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Professional Credentials: The reports that I write are my personal research and opinions. They are not associated with any firm or organization, and are not intended to be taken as investment recommendations or advice. They combine my passions of economics, finance, writing and education, and... More
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  • Gold Bug Bullies No Longer Rule The Financial Neighborhood

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    One of the most unfortunate things I've experienced in my financial career is the treatment I and others get from reporting honest analysis on gold and other precious metals. There is an emotional aspect to gold that makes it unlike any other investment, and the die hard supporters called the "gold bugs" often spew venomous attacks not only on the analysis, but on the analyst as well. The gold bugs have been especially critical of Ben Bernanke, and routinely appear on financial news shows to level their baseless and unfare ad-hominon attacks on a man that has few opportunities to defend himself.

    The unfortunate result has been a distorting of the public's understanding of monetary policy, the entrenchment and reinforcement of monetary and financial myths, over demand by a unjustifiably fearful cable TV watching public, some pretty bad public policy and new financial instruments and worst a self censorship of financial analysts that hold bearish views on gold.

    That however is changing, and as this quote highlights how the gold bears are no longer willing to allow the bullies to keep them silent.

    Sentiment has dramatically shifted on the precious metals. The gold bugs have gone silent or are desperately trying to re-frame their pitches. Meanwhile, the bears have gotten loud, and people previously claiming neutrality -- in no small part out of fear of wrath from the gold bug crew -- now feel free to pile on.

    That quote however highlights how damaging the uncivil behavior the gold bugs has been. Analysts should not fear expressing their opinions, and the financial community suffers when they do. Gold bears that are now emerging from hibernation should have been screaming at gold's peak back in 2011, but they remained silent, mostly out of fear. Doubt that claim? Simply find a gold bear today in the financial press, and try to find an article bearish about gold published by them back in 2011 or 2012. I doubt you will find many. Simply read the comment sections of any of my articles bearish on gold to understand why so many analysts simply avoid the topic. Inviting the wrath of the gold bugs simply isn't worth the cost.

    Gold bug bullying and their uncivil emotional behavior is so common place that it is openly dicussed in the financial press. Facts are, there are many perspectives on gold, and they all can't be right, and they all can't be right all the time. People have the right to think gold is a currency, but those that disagree have a right to their opinion. People can think QE-finity will cause hyper-inflation and the collapse of the US dollar, but those that disagree have a right to their opinion. People can think gold is going to the moon or even infinity, but those who think those claims are pure nonsense have a right to their opinion as well. The facts are people in the financial press should feel comfortable making their case, and not fear retribution of the angry emotional gold bugs. Whether or not gold is a currency is relevant to its investment value anyway so why even bring it up? What an ounce of gold bought back in the roman era is also irrelevant to its current investment value, so why bring it up? If that is the kind of analysis that is important to a gold bug, great, just don't force your views on everyone else, and bully those that may require analysis a bit more focused on valuing it in today's market as an investment.

    As the Ron Paul video linked above highlights, the gold argument is nothing new. It has been debated in the United States since our founding. Most ironic however is that George Washington didn't side with the gold bugs Jefferson and Madison, he sided with the paper money Hamilton and his Central Bank model. Ron Paul and his followers would be well served to study our history, especially the history of our central banking system. Ron Paul is simply on the wrong side of history, and wrong on his post-2011 prediction of gold prices.

    If people doubt the political ideology underpinnings of the gold bugs, one simply needs to visit the website of one of the gold bug leaders, Peter Schiff. On the very first page of his Europacific website he outlines his vision of a global economy no longer "dominated" by the US Dollar. When I was in high school Russia was going to dominate the global economy, then in college the "Rising Sun" of Japan was going to dominate the global economy, now China and the other BRICs are going to dominate the global economy. The theory of the demise of the US Dollar and economy has been debunked 3 times within my adult life time. I bet the ice age I was promised in high school will return to the headlines before Mr Shiff is proven correct.

