How does anyone have the legal right to pledge the lives of future generations to pay for our present day consumption ?
Just one part of the national debt, the one that is actually accounted for, went from 900 Billion in 1980 to 14,000 Billion today. That is an increase of 1500% and even when expressed as a share of GDP, it went up by 300%.
Where are the assets that were purchased with this money ?
Furthermore, this Dollar amount does not include the value of all the promises the government made. If any enterprise would try to keep accounts like the government does, its leaders would be rightfully thrown into prison.
Since 1980 the people of the United States have in the majority voted for a conservative platform, one that would call for prudent handling of the national finances and a reduction of debt. How did that apparent desire of the voters translate into this trainwreck ?
Is it any wonder that people do not even bother to vote ?
Wednesday, January 26, 2011
Tuesday, January 25, 2011
Barron's and Bill Gross of Pimco
Here are some quotes from Barron's twice a year investment roundtable and a link to the latest thoughts of Bill Gross from Pimco.
He manages over 1 trillion Dollars and has consistently outperformed the markets over decades.
Here's the link:
http://www.pimco.com/Pages/OffWithOurHeads.aspx
Still, Mexican Pesos and Brazilian Real ? Honestly, I'd rather stick with gold, thank you very much !
Here is a quote from a very long term participant of the roundtable:
Felix Zulauf in Barrons January 2011
He manages over 1 trillion Dollars and has consistently outperformed the markets over decades.
Here's the link:
http://www.pimco.com/Pages/OffWithOurHeads.aspx
Still, Mexican Pesos and Brazilian Real ? Honestly, I'd rather stick with gold, thank you very much !
Here is a quote from a very long term participant of the roundtable:
Finally, I have talked about gold many times. Structural trends are in place for a continued rise of public-sector debt in the industrialized countries, a continued monetization of debt and continued debasement of currencies, all of which are bullish long-term for gold. The price of gold has run up to an extreme point, and gold is technically vulnerable to a big shakeout this year, particularly if emerging markets tighten and lift real interest rates. But shakeouts will be followed by higher prices, and would just represent opportunities to buy. Gold could fall to $1,150 or $1,200 from $1,370 now. I would be a buyer at those levels.
How high is the upside?
Zulauf: Unlimited. What [Federal Reserve Chairman Ben] Bernanke is doing [buying up government debt to force down interest rates], others will do. The European Central Bank has tried to resist quantitative easing. It was the one major central bank that tried to sell part of the paper it bought on an emergency basis during the financial crisis. The first time it tried, it triggered the Greek crisis. The second time, it triggered the Irish crisis. Therefore, the ECB has to handle the European situation in a way that the weakest economies in the EU can survive. That forces it into monetary easing for a long time. That is bullish for gold. I don't know how high it can go, but I will give you a call when I think the run-up is over.
Do you like any gold stocks?
Zulauf: I am not a big fan of the stocks. The real costs for gold companies are rising about 15% a year. I would rather buy the physical stuff. There will be a time when the mining stocks outperform physical gold, but you have to time it.
Zulauf: Unlimited. What [Federal Reserve Chairman Ben] Bernanke is doing [buying up government debt to force down interest rates], others will do. The European Central Bank has tried to resist quantitative easing. It was the one major central bank that tried to sell part of the paper it bought on an emergency basis during the financial crisis. The first time it tried, it triggered the Greek crisis. The second time, it triggered the Irish crisis. Therefore, the ECB has to handle the European situation in a way that the weakest economies in the EU can survive. That forces it into monetary easing for a long time. That is bullish for gold. I don't know how high it can go, but I will give you a call when I think the run-up is over.
Do you like any gold stocks?
Zulauf: I am not a big fan of the stocks. The real costs for gold companies are rising about 15% a year. I would rather buy the physical stuff. There will be a time when the mining stocks outperform physical gold, but you have to time it.
Here's Marc Faber, another participant of the roundtable who has been there for as long as I can remember - 35 years ?
