Financial topics

[JonLaw]

Promising to keep rates low isn't enough. The Fed needs to give an indication that they will step up and buy trillions in bonds over the next few months if there's to be any chance of more economic expansion/inflation. The political will to do that has been lost. I think it's because any effect of a real multi trillion dollar QE3 would be very little economic expansion and just lots of inflation, which would make the economy worse. Gold is reacting (and everything else is going down in price) because without the Fed buying trillions in bonds over the next few months there will be bankruptcies. If the market was expecting QE3 style inflation due to trillions in bond purchases, oil and silver would be skyrocketing with silver moving up faster than gold, as happened when QE2 was still on (or in 1979). Overall, I see everyone grasping at straws and making moves of desperation. I think this last 20% move in gold is a bubble blowoff but I know I can't convince people of that.

With respect to QEIII, the Fed will telegraph what it's going to do in advance. Jackson Hole will be interesting next week.

With resepct to gold, we should be reaching the blowoff stage, but this one could be bigger than the others, just like everything is bigger than everything else thins time around (tech mania, soverign debt).

Normally, you would expect to see the gold blowoff end between $2,000 and $5,000, but this time, we should probably increase it....mabye the target for the blowofff spike and crash will be between $5,000 and $20,000. Everything else is bigger by a standard deviation (at least), why shouldn't gold follow it?

In any event, I am now looking for signs of QEIII and signs for the final blowoff spike and crash in gold. I'm not convinced that the true final blowoff in gold has even begun yet. I don't trade gold or own gold, so I'm not that concerned about it except to watch it.

I'm net short in GRZZX right now. Other than that I'm in a Vanguard MM fund.

I figure that Vanguard is the safest brokerage to be in given their conservative corporate culture.

Unless anyone else has ideas for a safer brokerage firm.

[John]

I have to insert a word here for web site readers. This talk about
gold is crazy. Gold is currently in huge bubble, and when the bubble
bursts, it will fall to well below $500 per ounce. It may indeed go
up further from where it is now, but the only way to make money from
that is to predict when the bubble will burst, and sell just before
that happens -- which no one can do.

For most people, I recommend cash -- either short-term Treasuries
or bank deposits.

If you're a very sophisticated trader and you want to invest in gold,
you should take possession of the actual metal. It's quite possible
that some gold investment firms are issuing shares in gold that
doesn't actually exist.

John

[Higgenbotham]

With respect to gold, we should be reaching the blowoff stage, but this one could be bigger than the others, just like everything is bigger than everything else thins time around (tech mania, sovereign debt).

I should have said that I believe the move from 1500 is the beginning of the gold bubble blowoff.

As posted the other day, gold is getting expensive in terms of oil and it will probably be there that we can get a more measurable idea of the extreme. It seems possible that the blowoff in gold won't end until the gold oil ratio is above its previous record high. Whether that means its mostly due to a crash in oil or mostly due to higher gold is unclear. So far, it's been pretty equally split between lower oil and higher gold. As the bankruptcies come in I would expect that to tilt toward severely lower oil but as Templeton said things will be very chaotic.

[MnMark]

I have to insert a word here for web site readers. This talk about
gold is crazy. Gold is currently in huge bubble, and when the bubble
bursts, it will fall to well below $500 per ounce. It may indeed go
up further from where it is now, but the only way to make money from
that is to predict when the bubble will burst, and sell just before
that happens -- which no one can do.

For most people, I recommend cash -- either short-term Treasuries
or bank deposits.

<snip>

John

This has been your position now for at least three years - that gold is in a bubble and will go below $500 an ounce.

I wonder if you have considered what it would take for you to think you were wrong about gold being at unsustainable prices? How many more years of rising prices? Or how many years at a high plateau? Because I think that when you were saying this three years ago you would have expected the bubble to have burst by now.

For years after the crash of the 1980 gold bubble the price of gold hovered around $300-$400 dollars, a plateau which you apparently believe we will return to.

The time it took for the price of gold to rise from what would be that plataeu value up to the 1980 high of ~$850 was just a matter of months. That's how a bubble works...the blow-off phase takes just months or weeks.

Something that grows consistently over the period of ten years can hardly be called a bubble in that sense.

How do you differentiate between something which is growing in value for fundamental, sound reasons, and that may rise or fall but will not crash, and something which is in a bubble?

I contend gold is growing in value because the era of the fiat dollar is accelerating to an end. And when the exponential price rise comes, it will, after a period of adjustment, remain at a permanently high value in relation to the dollar because the government will have been forced to begin defending the value of the dollar against gold by buying and selling gold just as many central banks buy and sell other reserve currencies to defend the value of their currency.

So, again: have you considered what it would take to falsify your hypothesis that gold is in a bubble and is going back below $500? Or, if five or ten years from now gold is in the thousands of dollars an ounce and has been for years, will you still contend that gold has no intrinsic value, is in a bubble, and will go back to the same nominal price it was before 2000 (despite all the growth in the money supply since then)?