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    In conclusion, one of the major pillars of sand that was supporting the price of gold was that analysts were intimidated into silence. The silence however seems to be ending, and gold bears are now expressing their views. Unfortunately for the owners of gold, they are two years late to the party. It would have been nice back in 2011 at the peak to hear these arguments, but I guess better late than never. My expectation is that the correction in gold will have a sobering effect on the gold market, and people will start to ask the questions they failed to ask during gold's bull market. Hopefully gold investors will take the time to understand why QE-finity didn't result in gold going to the moon or inflation, why the US dollar appreciated instead of depreciated post-2008 and why the gold bugs were so confident in their theory even as gold was in free fall. I'm pretty confident now that investors are getting both bullish and bearish arguments to study, that once both sides are analyzed, gold will be reaching pre-QE levels of under $1,000 before it reaches the moon. The bears simply have the far better argument, and the price of gold is confirming that.

    Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Jul 03 10:32 AM | Link | Comment!
  • Why QE Is Deflationary

    To understand why QE didn't lead to inflation, one needs to understand that much of economics is counterintuitive, conflicting and inconsistent. There simply isn't one economic theory that can define all economic conditions. That is why there are so many competing theories of economics, and not all of them work equally well for each economic environment. There is Classical, Neo-Classical, Keynesianism, Neo-Keynesian, Monetarism, Austrian and Supply-Side Economics.

    If all you ever studied was Classical and/or Austrian economics, the Fed printing money and it not resulting in inflation makes absolutely no sense at all. To these fields of economics it is basically dogma. The Austrian School goes so far as to re-define the definition of inflation as simply printing money. Clearly these theories are very lacking when it comes to explaining the modern economy.

    Keynesian economics can explain part of why we have near deflation, but is totally discredited on the government spending part of its theory. Keynesian economics is big government economic. Keynesians have never met a spending program they didn't like. If you ask a Keynesian economist why there is such slow growth and high unemployment in America they will say the government didn't spend enough money.

    "The economics is really easy," says Krugman, "If we were to spend more money at the government level and ... rehire the schoolteachers, firefighters, police officers who have been laid off in the last several years because of cutbacks at the state and local level, we would be a long way back towards full employment.

    You can get a Nobel Prize in Keynesian economics, and believe that you can solve unemployment by hiring firefighters, police and teachers. Considering that firefighters, police and teachers get paid with tax dollars, if everyone worked for the government, who would be left to pay the taxes? What products would fill the shelves of our stores made by these firefighters, police and teachers? This obvious flaw is simply ignored by Keynesian economists, and why I consider it more a political philosophy than an economic theory. Since President Obama took office the US debt has increased by $6 trillion, and unemployment has increased and growth slowed. Those statistics are bad enough by themselves, but considering that we had record low interest rates during that period pretty much debunks Keynesian economics for the third time in its history. Government spending didn't end the Great Depression, reversing the FDR policies did, government spending didn't solve the stagflation of the 1970s and government spending didn't solve the great recession that started in 2008. Spending money for the sake of spending money, especially when the money is being spent on non-productive ventures and non-comercially viable industries that have an expected negative rate of return isn't an economic recovery plan. It is a plan for greater debt.

    Why I say Keynesianism can partially explain deflation with QE is that Keynesians view monetary policy as a very weak policy tool. They describe monetary policy as "pushing on a string," and on this issue they are correct. Because monetary policy is viewed to be ineffective by Keynesians, they use it to justify any and all government spending programs. Clearly since 2008 the Keynesians have been proven wrong once again, but unfortunately we had to rack up $6 trillion in debt, tolerate anemic growth and high unemployment to once again learn this lesson.

    Monetarism provides the formula to put everything together called the "Quantity Theory of Money." MV=PQ is the theory in a nutshell, and since 2008, the velocity of money "V" has collapsed. To compensate the Federal Reserve dramatically increased the monetary base, but because of the anemic growth and lending, money supply hasn't increased at a rate to compensate for the collapse in velocity. Put everything together, V is falling, Q (real growth) is anemic, M (money supply) is increasing but not at a satisfactory rate, so P (price level) is stalled near zero. That explains mathematically why QE may lead to deflation, but it doesn't explain operationally why QE may lead to deflation.

