Why I Got Gold Wrong

There should now be no question that America is in a deflationary crisis. Therefore, holding gold - a commodity - is fundamental financial insanity. And yet gold is skyrocketing. I missed the fact that, psychologically, people have little choice.

One always needs to look at one's ideas from different perspectives, especially when one feels surest about them and certainly when developments call them into question. So, I know a guy who does branding and I thought about it from his perspective.

I went through the asset classes, thinking in terms of a simple phrase that might characterize people's opinion of them:

Commodities: See "deflation" above.

Real estate/REITs: Are you kidding?

Mortgage-Backed Securities: Full of Lemon Loans, the whole problem. Next.

Corporate Bonds: Spreads too high, too much risk.

Municipal Bonds: No bond insurance, hurt by falling tax revenues.

Treasury Bonds: Yields INCREDIBLY low.

Foreign bonds: Nobody even knows how to buy them.

American Stocks: Cramer says "1987".

Emerging market stocks: 1987 or 1929, take your pick.

Even Money Market accounts are in trouble as the Reserve Fund "broke the buck".

That doesn't leave much. I come up with MAYBE European/Japanese stocks...and gold.

Gold is the only asset with - if you'll allow me - an untarnished brand.

Therefore, tragically, gold will go up and fast as people lose faith in other assets. It will also go up on the false, chimerical belief that somehow gold is money.

Here's how wrong is the idea that gold is money: Islamic law more-or-less mandates that gold be used as money and yet Islamic states issue fiat currency.

In the modern world, gold operates as a vehicle for currency arbitrage - a place to temporarily park your assets until you decide what currency you want them in. But it is a creature OF the currency system, not a backing for it and certainly not a substitute. For this reason the dollar index - despite unprecedented turmoil and low short-term rates - does little:



Once people decide they need that currency - to buy things - they sell their gold. And that's what people will do - en masse - when they start to need the money they have "saved" by buying gold.

In the meantime, goldbugs, have fun and, as ever...


May you live in interesting times

Here's A Headline You Don't See Every Day

Treasury 3-Month Bill Rates Drop to Lowest Since World War II

U.S. Treasury three-month bill rates dropped to the lowest since World War II as a loss of confidence in credit markets worldwide prompted investors to abandon higher-yielding assets for the safety of the shortest- term government securities.

Investors pushed down the rate to 0.0203 percent on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of American International Group Inc. In a sign of banks' reluctance to lend, the rates charged for short-term loans relative to U.S. bill rates rose to the highest on record.

Short-term rates basically MAKE the value of money in the foreign exchange markets. And yet with short-term rates at almost ZERO, here's the effect on the dollar:



Yes, it is back to the Monday morning opening price.

Lowest short-term rates since WW2, and the value of the dollar goes down to where it was all of Monday morning.

That's basically BANKERS saying: "we are so scared right now that we will give you all the dollars you want as long as you simply promise to pay us back what we gave you - no interest."

That is a statement that right now the ONLY thing serious people trust in the developed world is the United States Treasury bond.

I was so cheerful this morning. With AIG was bailed out and I thought maybe crisis was averted. I want change in this country and the world. I KNOW the changes we need and, interestingly, we are heading there - fast.

But I never expected - or wanted - for it to happen like this.

I think we cannot but surmise that The Crash has already happened and we are just sitting here, waiting for the tsunami.

May you live in times of great interest - or at least more than 0.3%

GOLDEN MADNESS!!!!!

GOOOOOOOOOOOLLLLLLDDD!!!

Okay, when I said trends would "pause" here, I might have thought a little deeper about gold, but then again I wasn't really expecting the existential threat to Western finance to come, you know, yesterday. That was a little sudden.

And although I had read the lunacy , that was starting go come out of the gold-crazy goldbugs, I didn't count on panic buying of gold to strike quite so hard.

Here is the chart of value of the dollar in that past couple days, showing DOLLAR SHORTAGE maintaining the price even in the face of total turmoil in the American financial system, and some Treasury bonds at rates not seen since World War 2:

: And here is the gold chart over the same period showing the GOLDEN MADNESS striking the markets today.

