"Citi's CDO operations during late 2006 and 2007 functioned largely to sell CDOs to yet newer CDOs created by Citi to house them," charges a pending shareholder lawsuit against the bank that was filed in federal court in Manhattan in February 2009. "Citigroup concocted a scheme whereby it repackaged many of these investments into other freshly-baked vehicles to avoid incurring a loss."
Citigroup described the allegations as "irrational," saying the bank's executives would never knowingly take actions that would lead to "catastrophic losses."
ok, read those last two quotes/sentences again...
Citi did unethical behavior to avoid losses - they admit this - and that is their obligation to shareholders...so, how can a amoral entity be expected to be ethical? They don't give a shit and, therefore can't. Citizens united...up yours people, up yours...
Saturday, April 30, 2011
Friday, April 29, 2011
Thursday, April 28, 2011
Wednesday, April 27, 2011
Mises Daily - The Inside-Out World of Home Mortgages
by Doug French on April 26, 2011
However, markets propelled upward with the Fed's rocket fuel saw something they liked in the March housing numbers. Slabs were poured and nail guns commenced firing on 549,000 homes (annualized) up more than 7 percent from February, exceeding economists' forecasts.
The number of building permits rose 11 percent to a 594,000 pace, again above the projections of economists who had the number at a 540,000 annual pace.
"The underlying trend is one of stability or modest improvement since we hit our low point a couple of years ago," said economist Richard DeKaser, who is paid by Parthenon Group in Boston to tell Bloomberg nonsense like this.
"The mortgage mess is a house of mirrors."
The housing market is not improving and it is not going to for a long time. Daniel Indiviglio, writing for the Atlantic, points out that multifamily structures accounted for two-thirds of the increase in permits pulled in March. Apartments were a third of the increase in starts."The home building market remains weak and clouded with uncertainty," writes Indiviglio. "The upticks in permits and starts in March still leaves them both at very, very low levels from a historical perspective."
Builders around the country are resorting to extreme sales tactics to move their sticks and bricks. Kim Meier's KLM Builders is offering to throw in a new car with each home sale. Selling new homes in a Chicago suburb 50 miles from downtown, Meier told the New York Times "We needed to do something dramatic. The market's been soft."
The boom-time practical wisdom for the home-building industry was that people would stretch their commute to the limit in order be able to afford to buy a home. Suburbia kept expanding until people spent hours on the road each day getting to and from work. What were once small farm hamlets became bedroom communities with farmers selling their fields for more than they ever imagined, and row after row of tract homes were thrown up according to the FHA guidelines.
Homebuyers' desire to live what landscape historian J.B. Jackson describes as the lawn culture sent homebuyers to distant subdivisions that were previously devoted to growing grain in the Midwest, cotton outside of Phoenix, or timber near Seattle or Atlanta. "The culmination of the lawn culture was the country club," writes Robert Fishman in Bourgeois Utopias: The Rise and fall of Suburbia, with its carefully tended golf course. "It represents the suburban equivalent of the urban park."
Country clubs are going broke, and builders like Meier are forced to offer $17,000 toward a new General Motors car because, as David Streitfeld writes,
Builders and analysts say a long-term shift in behavior seems to be under way. Instead of wanting the biggest and the newest, even if it requires a long commute, buyers now demand something smaller, cheaper and, thanks to $4-a-gallon gas, as close to their jobs as possible. That often means buying a home out of foreclosure from a bank.Sales of new homes in February were down 80 percent from the peak in 2005. "New single-family sales are now lower than at any point since the data was first collected in 1963, when the nation had 120 million fewer residents," Streitfeld writes. An Associated Press story last month pointed out that new-home prices now average 45 percent more than average existing-home-sales prices. Normally the difference is 15 percent.
With such a price difference, it only makes sense that the sales of existing homes have faired much better by comparison, down only 28 percent since '05. However, distressed properties are 40 percent of all sales.
People are bailing from their American dream. Home prices don't always go up after all. And as much as prices have dropped thus far, Robert Schiller thinks there is 15 to 25 percent to go to the downside.
And the distressed market will not be cleared quickly. First it was attempts from Washington with tax incentives for buyers that propped up prices and kept builders from throwing in the towel. Builders also cashed up with tax refunds from taxes paid during their boom years, using the money to buy land, to buy lots, and to start new homes.
But the distressed-market headwind will be in builders' faces for many years. When Taylor Bean CEO Lee Farkas was asked by the Justice Department's Patrick Stokes if he thought his firm's agreement with Colonial Bank allowed Taylor Bean "to sell fraudulent, counterfeit, fictitious loans" to the bank, he replied,
Yeah, I believe it does. It's very common in our business to, to sell — because it's all data, there's really nothing but data — to sell loans that don't exist. It happens all the time.Yep, nothing but data. Maybe that's how a company of 50 employees can claim to hold title to 60 million mortgage loans in the United States. Mortgage Electronic Registration Systems (MERS) of Reston, Virginia, was created 16 years ago by Fannie Mae, Freddie Mac, and big banks like Bank of America and JPMorgan Chase.
"People are bailing from their American dream."