Faber: One more thing: Janet Yellen, vice chair of the Federal Reserve, said about a year ago that if it were possible to push interest rates into negative territory, she would vote for that. This is a very important statement because it implies that the Fed will keep interest rates negative as far as the eye can see. Negative real rates amount to expropriation and destroy one function of money: to be a store of value and a unit of account. If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn't value their wealth in dollars because one day, in dollars, everyone will be a billionaire.
Faber: One more thing: Janet Yellen, vice chair of the Federal Reserve, said about a year ago that if it were possible to push interest rates into negative territory, she would vote for that. This is a very important statement because it implies that the Fed will keep interest rates negative as far as the eye can see. Negative real rates amount to expropriation and destroy one function of money: to be a store of value and a unit of account. If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn't value their wealth in dollars because one day, in dollars, everyone will be a billionaire.
Sunday, January 23, 2011
Real Return
Are you making money, or losing ?
Not so easy to tell these days. If you buy 10 year Treasury Notes and "earn" 3.3%, are you actually gaining or are you losing ?
I have made my decision and I will elaborate in the next few days. I'm confident that I will make 7-10% buying real assets, like farmland or forestland, and that anyone who buys Treasury securities here is guaranteed to lose money.
Stocks, by the way, are no inflation hedge. In fact, they are stupendously overvalued right now.
Not so easy to tell these days. If you buy 10 year Treasury Notes and "earn" 3.3%, are you actually gaining or are you losing ?
I have made my decision and I will elaborate in the next few days. I'm confident that I will make 7-10% buying real assets, like farmland or forestland, and that anyone who buys Treasury securities here is guaranteed to lose money.
Stocks, by the way, are no inflation hedge. In fact, they are stupendously overvalued right now.
Saturday, January 22, 2011
Taxes and Government Services
Just a local issue, but a good proxy of how it usually works: The local transit authority is asking for a 0.03 % increase of the local sales tax to fund its operations and threatens voters with significant cutbacks if not approved.
Turns out, they're asking for a 50% increase.
They don't say that. They'll leave the voter with the impression that this is just insignificant small change.
How is a voter to decide ? The official ballot title or the statements offered in favor as well as the one opposed to the increase do not give any hard facts to base a decision on.
Its just: Don't you like public transportation ?
Turns out that dividing the total number of riders last year with their budget, I arrived at just about $10* per fare. Amazing: at that price we might as well have seen a lower tax bill if every user would have called a taxi cab instead of waiting 30 minutes for a bus !
This link is to other commentators who have a lot more insight into this particular issue than I have.
That's the method : ask for just what looks like a teeny amount at a time, get people hooked on “free” services and then threaten them with cutbacks to get even more money the next time around.
*this represents the price tag before the proposed increase in taxes, of course.
Tuesday, January 18, 2011
What will stop gold from going to $5000 or higher ?
Ben made it very clear that we need another few bubbles to overcome the problems of the latest ones blowing up. He welcomes rising commodity prices. At what point would he be publicly concerned about inflation ?
And, at what point would he be willing to re-issue "WIN" buttons ? (remember those ? Whip inflation now ! - hilarious !!)
To give you a graphic idea of Ben at work, here's a clip from Disney:
http://www.youtube.com/watch?v=XChxLGnIwCU&playnext=1&list=PL30DDB0EE9FFC8123&index=3
And, at what point would he be willing to re-issue "WIN" buttons ? (remember those ? Whip inflation now ! - hilarious !!)
To give you a graphic idea of Ben at work, here's a clip from Disney:
http://www.youtube.com/watch?v=XChxLGnIwCU&playnext=1&list=PL30DDB0EE9FFC8123&index=3
Monday, January 17, 2011
What is money ?
This most interesting question was discussed on NPR (yes, National Public Radio) the other day for about 1 hour. Here's the link:
http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money
If you'd like to listen to it, click on the link, click on the "Play Episode" button that is located right next to the lower right hand side of the picture of the huge stone disk, that the authors present as an example for money.
