I was reading Zero Hedge yesterday, a post in regards to gold where Peter Schiff was part of the topic, and there were some interesting comments. One caught my attention as being somewhat ludicrous which is not unusual, but is was because the author is a contributor to the site. Unfortunately the comment was flagged as junk, I hate it when that happens because counterpoints are always good things to have and I do not mean to rip him apart, but rather correct years of misinformation he probably picked up from school or TV armchair economists.
One comment he made was:
“On gold to the moon: Peter you’ve been talking up your gold positions for years, but once calm is restored, you’re going to take a major haircut on gold.”
Another was:
“On the US economy “not growing”: Has he looked at the ISM, employment (not just payrolls but household survey), industrial production, and the leading indicators over the last ten months?”
And the other one was referencing that as soon as the trillions in bailouts the banks received hits the economy it will calm the economies or something to that effect. He also indicated that as long as confidence remains in the system everything will be fine, which is true, but how much will it take to keep that confidence or instill that confidence? Also, the more money we inject to create confidence the more confidence it actually erodes, it is a zero sum game in the end. Part of the comment was that the EU was trying to avoid a “deflationary death spiral” or something similar, this is why people should not flag things as junk because they are not junk, which is what really bothered me.
People are thoroughly confused by deflation and deflationary death spirals and what that means. Deflation is a problem, we have deflation now, but it is not a huge problem. However, a deflationary death spiral is what we had in the 1930’s and is what keeps Ben Bernanke up at night. We will not, I do not think, have that deflationary death spiral and I think we need to understand what that death spiral was, what caused it and why we will not have it. After that I want to address the rest of the comments he made above.
What we suffered fro in the 1930’s was horrible and something I hope we never see again. To understand more about what it was like in the Depression please Read The Depression: A Diary by Benjamin Roth and stay away from the academic stuff. However, during the depression dollars were scarce because fo the massive bank failures and deposits were frozen or simply lost when the bank closed down. On top of that the stock market wiped out millions of peoples savings which had a domino effect into the real estate market which is what caused the banking crisis, somewhat reversed from today’s crisis I might add.
What this did was literally wipe dollars out of existence, they just disappeared and were not transferred to anyone else. Today one persons loss is likely another’s gain through derivatives or other hedging instruments known as bailouts, but that was not the case in the 1930’s. Since these dollars were gone or frozen and the U.S. was on the gold standard we did not have a Helicopter Ben to get dollars into the system, at first the Fed tightened credit, who knows why, but they later tried to reverse that decision, but it was too little too late. What we had was complete demand destruction and people saving whatever dollars they had, which was strange because people would rather starve than spend their money.
In fact, while people were starving crops were on or at a record pace, prior to the dust bowl fiasco of course. It was a simple fact that the U.S. was tied to the gold standard and could not put more dollars into the system and people just did not want to spend what they had saved because who knew what tomorrow would bring. We also had no safety systems in place such as unemployment insurance, welfare or Social Security, until FDR was elected a few years into the Depression. By not having those safety nets in place it made things much, much worse and that is why we had such massive deflation.
This was not the run of the mill demand deflation, which is what we have now, this was the death spiral lack of dollars in circulation plus no demand deflation. So for people to draw a comparison to 1930’s deflation to todays is a bit ridiculous to say the least. We have those safety programs now so people will not starve instead of spending money, ironically our poor actually have cable TV, go figure, and we have other safety nets in place. This is why we will not see 1930’s deflation and this is also why we can hide the evidence of our current Depression, if we do not have to see the soup lines they are not there, right? Never mind the fact that 1 in 8 Americans receives some form of Food Stamp assistance, if that is not a Depression statistic I am not sure what is.