The quaint practice of recording mortgage assignments down at the local courthouse was slowing the mortgage business down during the boom. MERS "cut out the county clerks and became the owner of record, no matter how many times loans were transferred. MERS appears to sell loans to MERS ad infinitum," explain New York Times reporters Michael Powell and Gretchen Morgenson.Suddenly securitization was set free. Nobody noticed until the housing market cracked. Then the question of who had standing to foreclose on properties came into question. The owner of a loan is whoever must do the foreclosing, not a loan servicer.
The holder of nearly half of all America's mortgages prefers to operate in the shadows. Powell and Morgenson write,
Little about MERS was transparent. Asked as part of a lawsuit against MERS in September 2009 to produce minutes about the formation of the corporation, Mr. Arnold, the former C.E.O., testified that "writing was not one of the characteristics of our meetings."For those who believe Taylor Bean's practices were an aberration, Alan M. White, a law professor at the Valparaiso University School of Law in Indiana, last year matched MERS's ownership records against those in the public domain and found, "Fewer than 30 percent of the mortgages had an accurate record in MERS."
Powell and Morgenson rightly ask, "If MERS owned nothing, how could it bounce mortgages around for more than a decade? And how could it file millions of foreclosure motions?"
The government-sponsored enterprises (GSEs) and big banks are not allowed to fail, and the ability to foreclose is in question as long as MERS is in the middle of all this. But for those making their payments, how can they actually know who their lender is? They know who they write a check to every month, but what entity actually owns their loan?
If underwater by thousands of dollars, or hundreds of thousands, what's the incentive to pay? If a borrower wants to work out a compromise in good faith, how can they know if they are negotiating with the right party? The mortgage mess is a house of mirrors.
Proof that strategic default is on the mind of more overindebted homeowners comes from credit analytics firm FICO claiming their team of researchers "have demonstrated the ability to identify borrowers who are over 100 times more likely to default strategically than others."
FICO wants to help mortgage companies get the jump on those who plan to walk away.
Strategic defaulters, as a group; have better FICO scores, display better credit management, spend money more carefully, have owned their property for a shorter period of time, and have more open credit in the last six months.
In other words, the financially savvy are much more likely to strategically default.
However, FICO's chief analytics officer Andrew Jennings argues,
Strategic defaults are bad for lenders and investors, they're bad for the homeowners who elect to default and they're bad for neighborhoods and cities. Preventing them is in the interests of everyone involved.These arguments are the typical nonsense trumpeted by the mortgage industry and are all addressed in Walk Away: The Rise and Fall of the Home-Ownership Myth.
The idea is that FICO's new tools will help lenders identify borrowers they should negotiate with before these folks walk. FICO is doing its part, but don't look for the bailed-out and the too-big-to-fail to start negotiating. Borrowers don't keep them in business — Washington does.
Tuesday, April 26, 2011
Iraq, Iran and the Next Move
PRINT
ShareThis
By George Friedman
The United States told the Iraqi government last week that if it wants U.S. troops to remain in Iraq beyond the deadline of Dec. 31, 2011, as stipulated by the current Status of Forces Agreement between Washington and Baghdad, it would have to inform the United States quickly. Unless a new agreement is reached soon, the United States will be unable to remain. The implication in the U.S. position is that a complex planning process must be initiated to leave troops there and delays will not allow that process to take place.
What is actually going on is that the United States is urging the Iraqi government to change its mind on U.S. withdrawal, and it would like Iraq to change its mind right now in order to influence some of the events taking place in the Persian Gulf. The Shiite uprising in Bahrain and the Saudi intervention, along with events in Yemen, have created an extremely unstable situation in the region, and the United States is afraid that completing the withdrawal would increase the instability.
The Iranian Rise
The American concern, of course, has to do with Iran. The United States has been unable to block Iranian influence in Iraq’s post-Baathist government. Indeed, the degree to which the Iraqi government is a coherent entity is questionable, and its military and security forces have limited logistical and planning ability and are not capable of territorial defense. The issue is not the intent of Prime Minister Nouri al-Maliki, who himself is enigmatic. The problem is that the coalition that governs Iraq is fragmented and still not yet finalized, dominated by Iranian proxies such Muqtada al-Sadr — and it only intermittently controls the operations of the ministries under it, or the military and security forces.
As such, Iraq is vulnerable to the influence of any substantial power, and the most important substantial power following the withdrawal of the United States will be Iran. There has been much discussion of the historic tension between Iraqi Shia and Iranian Shia, all of which is true. But Iran has been systematically building its influence in Iraq among all factions using money, blackmail and ideology delivered by a sophisticated intelligence service. More important, as the United States withdraws, Iraqis, regardless of their feelings toward Iran (those Iraqis who haven’t always felt this way), are clearly sensing that resisting Iran is dangerous and accommodation with Iran is the only solution. They see Iran as the rising power in the region, and that perception is neither unreasonable nor something to which the United States or Saudi Arabia has an easy counter.