Also I think it is terrible advice, though understandable for someone who thinks we're going to get deflation, to advise people to stay in cash. The real inflation rate (ShadowStats version) is eating alive the savings of people holding cash. I am afraid that people who stubbornly hold cash as this unfolds are going to be financially annihilated. I suppose it all comes down to whether you think we're going to get a serious deflation like the 1930s - a situation which is not applicable anymore because the government was constrained from printing by the gold standard then and is not now. All I ask, is show me an example of a country with fiat money that had a serious deflation like that.

[richard5za]

This talk about
gold is crazy. Gold is currently in huge bubble, and when the bubble
bursts, it will fall to well below $500 per ounce.

John,
I believe that you are right. The question is "how lomg can we milk gold?"
Maybe gold goes to $ 15 000 per onnce; maybe gold crashes tomorrow.
Richard

[John]

> So, again: have you considered what it would take to falsify your
> hypothesis that gold is in a bubble and is going back below $500?
> Or, if five or ten years from now gold is in the thousands of
> dollars an ounce and has been for years, will you still contend
> that gold has no intrinsic value, is in a bubble, and will go back
> to the same nominal price it was before 2000 (despite all the
> growth in the money supply since then)?

> Also I think it is terrible advice, though understandable for
> someone who thinks we're going to get deflation, to advise people
> to stay in cash. The real inflation rate (ShadowStats version) is
> eating alive the savings of people holding cash. I am afraid that
> people who stubbornly hold cash as this unfolds are going to be
> financially annihilated. I suppose it all comes down to whether
> you think we're going to get a serious deflation like the 1930s -
> a situation which is not applicable anymore because the government
> was constrained from printing by the gold standard then and is not
> now. All I ask, is show me an example of a country with fiat money
> that had a serious deflation like that.

I try, as much as I can stand, to avoid getting involved in these
discussions, because I'm so contemptuous of this total nonsense, and I
try not to insult the nice people in my own forum unless I'm really
forced to.

First off, I can ask you the same question -- what would it take to
finally convince you that hyperinflation is NOT going to occur? How
many years of being totally wrong will it take for you to change your
mind?

I've been dealing with this question for almost ten years. Month
after month, year after year, I've had to listen to people in your
camp claiming that hyperinflation is coming next month, next quarter,
next year. Just as people who don't want to deal with real P/E ratios
have invented "operating earnings," people who don't want to deal with
the actual CPI invent things like "shadowstats". What both of these
have in common is that they're newly fabricated, they have no history
to speak of, and they're motivated by either money or politics.

What's the shadowstats inflation value for the 1970s and 1980s? If
you can't answer that question, then your whole argument is
meaningless.

Now the CPI has gone up to 2-3%, and people are predicting
hyperinflation. This is after almost a decade of near-zero Feds Funds
Rate, and trillions of dollars of quantitative easing and fiscal
bailouts.

And STILL the CPI is only a small fraction of what it was in the
1970s, when the Fed Funds Rate was 5-10%, and there was NO
quantitative easily and fiscal bailouts.

The fact that trillions of dollars of liquidity has not raised the CPI
to more than a fraction of what it was in the 1970s shows what a
strong deflationary bias the economy has, contrasted with the 1970s.
All this liquidity in the 1970s would have caused massive
hyperinflation, but it's doing little today.

If you want to understand the theoretical reason, please familiarize
yourself with the velocity of money, which has hugely tanked in the
2000s, as it had in the 1930s.

And speaking of the 1930s, this "fiat currency" claim is also total
nonsense, and claims about it have already been massively disproven by
Japan's experience since 1990.

The U.S. did NOT have a "fiat currency" in the 1930s any more than it
has today, despite the political rantings of politicians. There was a
"gold standard," but that wasn't an immutable law of physics, and the
government could simply have ignored it and lowered the Fed rate or
supplied quantitative easing or fiscal stimulus if they have wanted
to. The thing that stopped them was political opposition - the same
thing that's preventing QE3 today.

And so the answer to your last question is -- Japan today and the U.S.
in the 1930s. There are other countries in the 1930s where the same
thing happened. As far as I know, the velocity of money always
collapses during a generational crisis era, since people are afraid to
spend.

While I'm at it, let me quote again something that you wrote
in February 2009:

> A year or two ago we exchanged some emails where I predicted that
> because there is no real sense of fiscal restraint or respect for
> real capitalism and the free market's price signals left in our
> government, the government's response to the approaching fiscal
> crisis would be to bail out and nationalize companies and
> industries left and right. You ridiculed that idea, saying the
> government would never nationalize. Well that's just what's
> happened on a trillion dollar scale. And they're not done yet.

Well, guess what? I was right to ridicule the idea. Nothing has
been nationalized, and the reason is that there's too much political
opposition to nationalization. What will it take for you to finally
admit that you were wrong about nationalization?

John

[Higgenbotham]

I wonder if you have considered what it would take for you to think you were wrong about gold being at unsustainable prices? How many more years of rising prices? Or how many years at a high plateau? Because I think that when you were saying this three years ago you would have expected the bubble to have burst by now.

On balance, with respect to the issues we discussed two years ago, you've been right.

