2 weeks holiday from tomorrow

This week has been a great one, filled with greed and fear, realism and irrationality.

Major markets dislocations etc. I took the opportunity to build more of my short Treasury, start building a position on oil, and increase my holdings of silver and oil/mining related companies.

I am not sure I will be able to keep up with the markets and update the blog until the 6th, but I will do my best.

Maybe Citi will be gone once I am back, and gold will hit 1,200?

Jastram's Classic: The Golden Constant [2009 edition]

Roy Jastram's Classic, the Golden Constant, has been out of print for many years now and I have been unable to find it for less than about $500 on Amazon's MarketPlace before it totally disappeared... and reappeared. The Golden Constant is a very important work on the price stabilizer role of gold throughout modern times (from 1560 to 1976 when the book was published) aas a store of value and as a way to keep prices stable.

It is now being republished — this is great news — and even better, the data has been updated by Jill Leyland.

I can't wait to receive my copy!

Amazon.com already lists it, while still nothing the Amazon.co.uk site. [update: it's available on Amazon.co.uk as well now.]

E-Elgar upcoming titles:

The Golden Constant
The late Roy W. Jastram, formerly of University of California, Berkeley, US with updated material by Jill Leyland
With the gold price reaching new records in 2008, this new edition of Roy Jastram’s seminal work, considered by some to be the finest empirical study of the gold price, is timely. Published in 1977, the author’s painstaking work on historical statistics enabled fluctuations since 1560 in the value of gold and its purchasing power to be studied. It established, for the first time, how gold’s purchasing power had been maintained over the centuries. This edition reprints Jastram’s entire original text but adds two more chapters to bring the book up to date shedding new light on gold’s relevance today.

April 2009 c 256 pp Hardback 978 1 84720 261 1 c £59.95

The Government bodies have no clue about what they are doing

Everything has been very foggy for the past several weeks, the markets are falling and rallying enormously. Everybody is wondering where the economy is going to be, and many are offering their solutions or asking for the government to fix things and come up with solutions.

One clear thing that emerges from all these non-sense and lies, is that these experts/pundits/economists etc. really don't understand what they are doing, and the same way that Joe Average became a day trader during the Tech Bubble and made a virtual fortune before making real big losses on the stock market, 90 to 95% percents of professional money managers (pension funds, prop traders, hedge fund managers, and so on) made a lot of money since the mega(-bear)-rally of 2004-2007.

And since the government and its bodies have no clue on how to fix this mess (they still don't understand that there is no fix and the market readjustment that is happening is a good thing for the future and should be embraced instead of fought).

I mentioned Rothbard's America's Great Depression a couple of days ago here, and it is very impressive how things are unfolding in the exact same manner as the depression of 1929-1934. Even the dates match, just 78 years later.

One thing that is different, is that at that time, the Gold standard was preventing the printing of trillions of $... so it looks like that the deflation that happened in the 1929-1930 period and was a predicted and positive action might not happen this time and make the sequel of Great Depression a lot worse than the original one.

Below some extracts of interesting posts.

Bill Fleckenstein shows his anger:

Unfortunately, despite some 12 financing facilities created by the Treasury and the Fed, massive interest rate cuts and various bailouts, the government has little to show for its attempts to dictate where markets should trade.

The Fed's own balance sheet has exploded from roughly $900 billion worth of debt in August to around $2 trillion as of last week. Knowledgeable sources expect that to reach $3 trillion by the end of the year.

[...]

These numbers and rates of growth are so enormous (and unprecedented) as to be utterly incomprehensible. Does anybody actually think the government has any idea what it's doing?

I think it's certainly dawning on folks that when the government "does something," it often creates more problems than it solves. In this case, as it props up poorly managed companies, it may only be allowing them to rain further havoc on the better ones in their industry.

[...]

When I wrote that book, I pretty much exorcised my own demons regarding my revulsion and anger at the policies of former chief Alan Greenspan and his Federal Reserve.

[...]