The Iraqi government’s response to the American offer has been predictable. While some quietly want the United States to remain, the general response has ranged from dismissal to threats if the United States did not leave. Given that the United States has reportedly offered to leave as many as 20,000 troops in a country that 170,000 American troops could not impose order on, the Iraqi perception is that this is merely a symbolic presence and that endorsing it would get Iraq into trouble with Iran, which has far more than 20,000 troops and ever-present intelligence services. It is not clear that the Iraqis were ever prepared to allow U.S. troops to remain, but 20,000 is enough to enrage Iran and not enough to deal with the consequences.
The American assumption in deciding to leave Iraq — and this goes back to George W. Bush as well as Barack Obama — was that over the course of four years, the United States would be able to leave because it would have created a coherent government and military. The United States underestimated the degree to which fragmentation in Iraq would prevent that outcome and the degree to which Iranian influence would undermine the effort. The United States made a pledge to the American public and a treaty with the Iraqi government to withdraw forces, but the conditions that were expected to develop simply did not.
Not coincidentally, the withdrawal of American forces has coincided with tremendous instability in the region, particularly on the Arabian Peninsula. All around the periphery of Saudi Arabia an arc of instability has emerged. It is not that the Iranians engineered it, but they have certainly taken advantage of it. As a result, Saudi Arabia is in a position where it has had to commit forces in Bahrain, is standing by in Yemen, and is even concerned about internal instability given the rise of both reform-minded and Shiite elements at a time of unprecedented transition given the geriatric state of the country’s top four leaders. Iran has certainly done whatever it could to exacerbate this instability, which fits neatly into the Iraqi situation.
As the United States leaves Iraq, Iran expects to increase its influence there. Iran normally acts cautiously even while engaged in extreme rhetoric. Therefore, it is unlikely to send conventional forces into Iraq. Indeed, it might not be necessary to do so in order to gain a dominant political position. Nor is it inconceivable that the Iranians could decide to act more aggressively. With the United States gone, the risks decline.
Saudi Arabia’s Problem
The country that could possibly counter Iran in Iraq is Saudi Arabia, which has been known to funnel money to Sunni groups there. Its military is no match for Iran’s in a battle for Iraq, and its influence there has been less than Iran’s among most groups. More important, as the Saudis face the crisis on their periphery they are diverted and preoccupied by events to the east and south. The unrest in the region, therefore, increases the sense of isolation of some Iraqis and increases their vulnerability to Iran. Thus, given that Iraq is Iran’s primary national security concern, the events in the Persian Gulf work to Iran’s advantage.
The United States previously had an Iraq question. That question is being answered, and not to the American advantage. Instead, what is emerging is a Saudi Arabian question. Saudi Arabia currently is clearly able to handle unrest within its borders. It has also been able to suppress the Shia in Bahrain — for now, at least. However, its ability to manage its southern periphery with Yemen is being tested, given that the regime in Sanaa was already weakened by multiple insurgencies and is now being forced from office after more than 30 years in power. If the combined pressure of internal unrest, turmoil throughout the region and Iranian manipulation continues, the stress on the Saudis could become substantial.
The basic problem the Saudis face is that they don’t know the limits of their ability (which is not much beyond their financial muscle) to manage the situation. If they miscalculate and overextend, they could find themselves in an untenable position. Therefore, the Saudis must be conservative. They cannot afford miscalculation. From the Saudi point of view, the critical element is a clear sign of long-term American commitment to the regime. American support for the Saudis in Bahrain has been limited, and the United States has not been aggressively trying to manage the situation in Yemen, given its limited ability to shape an outcome there. Coupled with the American position on Iraq, which is that it will remain only if asked — and then only with limited forces — the Saudis are clearly not getting the signals they want from the United States. In fact, what further worsens the Saudi position is that they cannot overtly align with the United States for their security needs. Nevertheless, they also have no other option. Exploiting this Saudi dilemma is a key part of the Iranian strategy.
The smaller countries of the Arabian Peninsula, grouped with Saudi Arabia in the Gulf Cooperation Council, have played the role of mediator in Yemen, but ultimately they lack the force needed by a credible mediator — a potential military option to concentrate the minds of the negotiating parties. For that, they need the United States.
It is in this context that the crown prince of the United Arab Emirates (UAE), Sheikh Mohammed bin Zayed al-Nahyan, will be visiting Washington on April 26. The UAE is one of the few countries on the Arabian Peninsula that has not experienced significant unrest. As such, it has emerged as one of the politically powerful entities in the region. We obviously cannot know what the UAE is going to ask the United States for, but we would be surprised if it wasn’t for a definitive sign that the United States was prepared to challenge the Iranian rise in the region.
The Saudis will be watching the American response very carefully. Their national strategy has been to uncomfortably rely on the United States. If the United States is seen as unreliable, the Saudis have only two options. One is to hold their position and hope for the best. The other is to reach out and see if some accommodation can be made with Iran. The tensions between Iran and Saudi Arabia — religious, cultural, economic and political — are profound. But in the end, the Iranians want to be the dominant power in the Persian Gulf, defining economic, political and military patterns.
