downward economic spiral continue.  As the Government assumes the massive losses of every more entities via bailouts, those still holding the cards may become the winners (from a value standpoint) over those holding dollars.

My viewpoint is that one asset class deemed worthy of investing in to preserve wealth is gold, as discussed in Gold, Cheap at $5,000?

Gold investors have been laughed at for years and there have been long periods of declines and/or under performance in price versus other asset classes.  Gold, however, is the only monetary asset where the ultimate value of your investment is not subject to someone’s else’s promise or ability to pay.  I view gold as the ultimate insurance hedge against a government’s propensity to spend itself into insolvency and, accordingly, I believe that gold should constitute 10 to 20% of one’s core investment assets.   Historically, governments  have regularly and repeatedly defaulted on their sovereign debts.  In every such case of default, the citizens of those nations would have been far better off holding gold rather than government paper.

Filed Under: Dollars, Gold Tagged With: , ,

A World Of Zero Interest Rates

December 11, 2008 by Leave a Comment

We have arrived at 0 interest rates and the reasons we are at this point are all negative indicators for where we are and where we are heading.

Theodore Ake, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York, one of the 17 primary dealers of U.S. government debt, said some investors bought three-month Treasury bills from his firm with negative yields of 0.01% to 0.02% Tuesday. By the end of active trade, the yield had inched back up to positive 0.02%.

In round numbers, the investors were willing to pay $100, knowing they would get $99.99 in return, in the belief that a small but guaranteed loss was preferable to investing in stocks, corporate bonds or other securities. Treasurys have been flirting with 0% yields since the Lehman Brothers bankruptcy nearly three months ago.

“The bond market is doing a much better job than stocks right now of telling you about the risks that are out there,” said Thomas H. Attenberry, a partner at First Pacific Advisors, an investment-management firm in Los Angeles. The high yield investors are demanding on anything other than Treasurys is particularly worrisome because companies need to refinance more than $800 billion worth of debt next year, according to analyst estimates.

The Telegraph.uk.co notes the extraordinary amount of risk aversion taking place as investors loss their confidence in the ability of anyone other than a central bank to repay their debts.

The investor search for a safe places to store wealth as the financial crisis shakes faith in the system has caused extraordinary moves in global markets over recent days, driving the yield on 3-month US Treasuries below zero and causing a rush for physical holdings of gold.

“It is sheer unmitigated fear: even institutions are looking for mattresses to put their money until the end of the year,” said Marc Ostwald, a bond expert at Insinger de Beaufort.

The rush for the safety of US Treasury debt is playing havoc with America’s $7 trillion “repo” market used to manage liquidity. Fund managers are hoovering up any safe asset they can find because they do not know what the world will look like in January when normal business picks up again. Three-month bills fell to minus 0.01pc on Tuesday, implying that funds are paying the US government for protection.

“You know the US Treasury will give you your money back, but your bank might not be there,” said Paul Ashworth, US economist for Capital Economics.

The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into “backwardation” for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices.

The latest data from the World Gold Council shows that demand for coins, bars, and exchange traded funds (ETFs) doubled in the third quarter to 382 tonnes compared to a year earlier. This matches the entire set of gold auctions by the Bank of England between 1999 and 2002.

Credit markets may have thawed somewhat but after suffering horrendous losses on virtually every asset class, investors seem determined to put whatever cash they have left in the most risk free category possible – even if that means paying for the privilege via negative interest rates.

A desire for a return of capital rather than a return on capital, as the old saying goes, is what we are looking at here.  Of course, at some point, the disgust of receiving a zero return on your money is bound to drive at least a portion of the capital now in treasuries into another asset class.  Investors will be willing to risk some of their capital in another asset class which might be riskier but which also promises some good chance of obtaining a return on capital.

My guess is that one such asset class will be gold, as I previously discussed in  Gold, Cheap at $5000?
I view gold as the ultimate insurance hedge against a government’s propensity to spend itself into insolvency and, accordingly, I believe that gold should constitute 10 to 20% of one’s core investment assets.   Historically, governments  have regularly and repeatedly defaulted on their sovereign debts.  In every such case of default, the citizens of those nations would have been far better off holding gold rather than government paper.

Filed Under: Economy, Gold, Interest Rates Tagged With: ,

Gold, Cheap at $5000?

December 1, 2008 by 2 Comments

Although I have been following the gold market for many years, I can’t seem to remember the last time that I have seen so many unanimously bullish articles on the price future of the yellow metal.  Typically in the past, I would note that a bullish article in a major publication or a cover story on a major magazine would coincide with a price peak, rather than a buying opportunity.

Is this time different?  Most of the bullish opinions on gold are based on the actions being taken by the  world’s governments to reflate the economy with oceans of cash and credit.  Let’s take a look at a sampling of some of the recent bullish articles on gold that appeared after the gold shares and the bullion recently rebounded sharply, after a nasty sell off from the price peaks of early 2008.

Will gold protect us from bailout inflation?

As the amount of bailouts and guarantees by the Federal Reserve grow exponentially, worries are mounting over the future inflationary impact of these actions.  Is buying FSAGX the best way to protect your purchasing power?

The role of gold in the world’s monetary history

For those who dismiss the idea of gold as having a continuing role in the world’s monetary system, consider that central banks and the IMF hold 80% of the world’s gold reserves.

Gold could gap up by hundreds of dollars in one day

Gold’s price is artificially low at this point, but fundamental market forces will prevail with huge and sudden price gains.

Low gold lease rates foretell of higher prices

The gold carry trade is now unprofitable resulting in less gold being supplied to the market place at a time of huge physical gold demand.

“gold itself is now free to rise in deflation given its true role as money”

Based on the technical breakouts on the gold stock charts and monetary fundamentals, it looks like a bottom is in for gold here.

Citi anaylst predicts $2000 gold price

As the huge government stimulus efforts work their magic, over time, inflation is expected to rise significantly causing large increases in the gold price

All of the above posts are written by exceptional ananylsts; over time I believe that they will be correct in their bullish assessment of gold – the exact timing of the price increase is not important.   I have been adding to my gold stock and bullion positions over the last fifteen years and will not sell until gold reaches $5,000 or Time Magazine runs a cover story on why everyone should own gold.

Gold investors have been laughed at for years and there have been long periods of declines and/or under performance in price versus other asset classes.  Gold, however, is the only monetary asset where the ultimate value of your investment is not sujbect to someone’s else’s promise or ability to pay.  I view gold as the ultimate insurance hedge against a government’s propensity to spend itself into insolvency and, accordingly, I believe that gold should constitute 10 to 20% of one’s core investment assets.   Historically, governments  have regularly and repeatedly defaulted on their sovereign debts.  In every such case of default, the citizens of those nations would have been far better off holding gold rather than government paper.

Filed Under: Economy, Gold Tagged With: