The End Is … Now

I have decided to shut the Daily Capitalist down and this is our last post. I have been publishing this blog for 5 years and, as they say, it’s fun until it isn’t. Think of a blog like a newspaper where readers expect new content every day. That takes quite a bit of time and it has squeezed a lot of things out of my life. Now it’s time to get them back. While readership is good and there is lots to say, I need to move on.

As you know, I am not in the financial business, and I don’t make money from the blog. Our sole purpose was to explain economics and finance through “Austrian” eyes and demonstrate through forecasts and analysis that Austrian economics is the best way to interpret that world. And, guess what: it works!

I have many regrets about this and the decision did not come easily. But, I can now reclaim my life and focus more on my own affairs and my other goals in life. Yes, I still have goals even at my advanced state of decrepitude. There is a book out there somewhere—when I find the time. I will also eventually have some kind of blog on which I will publish occasional rants. I’ll let you know.

We have been fortunate to have a number of fine Austrian-oriented financial analysts, investors, and investment managers contribute to the site. All in all, I am quite proud of our group and the high quality of our articles. I hope you have felt the same.

Thank you, dear reader, for subscribing and reading our commentary. I’ve enjoyed your comments and ideas and you always kept me on my toes. I’ve been asked where you can go to find similar commentary. I am a fan of Zero Hedge and Mish’s Global Economic Trend Analysis. They both have an Austrian bent to their writing and do an excellent job. I may occasionally contribute to Zero Hedge. Our other writers have been invited to contribute commentary to Zero Hedge so you may find them there as well.

Goodbye for now and thanks for reading us.

 Jeff Harding


Monday Morning Macro Market Commentary

Before my brief market commentary today, I’d like to announce that it’s coming to be time for me to resume writing at the blog site I founded in 2008,  This Blogger-run site has improved its capabilities and should allow me to come close to the quality that Jeff Harding has achieved with The Daily Capitalist; and, Blogger is free.  (Of course, one may snark that since Google runs Blogger, there is nothing so expensive as that which is free.)  It has been a privilege to be part of The Daily Capitalist team.  Perhaps the best part of the experience has been first meeting, and then becoming close friends with Jeff, and this relationship continues unchanged.    Please join me at econblogreview starting soon.  

Now to the markets.  While complacency in stocks has become widespread, that is not the same as agreeing with Mish that a major stock market top can be called, as he did last night.  This is especially true if one is measuring the stock market in (nominal) dollars rather than in T-bond- or gold-adjusted dollars.  The amazing collapse in the Japanese yen vs. the USD may, if the relationship stays where it is, lead to further currency depreciation, and over time, businesses are pass-through entities and thus are inflation hedges.  And to the extent that strong businesses can keep their dividends growing in price-deflationary times, they can serve as bond alternatives.  So I don’t spend too much time trying to call tops in the averages.  All I can say is the following:  there are only a small number of stocks that I can identify in Value Line’s universe of 3500 large-cap, mid-cap and small-cap stocks that are worthy of my money, adjusted for risk.  Not fighting the Fed is different than trusting that it will always rescue stockholders.  However, there’s nothing exciting about bonds, cash or commodities right now, either.  

… Continue reading Monday Morning Macro Market Commentary


The Unadulterated Gold Standard Part IV (Intro to Real Bills)

In Part I (, we looked at the period prior to and during the time of what we now call the Classical Gold Standard.  It should be underscored that it worked pretty darned well.  Under this standard, the United States produced more wealth at a faster pace than any other country before, or since.  There were problems; such as laws to fix prices, and regulations to force banks to buy government bonds, but they were not an essential property of the gold standard.

In Part II (, we went through the era of heavy-handed intrusion by governments all over the world, central planning by central banks, and some of the destructive consequences of their actions including the destabilized interest rate, foreign exchange rates, the Triffin dilemma with an irredeemable paper reserve currency, and the inevitable gold default by the US government which occurred in 1971.

In Part III ( we looked at the key features of the gold standard, emphasized the distinction between money (gold) and credit (everything else), and looked at bonds and the banking system including fractional reserves.

In this Part IV, we consider another kind of credit: the Real Bill.  We must acknowledge that this topic is controversial because of the belief that Real Bills are inflationary.  This author proposes that inflation should not be defined as an increase in the money supply per se, but of counterfeit credit (

Let’s start by looking at the function served by the Real Bill: clearing.  This is an age-old problem and a modern one as well.  The early Medieval Fairs were large gatherings of merchants.  Each would come with goods from his local area to trade for goods from other lands.  None carried gold to make the purchases for two reasons.  First, they didn’t have enough gold to buy the local goods plus the gross price of the foreign goods.  Second, carrying gold was risky and dangerous.

The merchants could have attempted some sort of direct barter.  But they would encounter the very problem that led to the discovery and use of money originally.  It is called the “coincidence of wants”.  One merchant may have had furs to sell and wants to buy silks.  But the silk merchant does not want furs.  He wants spices.  The spice merchant may not want silks or furs, and so on.  It would waste everyone’s time to run around and put together a three-way deal, much less a four-way or a 7-way deal so that every merchant got the goods he wanted to bring to his home market.  They developed a system of “chits” to enable them to clear their various and complex trades.  In the end, all merchants had to settle up only the net difference in gold or silver.

Clearing is necessary when merchants deal in large gross amounts with small net differences.

The same challenge occurs in the supply chain of consumer goods.  Each business along the way adds some value to the product and passes it to the next business.  For example the farmer starts the chain by selling wheat.  The miller turns wheat into flour and sells it to the baker.  The baker turns flour into bread and sells it to the consumer.  These businesses run on thin margins, and this is a good thing for everyone (though the baker, the miller and the farmer might disagree!)  The question is: on thin margins, how are they to pay for the gross price of their ingredients before selling their products?

This is an intractable problem and it only gets worse if they attempt to grow their businesses.  Further, it would be impossible to add a new business into the supply chain.  For example, a processor to bleach the flour might be a separate company.  And then it may turn out that when the bakery grows and grows, that it is more efficient to operate a small number of very large regional bakeries and then the distributor enters the supply chain to buy the bread from the baker and sell it to another new entrant in the chain, the grocer.

With each new entrant into each supply chain, the supply of gold coins would have to grow proportionally.  This is not possible.  Fortunately, it is not necessary.   If there were a means of clearing the market, then only the net differences would have to be settled in gold.  If consumers buy 10,000 grams of gold worth of bread from the grocer, the grocer could keep his 5% profit of 500g and pass 9,500g to the distributor.  The distributor would keep his 2% profit of 190g and pay 9310g to the baker.  The baker would keep his 10%, 931g and pay 8379 to the flour bleacher, and so on up the chain.

The obvious challenge is that the payments move in the opposite direction compared to the goods.  Whereas the wheat is eventually turned into bread as it moves from the farmer to the consumer, the gold moves from consumer to farmer.  The Real Bill is the clearing mechanism that makes this possible.