And here is the sequence as it is now becoming clear:

1) Lehman Brothers cracked open the stinking crypt of its books over the weekend and a horde of financial zombies leapt out and ATE WALL STREET'S BRAINS:

2) The WORLD saw that the Western Capital Markets were held in place by a rotten spiderweb called AIG and that AIG was failing.


3) They panic and Money-Market Rates Double Amid Global Credit Seizure (Bloomberg):

"I have never seen anything remotely like this. The money market was typically the one thing that always worked,'' said Luca Jellinek, head of interest-rate strategy in London at Royal Bank of Scotland Group Plc. ``It's the cardiovascular system of the financial body. When this happens, it's like a heart attack.''

4) AIG was rescued by the US government, giving markets a reprieve...aahhhh. Note the cool, refresing dollar-green of this text.

5) Banks, particularly in Europe looked at their books and realized that their very solvency was now - in a very real and immediate way - under the control of the BUSH ADMINISTRATION...(note here the alarming redness signifying possible shortage of dollars at the hands of laissez-faire idiots).

6) People went insane with panic and started to buy gold. [text color self-explanatory]

7) Goldbugs (and the venal, fiat-money-loving commodity traders who prey on their ignorance) went insane with happiness because it was the end of the world they had been predicting for so long had finally come and decided to buy, buy, buy.

I'm not a trader, but my thesis on these pages relies on their psychology. They will never try to "fight the tape" when it comes to madness like this - for good reason. If gold breaks out of the anti-bubble that major traded futures are in versus the dollar - or indeed any major commodities do - there is just as much of a possibility of another bubble as anything else. I doubt that it's happened yet, but it's possible.

If I sound dubious of my own words, see my post "It Begins" as an insight to bubble-market psychology. Bubble markets are an incredibly persuasive force, by definition. It's amazing. I know what I believe and yet the power of all this social energy works on my mind just as it works on everyone involved - although I'm not really involved.

May you live in interesting times

Gold Vs. Fiat Money - The Battle Begins

I had another one of those restless nights. I knew something was wrong, but I didn't know what. It was Gold. Of course it has always followed commodities. It's a commodity. In fact, it is the historical "master commodity". So my prediction that gold should go down was completely reasonable. But it troubled me.

Today, I turned on the computer and I saw it: GOLDEN MADNESS.

I was glib the other day when crossing foils with some goldbugs and I didn't feel good about it afterwards. I knew my thesis was holding up - better than ever - but there was something in their weird, anti-intellectual conspiiracy-theory enthusiasm that got to me. Something in their lunacy was echoing something sensible - however far away from their madness it might be. Even in lunatic conspiracy theory and nuttiness there is often value. The article is a weird, entertaining conspiracy theory about U.S. banks and commodities, but it had something in it that I noted with interest:

In July, India bought 22 tonnes of gold. In August, according to Reuters, India increased its gold purchases by more than 350%, buying more than 100 tonnes of gold.

This figure also represented a 56% increase in purchases when compared to purchases during the same month from a year prior. In Dubai, demand surged as well.

“We are definitely witnessing a surge in demand for gold in Dubai and physical shortages have been reported by many dealers,” said Ian MacDonald, the Dubai Multi Commodity Center’s executive director for gold and precious metals. “We are also seeing demand being driven by currency concerns in the region as many investors perceive the precious metal as one of the few strong currencies.”

Gold jewelry sales in Abu Dhabi soared 300 percent in volume and almost 250 percent in value in August from a year earlier after the metal dropped to nine-month lows, the emirate’s industry group said on Monday.

“It was the best month the market has seen in almost 30 years and it compensated for any drops we have seen earlier this year,” Abu Dhabi Gold and Jewelry Group Chairman Tushar Patni told Reuters.

There are big holes even in this data, but it reminds us of something very disturbing.

But first, a definition: Goldbug : A "goldbug" is a person who not only believes that gold is a good buy for market reasons, but believes that gold not only plays a huge part in the world financial system, but should and will inevitably play a larger part.

In the 1970's America on other developed countries cut any formal relationship between their currencies and gold in an agreement called "Bretton Woods". You'll find "Bretton Woods" listed under "Global Conspiracies To Undermine Rightness and Freedom" in the goldbug/loony-right-wing dictionary.