On April 18, Iranian Supreme Leader Ayatollah Ali Khamenei’s adviser for military affairs, Maj. Gen. Yahya Rahim Safavi, warned Saudi Arabia that it, too, could be invaded on the same pretext that the kingdom sent forces into Bahrain to suppress a largely Shiite rising there. Then, on April 23, the commander of Iran’s elite Islamic Revolutionary Guard Corps, Maj. Gen. Mohammad Ali Jaafari, remarked that Iran’s military might was stronger than that of Saudi Arabia and reminded the United States that its forces in the region were within range of Tehran’s weapons. Again, the Iranians are not about to make any aggressive moves, and such statements are intended to shape perception and force the Saudis to capitulate on the negotiating table.
The Saudis want regime survival above all else. Deciding between facing Iran alone or reaching an unpleasant accommodation, the Saudis have little choice. We would guess that one of the reasons the UAE is reaching out to Obama is to try to convince him of the dire consequences of inaction and to move the United States into a more active role.
A Strategy of Neglect
The Obama administration appears to have adopted an increasingly obvious foreign policy. Rather than simply attempt to control events around the world, the administration appears to have selected a policy of careful neglect. This is not, in itself, a bad strategy. Neglect means that allies and regional powers directly affected by the problem will take responsibility for the problem. Most problems resolve themselves without the need of American intervention. If they don’t, the United States can consider its posture later. Given that the world has become accustomed to the United States as first responder, other countries have simply waited for the American response. We have seen this in Libya, where the United States has tried to play a marginal role. Conceptually, this is not unsound.
The problem is that this will work only when regional powers have the weight to deal with the problem and where the outcome is not crucial to American interests. Again, Libya is an almost perfect example of this. However, the Persian Gulf is an area of enormous interest to the United States because of oil. Absent the United States, the regional forces will not be able to contain Iran. Therefore, applying this strategy to the Persian Gulf creates a situation of extreme risk for the United States.
Re-engagement in Iraq on a level that would deter Iran is not a likely option, not only because of the Iraqi position but also because the United States lacks the force needed to create a substantial deterrence that would not be attacked and worn down by guerrillas. Intruding in the Arabian Peninsula itself is dangerous for a number reasons, ranging from the military challenge to the hostility an American presence could generate. A pure naval and air solution lacks the ability to threaten Iran’s center of gravity, its large ground force.
Therefore, the United States is in a difficult position. It cannot simply decline engagement nor does it have the ability to engage at this moment — and it is this moment that matters. Nor does it have allies outside the region with the resources and appetite for involvement. That leaves the United States with the Saudi option — negotiate with Iran, a subject I’ve written on before. This is not an easy course, nor a recommended one, but when all other options are gone, you go with what you have.
The pressure from Iran is becoming palpable. All of the Arab countries feel it, and whatever their feelings about the Persians, the realities of power are what they are. The UAE has been sent to ask the United States for a solution. It is not clear the United States has one. When we ask why the price of oil is surging, the idea of geopolitical risk does come to mind. It is not a foolish speculation.
Read more: Iraq, Iran and the Next Move | STRATFOR
Monday, April 25, 2011
Gilbert earns the Hat Trick in the Ardennes...
...well, my prediction was wrong, the brothers Schleck, could not "workover" Phillipe Gilbert, and the Wallonian kicked thier collective asses...
Brothers have no regrets after finishing second and third
Fränk and Andy Schleck were bitterly disappointed to lose to Philippe Gilbert at Liège - Bastogne - Liège, but believed they did everything they could to try and beat him in the finale of one of the toughest editions of the race in years.
The Leopard Trek team worked hard to isolate Gilbert and then Andy lead Fränk as they made a double attack on the Cote de la Roche aux Faucons. However, Gilbert was the only rider able to go with them and then made his own attack on the Cote de Saint-Nicolas to stamp his authority on the brothers and show them who was the strongest in the race.
The sprint in Ans was an easily executed formality for Gilbert, and he pulled out several metres on Fränk, who finished second and the more fatigued Andy, who was third.
"I don't think we could have done any thing differently," Fränk conceded in a video interview just after his brother had spoken to camera.
"We attacked together, which we don't normally do. He was unbeatable - the only one who could follow us (on the Cote de la Roche aux Faucons) and there was nothing else we could do."
"We have no regrets and that's the most important thing. He just wasn't beatable."
Sunday, April 24, 2011
Liege-Bastogne-Liege, La Doyenne
Live coverage of Liège-Bastogne-Liège.
10:36 CEST (257.5km remaining from 257.5km)
The 199 starters have just set out from Liège under clear skies, with the temperature a pleasant 18 degrees and set to rise as the day goes on.10:40 CEST (254.5km remaining from 257.5km)
In spite of the 257.5km and ten categorised climbs facing the riders, the attacking starts from the moment the flag is dropped.Sébastien Delfosse (Landbouwkrediet) and Jesus Herrada Lopez (Movistar) manage to jump clear 3km in, and shortly afterwards David Le Lay (Ag2r-La Mondiale) bridges across.10:45 CEST (249.5km remaining from 257.5km)
8km in and the trio of escapees have an advantage of 20 seconds over the peloton, but there is no shortage of riders who want to try and make it into the echapee matinale, so they might have their work cut out to stay clear.The outward leg of the race, to Bastogne, is significantly flatter than the return journey, with just the Côte de Saint-Roch (1km at 11 %) to test the legs 71.5km in. Depending on the wind conditions (which will not be a factor today, it seems), it gives any early breakaway ample opportunity to build up a lead before the pace begins to ratchet up ahead of the gruelling series of climbs in the final 100km.10:47 CEST
Simon Geschke (Skil-Shimano) makes a bid to bridge across to the leaders, but it's hard to escape the clutches of the peloton.