The banking system is still suffering from after shocks much like we saw in the 1930’s, closures did not stop for years after the crash of 1929 as real estate continued to decline in value, sound familiar? We are still suffering from similar bouts of bank closures today because of declining real estate prices and that is unlikely to change. Many of these banks were bailed out, funny how some “too big too fail” are now failing after they were bailed out. How can, as his comment claimed, the markets be calmed because of trillions in bailouts will build confidence when those banks who were bailed out are still failing? This is very similar to the 1930’s when many banks who received aid under the first Hoover plan still failed. The point being is that it will take a long time for the system to heal itself and with the government propping it up it will take much longer. The Depression lasted some 10 years, 7 with major government help, our current problem got help on day 1, how long will our recovery really take?
With the massive stimulus and government spending in the banking system it is nothing more than inflationary measures. The comment that “when the trillions making it into the economy will only build confidence,” is a bit absurd, in my opinion, as it points out that the issues were very bad for a very longtime. Also, when the trillions, a bigger and more accurate statement would had been if the trillions, make it into the economy it will create inflation, period. There is really no doubt that the measures taken by all the central banks were to stem the tide of the aforementioned deflationary spiral and it did work, but the central banks cannot stem the tide of the inflation that they created. After all, central banker’s primary mandate is to inflate the currency at about a 3% annual rate to begin with so they have no real mechanism to dis-inflate a currency anyhow. Sure, they can raise rates and do reverse repos, but serious, that will do little.
In fact, for all the money spent on bailouts and stimulus measures I would argue we have received a very poor return on our investment. We had a sharp mini-V of a +5% GDP print, but that appears to be it. We had spend far less in the past and had averaged far higher GDP prints, about a 7% print after major interventions, so, sure, you got a V, but it is one side of a W, sorry Charlie. People had been bragging about the ISM Survey’s for some time until the Ism survey’s failed to support their claims, but they fail to support my claims as well. In fact, they are neutral, but well below what we would call normal expansion averages. Not to mention, these are survey’s and should be calculated as survey’s, as in this is how people feel at this point in time, not as this is what will happen in the future.
My main point is that we do have growth and things are better, but no where near where the bulls think they are and we are not heading to where they think we are going. The comment also pointed to the leading economic indicators as a “bright spot.” Funny, Kudlow and company have not brought up the LEI for sometime now because, well, the number rolled over a couple months ago now and has been heading lower, funny what happens when Uncle Sam cuts off the money. So, I am not sure what LEI the commenter is looking at, but the one everyone else is looking at is pointing to the South, not the North, good luck if you think down is up and up is down because you got Vertigo my friend.
The global economy is about to end its amazing recovery, sorry folks. Europe is 20% of the global economy and they are instituting massive austerity measures right now and these are only the start, more is needed. If 20% of the world’s buyers have less money you will see economists start lowering forecasts very soon, trust me on that one. You know how the U.S. is pestering China to revalue its RMB? Well, it is pegged to the U.S. dollar, right? Do you know who China’s largest trading partner is? Hint, it is not the U.S., it is the EU. That means Chinas products are now more expensive in the EU than they were just 2 months ago. Wasn’t China credited for the global recovery? Isn’t China in the middle of a liquidity bubble? Won’t not selling products hurt their exports causing an artificial popping of their bubble which could cause more problems for the world than originally thought? I think so, but we are still pressuring them to revalue and spreading the falsehood that we are their largest trading partners, what baloney.
It is kind of funny to see people dismiss all this information and keep economic events locally when this is a global economy, I mean, there is a reason why when the U.S. market tanks foreign markets go down as well and why when we go into a recession so do other countries. Decoupling will happen, but not until the rest of Asia emerges like China did, but until that happens China is dependent upon the U.S. and the EU. However, let us mak sure we are clear, the EU is, for sure, China’s biggest trading partner and a falling Euro is a big problem for China as well. Keep an eye on that, I am.
On to the topic of the day, gold. Peter Schiff has been bullish on gold since, well, forever now and has taken much heat for it since it climbed from $250 to $1,240, yes, taking heat for something that quadrupled. The commenter stated that gold will take a haircut, a major one, when markets calm down, maybe he is right, but let’s take a look so far. Trillions have been spent on the banks, that has not calmed the markets and now you have governments in trouble, what is going to calm the markets even if small governments start defaulting? Even beyond that, look at 2003, 2004, 2005, 2006, 2006, 2007, 2008, 2009, 2010. During most of those years the markets were considered “calm” and in a “goldilocks” period upon a new wave of global liquidity never before seen, what happened to the price of gold? Oh, yeah, it quadrupled.
