Author Archives: Keith Weiner

 

A Republic – If You Can Keep It

As the famous story goes, when Ben Franklin left Independence Hall after the Constitutional Convention in 1787, Mrs. Powel of Philadelphia had a question she wanted answered.

“Well Doctor, what have we got, a republic or a monarchy?”

Franklin replied, “A republic, if you can keep it.”

No one today (well, seemingly other than the current president) wants a monarchy. However, too many call our once-Republic a “democracy”. They love the idea of the will of the people, directly determined by vote and imposed by force of law.

The primary argument against this form of government is that it’s tyranny. A majority has no right to take away the rights of any individual, no matter how unpopular he may be. However, that is precisely the consequence of giving the people the power to vote for anything, with no constitutional limits to the power of government.

 

800px-Benjamin_Franklin_1767

Benjamin Franklin: founding father, prolific inventor, and frequent purveyor of political wisdom.

(Painting by David Martin, 1767)

  Read the rest of this entry »

 

A Key Flaw

There is now a very interesting initiative on the Swiss ballot, which will require the Swiss National Bank (SNB) to hold 20 percent of its reserves in gold. The voters will decide on November 30. I won’t predict the vote, but I want to discuss the likely impact of a yes vote.

Much of the analysis of this initiative is about the price of gold. A typical prediction is that it will go up, as SNB buying will exceed supply. However Mike Shedlock notes that, “Nearly all of the gold ever mined is available…”

That’s because gold is not consumed. The SNB is small compared to worldwide gold inventories, so it won’t move the price much. Shedlock adds, “It is entirely possible that SNB purchases could significantly alter perceptions…” I agree sentiment is ripe for a change.

The price isn’t very interesting, unless you’re a gold trader. It’s much more important that the referendum brings the first positive monetary change in decades. It reintroduces a link between gold and banking, and imposes a barrier to currency debasement. For this, the Swiss are heroes.

There is a key flaw in our system of floating currencies. Every financial asset is someone’s liability. When a currency moves, it creates winners and losers. Big moves can harm banks with loan portfolios outside their home.

That’s why the SNB currently doesn’t allow the euro to fall below 1.2 francs. To maintain this currency peg, the central bank sells francs and buys euros. There is no limit to this deliberate franc devaluation, which robs Swiss savers, investors, and businesses.

Big exporters, like Swatch and Nestle, may have lobbied for a weaker franc, hoping to make their products more competitive, but that’s a sideshow. The real purpose of franc devaluation is to shield the Swiss banks from euro devaluation.

They’re vulnerable, because they do a lot of lending outside the country. They have assets denominated in euros and liabilities denominated in francs. They suffer losses when the euro falls, or the franc rises.

 

EUR-CHF

EUR-CHF exchange rate – pegged at a 1.20 minimum floor by the SNB since September 2011 – via StockCharts, click to enlarge.

 

Read the rest of this entry »

 

Drivers of Financial Implosion

I proposed seven drivers of financial implosion in my dissertation. My recent writing has focused on two of them. One is the falling rate of interest on the 10-year government bond. As interest falls, the burden of debt rises. Since the falling rate incentivized more and more people to borrow, the number of indebted people, businesses, corporations, and of course governments is large. When the rate gets to zero, the burden of debt becomes theoretically infinite.

In the US, the downward trend is still in a deceptively mild phase (though there was a vicious spike down on Oct 15 to 1.87%). The rate on the 10-year Treasury is 2.3% today. In Germany, it is down to 0.82% and in Japan the metastatic cancer is much closer to causing multiple organ failures, with a yield of just 0.46%.

Two is gold backwardation, which has also been quiescent of late. Although it is worth noting that with these lower gold prices, temporary backwardation has returned. The December gold cobasis is over +0.2%).

I haven’t written much about a third indicator yet. What proportion of government bond issuance does the central bank have to buy? I theorized that when the central bank is buying all of the bonds issued by the government, that this is another sign of imminent collapse. I phrased it, as with the other indicators, as a value that is falling. Collapse happens when it hits zero, if not earlier. Here is what I wrote:

 

“The average amount of new Treasury bond issuance minus new central bank Treasury bonds falling towards zero (i.e. the central bank is buying a greater and greater proportion of Treasury bonds issued).”

 

Bloomberg recently published an article about the Bank of Japan’s announcement of a new bond-buying program. Bloomberg presents two facts. One, the Bank plans to buy ¥8 to ¥12 trillion per month. Two, the government is selling ¥10 trillion per month in new bonds. This is an astonishing development.

The Bank of Japan will buy 100 percent of the new government bond issuance.

