The White Elephant That Could Destroy Your Portfolio, Part I 63 comments
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The financial crisis has recently made talking heads of several heavy hitters in the investment community. Most notable amongst them is Warren Buffett, who now appears on TV almost every other day offering his sage insight to where we are in the crisis.
Buffett, as he commonly states in public, is not a “macro” guy. And I’m sure he appreciates the opportunity to impress with his insights and draw attention away from his recent embarrassment— losing nearly $1 billion in derivatives trading after famously calling derivatives “weapons of mass destruction.”
However, to me, a far more significant character has recently joined the financial media roundtable. Unlike Buffett, he’s very much a macro guy. And he understands the Federal Reserve and its actions better than anyone: He was the last decent Fed Chairman we’ve had in 30+ years.
I’m talking about Paul Volcker.
For those of you who are unfamiliar with Volcker, he served as Fed Chairman from 1979 to 1987. Volcker came in when the US was experiencing the worst inflation since the Civil war and left when the Fed experienced the worst protests and political backlash since the Great Depression.
Simply put, Volcker kicked off a serious recession in order to slay inflation. From an objective standpoint, his decision made economic sense, but it was a political death knell. Volcker’s clearly aware of the fact, joking that the “greatest strategic error” in his life was not the recession, but taking his wife fly-fishing in Maine for their honeymoon.
Our country has long struggled because people make political decisions differently from economic decisions. Volcker’s decision to impose a temporary set-back — a recession — to stop a problem that could easily result in the long-term destruction of Americans’ quality of life — inflation — is a perfect example of this discrepancy. It stands in sharp contrast to later Fed Chairmen Alan Greenspan and Ben Bernanke’s decisions to stave off a recession at the expense of the dollar.
So to see Paul Volcker speaking to Congress and hinting that the Federal Reserve is screwing up, is a BIG deal. Unlike his successors, Volcker understands economics. And it’s clear he now has a better understanding of political backlash: His criticism is expressed more via hints and insinuations than outright accusations.
And what is Volcker’s real concern? His old arch-nemesis, and the white elephant in the living room of the financial media, inflation.
The mainstream financial media has talked our heads off about “bottoms,” GDP growth, recessions and other news items. Amazingly, inflation, which is currently in the double digits (more on this later), hardly gets any mention. When it does, it’s the usual blather that it’s “better” or “worse than expected.”
A far more informative approach — and one that would be much more helpful to investors — would be to stop discussing inflation relative to expectations and start talking about inflation relative to reality. The Fed has changed its measure of inflation twice in the last 30 years; both times it chose to become more lenient. In fact, if you measured inflation today as you did when Volcker was Fed Chairman, you’d find inflation was in the double-digits.
As you can see, the Fed’s current measure of inflation is beyond inaccurate; it’s outright fraudulent. In fact it’s so bad that both Paul Volcker and members of the Philadelphia Federal Reserve bank have publicly stated it is not the “best predictor of total inflation.” You know things are bad when even current members of the Fed are beginning to admit their measures are somewhat inaccurate.
If you haven’t taken steps to protect your portfolio from inflation, you need to do so immediately. I’ll explain how in Tuesday’s essay (financial markets will be closed Monday in observance of Memorial Day).
PS. You can see Paul Volcker’s recent testimony to Congress and his interview with Charlie Rose here and here.
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This article has 63 comments:
Buffett DID NOT loose 1 Billion in derivatives last quarter (it was just accounting)...because those contracts cannot be called early...and they are LONG TERM contracts...specifical... PUT OPTIONS he sold on indexes with terms of 15-20 years...
You really think the SP500, DAX, etc. will be lower in 15-20 years? Those contracts are as close as you can get to receiving free money in the market.
So, why not have the real estate depression break the back of inflation this year and right through 2012? The Fed can't do much to prevent the loss of family wealth anyway. If it means sacrificing John McCain and the GOP in the process, those are the breaks.
Bernanke doesn't have to raise Fed rates. All he has to do is simply wait for Bush's depression to take hold and do the Fed's dirty work for him.
1) Supply the Federal Government with money so it can avoid raising taxes. This is obviously a cheat unless you believe in something from nothing.
2) Back up the fractional reserve banking cartel in this country which allows the banks to create "money from thin air" thereby allowing them to steal via inflation. The inflation and contraction of the money supply is also the chief cause of the banking cycle.
Central banking is a con. It is a cynical way to exploit the masses.