Without the Real Bill, the enterprises in the supply chain would have to borrow using conventional loans and bonds, which is less efficient and more expensive.  Or else the division of labor along with highly optimized specialty businesses would not be possible.

As we discussed in Part III of this series, everyone benefits if it is possible to efficiently exchange wealth in the form of savings for income in the form of interest on a bond.  The saver’s money can work for him his whole life, and he can live on the interest in retirement without fear of outliving his money.  The entrepreneur can start or grow a new business without having to spend his career saving a fraction of his wages, working a job in which he is underemployed.  Everyone else gets the use of the entrepreneur’s new products, and thereby improve their lives.

The same analogy applies to the efficient clearing of the supply chain for every kind of consumer good.  This is especially true as new entrants come in to the chain and make the process more efficient (i.e. less expensive to the consumer).  And it is also necessary for seasonal demand, such as prior to Christmas.  Clearly, there is an increase in the production of all kinds of consumer goods around September or October.  Everything from chocolates to wrapping paper must be produced in larger quantities than at other times of the year.  Without a clearing mechanism, without the Real Bill, the manufacturers would be forced to limit production based on their gold on hand.  There would be shortages.

In practice, the Real Bill is nothing more than the invoice of the wholesaler on the retailer.   In our example, the distributor delivers bread to the grocer and presents him with a bill.  The grocer signs it, agreeing to pay 9500g of gold in 90 days (probably less for bread).  It is an important criterion that Real Bills must be paid in less than 90 days, for a number of reasons.  First, the Real Bill is for consumer goods with known demand.  If the good does not sell through in 90 days, that indicates a problem has occurred or someone has misestimated the demand.  The sooner this is realized, the better.

Second, 90 days represents the change of the season in most countries.  What had been in demand last season may not be in demand in the next.

Third, the Real Bill is a short-term credit instrument that is not debt.  At the Medieval Fair, there was no borrowing and no lending.  The same is true for the Real Bill.  The wholesaler does not lend money to the retailer.  He delivers the goods and accepts that he will be paid when the goods sell through to the consumer.  The retailer agrees to pay for the goods when they sell through, but he does not borrow money.

Finally, if a business transaction requires longer-term credit, then it is appropriate to borrow money via a loan or a bond.  The Real Bill is not suitable for the risk or the duration.  Longer-term credit means that it is not simply being used to clear a transaction, but that there is some element of speculation, storage, and uncertainty.

What has happened in different times and in different countries is that Real Bills circulate.  Spontaneously.  No law is required to force anyone to accept them.  No banking system is necessary to make them liquid.  Real Bills “circulate on their own wings and under their own steam” in the words of Antal Fekete[1].  The Real Bill is the highest quality earning asset, and the highest quality asset aside from gold itself (incidentally, this is why Real Bills don’t work under irredeemable paper—it would be a contradiction for a Real Bill to mature into a lower-quality paper instrument).

Opponents of Real Bills have a dilemma.  They can either oppose them by means of enacting a coercive law, or they can allow them because they will spring into existence and circulate in a free market under the gold standard.  We can hope that the principle of freedom and free markets leads everyone to the latter.

It is not the job of government to outlaw everything that experts in every field believe will lead to calamity.  And those experts should be cautious before prejudging free actors in a free market and presuming that they will hurt themselves if left alone.

In Part V, we will take a deeper look at the Real Bills market, including the arbitrages and the players.


Dr. Keith Weiner is the founder of DiamondWare, a VoIP software company. He has a PhD from Antal Fekete’s New Austrian School of Economics in Munich. He is now CEO of Monetary Metals, a precious metals investment fund. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. He is also president of the Gold Standard Institute USA.

© 2013 by Keith Weiner


BEA Reports 4th Quarter 2012 GDP Contracting At -0.14% Annual Rate

In their first (or “advance”) estimate of the US GDP for the fourth quarter of 2012 the Bureau of Economic Analysis (BEA) found that the economy was shrinking at a -0.14% annualized rate, over 3% worse than the 3.09% growth rate that they recorded for the prior quarter.

The contraction was driven primarily by dramatic reversals to the prior one-quarter spikes in government spending and inventory growth, which sharply improved the final headline number for the 3rd quarter. The reversals of those two line items reduced the headline number by over 4%. This report also showed substantial weakening in exports, although that was also offset somewhat by a softening of imports.

Despite the gloom in the headline number, there were actually some positive signs in the details of the report. The consumer spending portions of the report were actually slightly stronger than reported for the prior quarter, with the modest upturn in consumer activity adding over +0.40% to the headline number. And commercial fixed investment improved enough to provide a 1% boost to the overall economic growth rate.

For this set of revisions the BEA assumed annualized net aggregate inflation of 0.60%. In contrast, during the third quarter the seasonally adjusted CPI-U published by the Bureau of Labor Statistics (BLS) recorded a dis-inflationary -0.75% annualized “inflation” rate. As a reminder: an overstatement of assumed inflation decreases the reported headline number — and in this case the BEA’s relatively high “deflater” (more than 1% above the CPI-U) hurt the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a modest (but positive) 1.21% growth rate.

And the previous ongoing contraction of real per capita disposable income was reported to have come to an end, with the annualized growth rate for per capita disposable income now reported to be a very healthy +6.03%. This decidedly good news was somewhat offset by a substantial surge in savings (up about $140 billion per year, or roughly 1% of GDP) as households remained cautious in their spending habits. It should also be remembered that the fully restored FICA deductions will take back some of that disposable income gain during 1Q-2013 — which may also explain the cautious expenditures.

Among the notable items in the report:

– The contribution of consumer expenditures for goods to the headline number was revised upward to 1.08% (from 0.85% in the previous quarter).

– The contribution made by consumer services increased to 0.44% — up from the 0.26% in the previous period.

– The growth rate contribution from private fixed investments was up sharply to 1.19% (from 0.12% in the prior quarter).

– Inventory draw-downs removed -1.27% from the headline number, down a full 2% from the positive 0.73% contribution during the prior quarter. Since the inventory data in the BEA’s reports are often impacted significantly by not-fully-compensated commodity price changes, it is difficult to tease out of these numbers the true source of the sharp reversal (e.g., uncorrected oil pricing anomalies or genuine changes to supply chain stocks and/or manufacturing schedules).

– A sharp decrease in government spending removed -1.33% from the headline number. This change more than fully reversed the prior quarter’s surge of spending in the same sector. Nearly all of this swing was in defense spending, where all of the surge in 3Q-2012 was fully reversed in 4Q-2012. The third quarter boost to the headline number was simply brought forward from the fourth quarter. State and local government also slipped back into contraction, removing an aggregate -0.08% from the headline annualized growth rate.

– Declining exports removed -0.81% from the headline number (sharply down from the +0.27% positive contribution during the prior quarter). Unlike the prior quarter this export picture finally seems to be reflecting the generally weakening global economy.