The one big down year gold had was in 2008, when it first hit $1,000 I might add, when everything was in liquidation because of a global margin call. If the Fed did not start dropping money from helicopters we would have had our 1930’s deflationary spiral on our hands, but that is not what happened. What happened was things were supported by the government and long before the markets shot back up 70% gold was on its way back up to it’s previous $1,000 high. So, Peter Schiff can hold on to his gold trade all he wants, it worked for him as he lost little during the collapse by holding it and it returned more than the S&P, from January 1, 2009 to December 31st, 2009, than the S&P 500 did without the volatility. Comments like the ones made by the person in question show that they do not look at the facts and simply do not like the asset class, or do not understand it, and end up looking silly at the end of the day.
Do I think gold will go down? Yes. Why wouldn’t it? Everything rises and falls, but I think it will be much high 10 years from now than today. We know that central banks inflate the currency, that is a fact. We know, especially right now, that sovereign default risk is real and confidence in currencies is really a fleeting thing, we have merely been lucky for 38 years since the gold standard was eliminated, we know that turmoil will always exist and we know gold, silver or other commodities are a finite resource that has much higher demand that supply could ever meet. In my opinion, only a fool would not want to own gold, just look at APMEX.com, all their smaller American Eagle coins are sold out for crying out loud, is that the confidence in the global system we are looking for? Is that the sign of a growing global economy? Nope.
To kick off the New Year you should go read this guy’s silliness. It is no wonder why he has been largely discredited and why he completely missed the housing bubble in 2005-06, he was the guy laughing at Peter Schiff when Schiff told him lending standards were nonexistent, guess who was right?
What I found amazing is that Mike Norman actually thinks that issuing treasuries is not borrowing money. Furthermore, he actually states the following, this blew my mind because it is utter nonsense:
Some would argue that the vote simply gave the government the right to “borrow” $290 billion more, so it did not really increase its spending power at all, only the amount it could take from others. This argument would be wrong.
Government spending, by definition, increases the amount of reserves in the banking system and those reserves are the funds used to buy Treasury securities. Therefore, it is correct to say that government spending itself provides the money to buy the debt.
How else can you explain how the national debt went from $900 billion to $12.4 trillion over the past 30 years with interest rates falling to historic lows or even zero? If the issuance of government debt were truly “borrowing” then rates would have climbed to astronomical levels.
If this made you say, what!? You are not alone. I know what he is saying and on the surface he is kind of right, but it is also the words of a true idiot. I will explain this in a very simple way for Mike to understand, if you issued your own debt and could control your interest rates, would you keep interest rates, the amount you pay, high or low? Clearly you would keep the amount you pay low, unless you like paying a lot more for what you borrow. Now, that is a very simplistic way of approaching the total issue and it is much more involved than that, but I fear if he reads this getting into details would probably confuse him.
Apparently Mr. Norman is one of these people who thinks you can issue unlimited debt or “increase the amount of bank reserves to buy treasury securities” and we never have to pay the piper. I find this fascinating that one can think that investors will never, ever, want their money back or that even though we have to pay interest on the amount of money we spend it is still not considered borrowing. I am not sure how that is not debt or borrowing nor am I sure how one can borrow their way to prosperity, but I find this disturbing among many economists in the US, including one Nobel Prize winning economist who writes for the NY Times a lot.
The last time I checked those who tried to borrow their way to prosperity, Dubai, Argentina, home owners, Eastern Europe and so on all ended up not doing so hot or defaulting. I am not suggesting the US will default on its debt, that would be crazy, we will simply inflate our way out as that is the game plan. Well, I guess I am early in giving out my 2010 Contrarian Award to Mr. Norman for going against all conventional wisdom and basic economic teachings when we examine debt and prosperity. Debt, for a lack of a better term, is good. I gotta stop, my head hurts.