It also contains the seeds of its own destruction. It would be worth a depression if a stake was driven through this abomination's heart.
Talk is cheap.
Folks, inflation sucks, but bread lines suck worse.
The real crisis may be ahead when:
1. the housing crisis spread into the credit card area as the inflation worsen.
2. Most Oil countries refuses dollar.
What I should have said is that if we have a depression or hyperinflation or stagflation let's know who is to blame. But strictly speaking, central banking is responsible for a lot of misery. WWII for instance was caused by the Great Depression. Here is what Uncle Ben has to say about that:
"I would like to say to Milton [Friedman] and Anna [Jacobson Schwartz] regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
50 million people were killed in WWII.
Never happened, of course - foolish idea, to devalue debt!
So, what have we done to debt obligations over the years? Well, we have worked things out so that the dollars in which they are denominated are reduced in value (and a lot more than 50% since 1933!).
The merits of those procedures (effectively constantly devaluing debt obligations) gave rise to a new and burgeoning class of entrepreneurs, today our "political class."
The procedures made (and make) it possible for them to use debt creation (at all levels of governments) to fund (by bribing the public with its own money) the increases in their aggregate powers and influence (which has proven better than plowin').
There is no easy escape, and as long as there are periodic surges in relative productivity increases, all costs will be covered over time. That is, so long as we are able to create more with less efforts, which is quite different from just trying to get more with less effort.
Gee! And it's not Sunday yet.
But it might be listed as being the same product. In order to get a product of the same value now one would have to pay much more. The shift from metal and wood to plastic has accompanied this but is not the cause of it.
With Treasuries & CDs earning 4% max, and gold no sure bet (Fed can knock down with sales by IMF & underweighting in GSCI as ordered by Sec. Paulson and simultaneous buying of our own Treasuries to support the dollar) Anyone watching how they hit the 10-year ($TNX)each time at 3.92%? That's our own Treasury/Fed buying our own bonds, making sure the 4% doesn't get pierced.
SDS, negative-correlated etfs are fine but your timing has to be right, the Big Boyz at the trading desks know the short interest, they will burn you when it's highest, by releasing a "better than expected" report, burning you in the premarket.
If you want to understand exactly how the banks steal via inflation by CREATING money I strongly suggest The Mystery of Banking by Murray Rothbard. It is available for free at:
mises.org/Books/myster...
The public at large has been looted since at least 1694 when the Bank of England was established to fund Charles II. Depressions, wars, and misery can be laid at the feet of banksters. They are just sophisticated counterfeiters.
www.financialsense.com...
And the Fed has practically guaranteed we'll have both.
Transitioning of the energy sector accompanied with higher energy costs may be one aspect that everyone is talking about - n o w
. . . but what about the food sector? Being aware that just the poor of China and India are gaining ground in the food chain gives way to understanding there will be an increase level of competition for the basic food groups . . . even before considering the negative impact of mandating corn being be used to partially fuel our transportation needs.
Meaning . . . costs for energy A N D food are likely to ratchet up and not be so cheap for quite a long period of time . . . or at least within the majority of my lifetime and yours.
Or do you prefer to live in the world before 1694?
"What do bankers do?"
Well, they take your money and lend it out
then make some more and lend it too.
"Make some more!? Surely you jest;
t' would take a printing press!"
Au contraire mon freir,
they make it from thin-air.
"they make it from thin-air!?
But that's dishonest, absurd!"
Yes, hence the Fed Reserve.
So you see, your solutions are BS.
I hope that the author of this article doesn't tell us to buy gold next Tuesday. I do not think that having gold is wise and if everyone would stop buying gold the price would drop. Also, if there continues to be a world cartel/monopoly called OPEC then we will all pay more for energy. I am not in favor of price controls but when some people in the US are struggling to pay for food, heat and housing, something must be done.
Perhaps, the first thing to do is spend your money wisely or don't buy anything you don't need.
The second thing to do is conserve energy.
The third thing to do is speak out against fraud in government and in business.
The fourth thing to do is get serious and get an education so you know what you are talking about.
( This kind of article is helpful but has a tiny audience)
The government, the military, commerce, the Church and the press have disgraced themselves repeatedly.
Where is the OUTRAGE after a decade of fraud, deceit and violence perpetrated on the US people and the peoples of the World?
If not enough poeple understand, and then express their outrage, then they will continue to get the government and institutions they deserve.
Curious though, people still want to live long and prosper. So SA founder, David Jackson, and others give advice on how to make the most out of these times.