 

Read the rest of this entry »

 

Monetary Metals Supply and Demand Report: 2 Nov, 2014

Woe unto the gold speculators, and a curse laid upon the house of silver.

At least, that’s how it may feel. In more clinical terms, the gold price fell from $1,230.90 to $1,172.59, or $58.31. The drop this week was 4.7%. The price closed the week below the level set after the crash of 2013, which was $1180 (by the way, an intraday dip). The gold price has never closed a day below $1188 since 2010.

The silver price fell from $17.17 to $16.13. $1.04 is 6.1%. It’s never been lower in years, except briefly in 2010.

On April 9, we said:

“The neutral price of silver is in the $16’s today. If the price overshoots as far to the downside as it is now stretched to the upside, we could see silver with a 12 handle.”

We got hate mail.

In the first place, one would hope that people don’t shoot at messengers. We are of the firm belief that gold and silver are money, and the paper issued by the Fed is not. At the same time, we argue that this view is not a trading strategy. For trading, we look to market data.

Second, we were right. While other analysts called every blip with renewed forecasts of $50 and $250, the silver price has spoken. It had a false breakout in June, and has been falling steadily since then. It has traded with a 15 handle this week. Incredibly, the fundamental price we calculate for silver is still below the market price.

To see the fundamentals, read on …

 

Read the rest of this entry »

 

Fans of Central Banking Have an Achilles Heel

Most of my writing about the gold standard is about how it works, and how the paper dollar standard doesn’t. A casual conversation I had with someone recently underscored that there is an even stronger argument.

Our opponents, those who support central banking and irredeemable paper money, have to make two cases. One is to defend the theory and practice of central banking, that central bankers are wise and honest and that their debt-based paper money works. They have to argue that the dollar does everything you want money to do, such as hold its value, enable proper accounting, encourage savings, support a stable economy, etc. Well, they can go through the motions and fool the ignorant.

The other is that they have to defend the use of force against innocent people.

 

five year plan in four

Full speed ahead for the fourth and final year of the five year plan! (this poster was made when Stalin decided the 5 year plan had to be fulfilled in four years)

 

Read the rest of this entry »

 

False Assumptions and Wrong Predictions

An interesting article on MarketWatch today caught my attention. The subhead is the money quote, “Back in April every economist in a survey thought yields would rise. Guess what they did next.”

Every? The article refers to 67 economists polled by Bloomberg, all of whom would seem to believe in the quantity theory of money. This means they believe a rising money supply causes rising prices. That means they think the bond market expects inflation. Which means they expect the interest rate to rise, because investors will somehow demand more.

It didn’t happen because every assumption in that chain is false.

Many people also expect interest rates to rise after the Fed’s bond buying program—quantitative easing—ends. Let’s take a look at the yield on the 10-year US Treasury bond from 1981 through today. This graph is courtesy of Yahoo Finance, though I have labeled it as carefully as I could for the three rounds of QE so far.

 

Read the rest of this entry »

 

The Post Gold Default World

After President Nixon’s gold default in 1971, many people advocated a return to the gold standard. One argument has been repeated: consumer prices are rising. While this is true, it wasn’t compelling in the 1970’s and it certainly doesn’t fire people up today. Rising prices—what most people think of as inflation—is a dead-end, politically. People care about rising prices, but not that much.

There is a greater danger to fixating on this one argument. What if you make a really bad prediction? The Fed did massively increase the money supply in response to the crisis of 2008. Many gold advocates predicted skyrocketing prices—even hyperinflation. Obviously, this has failed to materialize so far.

Preachers of imminent dollar collapse have lost credibility. Worse yet, they have poisoned the well. People who were once receptive to the benefits of gold have lost interest (their selling has exacerbated and extended the falling gold price trend). And why shouldn’t they walk away? They can see that some Armageddon peddlers have a conflict of interest, as they are also gold and silver bullion dealers.

 

Dollar IndexUS dollar – still alive, for now – click to enlarge.

 

Read the rest of this entry »

The Wrong Idea About Inflation

Here is a post I made to Facebook yesterday.

 

chart-1-crude oil

 

I was making two points. One, virtually all commodities are in falling trends now (except certain foods affected by the government-create drought conditions in California). Two, it has nothing to do with the money supply.

Some comments on the thread reminded me most people accept the idea that changes in the money supply lead to changes in prices (though not necessarily evenly or instantaneously). This idea is tempting, convenient, and it seems only “common sense”. However, it is facile.

I decided to write this post to add some context. Since 2008, there has been a massive increase in the money supply. M0 has increased from about $875B to $4T. It is now 3.5X what it was. M1 went from $1.4T to $2.8T, or 2X. M2 went from $7.8T to $11.4, or about 1.5X.