– And reduced imports actually added +0.56% to the headline growth rate (up from the 0.11% in the previous quarter). Again, this shows as a positive component in the GDP equation even though weakening demand for imports is often actually a sign of a slowing economy.

– The annualized growth rate of “real final sales of domestic product” was revised downward to 1.13%, some -1.23% below the prior quarter. This is the BEA’s “bottom line” measurement of the economy.

– And perhaps the best news in a long time: real per-capita disposable income was up $482 annually during the quarter (to $33,173 per year). From an economic standpoint however, a significant share of that was absorbed when the personal savings rate soared from 3.6% to 4.7%, pulling $365 of that annual improvement into savings or deleveraging activities instead of consumptive spending.

The Numbers

As a quick reminder, the classic definition of the GDP can be summarized with the following equation:

GDP = private consumption + gross private investment + government spending + (exports – imports)

or, as it is commonly expressed in algebraic shorthand:

GDP = C + I + G + (X-M)

In the new report the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows:

cmi 2-2-13

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table we have split the “C” component into goods and services, split the “I” component into fixed investment and inventories, separated exports from imports, added a line for the BEA’s “Real Finals Sales of Domestic Product” and listed the quarters in columns with the most current to the left:

cmi 2 2-2-13


There are several quarter-to-quarter “take aways” from the report:

– As detailed above, the contraction was driven primarily by dramatic (but not unexpected) reversals to the one-quarter spikes in government spending and inventory growth, which sharply (and conveniently) improved the headline number just prior to the November election. At best both of those one-quarter binges simply brought zero-sum economic activity forward by a quarter, and at worse we will see both of these surges later treated as data anomalies that disappear in future revisions.

– For those of us who follow these numbers closely (and perhaps foolishly try to make some longer-term sense of them), the inexplicable economic surge reported for the third quarter has now at least reversed, and the general weakening pattern previously recorded for 2012 seems to have been confirmed.

– The consumer data was actually a modest bright spot. Per-capita disposable income increased substantially, as did personal consumption expenditures for both goods and services. Similarly commercial fixed investment expenditures improved.

But there are several longer term issues with the data:

– We have mentioned before that the BEA is notoriously poor at recording turning points in the economy in “real time.” The first quarter of 2008 was a classic example, initially being reported in “real time” as yet another quarter of sustained growth before being revised downward several times over some 40 months to become the first quarter of contraction leading into what we now call the “Great Recession.” We fully expect that ultimately the surprising economic upturn seen in the 3Q-2012 data will largely vanish in future revisions.

– And in truth it is hard to look at these new numbers without at least some cynical thoughts about the reported numbers for the prior quarter. We were frankly astonished when the final numbers for the third quarter came in at a 3.09% “full recovery” growth rate, driven largely by unexplained increases in Federal spending, particularly in the Department of Defense (DOD) — the timing of which was completely controlled by an Administration in serious need of positive pre-election economic headlines. The annualized rates of growth for defense spending rose to over 15% in 3Q-2012, only to magically reverse to a -15% annualized contraction rate in 4Q-2012 — after the polls had closed.

To that last point: arguably the DOD was simply moving materiel acquisitions forward in anticipation/avoidance of “fiscal cliff” sequesters, with the economic impact of the contracting binge a mere side effect of bureaucratic hoarding. We should all hope that the context of any such timing shenanigans were more budgetary than political in nature.

 Dr. Rick Davis is president of Consumer Metrics Institute and publishes proprietary consumer metrics data.© 2013 The Consumer Metrics Institute, Inc.


Countdown To The Collapse

On multiple fronts there appears to have been a resumption of hostilities in the global currency wars. A subtle indication of this is the recently released report, Gold, the Renminbi and the Multi-Currency Reserve System, which I believe is highly significant for two reasons: First, it demonstrates that major global actors are now keenly aware and frightened of the possibility of a major breakdown in international monetary relations. Second, it suggests that these same actors are trying to contain the growing demand for gold as an alternative reserve asset and pre-empt an uncontrolled gold remonetisation. These efforts will fail. A collapse of the current, unstable global monetary equilibrium is inevitable. Recent events indicate that the countdown has begun.

Breaking the ceasefire

Curiously, in the second half of 2011 and through most of 2012, notwithstanding the escalating euro-crisis, US ratings downgrade, Japan’s protracted nuclear disaster and sharply divergent global growth rates, there was surprisingly little volatility in foreign exchange markets. EUR/USD traded mostly in the historically narrow range of 1.40-1.25. USD/JPY was in a range of from 76-82. The Chinese renminbi held between 6.4 and 6.2. GBP/USD moved within 1.54-162. The Swiss franc was also steady at around 1.20 versus the euro, although this was the result of an explicit Swiss policy of capping the franc at that level.

In retrospect, it appears that this period was characterised by a general ‘cease-fire’ in the global currency wars ignited by the global financial crisis of 2008.[1] Rather than attempt directly to devalue currencies to stimulate exports at trading partners’ expense, the focus during this period was primarily on measures to support domestic demand.

There has now been a resumption of hostilities. The first shots were fired by the Japanese, where national elections were held in December. The victorious LDP party campaigned on a platform that, if elected, they would increase the powers of the Ministry of Finance to force the Bank of Japan into more aggressive monetary easing. The LDP also has voiced support for either a higher BoJ inflation target or a nominal GDP growth target.

Combined with poor economic data, this had a dramatic impact on the yen, which has subsequently declined by about 10% versus the dollar and 15% versus the euro. This is the weakest the yen has been in broad, trade-weighted terms since 2011.

Now it is understandable that Japan should desire a weaker yen. Japan is no longer running a trade surplus, in part because it is importing a record amount of energy following the decision to scale back the production of nuclear energy. Moreover, demographics are such that the proportion of retired Japanese is growing rapidly. As Japan’s ageing population draws down its savings to fund retirement, this implies that Japan will be saving less and consuming more relative to the rest of the world.

But while Japan has an interest in a weaker yen, many other countries have an interest in weaker currencies too. Much of Asia has been following a classic, mercantilist growth model ever since the Asian credit/currency crises of 1997-98, seeking to export more than they import. They are still inclined to follow this model, as it has succeeded in the past.

Of course it is impossible for all countries to be net exporters. The US is by far the world’s biggest importer. But given structural economic problems and associated high unemployment, US policymakers also have reasons to desire a weaker currency to stimulate exports and jobs. Much the same is true of the UK, arguably the leading candidate for the next big devaluation. Then there is the euro-area, which is suffering under a huge debt burden and desires to stimulate exports abroad to offset ‘austerity’ at home.

The BRICs (Brazil, Russia, India, China, South Africa) and other developing economies are well aware of mature economies’ problems and do not want to be the ones that pay for what they perceive, quite justifiably, as economic hypocrisy. Just who has been living beyond their means? Who has been borrowing and consuming, rather than saving?