    To understand why QE can cause deflation requires understanding Neo-Classical economics and its "rational expectations hypothesis." Thanks in part to Ron Paul and his "End the Fed" and "Audit the Fed" campaigns, the Fed has embarked upon an unprecedented transparency campaign. The Fed had gone to great lengths to tell the markets exactly what it is planning to do. The Fed has even gone so far as to name exact targets for inflation and unemployment. More important is that they have been telling the markets that they plan to keep rates low for an extended period of time, and have followed up those claims with one episode of QE after another, all designed to lower and/or keep rates low. The Fed even implemented an unusual program called "operation twist" where longer maturity treasury bonds and mortgages were added to their balance sheet.

    What this has done is encourage consumers, especially home buyers, to postpone or delay making purchases in expectation of lower borrowing rates in the future. Why buy today when the interest rates will be lower tomorrow? QE, which was intended to stimulate consumption, actually inhibited consumption by establishing the expectation that interest rates were going lower, and that buyers would be rewarded for postponing buying. QE, through establishing market expectations of lower rates in the future, actually resulted in the exact opposite result that it was intending to produce.

    If we reject the Austrian School of Economics definition of inflation, and accept the traditional definition of inflation as being too many dollars chasing too few goods as the definition used by the markets then things begin to make sense. QE resulted in reducing the number of dollars chasing goods as people changed there expectations and shifted their consumption into the future. Keynesian economics proved itself a complete failure when $6 trillion was wasted on non-job and growth producing investments, so at best there was a very short-term and unsustainable boost in dollars chasing goods, but not enough to even register a significant impact. While the immediate spending didn't have a lasting impact, the resulting debt will weigh heavily on the minds of tax payers that are likely to reduce consumption today in expectation of higher taxes in the future, further reducing consumption today.

    Lastly, Supply-Side Economics can't really explain why QE resulted in deflation, but like Keynesian economics, can help explain the decrease in dollars chasing goods. Increasing taxes and regulations have created extreme uncertainty in the economy which has resulted in employers becoming paralyzed as they wait for the bills and laws to pass so they know the rules and can estimate the costs. This has resulted in many employers postponing expansion into the future. This has resulted in fewer dollars chasing goods today. The resulting higher unemployment has also reduced the number of dollars chasing goods.

    In conclusion, the post-2008 era has done a great job flushing out what economic theories have credibility and what ones don't. Gold bugs are finding out the hard way about adhering to an economic theory that isn't credible. Unfortunately, the one theory that would have most likely resulted in restoring growth much sooner, Supply-Side Economics, was deliberately avoided in favor of repeating the failed but politically preferable Keynesian policies. Because the Keynesian policies were such a miserable failure all the heavy lifting was left to monetary policy. Unfortunately, Ron Paul was successful in getting the Fed to be more transparent, which resulted in the markets being able to form expectations with a much higher degree of confidence. Those expectations were for lower interest rates in the future, which resulted in consumers postponing consumption, especially big ticket items, into the future. The end result was fewer dollars chasing too many goods, and that is why QE has resulted in at or near deflation.

    Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Jul 01 1:36 PM | Link | 3 Comments
  • QE's Ending...Now What

    Contrary to popular opinion, QE was never intended to, nor was it ever likely to solve the problems facing the US and global economies. Monetary policy is a very weak policy tool often described as "pushing on a string." If there was anything the Great Depression taught economists it was that:

    1) You should never allow the banking system to collapse.

    2) Monetary policy is not the tool to rely on to push and economy to growth.

    Facts are, monetary policy is a "carrot" not a "stick." Its effect is analogous to leading a horse to water. You can lead a horse to water but you can't make it drink. With the extreme levels of uncertainty being created by Congress and the White House, businesses are simply reluctant to hire and expand, people fearing for their jobs and in homes that are underwater are fearful to borrow and spend and banks facing ever changing rules are reluctant to loan even if people wanted to borrow and spend.

