Monday, April 22, 2013
Why are Gold and Silver destined for higher prices?
It is simple. Its supply is less than its supply on paper. The second people begin demanding physical for their ETF silver or gold, the farce will be exposed... prices will go up, and we will be left with a lot of legal action as bullion banks fight to not deliver the physical they don't have to the people who supposedly own it.
Great series on the unfortunate importance of gold through history
Part 1:
https://www.youtube.com/watch?v=4wgbpGF9kT0
Links to parts 2 and 3 can be reached from part 1.
https://www.youtube.com/watch?v=4wgbpGF9kT0
Links to parts 2 and 3 can be reached from part 1.
Friday, April 19, 2013
Physical vs Paper divergence beginning???
In other news, a phenomenon I've long preached about seems to be taking some shape:
http://www.zerohedge.com/news/2013-04-19/chinese-gold-exchange-sold-out-begins-importing-switzerland
http://www.zerohedge.com/news/2013-04-19/chinese-gold-exchange-sold-out-begins-importing-switzerland
Warren Buffett
I've bashed Warren Buffett a lot in the past for his fundamental outlook, government policy manipulation, portfolio performance that mimics the S&P but worse, and complete ignorance of HFT, Algorithmic trading, and everything that defines the "new normal" in the stock market. What can you say, its hard to teach an old dog new tricks sometimes.
However, I stumbled across something I agree with him on, even if only partially. People ask Warren Buffett why he doesn't invest in gold, and his answer is simple: gold has no intrinsic value as a useful material, he prefers to invest in assets that are productive and commodities that have use. I agree with this statement. Would you be able to do more with, all of the gold in the world, or an equivalent dollar value worth of farmland or even something like timber? Certainly no one would be able to be too productive with the gold. You could make a ton of jewelry.... possibly alloy the gold and make some electrical components... but even then it's used in very small quantities and is in relatively low demand for that particular purpose. Gold is not useful, and in real bull markets it certainly under-performs equities. It's only real asset is that it is limited in supply, its a time tested store of value, and people trust in its value. Therefore it is a clear favorite for money looking for safety. Personally, I would much prefer to own something of high industrial value and limited supply over gold, regardless of its time tested value. It is for this reason I think the real value is in silver, who's mining supply could be entirely depleted in 50 years. It also has irreplaceable electrical and thermal properties, and is used in large quantities for industrial purposes.
Does this mean i'm a gold bear? Not necessarily. People use it as a safe haven and as a hedge against inflation. In current market conditions the prospects for something that meets that criteria bodes quite well (likely better than equities). Also, the increasing support in other countries (and even this one to some extent) to allow for the optional use of a gold backed currency is certainly bullish. You also can't ignore the overwhelming support for gold among fund managers that were profitable during the 08 collapse.
So Warren Buffet, we found something in common, even if we may have some disagreement on future direction of pricing.
However, I stumbled across something I agree with him on, even if only partially. People ask Warren Buffett why he doesn't invest in gold, and his answer is simple: gold has no intrinsic value as a useful material, he prefers to invest in assets that are productive and commodities that have use. I agree with this statement. Would you be able to do more with, all of the gold in the world, or an equivalent dollar value worth of farmland or even something like timber? Certainly no one would be able to be too productive with the gold. You could make a ton of jewelry.... possibly alloy the gold and make some electrical components... but even then it's used in very small quantities and is in relatively low demand for that particular purpose. Gold is not useful, and in real bull markets it certainly under-performs equities. It's only real asset is that it is limited in supply, its a time tested store of value, and people trust in its value. Therefore it is a clear favorite for money looking for safety. Personally, I would much prefer to own something of high industrial value and limited supply over gold, regardless of its time tested value. It is for this reason I think the real value is in silver, who's mining supply could be entirely depleted in 50 years. It also has irreplaceable electrical and thermal properties, and is used in large quantities for industrial purposes.
Does this mean i'm a gold bear? Not necessarily. People use it as a safe haven and as a hedge against inflation. In current market conditions the prospects for something that meets that criteria bodes quite well (likely better than equities). Also, the increasing support in other countries (and even this one to some extent) to allow for the optional use of a gold backed currency is certainly bullish. You also can't ignore the overwhelming support for gold among fund managers that were profitable during the 08 collapse.
So Warren Buffet, we found something in common, even if we may have some disagreement on future direction of pricing.
