odin

Window Dressing for the Markets

My take is that not everyone can take advantage of the fed rate -- the spreads that banks charge on your cash essentially can make the fed rate negative.

Fed Sends Gold Higher, But What Is It Good For?

Re: A gold standard.

> “Aye, there's the rub” as William Shakespeare might say. A central bank that operates responsibly with the fiat currency they bring into existance at will, over a long period of time, is probably about as rare as pink unicorns.

But as Churchill once said, democracy is the worst form of government except all the others that have been tried. What is the realistic alternative?

> Then the cost of things goes down, much as the cost of computers, TVs and digital cameras have gone down over the years or the features and quality has improved while prices remain stable.

The cost of electronics has not gone down because of the constraints on the money supply. Those are productivity gains that could come about only BECAUSE money was NOT in short supply (though labor arb is the primary reason). When money is scarce, people start hoarding currency and stop borrowing/investing and productive enterprise is severely impacted. Lowering or even keeping prices stable is not an end in itself just as moderate inflation is not the end of the world. Real growth and productive use of money is what matters and that is what will solve our current mess (basically time and growth will help erase these bad decisions as it always has).

> He also had popular speeches in favor of prohibition and against the demon rum. Popular speakers don't necessarily have the best policies, and the fact that someone made a popular speech isn't really a strong argument in favor of something. He was also an advocate of bimetalism with silver sharing the load along with gold as a medium of exchange. He was in favor of a statutory 16:1 exchange rate between silver and gold. His movement was also apparently instrumental in bringing in the Federal Reserve System in 1913 and I think that has been a disaster for our country.
---

I dont endorse WJB as a monetary expert but simply point out the populist argument of the day. The gold standard crushed the debtors and they clamored to get off the gold standard. Today, if we get back on the gold standard, cui bono? Constrain credit and the ability to create money beyond the point of reason, and its the "banking classes" that populists of today vilify now that stand to benefit (and even that as one-eyed men in land of the blind).

We also seem to be confusing fiscal spending with Fed's money creation role. Those two decisions have a link, but they are not the same. If anything, the Fed constantly rails against runaway spending (because those are future taxes in another guise and hurt the Feds ability to maintain both price stability and full employment). People distrust the Fed (a stakeholder in the system) to make decisions about the money supply yet feel very comfortable with randomness of gold supply (hoarders and mining) making the decision for them. I find that position difficult to understand. Would you rather the Fed NOT have the ability to flood liquidity at the tail end of 2008? What would have been the consequences -- how long could anyone have "enjoyed" the spike in gold prices?

> By the way, the booms and busts have been more frequent and more severe since the Federal Reserve was spawned. They were at the helm after all when our country fell into both “The Great Depression” and this “Great Recession”.

I'm not sure about the basis of the argument above. Does that mean that absent the Fed, everything wouldve been okay? Were there no depressions before the Fed was formed? Furthermore, a big reason for this particular bust has been the fact that the Fed was NOT regulating the money creation (via the shadow banking system).

> odin wrote: “One only needs to look at nations that have lost control of their money supply to see the consequences.”
> That's a rather ironic statement given that “nations that have lost control of their money supply” invariably have a fiat monetary system.

Here is the distinction. A car may go out of control. It doesnt mean that having control of the car is a bad thing nor does it mean having control causes it to go out of control. Unless you prove that giving up control of the car to some third-parties (from the Fed to the gold hoarders and miners in our case) is beneficial, I dont see the irony. Just to point out: It took a currency devaluation to regain some of the control of money supply and ease the depression in the 30s (along with confiscation pre-devaluation to prevent hoarding).

>I don't think anyone is advocating hoarding on either side, and I don't think a gold or silver or other similar standard promotes hoarding any more than a fiat currency would. It might seem that way in comparison to a country with a fiat currency that has gotten out of control. When hyper-inflation hits people tend to run out and spend their money as fast as they get it because it will drop in value so rapidly. That really isn't to be desired, however, as it causes many distortions in an economy and results in misery for its citizens.

When credit is scarce, what outcome is there? In the current fractional reserve system backed by a fiat currency, during times of stress, the fed can lower rates to disgorge holders of currency and make it expensive to hoard. If it cannot control rates, how will you prevent hoarding? By fiat (confiscation)?