Prices haven’t done any such thing. The Bloomberg Commodity Index fell from about 175 to 118 today. In other words, the commodity index is 0.67X what it was.

How do we explain this? I have offered my theory of interest and prices. To condense 12,000 words into a sentence: rising interest rates and rising prices go together.

 

Read the rest of this entry »

 

Monetary Metals Supply and Demand Report: 5 Oct, 2014

How much higher can the dollar go? Betting on the Fed’s paper has been one helluva speculation. No doubt the Fed’s credit quality has been falling, but powerful forces are driving it up, such as desperate debtors clutching for cash to calm their creditors (sorry, couldn’t resist).

The dollar was up this week, from 25.5 to 26.1mg gold, or alternatively from 1.76 to 1.86g of silver. Since this move began, the dollar has risen from around 16mg gold, or about 63%.

If one prefers to measure value in terms of other currencies, the dollar was up from €0.788 to €0.80. It went up from £0.615 to £0.626. It went up from CAD$1.115 to CAD$1.124, or AUD$1.14 to AUD$1.15. It went up from ₽39.14 (Russian rubles) to ₽39.98. It went up in Japanese yen, Brazilian reals, Indian rupees, Indonesian rupiahs. You get the picture. In the past year and three quarters, the dollar has gone up about 33% in rubles. Exciting times for Russian speculators, many of whom probably feel they’re getting rich. Are they really? Not in our opinion.

Looked at the other way—in terms of most readers’ favorite paper currency—the prices of the metals fell this week. As usual, this means the price of silver fell in terms of gold as well. The gold to silver ratio made a new high on Thursday of 71.1. Last week, we said the following:

“We have long predicted the ratio will hit 70 and maybe 80. So we will call our target ‘hit’. Is this it? Will the ratio reverse direction, and will silver begin to rise in gold terms (and dollar terms) again?”

This wasn’t quite a premature calling of the top (particularly in light of our silver analysis). But it was not necessary to reach for 70 last week, when this week the market has solidly hit it.

What about 80? Read on …

First, here is the graph of the metals’ prices.

  chart-1, gold and silverThe Prices of Gold and Silver – click to enlarge.

Read the rest of this entry »

 

An Absurd Claim

Last week, a story broke about Fed whistleblower Carmen Segarra. I wrote an article on Forbes about it, Disgruntled Fed Lawyer Blows Whistle on Regulatory Capture. Segarra is a former Fed regulator assigned to supervise Goldman Sachs. She secretly recorded 46 hours of audio from her meetings, during her short stint on site at Goldman as a Fed employee.

This story does not come in a vacuum. There is an ongoing narrative, which is simple, even facile. We had a crisis in 2008, and therefore banks caused it. Because, greed. This is the backdrop for her story, and the story presented by This American Life and ProPublica. It is how every article I have read about that story, except this one by David Stockman, spins it.

Banks suffocate under a full-time, on-site team of government minders. In Sagerra’s words, “The Fed has both the power to get the information [i.e. whatever it demands] and the ability to punish the bank if it chooses to withhold it. And some of these powers involve criminal action.” The banks are monitored, controlled, regulated, and supervised. So how is it possible that they got away with crime on such a scale as to nearly collapse the monetary system?

 

segarra_630x420_20131115

Ex-Federal Reserve lawyer Carmen Segarra

(Photo credit: Nabil Rahman for ProPublica)

 

Read the rest of this entry »

 

Central Planners and Untenable Theories

The European Central Bank again cut the interest rates it controls. Notably, the deposit rate was moved deeper into negative territory. It is now -0.2% (minus 20 basis points, that is not a typo). The ECB says it’s trying to nudge prices higher, but it’s actually feeding the cancer of falling interest.

The linked article above, like most, is focused on the quantity of euros and the presumed direct relationship to price. The following bit of editorializing from that article is uncontroversial in Frankfurt, London, New York, Mumbai, or Shanghai.

“Inflation weakened to a five-year low in August, just 0.3% in annual terms. That is far below the ECB’s target of a little under 2% over the medium term, raising fears that the region could face a debilitating stretch of weak or falling prices that hampers debt-financing and investment. Those fears intensified as market-based measures of inflation expectations weakened, too.”

 

Mario DraghiThe chart shows the 5yr./5yr. swap rate, a.k.a. the 5 year forward inflation breakeven rate. This is the “inflation rate”, or rather the annual rate of change in harmonized euro area CPI, which market participants expect to reign 5 years hence over the following 5 years. This inherently imprecise datum is employed by the ECB as a measure of whether long term inflation expectations are “well anchored” (chart caption by PT).