According to these lighthearted experts, money is fiction. You can listen to them for 1 hour and will be not any wiser. Too bad that this opportunity was wasted that way, as a better understanding of money certainly would make it easier to understand our economic life.
Here's what they could have said :
1.Money is credit
2.Money is something of value that people agree on to act as an intermediary to facilitate the exchange of diverse goods
3.Money is anything that people agree to be money
4.Money is whatever the government tells you it is
Ok, but what SHOULD money be ?
It should be whatever people decide to be money. Money should have independent value that all parties to transactions voluntarily recognize.
Money is really a yardstick, a measure. Few people ever want to hold on to money, as no matter what form it takes, money itself is likely not very useful. Money helps us to get what we really want. The only time that people will want to hoard money itself, is when the future seems especially uncertain.
Today, money is credit. It does not have any independent value and the government tells you that you have to take it (legal tender laws). When a credit card company sends you a cash advance check and you decide to write it for $4000 and deposit it into your checking account, you have just legally printed money.
That $4000 didn't exist before you wrote that check, and when you pay it off, it has ceased to exist.
You could say that our money is backed by debt. People will accept it as long as they have debts that they need to pay off. If they would be debt free, they would likely think a lot harder about accepting something for value that has such a poor track record of keeping it.
http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money
If you'd like to listen to it, click on the link, click on the "Play Episode" button that is located right next to the lower right hand side of the picture of the huge stone disk, that the authors present as an example for money.
According to these lighthearted experts, money is fiction. You can listen to them for 1 hour and will be not any wiser. Too bad that this opportunity was wasted that way, as a better understanding of money certainly would make it easier to understand our economic life.
Here's what they could have said :
1.Money is credit
2.Money is something of value that people agree on to act as an intermediary to facilitate the exchange of diverse goods
3.Money is anything that people agree to be money
4.Money is whatever the government tells you it is
Ok, but what SHOULD money be ?
It should be whatever people decide to be money. Money should have independent value that all parties to transactions voluntarily recognize.
Money is really a yardstick, a measure. Few people ever want to hold on to money, as no matter what form it takes, money itself is likely not very useful. Money helps us to get what we really want. The only time that people will want to hoard money itself, is when the future seems especially uncertain.
Today, money is credit. It does not have any independent value and the government tells you that you have to take it (legal tender laws). When a credit card company sends you a cash advance check and you decide to write it for $4000 and deposit it into your checking account, you have just legally printed money.
That $4000 didn't exist before you wrote that check, and when you pay it off, it has ceased to exist.
You could say that our money is backed by debt. People will accept it as long as they have debts that they need to pay off. If they would be debt free, they would likely think a lot harder about accepting something for value that has such a poor track record of keeping it.
Monday, January 10, 2011
A good way to take a position in gold ....
Today, January 10th 2011, the GLD ETF is trading at 133.80 and one can buy the January 2012 call with a strike of 120 for $19.75.
That means: It's possible to purchase a position in GLD with a down payment of 14.76%. This amounts to the total risk taken. The balance of $114.05 is "financed" at a rate of 5.22% per year. To arrive at this yield, I divided the option premium paid by the balance that would remain if I purchased GLD at 133.80 and applied the option premium as a down payment.
$133.80 - $19.75 = $114.05 = financed balance
$5.95 = total premium paid divided by $114.05 results in 5.22%
If this position would be held to expiration, an increase in the price of GLD of 4.45% or more would yield a profit. The income generated from investing the $114.05 cash balance would be added to that profit.
The real advantage of this strategy reveals itself when the price, against expectations, falls. For instance, if the price of gold should go down by 20% in 6 months, to about $1100 an ounce from the current 1375, and GLD therefore falls to $107, the strike 120 call with 6 months to run should still cost about $3.50.