Hyperinflation is a straw man argument. There are a lot of assumptions to get from today to a hyperinflationary world and we can agree that hyperinflation is a bad thing but nothing points to that case today. Not saying it wont ever happen, but it is not my base case today.

Fed Sends Gold Higher, But What Is It Good For?

I stand corrected re: the SGS data. It does show the M3 growth rates collapsing, but still in positive territory. (Barely, I track M3 independently and I calculate the YoY growth as flat to negative -- 0.2% in Oct, -0.2% in Sep.) If you'll allow me to edit my earlier statement: absent the growth in the narrow money, the broad money measures, which have embedded in them the narrower measures, would be contracting rapidly. (Another way to say it, is again, that the velocity of money is falling). I will also yield that M3 (which I dont really equate entirely with "spendable" money but will accept as an imperfect component) has risen ~4.5% since Jan 2008 -- most of which is because of the 25+% rise in M1. Furthermore, the absolute level of money supply is less relevant in the inflation debate because real GDP is growing alongside because of productivity gains.

My key assertion is that by the measure of the ability to buy things (which should, in my opinion, include credit), there has been a big contraction YoY and those headwinds will not go away anytime soon and all the money-printing has not made up for the loss of this buying power. The data in fact shows that the M0 growth is NOT working its way through the system (otherwise, the growth in progressively broader measures like M2 and M3 would be amplified not dampened).

Whether the amplification will occur over time is also a question -- in essence, by forecasting hyperinflation, we are essentially stating that lending conditions are going to improve AND the real economy will not grow fast enough AND that the fed will not pull back to compensate.

My bet is that if real GDP contracts, the velocity of money is going nowhere but down. And if there is growth that employs the full productive capacity of the nation, I dont see how real GDP cannot rise sharply and that the Fed remains inert. And if there are hyperinflation expectations, who wants to lend? In other words, I do not believe the financial system and by extension investors have the will to LEVERAGE as in the past to generate hyperinflation. If the banks are content to take advantage of the steep yield curve (which I believe is the feds intention -- to rebuild the balance sheets of the banks and allow time and growth to negate the toxicity still on the B/S), why do you believe that the velocity of money will go up? The Fed can press the gas hard but if the carburetor is choked for air, we're not speeding down the highway.

I am also skeptical of the political pressure argument. I dont agree that the Fed is entirely independent (nor do I really believe that it just goes along with political whims) but even assuming political pressure, inflation expectations -- esp. high inflation expectations -- play a big role in the electoral platforms. There are more and more people out there on fixed incomes. And they vote.

Fed Sends Gold Higher, But What Is It Good For?

JeffDB: I very much disagree that the growth in M1 has "more than filled" the gap created by credit contraction. This is not borne out by the data. (M3 measures tracked by parties outside the Fed are actually contracting. See SGS or other estimators of M3. More broader measures -- ones that include credit are even worse).

What I am trying to get at is we want to track purchasing power (which is not necessarily captured by these narrower measures) vs. goods available for sale. If the broader money in M2 isnt growing as fast as M1, it should tell us something about the growth of this buying power. If MZM is growing but M2 is not, that should also tell us something about the velocity of money. This is what answers the inflation/deflation question. It should be clear that even with Fed's money pumping, the "money supply" available to buy cars, houses etc. is lower than it was at the peak.

I dont think this is where the real debate is. The debate I think is whether the Fed can withdraw liquidity fast enough ONCE the economy recovers (as in we have a contracting money supply driven by a collapsing multiplier and partially offset by the money printing....but if the banks start lending again, if risk appetites rise, will the velocity rise cause so rapid an expansion in money supply that the feds cant compensate fast enough by withdrawing their liquidity programs). I think you will find that a lot of the programs initiated in the past year have been reserve neutral (new money was not created). There is some money printing going on....but (and _this_ is a market view which you are free to disagree with) I believe the fed has the tools to take liquidity out. I'm less sure that there wont be political pressure (as in will apart from ability), but the tools are there.