I am thinking that the Schleck brothers work over Philipe Gilbert for the win, either Andy or Frank, and deny Gilbert the Ardennes Hat Trick..
La Doyenne - the oldest woman...
Liège–Bastogne–Liège, often called La Doyenne ("the oldest"),[1][2][3] is one of the five 'Monuments' of the European professionalroad cycling calendar.[4] It is run in the Ardennes region of Belgium, from Liège to Bastogne and back.Liège–Bastogne–Liège was part of the UCI Road World Cup and is part of the Belgian Ardennes Classics series, which includes La Flèche Wallonne. Both are organised by Amaury Sport Organisation. At one time, Flèche Wallonne and Liège–Bastogne–Liège were run on successive days as Le Weekend Ardennais. Only six riders have won both races in the same year: the Swiss Ferdi Küblertwice (in 1951 and 1952), Belgians Stan Ockers (1955) and Eddy Merckx (1972), Italians Moreno Argentin (1991) and Davide Rebellin(2004), and the Spaniard Alejandro Valverde (2006).
The British magazine Cycling Weekly said: "In purely physical terms, this is probably the toughest classic: the climbs are long, most of them are pretty steep as well, and they come up with depressing frequency in the final kilometers.[12]Moreno Argentin said:- Riders who win at Liège are what we call fondisti - men with a superior level of stamina. [The climb of] La Redoute is like the Mur de Huy in that it has to be tackled at pace, from the front of the peloton. The gradient is about 14 or 15 per cent, and it comes after 220 or 230 kilometers, so you don't have to be a genius to work out how tough it is. I remember that we used to go up with a maximum of 39 x 21 - it's not quite as steep as the Muur de Huy. A lot of riders mistakenly think you should attack on the hardest part, but in reality you hurt people on the slightly flatter section that comes after this.
Saturday, April 23, 2011
Debunking Anti-Gold Propaganda
- Font Size
A meme is now circulating that gold is in a bubble and that it's time for the wise investor to sell. To me, that’s a ridiculous notion. Certainly a premature one.
It pays to remain as objective as you can be when analyzing any investment. People have a tendency to fall in love with an asset class, usually because it’s treated them so well. We saw that happen, most recently, with Internet stocks in the late ‘90s and houses up to 2007. Investment bubbles are driven primarily by emotion, although there's always some rationale for the emotion to latch on to. Perversely, when it comes to investing, reason is recruited mainly to provide cover for passion and preconception.
In the same way, people tend to hate certain investments unreasonably, usually at the bottom of a bear market, after they've lost a lot of money and thinking about the asset means reliving the pain and loss. Love-and-hate cycles occur for all investment classes.
But there’s only one investment I can think of that many people either love or hate reflexively, almost without regard to market performance: gold. And, to a lesser degree, silver. It’s strange that these two metals provoke such powerful psychological reactions – especially among people who dislike them. Nobody has an instinctive hatred of iron, copper, aluminum or cobalt. The reason, of course, is that the main use of gold has always been as money. And people have strong feelings about money. Let’s spend a moment looking at how gold’s fundamentals fit in with the psychology of the current market.
What Gold Is – and Why It’s Hated
Let me first disclose that I’ve always been favorably inclined toward gold, simply because I think money is a good thing. Not everyone feels that way, however. Some, with a Platonic view, think that money and commercial activity in general are degrading and beneath the “better” sort of people – although they’re a little hazy about how mankind rose above the level of living hand-to-mouth, grubbing for roots and berries. Some think it’s “the root of all evil,” a view that reflects a certain attitude toward the material world in general. Some (who have actually read St. Paul) think it’s just the love of money that’s the root of all evil. Some others see the utility of money but think it should be controlled somehow – as if only the proper authorities knew how to manage the dangerous substance.
From an economic viewpoint, however, money is just a medium of exchange and a store of value. Efforts to turn it into a political football invariably are a sign of a hidden agenda or perhaps a psychological aberration. But, that said, money does have a moral as well as an economic significance. And it’s important to get that out in the open and have it understood. My view is that money is a high moral good. It represents all the good things you hope to have, do and provide in the future. In a manner of speaking, it’s distilled life. That’s why it’s important to have a sound money, one that isn’t subject to political manipulation.
Over the centuries many things have been used as money, prominently including cows, salt and seashells. Aristotle thought about this in the 4th century BCE and arrived at the five characteristics of a good money:
- It should be durable (which is why, say, wheat isn’t a good money – it rots).
- It should be divisible (which is why artwork isn’t a good money – you can’t cut up the Mona Lisa for change).
- It should be convenient (which is why lead isn’t a good money – it just takes too much to be of value).
- It should be consistent (which is one reason why land can’t be money – each piece is different).