This is going to be a very unpleasant period, I'm sorry to say. The outcome we are witnessing is exactly why, during both the stock mania and the housing mania, I was so vociferous in my criticism of Greenspan. He is the one man who continually meddled with the market and continually advocated that folks behave in an irresponsible way.

I find it outrageous that this buffoon is still making speeches (and commanding huge fees) when the entire country, and perhaps the world, is paying for his crimes against finance.

MacroMan is ironic and makes us laugh:

Macro Man had to laugh at a Bloomberg story about one of the Fed's alphabet soup programs, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Incredibly, this program seems to go by the shorthand acronym ABCPMMMFLF, which appears to be less a government liquidity program than the product of wiping spilled coffee off a keyboard.

Clearly, there is a gap in the market for snappily-named government programs. Image, as Andre Agassi used to say in the early 90's, is everything- and what sort of image does a program called the ABCPMMMFLF convey? "We don't know what we're doing".

What the situation requires is a public-spirited advertising agency to rebrand the dizzying array of government rescue packages in a way that will capture the public's imagination and boost confidence in the economy and financial markets.

In the absence of such an agency, Macro Man is happy to step into the breach. He has cobbled together a series of programs that should do a much better job of conveying their purpose to the public, and thus restore confidence in policymakers.

The first port of call is to revamp the liquidity and asset support programs. In the Macro Man Program (MMP), there will be two primary facilities:

* The Commercial paper Recovery Assistance Program (CRAP), and
* The Treasury Unsaleable asset Recovery Directive (TURD).

The MMP also provides for two programs that are designed to help banks shore up their financial standing:

* As previewed in this space last month, the Special Capital Raising/Extended Writedown Undertaking (SCREWU) will enable financial institutions to increase their capital base while reducing holdings of dodgy assets.

* Meanwhile, a special accounting framework for structured credit will be instituted until market conditions normalize: the Special CDO Accounting Mechanism (SCAM).

What to do with the GSEs? "Conservatorship" is an ugly word that is difficult to understand. Much better for the government to manage them under the auspices of the:

* Federal Residential Agency Unwinding Directive (FRAUD).

Meanwhile, we should probably assume that Ms. Pelosi's desire to divert some government funds to the automotive sector will be successful. This will be accomplished via a:

* Automakers' Recovery and Stability Enhancement (ARSE) program.

Let's not forget the international efforts at crisis resolution, either.

* The primary outcome of the weekend G20 meeting will be a new Liquidity Enhancement and Modality Origination Network (LEMON). As an aside, Macro Man has thought about it for another 24 hours....and he still doesn't know what a "modality" is.

* In Europe, where banks are behind the curve in owning up to losses, policymakers are rushing to create a Harmonized European Accounting Directive for Implementing New Standards for Assets and Nonstandard Derivatives (HEADINSAND).

Finally, it is worth observing that amongst the plethora of government programs produced over the last few months, very little has been done to address the original source of the crisis: US homeowners.

In conjunction with consumer advocacy groups, Macro Man has designed a program that seeks to aid troubled homeowners. Congress can expect to see lobbyists agitating for its passage in the new year:

* A Single Home Owners With Mortgages Extended Treasury Home Equity loan Modification with Offsetting New, Equilibrium Yields program. A bit of a mouthful, to be sure, but its acronym is sure to resonate with an irate electorate: SHOWMETHEMONEY.

Also worth reading:
The End, by Michael Lewis - Nov 11 2008

The Austrian Economics solution to the crisis.

A very well known and respected Austrian economist offers a solution to the crisis. I have edited his statement to make it shorter and have added emphasis (no emphasis was present in the original text, all emphasis is mine). Please read until the very bottom.

[...]
For forty years we have been told, in the textbooks, the economic journals, and the pronouncements of our government's economic advisors, that the government has the tools with which it can easily abolish inflation or recession. We have been told that by juggling fiscal and monetary policy, the government can "fine-tune" the economy to abolish the business cycle and insure permanent prosperity without inflation. [...]

Confronted with this stark destruction of all their hopes and plans, surrounded by the rubble of their fallacious theories, the nation's economists have been plunged into confusion and despair. Put starkly, they have no idea of what to do next, or even how to explain the current economic mess. [...] Some economists, union leaders, and businessmen, despairing of any hope for the free-market economy, have in fact begun to call for a radical shift to a collectivized economy in America [...].