Perhaps the most absurd statement anyone can make is that if you are not always bullish on US equities you are not patriotic. That type of talk is eerily similar to that of the Soviet Union or some other regime that discourages freedom of speech or thought. Unfortunately, that is what I get a lot from some readers and media personalities.
Tonight Dennis Kneale said, in his Blog You!, segment that because I am negative on US equities I am not a patriot. He seems to think that blind patriotism and belief that things will always get better because we are America is the way to go. He seems to think that things improved so much over the past 12 months that nothing can go wrong. That cannot be further from the truth and let us not forget that it was about 12 months ago that this guy had no idea what the VIX was and said Citi was a screaming buy at 25 a share or so.
Forgetting his past indiscretions let’s just take a look at the facts which determines why I am bearish on US equities. Real estate, both commercial and residential are in serious trouble and since most mortgages were securitized and sold to banks, later used as collateral, then it is safe to assume that banks have billions more in bad debt on their books. That fact alone should scare any normal person about the banking system by itself, not to mention that the Fed and the FDIC are both very concerned over commercial real estate as you read this post. A banking system that holds this much bad debt is not good and our actions will either postpone the inevitable or, in the best case scenario, create zombie banks.
Equities got way ahead of themselves and are currently trading about 130x their current earnings, 26x future earnings. The current pricing of the S&P 500 means that GDP has to have 4% growth in order to maintain these prices, I do not see that as a possibility no matter how they use hedonics to play with the numbers. I think a rational person would say 2% GDP growth is what we should expect which places the S&P 500’s fair valuation at about 850 or so. Earnings are down some 26% year-over-year and very few firms beat on revenue which means they are firing people to make their numbers, is that patriotic?
Monetary policy is a mess and I do not see how anyone could think differently. The Fed has monetized debt, propped up who knows how many banks, printed tons, literally, of money, have interest rates at zero, refuse to let us know exactly how bad the banking system really is and the list just goes on and on. While inflation is clearly not a problem, deflation is here for some time to come, it is highly unlikely that the Fed will be able to rein in this extremely accommodative monetary policy in a timely fashion and inflation will be a major problem in the future. Also, when foreign banks question the value of your currency and have voiced very public concerns over your currency that is a major problem, especially as we depend on them to fund our deficit spending.
Unemployment is a catastrophic problem because consumption is 70% of our GDP and anyone who thinks that the consumer is coming back, you might want to reevaluate that thought. Considering unemployment is going up it is highly unlikely that the consumer will spend on anything other than the basics. There is no sign of unemployment declining in the near future which will remain a problem for economic growth until we either get used to the new normal or change the structure of our GDP, guess which will happen.
Government subsidized growth is not growth as we must pay for it through our taxes sometime in the future. The programs that have been successful cash for clunkers and the first time homebuyer tax credit is the cause of all the demand that we have seen and will more than likely skew the GDP to positive for 3Q09. However, this artificial demand is not sustainable and eventually we will have to pay for it through taxes. Essentially the government is in the banking business, financial services business and the mortgage business all of which is bad for the free markets.
Based on that information how in the world can you be bullish? Long-term I am sure we will be fine, but if we look around the world I am sure we can find better investment opportunities than in the US at the moment. Until things get back to a new normal or until we are fully aware of the risks banks have n their books I think it is incredibly dangerous to just blindly invest on patriotism. After all America is about opportunity to better yourself and if that means you invest in China or India to make more money than that is as patriotic as you can get.
It is unbelievable that a media personality would go to the, if you don’t invest in America then you’re a traitor’ level. I think that is childish and it looks desperate, kind of like picking a fight with bloggers I might add, for ratings. I am in fine company with my bearish call with the likes of Doug Cass, at the moment at least, Paul Tudor Jones, the folks at Horseman Capital, Peter Schiff and a whole host of others. Of course there is the possibility that I am wrong, but based on the evidence I see I really don’t think that is the case, but in the event that I am wrong I will admit it.