It does, of course, take two to tango. The BRICs have been financing mature economies’ largesse—including financial bailouts—with their surpluses. But as the BRICs have stated on multiple occasions, they would far prefer for the developed economies to take their necessary economic medicine at the local, structural, supply-side level rather than to try and pass the pain of adjustment off on them.

A recent sign of such concern includes some rather provocative statements by Russian central banker Alexyi Ulyukayev. Russia is currently the Chair of the G-20 countries who seek to cooperate on global economic matters. Back in 2009 the G-20 agreed not to engage in competitive currency devaluations. Well they’re not exactly cooperating at present according to Mr Ulyukayev, who has specifically accused Japan of breaking the cease-fire: “Japan is weakening the yen and other countries may follow,” he said recently. South Korea, one of Japan’s closest competitors in several major industries, has warned of possible retaliation for the weaker yen and both South Korea’s and Taiwan’s currencies weakened sharply this week. Even Norway, with a healthy economy at present, has recently indicated that it is concerned by the strength of the krone.[2]

The sad fact of the matter is, currency wars (i.e., competitive devaluations) are ‘zero-sum’ at best. At worst, they severely distort global price signals, thereby misallocating resources, and eventually morph into trade wars, in which economic protectionism destroys the international division of labour and capital, making economic regression all but certain. The 1920s/1930s are a classic case in point but there were similar such episodes in the 18th-19th centuries, the era of mercantilist economic policy debunked by, among others, Adam Smith and David Ricardo. (While the classicists were right about mercantilism, it should be noted that classical economic theory is deeply flawed in key respects.)

Given the destructive power of currency and trade wars, it should come as no surprise that policymakers in the developed economies are increasingly desperate to find a way to de-escalate and contain the conflict. But is this possible?

Is the OMFIF Report an Olive Branch to the BRICs?

Perhaps the best indication of growing policymaker desperation is a recent report prepared by the Official Monetary and Financial Institutions Forum (OMFIF), on behalf of the World Gold Council. In the report, the OMFIF argues that the international monetary system is approaching a transformation from a mostly ‘unipolar’ system centred around the dollar, to a ‘multipolar’ one of multiple reserve currencies, including the Chinese renminbi, which at present comprises only a tiny fraction of global FX reserves.

Most important, the report recognises that monetary regime change is fraught with uncertainty. History is clear on this point. Also clear is that, historically, periods of global monetary uncertainty have been associated with central bank (and private) accumulation of gold reserves and, by association, a rising price of gold.

According to the OMFIF, this is the explanation for why central banks are accumulating gold today. It boils down to increasing uncertainty or, if you prefer, decreasing trust between countries, a natural consequence of the currency wars. OMFIF assumes that, in the coming years, uncertainty and associated gold accumulation will continue to increase, placing further upward pressure on the gold price.

It is difficult to argue with any of that. Indeed, in my book, The Golden Revolution (available here), I illustrate how the 2008 global financial crisis critically destabilised the international monetary system. In particular, the dollar is losing its dominant reserve currency status, yet there is no other existing fiat currency that can replace it. The euro has issues, the yen has issues and the renminbi has issues, although it is the ‘rising star’ in this group.

The OMFIF report then makes a recommendation that the best way to reduce the unavoidable monetary uncertainty ahead is to acknowledge that there should be a more formal role for gold to play in the international monetary order, in particular, that it should be included in the Special Drawing Rights (SDR) basket as calculated by the International Monetary Fund (IMF). The SDR is a global reference point for currency valuation and IMF member countries’ capital shares are denominated in SDRs.

This is a formalisation of what was first proposed by World Bank president Robert Zoellick back in 2010. In a Financial Times article that I believe will be noted by monetary historians in future, he wrote that gold was already being treated as an “alternative monetary asset,” and that the international monetary system “should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”[3]

The OMFIF report also suggests expanding the SDR basket to include all the ‘r’ currencies, not only the renminbi but also the Indian rupee, the Russian rouble, the Brazilian real and the South African rand. This would be a formal recognision of the rising economic power of all the BRICs, not just China, and pave the way for their currencies’ use as reserves.

 A Bureaucratic Pipe Dream

Bureaucrats are naturally drawn to bureaucratic ‘solutions’ to problems. But cooperative solutions become unworkable when cooperation breaks down, as is increasingly the case in global monetary relations. In this context, the OMFIF report, while it sounds nice on paper, is a futile attempt to hold an unstable equilibrium together. The fact is the BRICs no longer trust the mature economies in monetary affairs.[4] Lacking such trust, the only viable way forward is to ‘de-nationalise’ money for international trade, thereby disarming those who would opportunistically engage in currency wars.

Gold is the only such non-national money, a currency that cannot be printed or otherwise manipulated by one country at the expense of another. Its supply is strictly limited by that which can be got out of the ground at economic cost within a given period of time. Thus gold stands in sharp contrast to all unbacked fiat currencies, the weapons of the currency wars. The OMFIF report dances around this fundamental difference between the two but ultimately stumbles. Yes, the OMFIF report recognises that:

[T]he previously dominant western economies have attempted to dismantle the yellow metal’s monetary role, and – for a variety of reasons – this has comprehensively failed. Gold thus stands ready to fill the vacuum created by the evident failings of the dollar and the euro, and the not-yet requited ambitions of the renminbi.

 But notwithstanding the recognised failings of fiat currencies and persistence of gold, the report then moves on to recommend that gold and the major fiat currencies be treated as equals in the future monetary order, specifically, by:

… extending the SDR to include the R-currencies – the renminbi, rupee, real, rand and rouble – with the addition of gold. This would be a form of indexation to add to the SDR’s attractiveness. Gold would not need to be paid out, but its dollar or renminbi or rouble equivalent would be if the SDR had a gold content. By moving counter-cyclically to the dollar, gold could improve the stabilising properties of the SDR. Particularly if the threats to the dollar and the euro worsen, a large SDR issue improved by some gold content and the R-currencies may be urgently required. (Emphasis added.)[5]

From ‘dance’ to ‘stumble’ may be the wrong metaphor here, unless the stumble is meant to serve as a distraction for some slight-of-hand on the stage. Did you catch the subtle trick of logic in the above?

Allow me to explain. The “failings of the dollar and the euro” vis-à-vis gold are indeed “evident”: This is why central banks everywhere are in a scramble to acquire more gold and, in some cases (e.g., Germany, Venezuela, Turkey) to strengthen their custody of it through repatriation and changes in regulations. The dollar and the euro are no longer trusted as stores of value, at least not to anywhere near the degree that they were in years past.

But if your agenda is to try and contain the scramble for gold and prevent it from further displacing fiat currencies in reserves, how convenient if you implemented an international monetary system that would limit, through official, global arrangements, the degree to which gold could compete as an international money while still allowing for whatever amount of fiat inflation policymakers believe is required to devalue their excessive debts.