As to the question of looking at gold via the lens of a medium of exchange: it is no different than a fiat currency managed by a _responsible central bank_. It no more represents wealth creation than does fiat money. Those somehow sanctifying gold because theyve read the Fountainhead have a very superficial understanding of money. If you start pricing gold as if its a medium of exchange, what happens do you think when the world GDP grows but gold supply does not? (There is a popular and populist William Jennings Bryant speech about getting off the gold standard that can clue people in). What happens when world GDP contracts but new gold is discovered? Now, you can say that the central bankers are crooks (they are certainly not infallible but they do have a stake in the proper functioning of the system) but I wonder if its any better to put our faith the boom and busts of the gold supply cycle. One only needs to look at nations that have lost control of their money supply to see the consequences. Furthermore, the value of a currency (gold or fiat) does not come from hoarding. It comes from its ability to buy goods. Sure, if gold is in tight supply, it may rise in price (for a while). But if it causes a widespread contraction in the economy and puts people out of a job and causes riots, what good is it?

Fed Sends Gold Higher, But What Is It Good For?

I have never put this argument as eloquently before (especially the highlighting of a $12T credit contraction). Kudos. No one seems to track or pay attention to the broader money supply figures (including credit). Did we forget the purchasing power credit cards and HELOCs and 2nd mortgages brought to the american consumer? Or the monetary lubrication that the shadow banking system injected all over the world?

Re: gold investing itself even assuming a return to a de jure if not de facto gold standard:
People also extrapolate the data of a last few years to project supply (the best we can do). True, gold isnt printed, its mined. But what happened to silver as a monetary store of value when silver mines were discovered in the American west? If we are thinking of gold only in terms of a currency, we should know that there IS a growth rate for gold -- will it always be lower than the growth rate of global GDP? Are we so sure there is no more gold to be discovered beyond current mines?

Given that at the moment gold is not a de facto currency, it is worrisome that the demand trend is moving from jewelry buyers (longer-term, sentimental holders) and central banks (longer time horizons, fewer liquidity pressures) to investors (short-term, hot money buyers).... This is highlighted to me, especially by the ridiculousness of certain hedge funds creating "gold funds" or gold-class shares (2&20 really? For a one-way asset allocation decision or as a futures trading commission?)


On Nov 18 06:36 PM JasonC wrote:

>
> Yes it is absurd, because (1) dollar currency rather than monetary
> base is only $900 billion not $1.7 trillion - you could redeem every
> dollar in existence for gold below $3000 an ounce (2) the Fed owns
> 85 cents of US treasuries, 84 cents of mortgages, 15 cents of agencies,
> and 35 cents of other assets (loans to the banking system, foreign
> exchange, swap lines to foreign central banks etc), on top of the
> 40 cents of gold - for every physical dollar.
>
> Halve those figures if you like to cover all the core deposits rather
> than the physical currency, it remains true that all of the liabilities
> are over-backed by valuable assets. You have to pretend every other
> asset on the sheet is worthless and only the gold worth anything
> to support the idiotic $6300 figure.
>
> If you think $750 billion each of treasuries and mortgages aren't
> worth anything, go ahead and short them; it is a saner bet that expecting
> gold to go to $6300.
>
> And the Fed owns the same position in treasuries today that it did
> the day Bear went broke. It merely rebuilt the position this year
> that it sold off in 2008 as it moved its sheet to direct loans to
> the banking system. Remember those silly stories of last August about
> the Fed "running out of treasuries"? - lol The only new position
> is $750 billion of mortgage backeds. In case everyone just forgot,
> Fannie and Freddie are in receivorship and foreign holders are selling
> off their agencies; the Fed and GNMA have replace them as buyers.
>
>
> Everyone expecting inflation because narrow money is $1 trillion
> higher is ignoring the fact that total assets are $12 trillion lower.
> Why the former is considered more inflationary than the latter is
> deflationary is one of those magical mysteries of monetarist fanatics.
>
>
> No the Fed isn't going to monetize another trillion or three to fund
> the treasury. It hasn't taken a single action since the start of
> the crisis to accomodate the US treasury, which doesn't need the
> accomodating (because its credit is rock solid). All of its actions
> have been in support of the banking system and private credit markets,
> which is case everybody just forgot, are the ones who required it.
> It wasn't treasuries that went begging at 15% offered yields this
> time last year.
>
> Ideology is no substitute for objectivity in finance...

