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Thursday, October 7, 2010

If you live long enough you will see everything…

As a person who came of age in the America of the 70’s and 80’s I find it absolutely incredible the things that have come to pass, although nothing shocks me anymore.  As a kid and young man I knew capitalism worked and I had living proof across the pond in the former Soviet Union that socialism was not the optimal choice; even though our system was far from perfect.  The Soviet system of socialism with its multiple layers of bureaucracies, questionable monetary regime, closed markets and strict command and control was not only inefficient and unworkable, but also the butt of all economic jokes. Flash forward to today and the United States the country that produced President Coolidge whose famous quote “the business of America is business”, which sums up what our proud nation used to be, is being chastised about capitalism by Former Russian President Putin…I kid you not!

In a Pravda article titled, “Putin to the US Treasury - Russia gives USA a lesson in economic management”, he makes the case that the US is on the path to an economic night mare, while Russia is streamlining its government and doing well. He actually starts out by comparing the Sovereign debt sales of the two countries making the point that Russia is able to sell debt in the free market while the US has to monetize its debt. Additionally, he points out that Russia is deregulating while the US is firmly moving toward regulation and micromanagement. If you told the average American in the 70’s or 80’s that Russia would be on the path to become more like the US and the US would be headed the other way they would have tried to commit you, but here we are. Now granted this article is only circulating on Pravda as far as I can tell, but it does make interesting points.

To follow on the heels of the Putin article comes a missive from James Grant of the Interest Rate Observer titled, "We’re on Road to Socialization of Credit”. His basic point is that we have been socializing credit for decades and the next time there is a financial crisis the taxpayers will still be on the hook. According to Grant and I agree the new Financial Regulation Bill is all for show throwing crumbs to the individuals that it is supposed to protect all the while the bill does little to prevent another taxpayer funded bailout. “The next time there’s a crisis, taxpayers will ride to the rescue, subsidizing these big dumb banks,” he said. As a result, these same taxpayers will see their interest income dwindle, as the Federal Reserve again drives interest rates to zero, Grant says.

Next up is an item from Gallup that shows US unemployment actually is at 10.1% if you remove the government chicanery of seasonal adjustment. The article is entitled “Gallup Finds U.S. Unemployment at 10.1% in September goes in to further detail breaking down the numbers by demographics which is interesting. Now mind you dear reader that this news story is from Gallup which is a respected polling firm even though they tend to side with the Democrats, for this reason I find it significant that they would push this negative information; they deserve kudos for telling the truth. The kicker comes in the last four paragraphs which discusses how Friday’s unemployment rate report is likely to understate that actual number, meaning there are more unemployed than the government is admitting to and could be deteriorating more rapidly than the report indicates. They also admonish the FED and policymakers not be mislead by the report I guess so they continue with their QE plans and other policies aimed at further indebting the US in an effort to save it.

Paul Volcker was interviewed in an article “US Must Maintain Confidence in Dollar, an interesting read although this appeared to me to be a jawboning piece to try to bolster the Dollar like the FOMC does with the stock market. Growing up when I did I remember Mr. Volcker as he was the FED chairman who broke the back of inflation at the tail end of the 1970’s. He raised rates to a point that we had a recession and rates got so high every bit of inflation was rung out of the system setting the stage for the growth boom of the 80’s and 90’s. Of course today you cannot do what he did without economically destroying the country. I did find it amusing that at the end of the article Volcker is quoted regarding the rise in gold today and that inflation protected bonds are not showing inflation ,“I can’t fully explain this dichotomy…but I think part of it is the gold market after all is not a very big market”. Mr. Volcker is highly intelligent and politically savvy and he knows full well why gold is rising and inflation is not YET appearing in the TIPS market in fact the article title tells most of the answer, Dear Reader.

In a Central Bank related article on Reuters titled “Central Banks to be Net Buyers of Gold in 2011 – WGC, which discusses how they are expected to be buyers of the yellow metal in 2011 for the first time in about two decades.  Of course central banks have already been supporting the gold price s part of their reserves diversification program, just look at India’s announcement of the 200 ton purchase and China’s admission that it had been purchasing for its reserves. If gold were useless as a financial asset as we have been told the central banks would not have held on to their reserves for decades it would all be gone by now. The banks know that gold is real money and that is why they keep it and they are looking to add now as a means of preserving sovereign wealth and bolstering their own currencies. Moreover, the argument that the yellow metal(silver too) is too expensive now does not hold water as FIAT currencies debase, in fact the more expensive reserve now takes up less vault room for the amount of protection it provides.

Interestingly and article entitled “Vietnam Considers Allowing Gold Imports appeared in the Wall Street Journal online edition which discusses as the title states that Vietnam might allow companies to import gold to stabilize the local gold market as prices rose there too. This is just a canary in the coal mine people worldwide are seeking an alternative currency and are obviously not looking to the Dollar as a store of value like they used to, Even the people of Vietnam who have endured inflation and currency devaluation are clamoring to buy gold although you would think it would be easier and cheaper for them to hold dollars; I guess they feel the dollar and all FIAT currencies including their own are suspect.

Back in this country the same fears that are driving the Vietnamese to clamor for gold will grow even more here. The FED has already debased the currency over the past few years, which is a sure fire way to prevent deflation especially when your country is so debt laden. Now hot off the press also from the Wall Street Journal comes this juicy article, “Fed Officials Mull Inflation as a Fix”. The idea is to create a negative interest rate scenario where savers are so penalized for doing so that they will go out and spend money rather than save it. This is a dangerous and stupid idea particularly in the current environment when you have economic imbalances and rates of other sovereigns are higher like Australia are between 4.75 and 6.25% depending on the duration. After all ”money goes where it is treated best”. It has also been said that if you act to inflate gold and commodities will go up in price, but if you are just threatening to inflate those same items go up even more! Additionally, once the FED gets the ball rolling they run the real risk that they cannot stop the inflation and tip the US in to a hyperinflation. There are many that would disagree with me on that statement, but a hyperinflation is more than just a monetary event it is a perception event and once it gets going it is hard to change the perception. The recent monetary history of the US does not scream fiscal responsibility and restraint so something like this could tip the balance and cause Dollar dumping.

The last and biggest story of the day is “Gold Falls From Record on Speculation Rally Was Overdone”, I am sure dear reader that you are stunned by this. As the old saying goes nothing goes up in a straight line and corrections are bound to happen from time to time. Given the direction our policy makers are taking and the news that keeps churning out every day I view any drop in the gold price as a buying opportunity. To Paraphrase the great market veteran Richard Russell, a bull market will try everything in its power to take the fewest along for the ride possible. I do not care for days like this because I like to see green plus signs on my portfolio but one has to remember that it is a bull market and you want to keep your position until the trend is exhausted; based upon what I am seeing we have a long way to go until you cannot find multiple people on a daily basis deriding gold and commodities or predicting their demise.

When you can see the big picture one has to maintain their convictions regardless of what the talking heads blather about or the “sheeple” tell you. On a parting note Dear Reader if you have never read the book “Reminiscences of a Stock Operator” by Edwin Lefevere you should as it gives you insight in to trading and is also a fun read if you like the markets; it is fiction but is sort of a biography of Jesse Livermore considered by many to be the best trader who ever lived. Livermore is also well known since he made a fortune selling the market short in October 1929. You can pick up a copy at your local bookstore or on Amazon, and no I have no financial benefit or interest from the book but it is a fun educational tool of sorts.

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