If gold “need not be paid out” then, as the price of gold rises, you just print more paper currencies as required to make up the difference! In other words, gold would be unable to serve as a brake on a general global monetary inflation. And “if the threats to the dollar and the euro indeed worsen”, then yes, just print more of those SDRs—a basket of dollars, euros, renminbi, etc—and who cares if the price of gold rises in tandem? You’re still inflating!

In context of the changed global economic landscape, the OMFIF report thus reads as a desperate attempt to sue for a compromise peace in the currency wars, to find a basis for agreement between the US, euro-area, Japan, and China and the other BRICs, to inflate in coordinated fashion through SDR issuance, while at the same time keeping the golden genie in the bottle where, according to central-planning inflationists, it belongs.

Of course, just because an olive branch is extended does not mean it will be accepted. Is it really in China’s or the BRICs’ interest to participate in such an arrangement? Does China really want the ‘failing’ dollar and euro to keep depreciating? Or might China want to get paid for its exports in hard currency for a change?

Again, it all comes down to trust. Currency basket arrangements such as the euro or, as the OMFIF proposes, a global SDR with a token role for gold, only hold together as long as all the major players perceive that they serve their interest. The moment a player perceives otherwise, the system, lacking sound money foundations, falls apart. If the OMFIF report is indicative of the next step in the evolution of the global monetary system, then the past and current failures of the dollar and euro are destined to become the future failures of the SDR.

China must know this. I suspect the other BRICs do too. And numerous small countries, hardly irrelevant in the matter, are watching intently to see where this goes, while accumulating gold in the meantime, unsure of the outcome.

Why A Return to Gold is the Inevitable Result of the Currency Wars

If the developments discussed above seem unprecedented, think again. We have been here before, namely, in the mid- to late1960s, when the US and other Bretton Woods participating countries were struggling to maintain the gold price at $35/oz. There was lots of monetary inflation in the US and elsewhere by the mid-1960s and it was assumed by many that this would lead to price inflation in time.

European central banks, most of whom had accumulated substantial dollar reserves, were beginning to swap these for gold. Private investors sought to protect themselves with gold purchases. By 1967, while the official price for gold remained $35/oz, there was steady upward pressure on the market price in London. ‘Two-tier’ markets create arbitrage opportunities and, as more speculators got in on the game, the upward pressure on the gold price intensified.

In 1967, France, already having indicated from early 1965 that it was dissatisfied with the dollar-centric Bretton Woods system, abruptly withdrew from the pool. While this was a clear message to all that the official $35/oz gold price was unsustainable, encouraging yet more speculation, at the same time it meant that the remaining London gold pool participants had to cover for France’s significant absence by making even more gold available to the growing number of buyers.

This unsustainable arrangement lasted less than a year, with the pool collapsing entirely in 1968. The situation was now critical as the monetary system was without solid foundation. The upward pressure on the price of gold intensified yet again. The Federal Reserve was now frightened that a run on the dollar was imminent, with the pound sterling already under renewed attack. At one Fed meeting that year it was claimed that, “the international financial system was moving toward a crisis more dangerous than any since 1931.”[6]

By 1971 the day of reckoning had arrived. The US had continued to sell gold into the market to suppress the price and to convert foreign reserves on demand into gold since 1968 but when even the UK was asking for a substantial portion of its gold back in summer 1971, it was clear that this effort was futile. Either the US would run out of gold or it would allow the gold price to rise and the dollar to ‘float’, that is, to devalue substantially.

President Nixon opted for the latter course, as he announced to the world on 15 August that year. The dollar was devalued and gold convertibility suspended indefinitely as a ‘temporary’ measure. But why did the world continue to use dollars as reserves when these were unbacked by gold? Because the US was still by far the largest economy in the world, the biggest importer and exporter. And while US finances were deteriorating at the time, they were in far, far better shape than they are today, with trade and budget deficits tiny as a percentage of GDP. Today, the picture is the complete opposite. US finances are in a far worse state than those of the BRICs.

The US and the other developed economies are thus no longer in a position to dictate terms in international monetary matters. The BRICs have made the point clear. They are going to begin to demand hard currency in exchange for their exports. A plan to this effect could be announced as early as their annual spring summit, held this year in Durban, South Africa, on March 26-27.

Keep Calm, Buy Gold, and Keep Out of Bonds

If the recommendation to accumulate gold in advance of its remonetisation for use an international money seems obvious, perhaps less obvious is to reduce holdings of bonds. Why should a remonetisation of gold lead to higher bond yields/falling bond prices? After all, the economic dislocations associated with international monetary regime change could well tip the world into yet another recession as the associated economic rebalancing takes place.

While we have come to associate rising yields with economic recoveries and falling yields with recessions, in fact, on a sound money foundation this relationship does not hold. Back when the world was on the gold standard, for example, yields sometimes rose in recessions and declined in recoveries. This is because the central bank was unable to manipulate the bond market with monetary policy.

Take the euro-area today as a contemporary case in point. As Greece, Portugal and Spain have tipped into deep recessions, their bond yields have risen as they lack national central banks which can buy their bonds with printed money. And investors have a choice whether to hold these bonds, or to hold the bonds of sounder euro-area governments, such as Germany, hence the wide spreads that investors demand in compensation.

A return to gold-backed international money will have much the same effect but at the global level. US Treasuries and other bonds will need to compete more directly with gold itself as a store of value or as official reserves. Interest rates will therefore need to rise to compensate investors for the very real possibility that the supply of bonds will just keep on growing to finance endless government deficits while the supply of gold remains essentially fixed.

Now I am under no illusions here. If the US, euro-area, UK and Japan face sharply higher borrowing costs in future, they are going to have debt crises similar to those faced by Greece, Portugal and Spain today. Indeed, with no one willing or able to bail them out, the associated crises may be more severe. The US and other indebted countries may resort to capital controls and even to selective default on their debt, such as that held by foreigners abroad.

If so, this will be another major escalation in the currency wars, one that will begin to resemble the 1920s and 1930s in its intensity. Those were sad decades, to be sure, in which much of the global middle class saw its savings wiped out at least once and, in some cases, twice. They didn’t care whether this occurred via inflation/devaluation or via deflation/default. Investors today shouldn’t care either. They should accumulate gold and certain other real assets in limited supply. These are the ultimate insurance policy against inflation, deflation, devaluation, currency and trade wars, financial crises, monetary collapse … you name it. The time to do so is running out.

 [1] In the Amphora Report I have long followed the ‘currency wars’. My first take on the subject, BEGUN, THE CURRENCY WARS HAVE, dates from September 2010. The link is here.

[2] These various statements were reported in this Bloomberg News article that can be found here.

[3] Robert Zoellick, “The G20 Must Look Beyond Bretton Woods II,” Financial Times, 7 November 2010.

[4] Please see THE BUCK STOPS HERE: A BRIC WALL, Amphora Report vol. 3 (April 2012). The link is here.