The first issue was whether Bernanke would print money or be allowed to print money. He did print money and he was allowed to print money. Two years ago, I said that even if Bernanke was misguided enough to really believe he should be printing money that the rest of the country would have more sense and put a stop to it. That didn't happen, which is a good indication of the extreme moral decay in the US. It's one thing for a third world hellhole with a crazy dictator to print money but the hegemon has no reason to print money and actually has a responsibility not to.

The second issue was even if Bernanke did print money whether inflation could be generated. I said no because even if he did print, the pot of money could not become well mixed enough to turn all the dollars into junk dollars. In other words, there would continue to be writeoffs of bad debt and market freezeups as the market rejected bad paper over good paper. That didn't happen either, which is also a good indication of the extreme moral decay in the US. What happened instead were totally bogus accounting standards were approved and even though a lot of the debts were actually bad they were propped up through a corrupt process. I'm showing the CPI running at a 3.6% annual rate over the past year, which is a lot more inflation than I thought they'd ever get. I figured at best they might be able to get an inflation rate of 0.

From the time I said those things, there was no evidence of oncoming deflation; it was just opinion based on study. House prices began falling again late last year but wasn't enough to say deflation was taking over. My opinion now is the preponderance of evidence is indicating a deflationary environment took over around late April or early May. I posted all that evidence a few weeks ago. For the purposes of this discussion I'll just say what I think would indicate that environment has or will flip back to inflation.

The first would be that Bernanke announces a QE3 in excess of $4 trillion by the end of the month. Is he misguided and/or morally corrupt enough to do this? I think he is. Is Obama spineless, clueless and/or morally corrupt enough to let him do it and not remove him? I think he is. Will the rest of the country or the rest of the world allow it? At this point, I see evidence that the answer is no. Only a study of history provided that evidence two years ago.

Beyond that, here is a list of items that would make me think that things are flipping back toward inflation: silver prices begin to outpace gold prices and the gold/silver ratio drops to a new yearly low, silver goes to a new yearly high, oil goes to a new yearly high, oil exceeds its 2008 high (oil is currently 44% below its 2008 high), the CRB index goes to a new yearly high, the CRB index exceeds its 2008 high, the employment population ratio begins to increase, wages begin to rise faster than the CPI, people begin dining out again, VMT bottoms out and begins to rise, US treasury rates take out the February highs, house prices start going up, banks start lending more, semiconductor stocks start showing strength. Not all of these would need to happen.

[vincecate]

My opinion now is the preponderance of evidence is indicating a deflationary environment took over around late April or early May.

John has called for the CPI to drop 30% like in the early 1930s. Do you think anything like that has ever happened in a pure fiat money system? Do you think that could happen to the USA under Bernanke? He wrote a famous paper on fighting deflation and has lots of ideas on this.

If you line up 2008 and 1929 like you did with the stock market, it was only the first 3 years that had deflation. Once they made it illegal for people to own gold, they got inflation. So in some sense we are past the deflation part of the great depression in our current crisis.

[vincecate]

An idea on how fiat money will fail. Currently when some country like Brazil or Switzerland thinks their currency is too valuable they print more and buy some other currency. This drives down the value of their currency, particularly when the currencies they are buying are printing like crazy. The problem with this is the central bank is buying some loser currency that is dropping in value. My thinking is that at some point some central bank will instead print money and buy gold to lower the value of their currency. In this case they will end up with an asset that is going up in value, as nobody is printing it. Imagine if the Swiss did this. As time went on their currency would have much better backing than others, so more people would feel safe putting their money there, so they would keep printing more money and buying more gold, and you could get a positive feedback loop where Switzerland was printing paper and getting lots of real gold. Other central banks might then decide that they too would rather hold gold that was going up in value than US dollars that were going down in value. So as they printed money to drive down the value of their currency they would buy gold. The first central banks to play will get more gold. Last one in has a hard time getting any. Very quickly we could have a gold standard between countries again.

[OLD1953]

Student loans, a bubble ready to explode or a burden on future growth? Or possibly both?

http://www.theatlantic.com/business/arc ... 99/243821/

http://abovethelaw.com/2011/08/the-stud ... it-bursts/

Obviously this is unsustainable. Obviously, students are being overcharged, just as obviously, the schools, professors, bursars and so forth just do not care. Just as obviously, since you can't discharge student loan debt via bankruptcy IN THE UNITED STATES, it provides a huge economic incentive for the educated to LEAVE THE US AND MIGRATE TO A COUNTRY WHERE THEY CAN DECLARE BANKRUPTCY UNDER A DIFFERENT LEGAL SYSTEM! While nobody tracks those figures, there is certainly evidence that it is happening.

http://whiskeyandgunpowder.com/us-emigration/

I know people, quite a few of them, who are intending to retire or live outside the US, whether as citizens or not. I myself work as an expat, though I've no plans to give up my US citizenship, I seriously doubt I'll retire in the US, the USA is terribly overpriced for retirement.

Adding a large economic incentive for the educated to leave is just not a good idea in the long run, no matter how much it appeals to the "moral fiber" folks.