Monday, February 28, 2011

Marc Faber - We are Doomed - Buy Gold

Marc Faber recently did an interview with McAlvany Financial Group touching on familiar topics to many of you. Over the weekend I was looking at the world and feeling especially gloomy. However bad it could have been in 2008 and 2009 the government has been able to successfully buy a couple of years and make the inevitable that much worse. Faber touches on some of the investment themes that I have talked about in the past. You can read the entire transcript here. A few highlights.

No surprise here. I think it is obvious. It will happen over multiple years but I think the comparison to a computer rebooting is very accurate. The government, Fed, and Wall St have run the system into the ground and it will have to be completely scraped and reboot will have to occur. And as Faber correctly points out it always ends in war.

I think we are all doomed. I think what will happen is that we are in the midst of a kind of a crack-up boom that is not sustainable, that eventually the economy will deteriorate, that there will be more money-printing, and then you have inflation, and a poor economy, an extreme form of stagflation, and, eventually, in that situation, countries go to war, and, as a whole, derivatives, the market, and everything will collapse, and like a computer when it crashes, you will have to reboot it.

One thing Faber did not mention in this interview that I have heard him say recently is that regardless if your bullish or bearish or a deflationist or inflationist, you should be long term bullish on oil. Because at this point all roads lead to war and oil will move strongly when that happens. Of course he is talking over years and so oil could go down 70% just like in 2008 before rallying again.

And than on gold.

That is why I am advising people to accumulate gold. Can gold have a correction? Yes, there has been a little bit too much euphoria about gold, and we may have a correction, but I do not think we are in a bubble in the price of gold. In fact, I could make a case that gold, at this level of $1400 an ounce, is cheaper than in 1999, when I look at the unfunded liability growth of the U.S., at the credit growth of the U.S., and at the household growth, and at the money printing, and at all the wealth creation that happens in China and Russia.

Finally this is what I think is one of the surest bets in finance over the next decade. How it happens I have no idea. Maybe it is 10k like Faber mentions or maybe the Dow goes to 5,000 or something lower or higher. Either way it makes perfect sense.

In a money-printing environment, it is very difficult to know what is actually cheap and what is expensive. Is the price of wheat high, or is it low? Inflation-adjusted, it is extremely low. In nominal terms, it is relatively high. I believe that, in March 2009 when the S&P was at 666, the market was actually much cheaper than is generally perceived, because of the money-printing, and I do not anticipate that we will see 666 on the S&P again, in nominal terms.

In other words, they are going to print so much money that the S&P could be at, perhaps, 2000, but in real terms, it could be down below the lows of March 6, 2009. Maybe in gold terms, we could one day reach a ratio of Dow Jones to gold of 1-to-1, as we were in 1980. In other words, the Dow could be perhaps at 10,000 or 12,000, and gold could be at the same level.

Monday, February 7, 2011

JP Morgan Makes Big Move in Gold Market - Someday a Financial Trap?

One of the biggest problems in the last few decades with gold is that you couldn't use it as collateral in normal every day finance transactions. So besides the fact it doesn't earn an income stream or pay dividends, it was also a dead asset in that it couldn't be used to leverage other assets. Well all that is changing.

From JP Morgan Press Release:

J.P. Morgan Collateral Management Offers Automated Use of Gold
First tri-party agent to accept gold

London, 7 February 2011 - J.P. Morgan today announced it is the only tri-party collateral manager to accept physical gold as collateral to satisfy securities lending and repo obligations with counterparties. This comes as more clients look to use gold as a hedge against inflation and to post as collateral.

"The ability to finance and leverage the broadest range of asset classes is important to our clients. Many clients are holding gold on their balance sheets as an inflation hedge and are looking to make these assets work for them as collateral," said John Rivett, Collateral Management Executive, J.P. Morgan Worldwide Securities Services. "By combining our collateral management and vaulting capabilities, we provide clients with greater flexibility in how they mobilise collateral."