[6] Amateur historians take note: Federal Reserve Open Market (FOMC) minutes may be tedious for the most part but occasionally there are real gems to unearth, as is the case here. However, the transcripts are only released with a five-year lag. It will be interesting to see what was discussed—and not redacted—from transcripts from 2008 and 2009, when the Fed was involved in bailing out the bulk of the US financial system.

John Butler is co-founder of Atom Capital, an FSA-regulated, London-based fund manager. In addition to managing the Amphora Commodities Alpha Fund, Atom Capital oversees a diversified, multistrategy investment platform and provides associated wealth management and consulting services for professional investors in the UK, Europe, and internationally.

John is also the author of The Golden Revolution. You may find The Golden Revolution on Amazon and on Facebook.


Nobody Knows

“Economists, like royal children, are not punished for their errors.”

James Buchan.

We lost another client last week. This makes a grand total of two clients who have left us over the past year, not because we lost them money, but because apparently we didn’t make them enough. Since the rate at which we are attracting brand new clients is comfortably outpacing the rate at which we lose relatively new clients, this shouldn’t be an immediate cause for concern either for us or for our clients, but it is a little galling nonetheless. We take some pains to try and communicate our philosophy and process on a regular basis, but such communications for some clients are evidently insufficiently compelling when set against a bull market in common stocks and other risk assets. The market’s going up! And what have you guys done for me lately?

There are only a handful of truly great books on investing out there, and the late Peter L. Bernstein’s Against The Gods is one of them. Against The Gods is, effectively, a biography of risk. We first chanced upon it, if memory serves, in late 1999, when the dotcom insanity was still in full swing. Our then employer, Merrill Lynch Private Banking, had just handed every employee a copy of Glassman and Hassett’s Dow 36,000. Guess which book is better. But time moves on. We also moved on, and Merrill Lynch blew itself up and merged via a shotgun wedding with Bank of America. Sic transit gloria mundi. (This isn’t a rant against Merrill Lynch in isolation. They may not have been a good company, but they were in good company. Even Goldman Sachs blew itself up, and unlike Lehman Brothers was only rescued by the Federal Reserve rather mysteriously allowing it to convert into a bank – which it wasn’t and isn’t – and suckle directly from the Fed teat. Think about that emergency rescue the next time you see reference to “talent” at Goldman Sachs. Talent for sharp-elbowed self-preservation, perhaps. But we digress.)

 Against The Gods is worth reading in its entirety, but as anyone who has been subject to our investment pitch will testify, we are fond of highlighting one specific quotation therein. Daniel Bernoulli (1700-1782) was a Swiss mathematician and true “Renaissance man” who has a good claim to be the world’s first behavioural economist. Bernoulli once said that if you are managing money for wealthy people,

“The practical utility of any gain in portfolio value inversely relates to the size of the portfolio.”

In plainer English, if you are managing money for wealthy people, just don’t lose it. Wealthy people, like everybody else, like to make a decent return, but they don’t need to take outlandish risks since they’re already wealthy. So the requirement to make a “decent” return is mitigated by the likely regret at eroding a meaningful capital base. In other words, capital preservation – albeit in real terms to have any genuine value – trumps aggressive capital growth.

This may hold for all investors, but we think it has almost universal application to the wealthy. Why jeopardise the entire pot if the pot is already meaningfully large? This provokes another question, at least in our mind, namely what do we mean by risk? Unlike the regulator, which defines risk as whatever it is worried about on any given day, or as what IFAs are selling most successfully, or as price volatility, we use a very specific primary definition of risk: the risk of permanent loss of capital.

So our investment practice is quite deliberately not focused on capital growth in isolation, but on capital preservation and growth thereafter, along the same basis that the long run is nothing more than a sequence of short runs, and if we can manage to preserve clients’ capital tolerably well in the short runs, that aggregation of short run capital preservation and modest (occasionally high) growth will end up outperforming a sequence of aggressive capital gains with all the attendant substantial drawdowns.

How we divide the portfolio pie is probably atypical relative to most of our peers (we certainly hope so). We consciously try not to make overly subjective asset allocation calls. This is because, unlike most of our peers, we recognise that we cannot predict the future. What we do know is that a portfolio with meaningful allocations to four genuinely discrete asset types has a good chance of delivering superior risk-adjusted returns over a portfolio that is essentially split between stocks and bonds. Analyst and strategist Dylan Grice wrote about a very similar construct, the ‘cockroach’ portfolio, just before Christmas.

The ‘cockroach’ portfolio is named after one of nature’s survivors. The cockroach has survived three of the world’s five mass extinctions and is virtually indestructible. How, then, would a cockroach go about constructing a portfolio with the same robustness? Since the cockroach also cannot predict the future, it simply tries to hedge against as many risks as possible. Dylan’s cockroach therefore ends up with a very simple but remarkably robust asset allocation, consisting of:

  • 25% cash
  • 25% government bonds
  • 25% equities
  • 25% gold.

Cash is a hedge against overconfidence on the part of the cockroach-as-asset-manager (this category probably contains legions of real world examples). Government bonds are a hedge against deflation (admittedly assuming a “normal” bond market environment, which sadly we objectively do not have). Equities are a claim against the presumed real growth of the economy. Gold is a hedge against people like Ben Bernanke.

And the ‘cockroach’ portfolio is amazingly robust. Since 1971, the cockroach’s portfolio would have generated annual real returns of +5%. That is pretty saucy set against a portfolio of 100% equities (+5.5%) and 100% bonds (+4%). But that is only the start of it.

How would the cockroach’s portfolio have fared during moments of massive, actual crisis? Again, the cockroach fares very well during market crashes with his naïve multi-asset strategy:

Price 1 2-2-13

 During the 1970s, the cockroach had a far smoother ride than 100% equity or bond investors, as the chart above shows. Good job we’re not in an environment like the 70s, with banking failures, a debt crisis, stagflation and widespread political drift…with a fraction of the risks incurred by his racier peers.

 Price 2 2-2-13

 Please note, you do not need to be a cockroach to benefit from the ‘cockroach’ portfolio. Our own take on Dylan’s cockroach is a little different, but the similarities outweigh the differences. The percentages vary, but we remain committed to four discrete asset classes too:

  • Objectively high quality credit
  • Attractively valued equities
  • Uncorrelated funds, specifically systematic trend-followers
  • Real assets, notably the monetary metals, gold and silver.

How has our own version of the ‘cockroach’ portfolio fared during the vicissitudes of the last four years ?

Price 3 2-2-13 This is admittedly within a fund, but unlike most funds, the fund in question is designed to accommodate clients’ life savings. Compare the drawdowns, for example. Evidently other funds out there will have generated superior returns – but at what risk ?

We think that this four-factor model has huge advantages over the traditional, more subjective model that most wealth managers use, which is heavily dependent upon entirely subjective market timing and also heavily dependent on a largely binary decision between equity (“good”, now) and bonds (“bad”). The four-factor model is a great protection against asset manager hubris and overconfidence.