Thursday, April 18, 2013
Yellen on interest rates, November 2012
Janet Yellen is the likely replacement in 2014 for Ben Bernanke, she's the "#2" at the fed. Barrack Obama will still be in the whitehouse at the time of nominating the new fed chairman. These quotes are taken from her speech at Berkeley 6 months ago:
https://www.youtube.com/watch?v=XBW60d4PUfY
"Mid 2015 is the earliest date that a lift off (from 0% interest rates) might be warranted"
"Optimal policy would be to hold 0% rates until at least 2016 and below baseline until 2018"
"A highly accommodating stance on monetary policy will remain in effect long after the recovery"
"The fed should commit to holding the federal funds rate near zero as long as unemployment is above 7%, and as long as inflation is below 3%"
"A balanced approach is preferable whereby an inflation rate above 2%"
I hear people talking, speculating, and arguing for possibility of raising interest rates sometime soon, but I believe this talk has no factual base. The most hawkish move in the Fed's "toolbox" at this point is to slow down or cut QEinfinity.
Monday, April 15, 2013
Canada
I stumbled upon the chart below the other day, and thought it was worth citing that Cananda seems past due for a meltdown in housing and banking. It's a bold statement, but i'll dig into some numbers:
a) Canadian household debt to income ratio is dangerously high (see chart, from JPMorgan).
b) Canadian banks are thoroughly under-capitalized There is no fractional reserve requirement, and they didn't experience a financial crisis in 2008. The potential for deleveraging is quite large.
c) Mortgage rates are the lowest they have been in decades.
d) Energy markets are currently weak, a foreboding sign for the Canadian economy.
e) Ranking banks in the word by lowest tangible common equity, Canada has 6 banks in the top 21 (see below). Note the TCE ratios. Sure we see a lot of familiar names high on this list, but many of these banks went through the financial crisis is 2008 and have been subsequently de-leveraged to a certain extent and possibly bailed out. The Canadian banks have not had this experience.
f) The dollar value of total outstanding residential mortgages continues to hit all time highs. As shown below, this number is an increasingly high percentage of GDP.
g) Despite a, d, and f, housing prices remain high. (see below).
h) Ratio of housing prices to rental prices is higher than any other developed nation. Image from theatlantic.com, january 2013.
Thursday, April 11, 2013
The 2% Inflation Target...
It's time we all took a sober look at the concept of 2% inflation. As a population we tend to think of 2% inflation as a constant rate of growth, after all, a two percent increase inflation on any given year is a relatively small change right? Don't be naive enough to think this either a small or linear phenomenon. Lets put things into perspective.... say you had savings of $1,000 in cash, and held it in your bank account from the time you were 20 years old to retirement (we'll say 50 years). How much is that money worth if there was 2% inflation each year?
Certainly we remember the compound interest equation from school: $ = P(1 + r)n
To get the fraction of what you're 1000 is worth after 50 years at 2% inflation we can take:
Put in other terms, if you saved 2% of your annual salary in cash for retirement, you would retire with 1 years average salary. Yes, do the math, its right. Lets suppose instead the federal reserve targeted 0% inflation instead, how much money would you have at retirement? If your annual salary was $50,000, you would have: 50000(1 + .02)50 = $134,579 if your salary stated the same throughout your life. That is a savings of 2.69* your average salary vs 1*your average salary. It is clear that a 2% inflation target punishes those that save in cash.
Some might say the 2% is a trade off to maximize growth and employment....oh really now. There's a concept that needs to addressed here: resources are finite. Unless the supply of resources grew at an average of 2% every year, this system is fundamentally flawed. Lets visualize it:
In the above graph, the money supply grows at 2% while the rate of hard paper money printed resembles the rates of the treasury. Paper money could be any limited resource, but for sake of a simple and compelling argument, I used a realistic rate of paper/hard money printing in the above graph. The rate at which the treasury prints paper grows slightly each year, but not by 2%. Why??? For one, because paper is a finite resource and it would be impossible. We would need 2% more trees/cotton each year to make that money, 2% more printing presses, 2% more labor to operate that production. In a finite world, you can't meet the expectation of 2% more every year, after about 200-300 iterations this starts to become nearly impossible.
Some may say: "But the fed can lower rates too, if this phenomenon occurs we can just lower the inflation target".
Here's a fun fact, deflation has NEVER been targeted by a central banking system. Price deflation has occurred naturally through various recessions/depressions... but actual monetary supply deflation???? Unheard of.
Here's another fun fact 2% inflation target is gauged by the CPI, a synthetic number the government determines (and can adjust to a certain extent at will using goods substitutions). In terms of monetary base, we are going much further than 2% a year.
See the graph below, its in a its in log scale.... don't misinterpret anything the fed does as "linear". The graph also highlights our divergence from CPI, inferring inflation rates far above 2%.