The automated use of gold in collateral management is introduced under J.P. Morgan's Worldwide Securities Services global collateral engine initiative. This initiative enables clients to mobilize collateral inventories across multiple geographies and trading activities, regardless of the underlying obligation, to extract maximum value and manage risk.

The firm expects to accept additional precious metals and commodities as collateral later in the year.

This is a huge move by JP Morgan. They announced they will accept as collateral physical gold to satisfy securities lending and repo obligations with counterparties. Over time this seems to be a game changer for the gold market and will allow for a potential large gold bubble down the road. It is also interesting because if we do someday have a massive debt implosion and the system collapses this gives the government (i.e. JP Morgan) a way to repo the US gold holdings held by private investors. It has the potential to be a very keen laid trap. I don't want to imply there is a conscious effort of a keen trap being laid. Just that the trap is being created consciously or unconsciously. Used correctly this is very important for money management and opens up all sorts of possible avenues, but what at the beginning wise men do fools will do at the end. As we have learned rules can change overnight. Someday down the road if the system were to collapse and most of the gold is leveraged and used in various derivatives and swaps etc etc it could very easily end up where the banks and hence the government will end up with most of the gold in the world by taking possession of the collateral. They don't have to consciously scheme at all. It just falls into place. The government doesn't have to look bad confiscating anything because it was part of the collateral arrangement.

Who knows what gold does in the short term. It looks sort of weak technically currently but who knows. Long term this creates the dynamics needed for a big gold bubble. It makes gold alot less useless. I can still own gold and leverage it to own income producing assets.

Thursday, February 3, 2011

Tomorrow - An Important Day for the Markets

I haven't talked about the markets in a long time. We are on a runaway train. It doesn't matter much what any data says. I think the next two market days determine whether the trains shifts into a higher gear or gets derailed. Right now nothing is able to stop this market. It seems we are about to break upside resistance where the market would quickly progress higher towards the 1400 range in S&P 500. We have already broek 1300 which is important but we cant get beyond 1310 to 1315 without really leaving 1300 far behind.

It seems shocking (I guess it really shouldn't be) how the market has ignored this Egypt thing. Tomorrow into Monday I think is really important on whether that becomes a stock market issue or not in the short term. Muslim Friday's prayers are tomorrow and I would expect that to get things heated again. Mubarak is picking up his rhetoric that he wont quit before September despite world leaders saying he needs to quit now. We are in the sweet spot for this to become an issue or prove it is a non issue.

Jobs number comes out tomorrow also. I think the only way it is an issue is if it is really strong. In that case the market probably falls in this warped world since Wall St needs liquidity, not positive economic results for Americans.

Republicans - Already a Failure

That didn't take long. From Bloomberg

House Budget Committee Chairman Paul Ryan announced plans today to cut government spending by $35 billion from last year’s levels as Republicans backed away from campaign promises to slash expenditures more deeply.


The government’s deficit is projected to reach $1.5 trillion this year.


Republicans promised in their “Pledge to America” issued during the 2010 midterm campaign to roll back non-security discretionary spending to pre-Obama 2008 levels, which would have saved $100 billion compared to what the administration proposed last year in its budget request. Republicans scaled back their plans largely because the government’s fiscal year is almost half over.

The plan amounts to a rejection of calls by the Republican Study Committee, a bloc of self-described fiscal conservatives who had demanded party leaders stick to plans to cut $100 billion this fiscal year. Democrats said the scaled-back cuts still went too far.

$35 billion cut? We are running a 1.5 trillion deficit, total appropriations budget is 1.055 trillion, the total government budget is 3.7 trillion and the Republicans are declaring a victory on 35 billion cut? That is a freaking rounding error!!!

The tea partiers have already been marginalized by the establishment. They are great freinds of the Republicans when it is popular to be so and put in the corner when what they stand for actually becomes an issue. While we don't need Egypt it will take some massive protests to really get things changing.