Ron Paul is the present day's most famous goldbug.

Karl Marx was a great goldbug of the past. Quoth Comrade Karl:

"Only in so far as paper money represents gold, which like all other commodities has value, is it a symbol of value."

Modern capitalist society is based on fiat money, so goldbugs are, naturally, those who do not believe that modern capitalism can survive. They inhabit a surprisingly big portion of the Right wing - all the way from Survivalists through Millenialists to serving Congressman and Presidential Candidate Ron Paul. On the Left, there is a very small fringe of anarchists and Old-Time Leninist/Maoist/Marxists.

I'm sure the Ron Paul fans and the Hard-Line Marxists and Anarchists would get on famously if we put them all in the same room. Let's try that someday.

But what does this gold madness mean?

It means that the situation is far worse than I thought. The disturbing thing we have to remember is that while in the developed world currency crises can cause a lot of displacement, in the developing world people die from them. I'm sure people in India and even Abu Dhabi have a cultural memory of times when the value of the little boxes of notes and coins representing people's life savings evaporated, the next harvest went bad, and they simply died.

Hence, the invention of the credit system, in about the 15th century.

In the modern credit system, even in the face of the kind of financial turmoil that comes once in a century and the prospect of future U.S. government borrowing the like of which we can't even imagine (especially if McCain somehow gets elected), the U.S. dollar is holding steady or going up. The euro is spiking up, the yen is spiking down, so there is no persuasive major-currency trend away from the dollar.

Gold, however, is going mental.

When reason leaves us and no answers come, all we have is fear. This is why we have to fix and EXPAND the modern fiat money system as fast as possible. People cannot be dependent on the value of notes and coins in a little jar. The metal they are made of doesn't matter.

Think of it this way: gold is very pretty and even useful sometimes, but it's also very weak. You can't build anything out of it.

What holds the world together is the labor and trust of people - human beings - Homo sapiens - US.

May you live in goldenly interesting times, goldbugs

Oh, THANK Goodness!!!

Jim Cramer made this shocking point today about and existential threat to the "world capital markets" if AIG was allowed to fail.



Amazingly, against all their principles and in a singularly-rare show of rationality by this Administration, the Feds saw the light!!!

Federal takeover of AIG planned

Federal officials reportedly may take 80% stake in the nation's largest insurer in an $85 billion rescue plan to prevent financial chaos worldwide.

NEW YORK (CNNMoney.com) -- The federal government is reportedly on the verge of taking over crumbling insurer American International Group in an $85 billion deal that could leave the company in the Federal Reserve's hands.

Probably up to a trillion dollars of AIG's obligations will be backed up by the American government and the world's financial system can go on another day.

Thank goodness!!!

May you LIVE in interesting times

You Stupid Bastards

How could you let this happen?

All night a question kept eating at me: "Why are these mortgage-backed securities and derivatives not worth more?"

There are real HOUSES underneath them, right?

I couldn't figure it out.

I couldn't make the numbers work.

They HAD to be worth more than the mark-down price. It just made no sense. The securities are trading for less than the underlying collateral. They had to be worth more.

Had to.

And then it hit me.

Folks, it's not that we should be anticipating The Crash, our worry should be that The Crash Has Already Happened.

After the crash of '29, people had the same question: "Why aren't these stocks worth more?" And the answer was that they were, in fact, trading well below their "intrinsic" value, but there was nobody there to buy them. The modern stock market was a relatively new institution. People simply lost faith in it.

While the more-or-less modern market for mortgage securities is at least 40 years old, most people don't understand it - just like stocks in '29. While the 20's roared for the smart set, most people lived out in the countryside. By the time they heard about the stock market, it was crashing or just about to. I daresay there are a great many VERY smart and well-informed people who cannot tell you what MBS, RMBS, CMBS, CDO, CMO and CDS mean, although these terms are not even thought to be exotic any more. Relative to these huge, modern, international mortgage securities' market, most people just plain live out in the countryside.