Two More Myths About Business in China

The telling comment is: "I want to enjoy life now before I get old. My salary keeps rising, and spending will help me get the career I want."

Havent we heard this tune before? Perhaps in this country -- when a hourly wageearner gets the McMansion on a ARM? There are a lot of assumption this young lady is making about the future.

The standard of living is undoubtedly better than it was in the years past. How could it not be? China has grown its aggregate wealth (in latter years, at the expense of the deficit-producing nations) faster than its population. But the question we ask is not if things are better today but if they will be even better tomorrow to the extent that they satisfy people and keep those 86% people equally optimistic? Is this growth sustainable? There are vast expecations that underlie any rise like this. That is the disconnect between what the author is saying and the complaints about China. As news of this young lady's lifestyle and research from experts like Shaun reaches more and more people in China (including the rural areas), they, too, will want to dine at Pizza Hut and get weekly pedicures. Any departure from realizing those expectations is a recipe for unrest. Even with the breakneck current rate of growth, China adds 12M unemployed to its roll. This is not to compare to the level of un/underemployment in the past. Those people in the past had very different expectations for their future and hence did not think that a life spent never having eaten at PizzaHut was such a terrible thing.

Sure there has been growth...but has it resulted from wise investments?. I remember highways just outside of Beijing packed as far as the eye could see from trucks carrying construction equipment. Will the houses and offices that got built find occupants that justify the cost? Is the $200B being spent on railways similar to the money spent in the US on highways after WW2? Only time will tell. There are people, like Shaun, who are in a different profession and take the optimistic view. I ask, realistically speaking, what is the probability that they are wrong? And even if its low, what the cost of being wrong? I risk losing the upside (as I have this year) but I tend to err on the side of caution.


On Nov 14 02:14 AM huangthomas wrote:

> I want to make my criticism as transparent as possible, let me explain
> that "Anna move from Tokyo to Shanghai". Japanese sociologists describe
> the "Anna phenomenon" decades ago. The young single female get free
> loading of room and board from their parents and freely spending
> their income to promote their life style. The same phenomenon move
> from Tokyo to Shanghai or Beijing as the economy develops in China.
> I do not wish to impose any moral judgement to the life style, but
> I do call attention to the fact that the life style is not sustainable.
>
>
> How about the unmarried single male? Well, they are not as lucky
> as single female. They have to consider three zi. They are fang-zi
> (house), che-zi (car) and ying-zi (silver ingot, which means money
> in China) before they can attract any niang-zi (young lady) to marry
> them. I don't really care how and how much money Anna make. It is
> simply a social phenomenon that we have to pay attention to.

Gold Fever Spreads to India

What do central banks care about? Do they care whether they get an extra few points return on their FX reserves or whether there is employment, stability and sustainable growth?

Regardless of the recent strength in their currencies, the Asians have not forgotten the currency crisis. The stockpiling of $ they are pursuing and the undervaluation of the currency is not stupidity, they are plainly merchantilist policies designed to collect US$. This policy keeps the masses employed, stability in the financial systems and politicians in power.

While the market has looked at this news as unadulteratedly bullish for gold, it was always clear that IMF was not dumping 400 tonnes on gold on the open market. I'm not sure if anything at all has changed with this purchase.

The fact is that trade surpluses will trending down as US savings rate (post the clunker dip) start rising again. The priority of these banks will be to ensure that their respective currencies DONT rise too fast (and that the $ doesnt fall too fast).

China's Economy: All GDP Is Not Created Equal

China faces difficult challenges - while rebalancing is desired, it MUST grow. The short term incentives are heavily skewed towards providing continued employment -- even if it is on digging or filling holes. Just as the US is kicking the can down the road regarding inevitable slowdown in consumption, China is delaying the bitter medicine of shifts in employment patterns.

Continued structural imbalances and nascent signs of conflict within the governing structure (Xi Jinping failure to make it to the Central Military Commission) do not bode well for the well-being of the world.

The Next Major Crisis Brewing

The C/A surplus nations dont buy treasuries because they are good investments. When they run a surplus, they can either let their currencies rise or recycle the surplus into something else (like Treasuries). If they want to run merchantilist policies and keep unemployment low, they choose the latter.