These are dark times for many asset managers. We doubt if we’re alone in struggling to retain some clients in the face of yet another ‘risk on’ spasm in the financial markets. Investors have very short memories. The same investors who wanted out of stocks in 2008 because the world seemed to be hurtling towards an end are now the ones wanting back in when barely any of the problems facing the world in 2008 have been resolved, and when most have deteriorated markedly, and the ones that have been seemingly resolved have only reached that stage due to extraordinary inflationary monetary stimulus ($6 trillion or so in base money creation just waiting on bank balance sheets to morph into real price inflation?). Admittedly, there is no real correlation between stock market returns and economic growth, so the fact that the western economies have now gone conclusively ex-growth is not an automatic reason to shun stocks. But the fact that global credit market debt stands, according to Kyle Bass, at some 340% or so of global GDP – a level never reached before in world history – has to be cause for concern. Our thesis remains that the western economies now require constant economic growth purely to service that mountain of debts. The growth won’t happen, so the debt service now won’t happen either. Someone is going to get shafted. We just don’t want it to be us.

Perhaps our recently departed clients know something we don’t. They may well thrive out of their newly raised allocations (one presumes) to equity risk. Nobody knows. But we’re still content to play our long game of capital preservation – come what may – with a paranoiac’s attitude to risk. And those two words – Nobody knows – should be taped to everybody’s computer screen or TV screen or mobile phone screen for the duration of this long emergency. We don’t know either what happens, in debt markets or currency markets or stock markets or the economy, so we’re resigned to making our own modest subjective allocations to each of those four core asset classes, and within them then only working with either (subjectively) the best managers we can find, or the most attractively valued instruments we can find. Uncertainty’s a bitch. But certainty, in this financial environment, is even more absurd.

Tim Price is Director of Investment, PFP Wealth Mangement, London. 


“Best Stock Market Indicator” Ever? A Dissenting View

As long as I’m in a bah humbug mood, I thought I’d turn my cold eye on a fellow blogger, rather than on the MSM.  

There is a fellow who posts on Doug Short’s site named John Carlucci.  He is the author of a Kindle book titled Ashes To Riches:  How To Profit Spectacularly During The Economic Collapse of 2012 to 2022.

Well, he’s entitled to his nuanced views of the future.  As regular readers know, I am much more riven with uncertainty.  As the old Traffic song goes, who knows what tomorrow may bring?

In any case, Mr. Carlucci has the similarly nuanced technical tool titled Best Stock Market Indicator Ever.  The latest update reports (LINK): 

Best Stock Market Indicator Ever:
Rises to 88% and Secondaries Confirm “Tradable”

… Continue reading “Best Stock Market Indicator” Ever? A Dissenting View


Impact Of Germany’s Gold Repatriation

Germany has announced that it plans to take home all 374 tons of its gold stored at the Banque de France, and 300 out of 1,500 tons held at the Federal Reserve Bank of New York.

Bill Gross of PIMCO tweeted:

“Report claims Germany moving gold from NY/Paris back to Frankfurt. Central banks don’t trust each other?”

In this article, I consider some popular reactions to the news and then present my own analysis and some ideas about what I think could happen.

Declining trust is a global megatrend.  It is impossible to ignore.  I proposed trying to measure it as one indicator for financial Armageddon in my dissertation.

I am sure distrust for the US government, or more likely, responding to the German voter’s distrust is among their concerns.  But, I doubt that this is the primary motivation.  The Bundesbank is not acting as if they are in any hurry, planning to have the gold moved over a period of 8 years (yes, I know, it all “fits”, the delay is because the Fed hasn’t got the gold, etc.)  A lot can and will happen in 8 years (including the end of the current monetary system).  The distrust theory has to answer: why would Germany leave 1,200 tons of gold in New York and 447 tons in London?

As a side note, if distrust grows to the point where a major government cannot trust another major government with $2.4B worth of gold, then there are some negative consequences.  The gold market will not be the greatest of them, as the world experiences a collapse in trade, borders are closed to the movement of (peaceful) people, goods, and money, and the world in general moves towards world war and the possibility of a new dark age.

Some have declared that German’s gold withdrawal is a “game changer”.  The game will change sooner or later, and gold will be used again as money.  In this sense, German’s move is not a game-changer at all.  They are just moving metal from one central bank vault to another.  They are doing nothing to change the paper game into a gold game.  They are not helping gold to circulate.

In any case, I don’t think this is what most pundits mean when they say, “game changer”.  I think they mean the price will rise sharply.  This follows from the belief that the Federal Reserve has already sold this gold, perhaps multiple times over.  If this were true, then it would be obvious why Germany would want its gold back, while it is still possible to get it back.  This would force the Fed to buy it back.  This would cause the price to rise.

The data does not fit this theory.

At the time I prepared the chart for my appearance on Capital Account, there were less than 400,000 gold futures contracts open.  Even if there were a conspiracy to manipulate the market by naked shorting futures, a big fraction of them would certainly be legitimate.  There aren’t enough contracts to support the theory that Germany’s 1500 tons of gold, which would be about 480,000 COMEX contracts, was sold in the futures market (let alone that it was sold multiple times over!)

Alternatively, the Fed could have sold the gold in the physical market (albeit only once).  This gives us an easily testable hypothesis.  If the Fed had sold Germany’s gold and now it must buy about 1.2M ounces a year, this should show up in the gold basis.  The Fed would become the marginal buyer of physical gold.  This should cause the basis to fall sharply, or perhaps even go negative.

This is a graph of the gold basis (for the December contract).  There has been a gently falling trend since the start of the data series in July, from about 0.7% annualized to around 0.55%.

 Weiner 2-2-13

It is hard to guess how much impact would occur as a result of a new 1.2M ounces of annual demand at the margin.  This would be about 5000 ounces a day, every business day relentlessly for 8 years (assuming it is disbursed evenly, which is doubtful).  I think there would be an impact in the basis.  We shall have to wait, and watch the basis to see.

I think the Fed does have the gold, or at least title to gold leases.  If the gold is out on lease, then the Fed would have to wait for the leases to mature.  The leased gold might even be in the Fed’s vaults.  It has to be stored somewhere, and to a financial institution the Fed’s vault is as good as anywhere.

I plan to write more about gold lending and leasing.  In short, no one today borrows gold to directly finance anything.  The world runs on dollars.  A gold lease today is basically a swap.  One party provides gold.  The other party provides dollars.  And at the end, the gold and dollars are returned to their original owners; plus one party has to pay dollars to the other.  Typically the party who owns the gold pays net interest (it’s like a dollar loan to the gold owner, secured by the latter’s gold as collateral).

Of course the Fed has no need to borrow dollars, so if it leases gold it must be for another reason.  I can think of two.  First, the Fed might want to remove liquidity from the banking system (though not in the post-2008 world!).  Second, the Fed might accommodate the case of a bank with a profitable gold arbitrage opportunity.  There are several potential candidates, but one that comes to mind is temporary gold backwardation.  In this case, the Fed leases gold to a bank.  The bank sells the gold in the spot market, and simultaneously buys a future.  The bank ends with the same gold bar and pockets a spread.  It returns the gold to the Fed and even gets a little interest on the dollars it lent against the Fed’s gold collateral.