The market for American mortgage-backed securities WAS the most-liquid market in the world - even more liquid than treasury bonds. But most people - even very smart people - poo-poo this "securitization" as something new and somehow false. It's not. We all depend on it, actually. We have big government agencies that make sure that at least half of it is guaranteed and keeps running - Fannie and Freddie.

But I really am beginning to come to the conclusion that the private side of the mortgage-backed securities market has crashed completely. By that I mean, it is in a deflationary spiral where nobody will buy, even though there is "intrinsic" worth there. Why do I keep putting "intrinsic" in quotes? Because something is only worth something if somebody is there to buy it. The assumption is that because these securities represent real flows of cash payments, of course people will buy them. But those cash payments have to flow through financial institutions and those institutions over-leveraged themselves and now.....?

Well, you can think of it this way:

Banks must loan money to keep functioning, ideally safe loans.

At today's cut-rate prices, mortgage-backed securities should be, in effect, among the safest possible loans there are.

So what does it mean when banks WON'T make even the safest possible loans?

It means they must be, in effect, out of money.

And that's really bad.

And these stupid bastards have a small window left to save it - and I'll just bet you they won't because they have this weird belief that an "Invisible Hand" is going to fix it all for them.

May you live in SIGNIFICANTLY less interesting times than these

The Data Points Are Coming In Too Fast, But...

...these are my impressions so far:

When the Fed took its extraordinary action to rescue Bear Stearns (and I want to assure younger viewers that it was, at one time considered extraordinary for the Federal Reserve to recue financial institutions), "free-market" commentators like Jim Rogers were saying that it was "not the end of the world" if an investment bank like Bear Stearns went bust.

Meanwhile, in the real world, the people who were involved in the Bear negotiations were dealing with the fact that if Bear was not rescued, Lehman Brothers would be next - within a week - and Merrill would be next. So although these people (and I know some of them) believe the same way Jim Rogers does, they did the extraordinary thing - against their beliefs - and rescued Bear Stearns.

But the problem has been that every extraordinary move by the Fed and Treasury have been too little, too late. Their actions SEEM to be "all they can do" and "more than we would have expected". The actions are more than we would have expected, but only because these people are laissez-faire radicals. Clearly, each individual action has not been "all they can do" because they have then gone on to do even more - each time.

This is absolutely the worst possible thing to do - possibly even worse than doing nothing at all. If they had done nothing, then the election in November would be little more than a formality. It wouldn't be a question of whether the Republicans would lose, so much as whether there would even be a Republican party going forwards (even now, here in Washington state, the Republicans have taken to calling themselves the "GOP Party," avoiding the world "Republican" as much as possible). There would have been a panic, and disaster, but at least it would have happened so suddenly and early enough that the whole government would have been forced to act.

Instead, the laissez-faire radicals have compromised their "standards" just enough to put a patch on things for a few months at a time. Their credibility in the markets is starting to fall and they are beginning to inject not moral hazard but dangerous complacency into the financial system. The Administration was only able to rescue one out of the four this time as big buyers could not be induced to save the system (and themselves, ultimately, but they don't see that). Merrill is now part of Bank of America, but Lehman is bankrupt, AIG needs to raise an incredible $40 billion in order to stave off disaster, and we are not even hearing about Washington Mutual.

For the Federal Reserve bank to lend an insurance company this badly run $40 billion would be insane. They need to take the assets into conservatorship. The Fed is already becoming reckless, now apparently accepting any crap security out there for "collateral" on the loans it is extending to keep these firms afloat. Even the deal that "saved" Merrill Lynch is deceptive in that it was simply a matter of Bank of America giving Merrill Lynch shareholders stock and then receiving exceptional new credit facilities from the Fed. The underlying assets are no better than they were Friday. Bank of America has simply weakened its capital position.

As for WaMu, I think that they are just talking to their regulator and the FDIC - and probably stalling. These idiots think they can ride this all out. And more fundamentally, they don't care. Why should they? They're rich. It's not going to hurt them. It's just a game.

Meanwhile, gallingly, other stock markets will crash worse than the ones in the U.S., because even though this crisis is happening at the very heart of the American financial empire, it is the extremities who will feel the lack of blood first.

May you live in interesting times