In the midst of this miasma and despair, there is one school of economic thought which predicted the current mess, has a cogent theory to explain it, and offers the way out of the predicament—a way out, furthermore, which, far from scrapping free enterprise in favor of collectivist planning, advocates the restoration of a purely free enterprise system that has been crippled for decades by government intervention. This school of thought is the "Austrian" theory [...]. The Austrian view holds that persistent inflation is brought about by continuing and chronic increases in the supply of money, engineered by the federal government. Since the inception of the Federal Reserve System in 1913, the supply of money and bank credit in America has been totally in the control of the federal government [...].

The Austrian theory further shows that inflation is not the only unfortunate consequence of governmental expansion of the supply of money and credit. For this expansion distorts the structure of investment and production, causing excessive investment in unsound projects in the capital goods industries. [...] The recession periods of the business cycle then become inevitable, for the recession is the necessary corrective process by which the market liquidates the unsound investments of the boom and redirects resources from the capital goods to the consumer goods industries. The longer the inflationary distortions continue, the more severe the recession-adjustment must become [...].

What, then, should the government do if the Austrian theory is the correct one? In the first place, it can only cure the chronic and potentially runaway inflation in one way: by ceasing to inflate: by stopping its own expansion of the money supply by Federal Reserve manipulation, either by lowering reserve requirements or by purchasing assets in the open market. The fault of inflation is not in business "monopoly," or in union agitation, or in the hunches of speculators, or in the "greediness" of consumers; the fault is in the legalized counterfeiting operations of the government itself. For the government is the only institution in society with the power to counterfeit—to create new money. So long as it continues to use that power, we will continue to suffer from inflation, even unto a runaway inflation that will utterly destroy the currency. At the very least, we must call upon the government to stop using that power to inflate. But since all power possessed will be used and abused, a far sounder method of ending inflation would be to deprive the government completely of the power to counterfeit: either by passing a law forbidding the Fed to purchase any further assets or to lower reserve requirements, or more fundamentally, to abolish the Federal Reserve System altogether. We existed without such a central banking system before 1913, and we did so with far less rampant inflations or depressions. Another vital reform would be to return to a gold standard—to a money based on a commodity produced, not by government printing presses, but by the market itself. [...]

As for avoiding depressions, the remedy is simple: again, to avoid inflations by stopping the Fed's power to inflate. If we are in a depression, as we are now, the only proper course of action is to avoid governmental interference with the depression, and thereby to allow the depression-adjustment process to complete itself as rapidly as possible, and thus to restore a healthy and prosperous economic system. Before the massive government interventions of the 1930s, all recessions were short-lived. [...] When the stock market crash arrived in October, 1929, Herbert Hoover intervened so rapidly and so massively that the market-adjustment process was paralyzed, and the Hoover-Roosevelt New Deal policies managed to bring about a permanent and massive depression [...].

In this time of confusion and despair, then, the Austrian School offers us both an explanation and a prescription for our current ills. It is a prescription that is just as radical as, and perhaps even more politically unpalatable than, the idea of scrapping the free economy altogether and moving toward a totalitarian and unworkable system of collectivist economic planning. The Austrian prescription is precisely the opposite: we can only surmount the present and future crisis by ending government intervention in the economy, and specifically by ending governmental inflation and control of the money supply, as well as interference in any recession-adjustment process. In times of breakdown, mere tinkering reforms are not enough; we must take the radical step of getting the government out of the economic picture, of separating government completely from the money supply and the economy, and advancing toward a truly free and unhampered market and enterprise economy.

MURRAY N. ROTHBARD
Palo Alto, California
May 1975
Introduction to the Third Edition,
America's Great Depression

Yes, ladies and gentlement, this extract was written in 1975 and yet, as you can see, all the facts match our current issues perfectly. I am sure you could show this extract to your friends/family/colleagues and tell them it's from November 2008 and no one with have doubted.