The Mystery of Banking by Murray Rothbard is available for free at:
mises.org/Books/myster...
mises.org/Books/myster...
Foolishly trying to avoid small recessions, the federal government used Keynesian economics to maintain the status quo. Today, the cumulative effect is a federal debt of nearly $10 trillion. This is a measure of how much change needs to take place to realign the economy with what is needed. The fear people feel for the future is the realization that we have become a nation of rackets - businesses of questionable or negative value - but we must soon earn our way competing with Asians used to a lower standard of linving.
If all this wasn't enough, we find we live in interesting, changing times. Oil is at peak, the global climate is changing, the internet has shrunk the world. So great change is at hand and the the passage into the new world will be painful.
It is unfair to blame central bankers who find themselves caught between a rock and a hard place and realize they must always choose between the lesser of two evils.
Personally, I think the federal government should default on its debt obligations. This would be very painful to all, but less painful than the water torture of trying to maintain the fiction that it will be paid off or debasing the currency to monetize the debt. Sovereign debt would finally get the repuation it deserves. Governments around the world would not be able to run deficits and make mischief.
That is very forgiving of you but the central bankers BUILT the kitchen they are now sweating in. Let them disassemble the monster they have built as Jim Rodgers suggests. But other than that you make some very good points as would be expected of someone who knows Austrian economics. I will quote Ron Paul,
"The problems are not complex, and even the big ones can be easily handled if we pursue the right course. Prosperity and peace can be continued, but not with the current system that permeates Washington. To blindly hope our freedom will remain intact, without any renewed effort in its defense, or to expect that the good times will automatically continue, places our political system in great danger.
Basic morality, free markets, sound money, living within the rule of law, and adhering to the fundamental precepts that made the American Republic great are what we need. And it's worth the effort."
Well, the central banks have lots of gold. Eventually they may have to back their paper with the stuff. It does seem silly to mine gold and then bury it again in vaults but governments (and banks) have proven time and again that they cannot be trusted. If gold simply kept governments and banks honest it would be worth all the effort to mine it. The day someone can make or mine gold cheaply is the day I will reconsider.
Well, the central banks have lots of gold. Eventually they may have to back their paper with the stuff. It does seem silly to mine gold and then bury it again in vaults but governments (and banks) have proven time and again that they cannot be trusted. If gold simply kept governments and banks honest it would be worth all the effort to mine it. The day someone can make or mine gold cheaply is the day I will reconsider.
Rather than blame an entire nation how about looking for a more general cause? The fractional-reserve government-backed banking cartel is based on dishonesty. Just read the history of banking.
When the ROOT of our finance system is corrupt, shouldn't that be the first thing to be fixed?
The Great Depression was in 1930's, seventeen years after the establishment of the Federal Reserve which was supposed to cure the business cycle. Instead it made it far worse. It has now been almost 100 years and we are still having financial disasters. I WILL blame the Fed and the banking cartel since they have monopoly control of the money supply. With absolute power comes absolute RESPONSIBILITY.
Plus on a more practical note, who thinks they will starve if we have an honest monetary system? You guys have honed your financial skills in a corrupt financial system, imagine what you could do in an honest one!
The Great Depression led to WWII. Do you think we will survive WWIII?
Let Ben do what he thinks best to avoid a meltdown. But after the crisis passes, he had better start disassembling the monster that periodically brings us to the brink.
The cause was historical. The screwing of Germany by the LoN post WW1 and the total impoverishment of the Germans by the imposed reparations lead to the rise of the Nazis' and subsequent war, WW2.
I hope your economic knowledge is better than your historical knowledge.
regards.
Ah yes, WWI. The US entry into that unnecessary war was financed by the newly created Federal Reserve. And yes, it (the US entry) also led to WWII. But to address your objection:
"Economic depression
The Great Depression resulted in 33% unemployment rate in Germany and a 25% unemployment rate in the U.S. This led many people to support dictatorships just for a steady job and adequate food.
The Great Depression hit Germany second only to the United States. Severe unemployment prompted the Nazi Party, which had been losing favor, to experience a surge in membership. This more than anything contributed to the rise of Hitler in Germany, and therefore World War II in Europe. After the end of World War I many American industries and banks invested their money in rebuilding Europe. This happened in many European countries, but especially in Germany. After the 1929 crash, many American investors fearing that they would lose their money, or having lost all their capital, stopped investing as heavily in Europe."
from: en.wikipedia.org/wiki/...
who would like to be a bull.