Frankly, I consider myself more patriotic than most as I voice my dissent to the status quo and calling out things in the media that I see as blatantly false or spinning. Anyone voicing their opposition to what they see as wrong is a patriot no matter if it is on healthcare or the way our politicians blatantly vote against their constituents. In the days of old it was the media who was inquisitive about the government and tried to get the real facts, but somewhere along the way the media thought that the latest Britney Spears news was more important than reporting on what our government is up to. I guess they forgot why the Constitution gave them such wide power.
Its time to send Mr. Dodd home for good. There is no way he had no idea he was getting a good deal. When someone says your getting the V.I.P. deal, you know you are getting something no one else was getting. So, either Chriss Dodd is the dumbest person in the world or he knew he was getting a good deal. Either way, he has to go. Here is the Story from Bloomberg:
Ethics Panel Clears Dodd in Countrywide Refinancing (Update2)
By Jonathan D. Salant
Aug. 7 (Bloomberg) — The Senate Ethics Committee said Senate Banking Committee Chairman Chris Dodd of Connecticut and fellow Democrat Kent Conrad of North Dakota didn’t violate ethics rules in refinancing their home mortgages with Countrywide Financial Corp.
The panel said today it found “no substantial credible evidence” that the mortgages violated Senate ethics rules.
Even so, the committee, which includes equal numbers of Democrats and Republicans, said both senators should have “exercised more vigilance” to “avoid the appearance” of preferential treatment.
Dodd, who faces re-election next year and whose committee oversees the mortgage industry, claimed vindication.
“There was no ‘sweetheart’ or special deal; the allegations are and have always been false,” Dodd said in a statement. “I hope that today’s dismissal will go a long way towards restoring the bond of trust and confidence that I’ve worked long and hard to build with the people of our state.”
Conrad called findings “welcome news” in a statement. “While I should have shown more vigilance in the appearance of these transactions, the committee has concluded I did nothing unethical, and that is the truth,” he said.
The complaint against the senators was brought by Citizens for Responsibility and Ethics in Washington, a watchdog group. CREW executive director Melanie Sloan said Dodd and Conrad were cleared of wrongdoing “despite the fact that the senators participated in a program the committee found ‘offered quicker, more efficient loan processing and some discounts.’”
‘Friends’ of Mozilo
Both senators were put into Countrywide’s VIP program and were designated by the company as “friends” of former chief executive officer Angelo Mozilo, who founded the company and served as its head until last year. The committee found that neither Dodd nor Conrad received special treatment, that their mortgages were in line with offers from competing companies, and that they didn’t obtain any benefits by virtue of their elected offices.
Dodd, 65, said he assumed the VIP program was simply a courtesy for customers. Conrad, the Senate Budget Committee chairman, also denied receiving favorable treatment.
Dodd, first elected to his seat in 1980, is the only Democratic senator currently in danger of losing re-election next year, political analysts say. Three Washington-based organizations that rate congressional races — Congressional Quarterly, the Rothenberg Political Report and the Cook Political Report — say the race is a tossup.
Through June 30, Dodd had $1.8 million in his campaign bank account, more than double that reported by his leading Republican challenger, former Representative Rob Simmons.
Conrad, 61, faces re-election in 2012. He first won his Senate seat in 1986.
As you may know I support Peter Schiff in Connecticut in the upcoming Senatorial race. Even if Schiff wasn’t running I would be saying this anyhow, don’t re-elect Chris Dodd or ant incumbent for that matter. Mr. Dodd received the V.I.P. treatment from Countrywide and it did not raise any red flags with him. This is the same Chris Dodd who was on the Ethics Committee and was supposed to be regulating these mortgage underwriters. If he did not know he was getting preferential treatment he shouldn’t be re-elected because that would mean he is the dumbest man on the planet. Even Kent Konrad even admitted he knew he was getting a “good deal.”
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