 

Read the rest of this entry »

 

The Credit Gradient

The United States, and every country, is subject to a monetary authority and legal tender laws. Here in the U.S. we have the Federal Reserve, a central bank that plans money and credit. The Fed thought they had perfected their planning (but of course it cannot be perfected). They thought they had ended the boom and bust cycle, and brought us into a brave new era, their so-called great moderation that ended in 2008. All they really did was manage the banking system to the brink of insolvency.

Let’s try a thought experiment. Suppose the monetary central planner attempts to fix the problem of insolvency by massive injections of liquidity. The central bank buys bonds. It dictates rates near zero on the short end of the yield curve, and promises not to raise rates for years to come. What perverse outcome would we expect?

Arbitrageurs see a green light, telling them that they can safely borrow short to buy long bonds. As the price of a bond goes up, the rate of interest goes down—it’s a rigid mathematical inverse. This is how suppression of short-term rates causes suppression of long-term rates.

 

Read the rest of this entry »

 

The Death of Goodwill

 

This is the first piece in what I intend to be a series, on the theme I think of as the Death of Goodwill. There was (and still is) a huge difference between the attitudes of people in America and the attitudes of those in third-world countries. I use the word goodwill for this difference. For centuries, Americans have been helping one another raise barns, live through hard times, and get up when they fall in the street. Unfortunately, goodwill is being strangled. There are numerous mechanisms for this, though all have bad governance at the core.

With the death of goodwill will come the collapse of civil society, and its twin sister law and order.

 

Read the rest of this entry »

 

Immigration For Republicans

 

This essay is not intended to address a crisis that may be occurring on the border at this time. I make no comment on that. Nor does it discuss the issues around war, such as how to deal with citizens of enemy nations. This essay is not a policy proposal, it does not set out, for example, when an immigrant can become a citizen and attain the vote or what to do to immigrants who commit crimes. It has but one purpose: to enumerate and respond to the common arguments used in favor of an impenetrable and guarded border fence to shut down immigration.

 

Read the rest of this entry »

 

How Can the State Bank of India Pay Interest in Gold?

An article caught my eye this week. The Tirumala Tirupati Temple in India has deposited gold at the State Bank of India, and is getting paid interest on their deposit. There is something unique about this.The interest is paid in gold.

To understand why no one else is paying interest in gold, let’s first look at how one can use any asset class to make a dollar income: speculation. Buy something. Wait. Sell it at a higher price. You can use bonds, stocks, real estate, artwork, or classic Ferraris. By the way, no matter what you use, you are converting what had been someone else’s capital into your own income. This is capital destruction on a massive scale.

Using gold to produce a dollar income is simple. Just sell a covered call with a strike price a little higher than the current market price. You get paid a premium immediately. If the gold price does not rise, then you can repeat the trick and sell another call. If it does rise, you must sell the gold at the strike price. This earns you a profit, as it is above what you paid. Then just buy more gold and do it again.

If you keep your books in dollars, and trade for dollar gains, you don’t really care how much gold you have. You only care about how many dollars. If the gold price doubles, you may end up with about half the gold. But who cares, at least you’re making a steady stream of dollarst hat you can consume.

Making a gold income is something else.

You can’t just sell calls, or sell the gold itself. If you do, and the gold price rises, you will have to buy the gold back. However, the same dollars you have will get you less gold at the higher price. For example, you start with 100oz gold. Today the price is about $1,300 per ounce, and you sell a December call option. It has a strike price of $1,325 and you get paid immediately $25 per ounce or $2,500 for the contract.

Unfortunately — yes this is unfortunate as we shall see in a moment — the gold price jumps in September. It goes to $1,500 and holds steady there. In December, you deliver the gold and per your contract you are paid $1,325 per ounce. Now you have $1,325 × 100oz = $132,500 + the option premium of $2,500 = $135,000.

When you go to buy your gold back, you discover the catch. At the new price, you can only get $135,000 ÷ $1,500 = 90oz. Even after picking up almost two ounces worth of pennies in front of the steamroller, it still squeezed 10 ounces out of you. Your 100oz shrunk to 90oz.

 

TirumalatempleThe Golden Tirumala Tirupati Temple, which is reportedly the richest temple in the world.

(Photo credit: Raj Srikanth)

 

Read the rest of this entry »

Support Acting Man

Archive

Own physical gold and silver outside a bank

Realtime Charts

[Most Recent Quotes from www.kitco.com]

[Most Recent Quotes from www.kitco.com]

[Most Recent Quotes from www.kitco.com]

[Most Recent USD from www.kitco.com]

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Oilprice.com