But how can I
when pigs are running the show?
In 1999 I paid .89 a gallon for gas, that is less than 10 years ago. Yesterday I fueled up and it was 3.79 a gallon. That is about a 425% increase in one of the primary commodities I must use to operate a middle class lifestyle. In the same period, my income has increased about 3%. Since everything tangible has to be shipped, we are seeing steady increase in cost of goods sold, as would be expected. I tracked the cost of laundry detergent over the last 6 months at WalMart and it doubled in price.
Anyone who tells you there is single digit inflation or no inflation has their head buried right up their rear end.
My take on investing in this time is to purchase commodities and specifically tangible in your hand commodities like open pollinated vegetable seed and pure water. I highly suspect these will be the next oil.
Food Banks to supply breadlines are in DIRE staits... because of inflation in the price of Agricultural goods... a littlemore inflation... or the bees completely dying off... and there will be no Food Banks for the Bread lines to form at!
Take a little longer to do the research yourself... most Americans want entertainment... not an education!
Dan, Where do you live? Every American who has a job and pays his own way in life... knows that REAL INFLATION they face is way WAY way over 3 or 4 percent.
Most of us who read sites like this don't need any explanation of the simple Inflation charts posted by the author. We have found the research and information ourselves, and have done the math already.
We appreciate the importance of Volker, who finally stopped the 70's and 80's inflation, making clear, unambiguous (big word here Dan) comments on the crises we face this time around.
Try to think 1st before you write.
We don't need any entertainment.
At least try to come prepared for class.
www.pimco.com/LeftNav/...
You can fool some of the people all of the time,
and all of the people some of the time,
but you cannot fool all of the people all of the time.
– Abraham Lincoln
I prefer to trust Bill Gross and Paul Volcker rather than Greenspan and Bernanke who just care about their Wall Street friends.
1st Aggregate Bank of America (1st ABA)
Assets:-------Liabilit... + Equity:
------------------Equi...
---------------------$...
IOU's:----------Liabil...
-----$9T----------$10T Checking Acct. Deposits
----------------------... Checking Acct. Loans
Reserves:
---$11T
Total:
---$20T----------$20T
Assets:------------Lia... + Equity:
----------------------...
----------------------...
IOU's:----------------...
-----$9T--------------... Checking Acct. Deposits
----------------------... Checking Acct. Loans
Reserves:
---$11T
Total:
---$20T---------------...
OK Jim, while we slept 1/2 of the US banks merged into the 1st Aggregate Bank of America and the other 1/2 merged into the 2nd Aggregate Bank of America. All of the assets, equity, and liabilities have been added up and are now on two balance sheets. There are now just two US banks. We'll talk about the Fed later maybe. Here they are:
1st Aggregate Bank of America (1st ABA)
Assets:-------Liabilit... + Equity:
------------------Equi...
---------------------$...
IOU's:----------Liabil...
----$9T-----------$10T Checking Acct. Deposits
---------------------$... Checking Acct. Loans
Reserves:
---$11T
Total:
---$20T----------$20T
So we see that the 1st ABA has lent out 90% of its deposits (9T). The leverage is thus 19/11 = 1.727/1 . This is less than the legal maximum of 1.9/1.
Now the balance sheet for the 2nd Aggregate Bank of America:
2nd Aggregate Bank of America (2nd ABA)
Assets:------------Lia... + Equity:
----------------------...
----------------------...
IOU's:---------------L...
---$4.5T--------------... Checking Acct. Deposits
----------------------... Checking Acct. Loans
Reserves
---$6.0T
Total:
--$10.5T-------------$...
The 2nd AGA has lent out 90% of its deposits (4.5T). Its leverage is 9.5/6.0 = 1.58/1. This is less than the legal maximum of 1.9/1.
Now for whatever reason (they are demand accounts, aren't they?) the customers at the 1st AGA decide to withdraw 14T and deposit it with the 2nd AGA. oops! 1st AGA is 3T short. Who is it going to borrow from now Jim? There are no other banks besides the 1st AGA and the 2nd AGA. The money doesn't exist! The 1st AGA created 9T of money from nothing and without another bank to borrow from is exposed as a counterfeiter. What good are the IOUs 1st AGA has? The 2nd AGA wants money not IOUs.
What about the Fed? Sure it can create some money from nothing and lend it to 1st AGA. That's its job, to back up the legalized counterfeiting ring know as our banking system.
Money from nothing which steals its purchasing power from the public at large.