Everything that happened during the great depression is happening again, the same mistakes are getting done again. At least, we now know where we are headed. It's going to be ugly, and we can all thank our incompetent politicians and economists for putting us on the highway to the 2nd Great Depression.

You can read Murray Rothbard's book online on the Mises.org institute web site, download and print the PDF version, or just buy the book and save the environment while contributing to the Mises Institute - all from the same links just a few lines above.

As usual, comments are welcome :-)

Bloomberg Sued the Fed Reserve

Bloomberg Sues Fed to Force Disclosure of CollateralBy Mark Pittman

Nov. 7 (Bloomberg) -- Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public [emphasis mine], according to the complaint. The suit, filed in New York, doesn't seek money damages.

``The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,'' said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn't made.

The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn't include an additional $700 billion approved by Congress in a bailout package.

The problem I see is that the Fed is a privately held company/corporation and hence would be excluded in the"federal agencies" category. The Federal Reserve is really nothing but a private company which has been given the monopoly to print US dollars by the government.

I would like to see Bloomberg win this action, and even more to see the Fed abolished (which is quite likely, just a couple of years or so down the road, when hyper inflation destroys the USD or when/if the Amero is created).

Pedge Fund performance - 200810

I have decided to write about my portfolio, managed somehow like a macro/discretionary hedge fund. I would like to publish letters and performances in order to build a public track record. The fund will be named Pedge Fund.

I won't have the time to achieve a good result and long letter for this October, but the good news is that Pedge Fund is up quite substantially this month (and YTD). I haven't build a proper NAV and brokerage fees/expenses/interests/commissions systems yet (and if you know a good system to deal with all this, I am a taker!), but I have calculated a gross performance for October of about +10%

Please note that I am not managing the portfolio as a full time job, so the performances are affected by this (probably negatively, as in October, I wasn't in front of my computer when most of the action took place and missed several great opportunities...). Anyway, that's life!

Summary:
Pedge Fund USD
October performance: +10% (gross, approx)
Year to Date performance: +45% (gross, approx)

The portfolio was about 150% short US indices in October, and another 70% short in notional terms with Puts on the Dow Jones bought when the Dow was flying at 13,000 points and 50% long stocks and another 50% long commodities (mainly precious metals). About another percent of performance is attribuable to short term positions (holding of about a week).

Obviously, the commodities and stocks took a big hit in Pedge Fund.

I progressively reduced the short exposure and closed the major parts of them on the 21st of October (a few days to early). I still have some puts on the Dow, and will probably buy more of them and maybe go short if Vol gets cheaper and if the Dow and other indices keep on raising on nothing but bad news. The US indices rallied for about 25% from bottom in October to top last week. This is huge. Let's see if the trend has been reversed or not before getting in too early.

If you think it's a good idea to publish this information, or if you think that you would like to hear more info, please let me know. I might also consider marketing the fund at some point, so please stay tuned, and if you are interested in seeding, let me know :-)

The two next bubbles to pop, countries defaulting, hyperinflation?

Well, it now seems obvious to many that the stock market was more than overvalued (which I have been writing about for many months...) even though some people would like us to believe that we have reached the bottom (last weeks rally was a nice bear rally, that fooled many). So where we go from now?

I think two major type of assets that are going to collapse (and I am not even mentioning credit card debt, since they are currently collapsing) next are:

1. Private Equity - often seen as an alternative investment. Well TPG lost several billions in Washington Mutual, Cerberus has been fooled by Daimler and is now unable to get rid of Chrysler, BlackStone went public and since that time has lost 80% of its value in 18 months, and KKR has postpone its IPO. The problem is that these companies are over-leveraged and won't be able to bay back their dept on time. Take the example of these idiots at BC Partners who acquired Foxtons at the very top of the real estate bubble in the UK... Clearly, many Pivate Equity firms took over hotels, commercial real estate, offices, etc. in the US and the rest of the world. The loss are going to be huge and will also spread to the banks which lent the money. It's going to be ugly, that's for sure.
   