    No amount of appropriate monetary policy can compensate for dysfunctional fiscal policy. Unfortunately, the Financial media seems to have skipped class when that lesson was taught so they spend a disproportionate amount of time focused on monetary policy, where the real economically significant policy is fiscal policy. Monetary policy can stabilize the banking system and create an environment for growth, it can not create the growth. The main question the financial media has been totally ignoring is why, given 5 years of near 0% interest rates, hasn't the US economy picked up growth? What is different this time? Why isn't monetary policy having the stimulative effect that it has had in past times? Why is this time different? That is the question the media has been avoiding.

    In reality what the Fed and Ben Bernanke have done is buy time for Congress and the White House to get their act together and address the real issues that are holding the American economy back. The Fed is analogous to an emergency room physician keeping the patient alive, whereas fiscal policy is like a physical therapist doing rehab on a recovering patient. The ending of QE represents the transferring of the patient from acute care to recovery. Each round of QE had less and less impact upon the patient, and the patient is now stabilized enough to transfer the patient to recovery. That should be viewed as a positive for the economy and markets, even if it results in marginally higher interest rates. When a wound is closed, the patient's blood pressure often increases, and that is a good sign that the patient is recovering.

    With the ending of QE we will be returning to a period of "normalcy," and during normal time, fundamentals matter. Businesses will no longer be able to rely on monetary policy for support, they will have to stand on their own two feed. Most importantly, Congress and the White House will no longer be given cover for their ineffectiveness and inaction. A back-up in rates will cost the US Government extreme amounts of cash and make borrowing more difficult. Fortunately some in Washington are beginning to at least acknowledge that fact. Ben Bernanke has been saying for quite some time that fiscal policy needs to pick up the responsibility for recovery, and now he has support from the Bank of Internatioinal Settlement or BIS. Both Ben and the BIS are saying what should have been obvious to everyone from the beginning, but unfortunately Washington has done what it does best; it procrastinated and kicked the can down the road. Washington basically squandered the time the Fed bought for them, but the real problems the US economy faces can't be ignored, and can't be fixed with easy money and eventually the piper will need to be paid.

    What then should investors watch for coming out of Washington that might move the markets:

    1) Any form of tax reform that repatriates foreign profits, simplifies, broadens and lowers the tax rates would be well received by the markets. Lower capital gains, dividends and corporate tax rates would almost certainly drive the markets higher.

    2) Clarity of regulation across the board would greatly help. Change has created uncertainty in the business community with new energy, healthcare, banking, labor and environmental regulations stalling recovery. Businesses simply won't act until the rules are known, and right now the rules are still being written.

    3) Reform of entitlements and serious advancement on addressing the debt would also likely be well received by the markets.

    In conclusion, with the ending of QE, fiscal policy will now likely become the focus as the tool of recovery. Until now America could ignore the real problems that it faced, and mis-direct its attention towards monetary policy. Those days are coming to an end, and investors should start to look forward and understand how changes in fiscal policy are likely to impact the economy, markets and their portfolios. Without having Ben Bernanke to kick around anymore, Congress and the White House won't have anymore scapegoats to persecute or witches to burn, and will have to start making the tough decisions needed to truly lead this economy to recovery. When that happens, the legislation that is written will likely have an impact on the markets, and it is important for investors to understand how those laws will impact their portfolios. The problem is, it is much easier for the financial press to focus on a single issue, interest rates, and it is much more difficult to understand the intricacies and impacts of new laws and regulations. Fortunately for Seeking Alpha readers, there are many contributors that dig through the details and report on the impacts of these new laws like this article does on how energy regulations are impacting biofuels companies. Understanding the impact of fiscal policy isn't as easy as monetary policy, but looking forward in my opinion it is the best way to generate market beating returns. Bottom line, with the ending of QE the easy money is in the past. Looking forward, returns are going to take a lot more research, hard work and an understanding of fiscal policy as well as monetary policy.

    Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Jun 26 11:51 AM | Link | 2 Comments
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