While they are changing the mix of what they are buying (agencies etc.), the theory that CBs are buying LESS (in absolute terms) US securities is not borne out by the TIC data. Could Mr. Graham perhaps show us where he got the data showing that the foreign banks are reducing in absolute terms their T-bill purchases? I also dont understand how higher yields induce any CB to buy a T-bill. Did we get deficit nations in Africa scrambling to buy T-bills in the 80s? You only buy a foreign bond if you have a surplus. If you dont, your currency will rise and ceteris paribus, over time, you will run less of a surplus. That is how international economics works.

I wont decipher the chicken-and-egg connections here, but the foreign buyers undoubtedly will buy less treasuries in the future as US saves more, China consumes more, international trade contracts and the US runs a smaller trade deficit, while these surplus nations run a smaller surplus.

There is a choice however of WHAT foreign asset to buy. China has been buying more commodities, some gold....even foreign companies. But I have yet to see convincing evidence (and random comments from various pols in China in news publications is not that evidence) that China believes it should make MORE of these purchases in lieu of US Treasuries. What I have seen is that China is buying more of everything, incl. Treasuries.

You Can Spend Your Way Out of a Recession

I think the question is less whether you can spend your way out of a recession (as you pointed out, whether it is government spending or consumers borrowing, its not difficult to turbocharge current consumption by sacrificing future earnings). The real question is whether you should: and there is the point of contention with those who trust free markets and those who call themselves Keynesians and everyone in between that spectrum.

Our world operates on confidence and trust. And not just because we have fiat currencies. The level of trade and mutual give-and-take will be greatly reduced if we turned away from such systems. And if we doubt the solvency of the system, no one benefits. Bernanke's monetary lubrication to restore confidence in the solvency of the entire system was well warranted.

Even fiscal stimulus that keeps people productive and out of bankruptcy is welcome. However, we should realize that fiscal stimulus takes a much longer time to work and we should rely less on stimulus checks, _unworkable_ mortgage modifications, continued transfers (why should only certain states benefit from extended unemployment?) that spend massive amounts of future earnings and try to provide an immediate boost.

Ultimately, people over the medium term, do realize that that money spent today that they do not have (either by government or via their own borrowing) must be paid back in one form or another. For governments, it means either via inflation or higher taxation (or via growth). Perhaps some people think that it will only be the rich that will be taxed but thats a fallacy (there simply arent enough of them and they have great incentive and resources to hide taxable wealth). And Inflation is actually a regressive tax. We will get both -- actually also accompanied by spending cuts and higher deadweight losses as politicians try to wiggle their way out of this mess.

So my view is that while we can use a defibrillator to shock the patients heart into beating, there is only so long we can continue to administer that same treatment. There is no way to avoid diet and exercise. We need to spend in areas that generate jobs and also recognize that there will be unemployment pain in the near term. That will generate growth and lessen the pain of both higher taxes, social spending cuts and higher inflation that is to come.

China’s August Data Confirms Both Optimists and Pessimists

I am curious as to the breakdown of retail sales. Where is this growth concentrated? It is clear that asset prices in China have skyrocketed in the past few months. Is it possible that this has made a small segment of the population feel wealthy and splurge (just as rising house prices in the US led to better times for the luxury market)?

When I think of and hope for rising domestic consumption in China, that is not quite the rise I trust. Consumption by a small segment of the population based on paper wealth is likely to come down just as fast. The consumption that global companies get excited about is broad-based -- driven not just by buying cars and luxury goods but by spending on mass-marketed goods (appliances, apparel etc) -- and based on rising wages and consumer confidence. To some degree, that is the hallmark of Chinese growth story (and while export subsidies did transfer away wealth from the workers to the exporters, its also undoubtedly true that a significant portion trickled down).

As to the risks facing the Chinese (and global) economy due to its export orientation and a point that Prof. Pettis has been making for a while (nations running a surplus are a lot more vulnerable than those running a deficit when there is overcapacity in the system), read these shades of Smoot-Hawley: www.ft.com/cms/s/0/f67...

5 Reasons to Avoid the Gold Rush

I think commentators really missed a major point -- the risk of owning gold. Its not that gold is not a good diversifier nor that it shouldnt be a part of your portfolio. But those who advocate a massive overweight in gold are completely discounting the risks of gold investing. Does no one ask why Paulson chose to pay higher fees and invest in the ETF? He's not paid to pick the beauty queen. He's paid to pick what others believe is the beauty queen. There is an exit strategy for the hot money crowd and its when retail goes gung-ho on gold. What really is the outcome -- however remote -- of one of these big holders trying to dump the ETF?