2. US bonds (treasuries bonds, notes, etc.) and more specially the long term US debt. I already mentioned that I am short these bonds via TBT. If you go on TreasuryDirect.gov and more specifically the Dept to the Penny page, you will see how much the US government owes and how quickly this dept is increasing. More below:
   

Just how much dept can the US take?

The total debt (excluding liabilities such as pension, healthcare etc.) reached $10 trillion on the 30th of September 2008, and just one month later, as of the 30th of October 2008, it had reached $10.5 trillion, that is a massive $500 billion increase, or 5% in a single month, which is about 80% annualized!

One question that I don't find often asked and never answered is: from whom are they borrowing? Because debt must be coming from some entity right? The answer is: they can be borrowing from the Fed (printing money) or borrowing from other private investors and sovereign countries.

Let's focus just a bit on that latter: the countries. I have had hard time finding the information that I need, but the CIA web site provides the total foreign exchange and gold reserves of each country.

Playing just a little bit with this data, you soon discover that the 30 richest countries have a cumulative total reserve of about $5.873 trillion (including all the various currencies they hold and their gold reserves!) while the whole list of 155 countries barely reaches the $7 trillion.

I honestly must admit that I hope this figures are not right, that something is wrong here. The total debt of the US is currently bigger than the total cumulative currencies and gold reserves of the rest of the planet! Can this be right? Please let me know if I am wrong, because if I am right, not only does it mean that the USA are insolvent (nothing really new here), but it also means that should they be willing to keep on borrowing that much, they will have washed the whole globe off their currencies. Which obviously is not going to happen.

So they will either not be able to borrow, or will have to turn to the Fed for their borrowing needs. In either cases, the USD is going to collapse, as well as the US bonds.

On a side note, I think one must be stupid to lend their savings for 20 years to get a return of 3-4%. At some point, lenders will start to notice what is going on.

Finally, today the BoE slashed interest rates by a massive 1.5%, and the ECB by 0.5%. It seems like we are going to see a competitive devaluation and most rates are going to reach 1% if not less pretty soon (the USA and Japan are already there). Hyper-inflation might be what will happen after a short period of deflation?

Economic disasters ahead

While markets are rallying while the bad news are still piling up and that things are getting worse and worse (before maybe getting better in 2012?), the perfect conditions for international economic disasters are getting in place (see below).

Obama is finally elected. In my opinion, the good side for the American people is that now, instead of stealing from the people to give to the establishment (the likes of banks, Halliburtons, Carlyles) , the government is going to steal from the people and give a little back to the people. But the policies of Obama are receipes for disasters. Steffan Karlsson has done quite a job summarizing them here. I believe Obama's policies will take to the ground both the US dollars and the US bonds, since he is going to increase expenditures by a huge amount and he will also do all the wrong things that we have seen in France (increasing taxes on capital gains, higher brackets, etc.).

The IMF is also bailing out more and more countries. Today is Pakistan, a few days ago was Hungary after Iceland, and Ukraine. History shows that the Keynesian principles forced by the IMF to the countries which receive the funds has always led that same countries against the road, just a few years later, and that their conditions became a lot worse than what they would have been without the IMFs help (just check out Argentina or Thailand as examples).

Japan, India, China have reduced even further their interest rates, trying to inflate their way out of their issues. I can't believe leaders in Japan are that stupid honestly. They already were burnt by fire two decades ago, and are still in the whole, but they are trying the same remedy again. I am not sure reducing the rates from 0.5% to 0.3% could help anyway. They are basically the same as 0.0% and have been that way for many many years...

Lost decades (with a trailing 's')

The Eurozone is also inflating and borrowing like crazy to fund it's now socialized banking system, but also to bailout other countries (Hungary again...). The list is just too long to enumerate, but just think of Spain which decided that people could pay only half of their monthly mortgage repayment for the next two years...

Unfortunately, I don't have enough time to go through this now, and too many things are happening for anyone to be able to keep up. I would just like to conclude by showing a graph from the Fed and ask anyone who would like to understand what is going on and get an idea about what the solutions might be, to read America's Great Depression by Rothbard. The full text is available as soft copy freely, or hardcopy for a small fee from the Mises Institude. I will try to write a lot more about all this during the week(-end?).