- And it should have value in itself (which is why paper money leads to trouble).
Of the 92 naturally occurring elements, gold (secondarily silver) has proved the best money. It’s not magic or superstition, any more than it is for iron to be best for building bridges and aluminum for building airplanes.
Of course we do use paper as money today, but only because it recently served as a receipt for actual money. Paper money (currency) historically has a half-life that depends on a number of factors. But it rarely lasts longer than the government that issues it. Gold is the best money because it doesn’t need to be “faith-based” or rely on a government.
There’s much more that can be said on this topic, and it’s important to grasp the essentials in order to understand the controversy about whether or not gold is in a bubble. But this isn’t the place for an extended explanation.
Keep these things in mind, though, as you listen to the current blather from talking heads about where gold is going. Most of them are just journalists, reporters that are parroting what they heard someone else say. And the “someone else” is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF or a similar institution with an interest in the status quo of the last few generations. You should treat almost everything you hear about finance or economics in the popular media as no more than entertainment.
So let’s take some recent statements, assertions and opinions that have been promulgated in the media and analyze them. Many impress me as completely uninformed, even stupid. But since they’re floating around in the infosphere, I suppose they need to be addressed.
Misinformation and Disinformation
Gold is expensive.
This objection is worth considering – for any asset. In fact, it’s critical. We can determine the price of almost anything fairly easily today, but figuring out its value is as hard as it’s ever been. From the founding of the U.S. until 1933, the dollar was defined as 1/20th of an ounce of gold. From 1933 it was redefined as 1/35th of an ounce. After the 1971 dollar devaluation, the official price of the metal was raised to $42.22 – but that official number is meaningless, since nobody buys or sells the metal at that price. More importantly, people have gotten into the habit of giving the price of gold in dollars, rather than the value of the dollar in gold. But that’s another subject.
Here’s the crux of the argument. Before the creation of the Federal Reserve in 1913, a $20 bill was just a receipt for the deposit of one ounce of gold with the Treasury. The U.S. official money supply equated more or less with the amount of gold. Now, however, dollars are being created by the trillion, and nobody really knows how many more of them are going to be shazammed into existence.
It is hard to determine the value of anything when the inch marks on your yardstick keep drifting closer and closer together.
The smart money is long gone from gold.
This is an interesting assertion that I find based on nothing at all. Who really is the smart money? How do you really know that? And how do you know exactly what they own (except for, usually, many months after the fact) or what they plan on buying or selling? The fact is that very few billionaires (John Paulson perhaps best known of them) have declared a major position in the metal. Gold and gold stocks, as the following chart shows, are only a tiny proportion of the financial world’s assets, either absolutely or relative to where they've been in the past:
Gold is risky.
Risk is largely a function of price. And, as a general rule, the higher the price the higher the risk, simply because the supply is likely to go up and the demand to go down – leading to a lower price. So, yes, gold is riskier now, at $1,400, than it was at $700 or at $200. But even when it was at $35, there was a well-known financial commentator named Eliot Janeway (I always thought he was a fool and a blowhard) who was crowing that if the U.S. government didn’t support it at $35, it would fall to $8.
In any event, risk is relative. Stocks are very risky today. Bonds are ultra risky. Real estate is in an ongoing bear market. And the dollar is on its way to reaching its intrinsic value.
Yes, gold is risky at $1,400. But it is actually less risky than most alternatives.
Gold pays no interest.
This is kind of true. But only in the sense that a $100 bill pays no interest. You can get interest from anything that functions as money if it is lent out. Interest is the time premium of money. You will not get interest from either your $100 or from your gold unless you lend them to someone. But both the dollars and the gold will earn interest if you lend them out. The problem is that once you make a loan (even to a bank, in the form of a savings account), you may not even get your principal back, much less the interest.
Gold pays no dividends.
Of course it doesn’t. It also doesn't yield chocolate syrup. It’s a ridiculous objection, because only corporations pay dividends. It’s like expecting your Toyota in the driveway to pay a dividend, when only the corporation in Japan can do so. But if you want dividends related to gold, you can buy a successful gold mining stock.
Gold costs you insurance and storage.
This is arguably true. But it’s really a sophistic misdirection to which many people uncritically nod in agreement. You may very well want to insure and professionally store your gold. Just as you might your jewelry, your artwork and most valuable things you own. It’s even true of the share certificates for stocks you may own. It’s true of the assets in your mutual fund (where you pay for custody, plus a management fee).
You can avoid the cost of insurance and storage by burying gold in a safe place – something that’s not a practical option with most other valuable assets. But maybe you really don’t want to store and insure your gold, because the government may prove a greater threat than any common thief. And if you pay storage and insurance, they’ll definitely know how much you have and where it is.
Gold has no real use.
This assertion stems from a lack of knowledge of basic chemistry as well as economics. Yes, of course people have always liked gold for jewelry, and that’s a genuine use. It’s also good for dentistry and micro-circuitry. Owners of paper money, however, have found the stuff to be absolutely worthless hundreds of times in many score of countries.