Selling it at that price would result in a loss of $16.25, but the loss on the GLD itself would have been $26.80.
Now we would have the opportunity to employ the same strategy at the lower price.
That means: It's possible to purchase a position in GLD with a down payment of 14.76%. This amounts to the total risk taken. The balance of $114.05 is "financed" at a rate of 5.22% per year. To arrive at this yield, I divided the option premium paid by the balance that would remain if I purchased GLD at 133.80 and applied the option premium as a down payment.
$133.80 - $19.75 = $114.05 = financed balance
$5.95 = total premium paid divided by $114.05 results in 5.22%
If this position would be held to expiration, an increase in the price of GLD of 4.45% or more would yield a profit. The income generated from investing the $114.05 cash balance would be added to that profit.
The real advantage of this strategy reveals itself when the price, against expectations, falls. For instance, if the price of gold should go down by 20% in 6 months, to about $1100 an ounce from the current 1375, and GLD therefore falls to $107, the strike 120 call with 6 months to run should still cost about $3.50.
Selling it at that price would result in a loss of $16.25, but the loss on the GLD itself would have been $26.80.
Now we would have the opportunity to employ the same strategy at the lower price.
Sunday, January 2, 2011
Fairy Tales Concerning The Emperor
As most everyone knows, the previous peak of inflation and Dollar crisis, with gold reaching almost $1000 an ounce, happened at the end of the 1970s.
What is different between now and that time 30 years ago:
Gold had risen from around $100 to almost $1000 in about 10 years, inflation (as measured by the Government) was running at 10%+. At that time, the Fed had the insight that they needed to target the supply of money to bring inflation under control. Interest rates rose to 18%, long-term Treasuries yielded almost 13% and inflation subsided.
Now that the world is again losing faith, as evidenced by the rise of commodity prices, the rise of Gold to new record highs and the Dollar falling to record lows against all other major currencies, the Fed is printing a few trillion Dollars.
In 1980, the official federal debt amounted to 908 billion which was equal to 33% of GDP.
Today, the debt is about 14 trillion, which amounts to 100% of GDP.
If the government would have to apply the same bookkeeping that is required of any private entity, the obligation likely would top 60 trillion !
While Ben believes that printing money cures unemployment and lowers long term interest rates, and that he is basically able to avert any future financial calamity with all the powerful tools at his disposal, it will all come crashing down when that little boy takes a look at all this and says: "but the emperor has no clothes !"
PS - Just a little perspective: 14 trillion amounts to about $50,000 for each man, woman and child living in the USA, 60 trillion equals roughly $200,000.
Take a family of 4, and they owe $800,000 thanks to our gracious and benevolent government.
What is different between now and that time 30 years ago:
Gold had risen from around $100 to almost $1000 in about 10 years, inflation (as measured by the Government) was running at 10%+. At that time, the Fed had the insight that they needed to target the supply of money to bring inflation under control. Interest rates rose to 18%, long-term Treasuries yielded almost 13% and inflation subsided.
Now that the world is again losing faith, as evidenced by the rise of commodity prices, the rise of Gold to new record highs and the Dollar falling to record lows against all other major currencies, the Fed is printing a few trillion Dollars.
In 1980, the official federal debt amounted to 908 billion which was equal to 33% of GDP.
Today, the debt is about 14 trillion, which amounts to 100% of GDP.
If the government would have to apply the same bookkeeping that is required of any private entity, the obligation likely would top 60 trillion !
While Ben believes that printing money cures unemployment and lowers long term interest rates, and that he is basically able to avert any future financial calamity with all the powerful tools at his disposal, it will all come crashing down when that little boy takes a look at all this and says: "but the emperor has no clothes !"
PS - Just a little perspective: 14 trillion amounts to about $50,000 for each man, woman and child living in the USA, 60 trillion equals roughly $200,000.
Take a family of 4, and they owe $800,000 thanks to our gracious and benevolent government.
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