You don't believe in (hyper)inflation?

Disclosure: I am short USD, long Gold and Silver (via GBS, SLV, DBP) and have shorted US 20+ years treasuries yesterday (via TBT).

Gold vs Gold (Paper vs Physical) pt4

This is yet another update of the Gold vs Gold (Paper vs Physical) series, which I started in September and you can read the previous posts here:

1. Gold vs Gold (Paper vs Physical) pt1 2008-09-12
2. Gold vs Gold (Paper vs Physical) pt2 2008-10-10
   
3. Gold vs Gold (Paper vs Physical) pt3 2008-10-15

The price of Gold in USD terms keeps on declining, but it is about stable in other currencies. It is important to understand that. The second point worth understanding, is that during this mega forced liquidation, the prices of all assets have collapsed by about 40% to 60%, and sometimes up to 80%. Yet, gold, in USD terms, is down only about 25 to 30%, which is quite a good performance.

So I mentioned already that many bullion merchants were running out of stocks and that major retailers such as Kitco where not taking any new orders until they resolve their back-log issues. That was many weeks ago. What is current status now?

Well, Kitco is still not selling anything but 400 oz bars! It has been 2 months that they are almost not taking any orders! This is more than suspicious, and I do not understand how they can still be in business! Just to make sure, I called them and asked to place an order, but they told me that they cannot take any orders right now. So this is real.

I also decided to call some other merchant bullions. One who I was in touch with a few weeks ago. So what is their status update? "28/10: Coins still unavailable, bars can be ordered but there may be delays of 2-3 weeks for Gold bars and up to 4 weeks for Pt and Pd bars."

And I called yet another one that I hadn't called before and asked for Platinum and Gold coins. Same answer: They don't have any, and they don't know when they are going to get any stock!

The conclusion is that the current paper prices do not reflect the real demand for physical gold but mainly reflect the Great Unwind we have been talking about for the past few weeks. On top of that, it appears that this artificially low prices do not benefit to the retail customers, who are unable to buy the products they want, and they actually hurt the bullion merchants, since they are either unable to take orders or that they have delays of up to several weeks.

All in all, I still think that gold can go down to 600-650$ but I am still buying little bit by little bit. The main driver is that governments and central banks have totally given up their pseudo-inflation fighting and are debasing the currencies as fast as they can to bail out all the debtors of the world. This means that the few savers who did not participate in this credit-orgy are going to get punished instead of being rewarded....

And finally, since it's so hard to take delivery of the physical, I use the Lyxor GBS ETF proxy and you can also use the GLD ETF. The main reason I do not use GLD is that I do not want my gold to be held in the US soil. But the main danger of Lyxor GBS is that their bullions are held in an uninsured vault (by HSBC).

S&P 500 and DJ indices update - 20081031

This is a follow up on the S&P 500 and DJ Indices update (2 weeks ago).

There isn't much to say except that the expected massive rally in the $ and the markets happened, and led to a massive overvaluation of the US markets in both absolute terms (in $ terms and PER terms) as in relative terms, compared to the European shares and Gold:

• The Dow still has a negative EPS which means that the basket of shares composing the index are losing money on the calendar year (and it doesn't have a PER).
• The S&P 500, after a big decline since the all time highs of last year still sports a massive a PER of 21, meaning that it can easily decline by another 50 to 75% (!!!) and that the current prices show either a massive bullishness and expect the end of the crisis as early as maybe next quarter? or a massive inflation in $ terms (quite likely given the reckless behaviour of the US gov and the Fed).
• The Dow is up almost 10% in Gold terms since the lows in July (which crisis? which crash?) and up 4% in Euro terms where the CAC is down 14%, meaning that it is over-performing the French index by a massive 18%!
• The S&P 500 shows the same trend, but with a lower over-valuation.
• The short US equities - long European ones trade seems more and more appealing. I am still waiting for the Dow to reach 10,000 to short it.
  

Dow Jones in various currencies (click for bigger image)

S&P 500 in various currencies (click for bigger image)