In point of fact, gold is useful because it is the most malleable, the most ductile and the most corrosion resistant of all metals. That means it’s finding new uses literally every day. It’s also the second most conductive of heat and electricity, and the second most reflective (after silver). Gold is a hi-tech metal for these reasons. It can do things no other substance can and is part of the reason your computer works so well.
But all these reasons are strictly secondary, because gold’s main use has always been (and I’ll wager will be again) as money. Money is its highest and best use, and it’s an extremely important one.
The U.S. can, or will, sell its gold to pay its debt, depressing the market.
I find this assertion completely unrealistic. The U.S. government reports that it owns 265 million ounces of gold. Let’s say that’s worth about $400 billion right now. I’m afraid that’s chicken feed in today’s world. It’s only a quarter of this year’s federal deficit alone. It’s only half of one year’s trade deficit. It represents only about 5% of the dollars outside the U.S. The U.S. government may be the largest holder of gold in the world, but it owns less than 5% of the approximately 6 billion ounces above ground.
From the ‘60s until about 2000, most Western governments were selling gold from their treasuries, working on the belief it was a “barbarous relic.” Since then, governments in the advancing world – China, India, Russia and many other ex-socialist states – have been buying massive quantities.
Why? Because their main monetary asset is U.S. dollars, and they have come to realize those dollars are the unbacked liability of a bankrupt government. They’re becoming hot potatoes, Old Maid cards. But the dollars can be replaced with what? Sovereign wealth funds are using them to buy resources and industries, but those things aren’t money. And in the hands of bureaucrats, they’re guaranteed to be mismanaged. I expect a great deal of gold buying from governments around the world over the next few years. And it will be at much higher dollar prices.
High gold prices will bring on huge new production, which will depress its price.
This assertion shows a complete misunderstanding of the nature of the gold market. Gold production is now about 82.6 million ounces per year and has been trending slightly down for the last decade. That’s partly because at high prices miners tend to mine lower-grade ore. And partly because the world has been extensively explored, and most large, high-grade, easily exploited resources have already been put into production.
But new production is trivial relative to the 6 billion ounces now above ground, which only increases by about 1.3% annually. Gold isn’t consumed like wheat or even copper; its supply keeps slowly rising, like wealth in general. What really controls gold’s price is the desire of people to hold it, or hold other things – new production is a trivial influence.
That’s not to say things can’t change. The asteroids have lots of heavy metals, including gold; space exploration will make them available. Gigantic amounts of gold are dissolved in seawater and will perhaps someday be economically recoverable with biotech. It’s now possible to transmute metals, fulfilling the alchemists dream; perhaps someday this will be economic for gold. And nanotech may soon allow ultra-low-grade deposits of gold (and every other element) to be recovered profitably. But these things need not concern us as practical matters in the course of this bull market.
You should have only a small amount of gold, for insurance.
This argument is made by those who think gold is only going to be useful if civilization breaks down, when it could be an asset of last resort. In the meantime, they say, do something productive with your money…
This is poor speculative theory. The intelligent investor allocates his funds where it’s likely they’ll provide the best return, consistent with the risk, liquidity and volatility profile he wants to maintain. There are times when you should be greatly overweight in a single asset class – sometimes stocks, sometimes bonds, sometimes real estate, sometimes what-have-you. For the last 12 years, it’s been wise to be overweight in gold. You always want some gold, simply because it’s cash in the most basic form. But ten years from now, I suspect that will be a minimum. Right now it’s a maximum. The idea of keeping a constant, but insignificant, percentage in gold impresses me as poorly thought out.
Interest rates are at zero; gold will fall as they rise.
In principle, as interest rates rise, people tend to prefer holding currency deposits. So they tend to sell other assets, including gold, to own interest-earning cash. But there are other factors at work. What if the nominal interest rate is 20%, but the rate of currency depreciation is 40%? Then the real interest rate is minus 20%. This is more or less what happened in the late ‘70s, when both nominal rates and gold went up together. Right now governments all over the world are suppressing rates even while they’re greatly increasing the amount of money outstanding; this will eventually (read: soon) result in both much higher rates and a much higher general price level. At some point high real rates will be a factor in ending the gold bull market, but that time is many months or years in the future.
Gold sentiment is at an all-time high.
Although gold prices are at an all-time high in nominal terms, they are still nowhere near their highs in real terms, of about $2,500 (depending on how much credibility you give the government’s CPI numbers), reached in 1980. Gold sentiment is still quite subdued among the public; most of them barely know it even exists.
Some journalists like to point out that since there are a few (five, perhaps) gold dispensing machines in the world, including one in the U.S., that there’s a gold mania afoot. That’s ridiculous, although it shows a slowly awakening interest among people with assets.
Journalists also point to the numerous ads on late-night TV offering to buy old gold jewelry (generally at around a 50% discount from its metal value) as a sign of a gold bubble. But this is even more ridiculous, since the ads are inducing the unsophisticated, cash-strapped booboisie to sell the metal, not buy it.
You’ll know sentiment is at a high when major brokerage firms are hyping newly minted gold products, and Slime Magazine (if it still exists) has a cover showing a golden bull tearing apart the New York Stock Exchange. We’re a long way from that point.
Mining stocks are risky.