If all this is true.....why don't we see soaring prices????? In recessionary environment deflation is a natural phenomenon. The cumulative effect of this isn't necessarily higher prices. It can be felt in the sense of higher unemployment rates, rising poverty, and rising debt (in other words, the real wealth/money ratio decreases, whether this is inflation or not is irrelevant, it has the same cause). Remember the following:
Without exponential growth equal to the exponential rise in debt-created money supply , it becomes impossible to repay debt. In a world of finite resources, it will at some point become impossible to keep pace with and exponential money supply.
While recessions/depressions can dampen prices temporarily, prices must eventually increase to meet intrinsic values of hard assets as the difference between total money supply and growth/new finite resources grows exponentially larger. Inflation is not myth, Inflation is math.
Money is printed as debt. Paper money can not mathematically be printed at the same rate as the money supply is expanded, because it costs resources to print hard money, and resources are finite.
Certainly we remember the compound interest equation from school: $ = P(1 + r)n
To get the fraction of what you're 1000 is worth after 50 years at 2% inflation we can take:
1000(1 - .02)50
= $364.17
So we are left with just 364.17 dollars.
Put in other terms, if you saved 2% of your annual salary in cash for retirement, you would retire with 1 years average salary. Yes, do the math, its right. Lets suppose instead the federal reserve targeted 0% inflation instead, how much money would you have at retirement? If your annual salary was $50,000, you would have: 50000(1 + .02)50 = $134,579 if your salary stated the same throughout your life. That is a savings of 2.69* your average salary vs 1*your average salary. It is clear that a 2% inflation target punishes those that save in cash.
Some might say the 2% is a trade off to maximize growth and employment....oh really now. There's a concept that needs to addressed here: resources are finite. Unless the supply of resources grew at an average of 2% every year, this system is fundamentally flawed. Lets visualize it:
In the above graph, the money supply grows at 2% while the rate of hard paper money printed resembles the rates of the treasury. Paper money could be any limited resource, but for sake of a simple and compelling argument, I used a realistic rate of paper/hard money printing in the above graph. The rate at which the treasury prints paper grows slightly each year, but not by 2%. Why??? For one, because paper is a finite resource and it would be impossible. We would need 2% more trees/cotton each year to make that money, 2% more printing presses, 2% more labor to operate that production. In a finite world, you can't meet the expectation of 2% more every year, after about 200-300 iterations this starts to become nearly impossible.
Some may say: "But the fed can lower rates too, if this phenomenon occurs we can just lower the inflation target".
Here's a fun fact, deflation has NEVER been targeted by a central banking system. Price deflation has occurred naturally through various recessions/depressions... but actual monetary supply deflation???? Unheard of.
Here's another fun fact 2% inflation target is gauged by the CPI, a synthetic number the government determines (and can adjust to a certain extent at will using goods substitutions). In terms of monetary base, we are going much further than 2% a year.
See the graph below, its in a its in log scale.... don't misinterpret anything the fed does as "linear". The graph also highlights our divergence from CPI, inferring inflation rates far above 2%.
If all this is true.....why don't we see soaring prices????? In recessionary environment deflation is a natural phenomenon. The cumulative effect of this isn't necessarily higher prices. It can be felt in the sense of higher unemployment rates, rising poverty, and rising debt (in other words, the real wealth/money ratio decreases, whether this is inflation or not is irrelevant, it has the same cause). Remember the following:
Without exponential growth equal to the exponential rise in debt-created money supply , it becomes impossible to repay debt. In a world of finite resources, it will at some point become impossible to keep pace with and exponential money supply.
While recessions/depressions can dampen prices temporarily, prices must eventually increase to meet intrinsic values of hard assets as the difference between total money supply and growth/new finite resources grows exponentially larger. Inflation is not myth, Inflation is math.
Money is printed as debt. Paper money can not mathematically be printed at the same rate as the money supply is expanded, because it costs resources to print hard money, and resources are finite.
Thursday, April 4, 2013
You're Probably Not as Diversified as You Think.
-_-
So you have a stock portfolio, a 401k, maybe even a Roth IRA. Do not make the mistake of thinking you are well diversified because you have your money mixed in a number of different stocks of varying "risk". Stocks are a single class of investments, and your mutual fund/IRA/401k is merely a collection of stocks managed by someone "smarter" than you. Sure, you may have some bonds thrown in there somewhere but as far as I'm concerned those can be considered a neutral asset (bond yields are at all time lows, and the yield you do get is merely poor compensation for the growing risk that the Fed may one day either raise rates or lose the ability to control the bond market). We carry these equities thinking that the fundamental driver behind its value is the efficiency and performance of the equity itself. While this is partially true, markets rely far more on monetary policy, exchange rates, regulations, and the expectations of future monetary policy & exchange rates (these have a direct effect on equity/asset performance and efficiency, as well as on the value of savings). It is the continual free flow and expansion of credit that enables growth for many of the stocks in my 401k, and i'm sure others are no different. If the punch bowl is removed, the suffering is non-discriminatory.