While this might have been occurring intermittently since December 2008, there is not much of a backwardation today in the February contract (around 0.1% annualized).  And in any case, a lease for this purpose would be a short-term lease as there has not been any backwardation in long-dated futures, only the expiring month (less than 60 days).

Moving 300 tons of gold from New York to Frankfurt will be a non-event in the gold market in itself.  However, there could be a large and unpredictable change if the gold-buying public sees this as a reason to increase their distrust of the system and runs to their nearest coin shop to load up.

Let’s not forget that the Bundesbank is also a central bank, invested in the regime of irredeemable currency.  Like the Fed, it is built on faith in Keynesianism, along with some Monetarism and Mercantilism.  Is there any reason to assume that they would not do the same things that the Fed is doing, when they feel the same pressures?  The gold is going out of the frying pan and … into another frying pan.

What if the Fed is currently leasing out all 300 tons and the Bundesbank plans not to lease?  This would remove some gold currently circulating in the market.  Will this cause the price to rise?  Certainly.

More importantly, it is a move away from the gold standard, away from the use of gold as money.  It is a step towards the end.

I suspect the reason for repatriating the gold has more to do with a shift in German politics than any sudden concern about the intentions of the Fed, any sudden questions about the faith and credit of a central bank, or any desire to re-monetize gold in Germany.  Readers from Germany are encouraged to write me if they disagree.


Barron’s Replaces Henry Blodget In Pumping AMZN; Have a Taste Of the Bubbly?

Tiernan Ray, who writes the Technology Trader column for Barron’s, has a hot tip for you:  the price of a share of AMZN is going to keep moving up.  Get ‘em while you can.  In 1999 it was Henry Blodget leading the cheerleading for AMZN shortly before it both burst higher and then collapsed; now it’s the much more respected Barron’s.


Barron’s used to cast either a neutral or skeptical eye on the Street.  It had a sort of “Where are the customers’ yachts?” point of view.  No longer.

Here is the latest offending evidence (LINK):

Still in Love With

Missing expectations? No worries. Just keep the sales coming for the Net’s biggest merchant.

I’m going to go out on a limb here and assert that many value-conscious Barron’s readers are baffled and even dismayed by the price action in (ticker: AMZN). Shares of the e-commerce giant rise when the company makes money, and sometimes rise by even more when it doesn’t.

That illogical—some say unfair—situation could persist for a while, and the shares are likely to keep climbing.  (Emphasis added)

Last Tuesday Amazon reported fourth-quarter results, and announced it missed revenue and profit estimates for the period. Its shares rose 10% in after-hours trading. They went on to notch a more modest gain of 5% Wednesday, but fell 4% to $265 on the week.

Still, Amazon shares are up 48% in the past 12 months, even as reported results swung from a profit of $1.37 a share in 2011 to a net loss of nine cents in 2012.

Just to make sure the reader did not miss the point, Mr. Ray follows the standard format of first telling the listener s what he’s going to tell them (the title and sub-title of the article), then telling them his message, then telling them what he just told them.  Thus, this is the ending of the article:

EVEN IF THE TOP LINE MISSES, the Street stands astonished at just how much stuff the company is moving between buyers and sellers. That likely won’t please readers who take a more conventional view of sales and profits, not to mention valuation, and a P/E of 70 doesn’t sit right with me, either.

But it is what most of the Street cares about. As long as Amazon increases the volume of goods whose trading it facilitates, and lures more sellers and buyers, its stock is apt to rise. 

OK, now you know that Barron’s has given its imprimatur that this unknown company, whose products no one reading the article has ever purchased, is a momentum stock with a story that is insufficiently pumped.  

… Continue reading Barron’s Replaces Henry Blodget In Pumping AMZN; Have a Taste Of the Bubbly?


Markit PMIs Show Changing Global Economic Trends; With Comments On Gold’s Possible Rebound

The first part of today’s post will be brief but will link you to a great deal of information.

Markit has been out today and yesterday with a vast amount of monthly economic updates.  The U.S. data is not out as of now.  Here is a LINK which gets you to the country and regional data.

Please look at the data for the BRIC countries:  Brazil, Russia, India, and China.  All PMIs are above 50.  Also, consider Taiwan and Turkey.  Good month, guys (as they say on earnings calls re the quarter).

Now look at the ongoing disaster in much of Europe.  Greece keeps declining, and we must remember that each decline sets a new lower bar.  Then there is the second disaster of Spain.  France and Italy look miserable as well.  Regardless of how the U.S. data comes in, its economic data is suspect given an enlarging quantity of QE and much larger fiscal deficits than my liberal friends and relatives ever accepted from Ronald Reagan or George W. Bush.

The world looks to really be changing.  

How long will the USD and its buddy the euro remain unchallenged as the major global currencies, as demographic and economic trends bring greater power to “emerging” countries?

And as the second part of this post, I want to discuss gold and its more volatile relative silver.

… Continue reading Markit PMIs Show Changing Global Economic Trends; With Comments On Gold’s Possible Rebound


Student Loans Replacing Mortgages As The Credit Cycle Peaks

Courtesy of a link on Jesse’s blog, I’d like to link you to a blog post on Scientific American, of all places, that puts the Great Financial Crisis in a mathematical and human perspective.  While I would have chosen a title that reflects that ultimately the collapse came from greed more than an equation, here is a LINK to “The Real, and Simple, Equation That Killed Wall Street”.

It puts, among other points, the importance of low volatility to booms fueled by cheap central bank credit in a helpful context.

It’s brief.  Please consider reading it and then coming back here.

In one sense, nothing much has changed, just the names and the asset classes, between then and now.  Headline asset prices keep ramping higher.  No one knows where the top is.  All you know is that cash is trash.

NINJA home loans turned into NINJA student loans, as last night’s updated WSJ article made clear (LINK):

Repaying debt has become more difficult in part because loan balances have grown and the interest rates on federal loans have increased as a result of a shift from variable-rate to fixed-rate loans. Most federal loans now carry interest rates of 6.8% or 7.9%, versus a rate of 2.875% on federal Stafford loans in May 2005, said Mark Kantrowitz, publisher of the financial-aid website…

Stafford loans, which account for more than three-fourths of federal student loans, impose no credit standards and are capped at a total of $57,500 for undergraduates. Ruben Medrano, a 52-year-old undergraduate studying business management at Texas A&M University-San Antonio, said taking out about $26,000 in federal student loans was much easier than taking out an auto loan or a mortgage. “The last vehicle we purchased, we spent four to five hours in the dealership,” Mr. Medrano said. “The student-loan process took me 30 to 45 minutes and I never had to leave my home.”

… Continue reading Student Loans Replacing Mortgages As The Credit Cycle Peaks