While its nice to think (just because the CCP says so) that China will put a floor under gold to escape the dollar, the exit trade _is_ a risk. The simple truth is China cant exist in a vacuum. The reserve currency is still the prerogative of military and economic strength and China is decades away from overtaking the US in both arenas. They will have to contend with an inverted demographic pyramid thats probably stronger than the one in Japan. They will have to deal with the health impact of two decades of heavy pollution. They will have to deal with a generation of wealth transfers from workers to exporters. China is a big nation -- one with many natural resources and bright people and it has a bright future, but these are real problems that are on the same scale as the ones that plague the US. Its relationship with the US is symbiotic. The moment China stops funding the C/A deficit is the moment it stops accumulating a surplus and its when US stops needing that funding (In a simple two economy model: US imports less, period. Its not a choice, its a tautology). Does it really make sense for China to do anything but make symbolic gestures against the USD unless it wants a domestic crisis on its hands?

Now, if collapse of society is where your bet is, then, by all means, push all chips into gold. (though probably not the ETF)

But inflation? Look at the performance of gold vs. consumable commodities (oil particularly) in the 70s. Gold isnt my first choice when I think of high inflation.

Trading the 'Theme du Jour'

While fashions du jour change rapidly, it seems to me the short dollar crowd is touching the elephant trunk and calling it a snake. My big question to the $-fall over the medium term is: against what? MM has answered it in the short-run: against everything else but it makes little sense over the long run.

We talk of Fed $-printing. Arent the Chinese doing the same thing at a much more accelerated and an even more unsustainable pace?

Against gold because of inflation? But are wages going up? Unemployment going down? (i actually believe employing will be a a leading rather than a lagging indicator in this cycle) Re-leveraging into asset speculation is no inflation. That is the only recovery I see and likely to end up the same way as the earlier experience -- in tears.

The Chinese have NO choice but to buy dollars if they wish to keep employment levels remotely close to where they are. Even small economies dont turn on a dime, let alone the worlds 2nd largest suddenly turning its export-focus and promoting domestic consumption in a short time-frame. Repatriating physical gold, jawboning about dollar worries are just that -- noise.

I would not be surprised if DXY ended the year in the mid-80s. If ever the world gets back to full productive capacity and near-full employment levels AND the central banks all over the world keep easy money policies that result is more than just asset bubbles (especially widespread shortages in food and energy), then and only then will I worry about high inflation (and invest not in gold but in those commodities and the equities of companies that produce/service them).

However, I cant put weight scales in the voting booth and am content to stay on the sidelines through these rallies.

The Shanghai Market Calls the Tune

The story about the attacks is significant not so much for its contents (after all, I'm sure more people get hurt by more violent levels of crime in areas bigger than Urumqi) but as a reflection on the state of the people. The fact that fear (especially rumors) gets wings like this among a large section of population (enough to get international attention) and rapidly gets transformed into anger against the GOVT (www.timesonline.co.uk/...) is significant and worrisome.

From a psychological perspective, it reinforces the idea that despite other signs that may be impacted by governmental interference, the ordinary people are concerned about their future, nervous about the changes that may come and distrustful of the government to solve their problems. It is in such environments that random rumors grow bigger than life and cause headaches for governments and force them to make sub-optimal choices.

Of course, this is just one incident and I wouldnt want to let the imagination run wild solely on this story but I keep my ears open for similar signs of discontent and fear (which to me portend tougher economic times)

Volatile Trading Conditions Continue

Just to throw some natural gas on the fire: in the absence of near-term inflation, the ruling out of armageddon deflationary scenarios, the loss of jewelry buying, the explosion in ETF buying (esp. by the fast money crowd - does anyone have an answer for why Paulson wants to own the ETF rather than the futures?), I'm a little lost as far as gold as an investment thesis is concerned. Have we forgotten 1980 that quickly?

Dont get me wrong, gold bugs. Gold plays a very healthy role in any diversified portfolio. Its the overweight bias in this environment that I question.