The point is..... many of us sleep comfortably looking forward to retirement because we have a 401k and some Apple stock, but the truth is that all of your eggs are in very few baskets.
My advice for diversification would be to: Get foreign, get physical, get alternative, get active.
It sounds like a catch phrase on a motivational speech, I know, but seriously, here are some examples:
Get foreign
- Foreign currencies and bonds: yield exists in some places.... weigh this with monetary policy risks of a given country.
- Foreign equities in emerging economies: not as easy or as secure as you may like, but surely growth opportunities exist in developing nations that would not be stifled by a domestic meltdown.
Get Physical
- Precious metals: a traditional store of value, get things you can actually touch.... in todays economic environment there is a growing disparity between what exists electronically or "on paper" and what actually exists. Don't be caught on the wrong side.
- Hard Assets: collector items, real estate, whatever you fancy and can get a good deal on.
- Physical Cash and change: this may seem a bit conspiracy theory, but its common knowledge that only about 3% of money in existence is in cash, the rest is just numbers on a balance sheet. In the event of a Cyprus-style capital freezeout-and-then-tax your bank account, its good to have some cash on hand to mitigate losses.
Get Alternative
- Guns and Ammunition: One of my favorites, increasing gun control laws increase the value of guns. Easy to resell, value doesn't deteriorate over time, simple.
- Bitcoin: Volatile, but a rising star. Do not make the mistake of considering a "bubble" to be a dramatic rise in prices. A bubble occurs when "Future Demand - Current Speculative and Real Demand" goes negative. As an alternate to major currencies, I would say the future demand of this asset presents a very attractive risk-reward ratio.
Get Active
- Gardening: grow your own herbs, spend less on groceries, sell your goods
- raising cattle/farm animals: Sell or eat, watch out for coyotes and mad cow disease.
- Recycle things: little bits can add up
So you have a stock portfolio, a 401k, maybe even a Roth IRA. Do not make the mistake of thinking you are well diversified because you have your money mixed in a number of different stocks of varying "risk". Stocks are a single class of investments, and your mutual fund/IRA/401k is merely a collection of stocks managed by someone "smarter" than you. Sure, you may have some bonds thrown in there somewhere but as far as I'm concerned those can be considered a neutral asset (bond yields are at all time lows, and the yield you do get is merely poor compensation for the growing risk that the Fed may one day either raise rates or lose the ability to control the bond market). We carry these equities thinking that the fundamental driver behind its value is the efficiency and performance of the equity itself. While this is partially true, markets rely far more on monetary policy, exchange rates, regulations, and the expectations of future monetary policy & exchange rates (these have a direct effect on equity/asset performance and efficiency, as well as on the value of savings). It is the continual free flow and expansion of credit that enables growth for many of the stocks in my 401k, and i'm sure others are no different. If the punch bowl is removed, the suffering is non-discriminatory.
The point is..... many of us sleep comfortably looking forward to retirement because we have a 401k and some Apple stock, but the truth is that all of your eggs are in very few baskets.
My advice for diversification would be to: Get foreign, get physical, get alternative, get active.
It sounds like a catch phrase on a motivational speech, I know, but seriously, here are some examples:
Get foreign
- Foreign currencies and bonds: yield exists in some places.... weigh this with monetary policy risks of a given country.
- Foreign equities in emerging economies: not as easy or as secure as you may like, but surely growth opportunities exist in developing nations that would not be stifled by a domestic meltdown.
Get Physical
- Precious metals: a traditional store of value, get things you can actually touch.... in todays economic environment there is a growing disparity between what exists electronically or "on paper" and what actually exists. Don't be caught on the wrong side.
- Hard Assets: collector items, real estate, whatever you fancy and can get a good deal on.
- Physical Cash and change: this may seem a bit conspiracy theory, but its common knowledge that only about 3% of money in existence is in cash, the rest is just numbers on a balance sheet. In the event of a Cyprus-style capital freezeout-and-then-tax your bank account, its good to have some cash on hand to mitigate losses.
Get Alternative
- Guns and Ammunition: One of my favorites, increasing gun control laws increase the value of guns. Easy to resell, value doesn't deteriorate over time, simple.
- Bitcoin: Volatile, but a rising star. Do not make the mistake of considering a "bubble" to be a dramatic rise in prices. A bubble occurs when "Future Demand - Current Speculative and Real Demand" goes negative. As an alternate to major currencies, I would say the future demand of this asset presents a very attractive risk-reward ratio.
Get Active
- Gardening: grow your own herbs, spend less on groceries, sell your goods
- raising cattle/farm animals: Sell or eat, watch out for coyotes and mad cow disease.
- Recycle things: little bits can add up
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