This is absolutely true. In general, mining is a horrible business. It requires gigantic fixed capital expense to build the mine, but only after numerous, expensive and unpredictable permitting issues are handled. Then the operation is immovable and subject to every political risk imaginable, not infrequently including nationalization. Add in continual and formidable technical issues of every description, compounded by unpredictable fluctuations in the price of the end product. Mining is a horrible business, and you’ll never find Graham-Dodd investors buying mining stocks.
All these problems (and many more that aren’t germane to this brief article), however, make them excellent speculative vehicles from time to time.
Mineral exploration stocks are very, very risky.
This is very, very true. There are thousands of little public companies, and some are just a couple steps up from a prospector wandering around with a mule. Others are fairly sophisticated, hi-tech operations. Exploration companies are often classed with mining companies, but they are actually very different animals. They aren’t so much running a business as engaging in a very expensive and long-odds treasure hunt.
That’s the bad news. The good news is that they are not only risky but extraordinarily volatile. The most you can lose is 100%, but the market cyclically goes up 10 to 1, with some stocks moving 1,000 to 1. That kind of volatility can be your best friend. Speculating in these issues, however, requires both expertise and a good sense of market timing. But they’re likely to be at the epicenter of the gold bubble when it arrives – even though few actually have any gold, except in their names.
Warren Buffett is a huge gold bear.
This is true, but irrelevant – entirely apart from suffering from the logical fallacy called “argument from authority.” But, nonetheless, when the world’s most successful investor speaks, it’s worth listening. Here's what Buffett recently said about gold in an interview with Ben Stein, another goldphobe: "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all – not some, all – of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
I’ve long considered Buffett an idiot savant – a genius at buying stocks but at nothing else. His statement is quite accurate, but completely meaningless. The same could be said of the U.S. dollar money supply – or even of the world inventory of steel and copper. These things represent potential but are not businesses or productive assets in themselves. Buffett is certainly not stupid, but he’s a shameless and intellectually dishonest sophist. And although a great investor, he’s neither an economist or someone who believes in free markets.
Gold is a religious statement.
Actually, since most religions have an otherworldly orientation, they’re at least subtly (and often stridently) anti-gold. But it is true that some promoters of gold seem to have an Elmer Gantry-like style. That, however, can be said of True Believers in anything, whether or not the belief itself has merit. In point of fact, I think it’s more true to say goldphobes suffer from a kind of religious hysteria, fervently believing in collectivism in general and the state in particular, with no regard to counter-arguments. Someone who understands why gold is money and why it is currently a good speculative vehicle is hardly making a religious statement. More likely he’s taking a scientific approach to economics and thinking for himself.
So Where Are We?
So these are some of the more egregious arguments against gold that are being brought forward today. Most of them are propounded by knaves, fools or the uninformed.
My own view should be clear from the responses I’ve given above. But let me clarify it a bit further. Historically – actually just up until the decades after World War I, when world governments started issuing paper currency with no relation to gold – the metal was cash, and it was used as money everywhere, on a daily basis. I believe that will again be the case in the fairly near future.
The question is: At what price will that occur, relative to other things? It’s not just a question of picking a dollar price, because the relative value of many things – houses, food, commodities, labor – have been distorted by a very long period of currency inflation, increased taxation and very burdensome regulation that started at the beginning of the last depression. Especially with the fantastic leaps in technology now being made and breathtaking advances that will soon occur, it’s hard to be sure exactly how values will realign after the Greater Depression ends. And we can’t know the exact manner in which it will end. Especially when you factor in the rise of China and India.
A guess? I’ll say the equivalent of about $5,000 an ounce of today’s dollars. And I feel pretty good about that number, considering where we are in the current gold bull market. Classic bull markets have three stages. We’ve long since left the “Stealth” stage – when few people even remembered gold existed, and those who did mocked the idea of owning it. We’re about to leave the “Wall of Worry” stage, when people notice it and the bulls and bears battle back and forth. I’ll conjecture that within the next year we’ll enter the “Mania” stage – when everybody, including governments, is buying gold, out of greed and fear. But also out of prudence.
The policies of Bernanke and Obama – but also of almost every other central bank and government in the world – are not just wrong. These people are, perversely, doing just the opposite of what should be done to cure the problems that have built up over decades. One consequence of their actions will be to ignite numerous other bubbles in various markets and countries. I expect the biggest bubble will be in gold, and the wildest one in mining and exploration stocks.
When will I sell out of gold and gold stocks? Of course, they don’t ring a bell at either the top or the bottom of the market. But I expect to be a seller when there really is a bubble, a mania, in all things gold-related. There’s a good chance that will coincide to some degree with a real bottom in conventional stocks. I don’t know what level that might be on the DJIA, but I’d think its average dividend yield might then be in the 6 to 8% area.
The bottom line is that gold and its friends are no longer cheap, but they have a long way – in both time and price – to run. Until they're done, I suggest you be right and sit tight.
[If you take the time to learn more about gold and silver, you’ll realize quickly that both still have a long way to go in this bull market. And with China – and other countries – ready to dump the flailing U.S. dollar, it’s imperative to protect yourself with precious metals.
Subscribe to:
Posts (Atom)