Ack! Contrarian Overload

When I was a teenager “Alternative Rock” was just coming on the scene. In the early days, Alternative Rock was just that- the alternative to the music that was consumed by the masses. But then people decided that Alternative Rock was cooler than Pop Rock and suddenly there was a movement en masse out of pop and into alternative. The result was that the term “alternative” became increasingly ironic because it was, in fact, simply the new pop marching under a different label. Rebellion, as they say, is best done through conformity.

The reason I bring this up is because I’m starting to feel that way regarding investing and the mainstream media. A couple of years ago economic contrarians where the lepers of the financial media. Everyone seemed to know that the stock market was the place to be, as Dr. Jeremy Siegel wrote, for the Long Run. After all, the Federal Reserve was firmly in control of the economy, and they would never let a prolonged market downturn occur.

People aren’t saying that anymore. Last week the New York Times ran a story saying that the ten year period ending last month was the worst for stock market returns in the history of the S&P. As the story said, if you factored in Consumer Price Inflation, the S&P returned a negative 40.4% over that ten year period. Now media pundits are lining up to say that the economic troubles we are in are going to get worse still. A friend of mine just forwarded me an article saying that, if the stock market were to return to historical bear market averages for price-to-earnings, that the S&P would soon see levels of around 500 or so- a decline of another 40%. Continue reading Ack! Contrarian Overload

2009 Off to a Rough Start

For the first five days of trading of 2009, the Dow has fallen from opening around 8800 to closing today at 8750. Gold’s down some $40 too as its Comex price has fallen to $844 an ounce. No Earth shaking moves in these first few days of trading, but the investors are watching each other and trying to gauge the mood. A lot of people are expecting 2009 to be an up year for stocks. The logic is that last year was the second most horrible on record, so this year should see a big bounce after a big fall.

As for me, I feel that making a prediction about how stocks will do in 2009 is a luxury I can ill afford at this point. It just seems so far away and there are so many unknowns that going to have to develop over the course of the year before a clearer picture emerges. Markets are, after all, made of people, and people are unpredictable. At this point in I feel like I’m watching the Super Bowl warm-up show. I’m sure the hardcore football fans will know what I’m taking about- that show that comes on before the Super Bowl where the sport’s commentators fill up airtime talking about all of the players, their strengths and weaknesses, and the game plans they tend to use. Those shows take almost as much time as the Super Bowl itself, because you can endlessly debate how the teams should match-up, but no one will really know until after the fact how they will match-up.

Well, here’s Preston’s pre-Super Bowl commentator show. The players that are going to be squaring off this year are many. We’ve got “Helicopter” Ben who’s certainly proven to be true to his nick name. He’s showering money down upon anyone and everyone who could possibly ask for it. Recently he went so far as to essentially eliminate short-term interest rates and he’s said that he won’t rest until he uses more newly created money to crank down the long-term interest rates too.

Joining Ben’s team are two new players, Barack Obama and Timothy Geither. Both are talking a big game. Obama in particular is saying that he wants to run up the deficit score another trillion dollars over the course of this year and “for years to come.” That’s quite a powerful inflationary combination. The ultimate Keynesian fantasy of monetary stimulus complemented with a strong fiscal stimulus. The classic team of the banking system and government working in combination. One makes the money and the other spends it. Together they represent a potent inflationary team that is dedicated to pumping up the stock market.

But the inflationary team is up against some tough competition this year. The biggest concern I’d have for team inflation would be that the other nations of the world refuse to soak up the dollars they are going to throw off. In particular, I’d be concerned about China. China has been the primary consumer of newly created US Dollars over the last few years, but lately, according to a NY Times Headline, China Losing Taste for US Debt. If that’s the case, then I’d say this inflationary team is about to meet it’s match; the Fed can print all the money they want, but if people don’t value it, it’s not going to do a damn thing but cause spawn runaway inflation.

Obama seems to feel that he’s stepping into the shoes of Roosevelt, but Roosevelt ran against Hoover by saying that his policies of taxing and spending were reckless. It was only after he gained power that he developed a taste for it himself. Obama’s coming onto this stage not only broadcasting his love of inflation, but just how much inflating he’s willing to do. For a President-Elect to announce to the world that he intends to run trillion dollar deficits “year after year” is simply unheard of and I’m sure it’s quite a gut-check for the current holders of our debt. Are they really going to just stand by and continue to loan us another few trillion?

Inflation has always needed a bit of subterfuge to exist. In his book, Human Action: A Treatise on Economics, Ludwig von Mises wrote:

Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.

He didn’t get that exactly right. It would seem that people tolerate a little inflation far more than Mises anticipated. Still, I doubt the Fed is going to be able to keep inflationary expectation well “anchored” with these trillion dollar deficits coming down the pike.

And if our foreign lenders decide to stop loaning us the money, then the whole inflationary plan will be wrecked. Then, and only then, will Ben, Barack, and Timothy, have to contend with how to get us out of this mess without the trusty tool that’s worked time and again since the 1980s. In that eventuality, fasten your seat belts because it’s going to be a bumpy year.

My Investment Scorecard for 2008

I just went through and reviewed how my investments did throughout 2008. I will now reveal my result. Drumroll, please.

In 2008 … my ROI was …

25%!!!

That’s right. While everyone else went broke, I was makin’ bank. How on earth did I do it? Okay, okay, okay — I’ll tell you. But only ’cause I’m a nice guy; I had three investment accounts: a ROTH IRA, a traditional brokerage account, and a Variable-Universal Life Insurance Policy. At the start of the year, my accounts were invested as follows:

* My VUL Policy had roughly $3500 invested in Gold Mining Stocks through the Rydex Precious Metals Fund. (RYPMX)
* My Roth IRA had roughly $17,000 invested in Water Mining Companies (PHO) and gold bullion (GLD).
* My traditional brokerage account has roughly $1500 invested in the Prudent Global Income Fund (PSAFX)

As you can see from the start, I was invested to profit from a falling dollar. Let’s take a quick step back into the recent past; last fall, to be specific.

It’s October, 2007. The stock markets have recently reached their peak with the Dow Jones closing at 14,100 on the 9th, and I just don’t see how stocks will possibly hold any value with all the bad news now coming out. At the dawn of 2008, I want to try and steer as clear of the main stock market as I can; as February ends, I liquidate both of my Roth positions, basically breaking even.

Springtime, and the market’s begun to heavily swoon; I want to reposition myself to profit from the short side. I put my Roth money into the Prudent Bear Fund, (or BEARX) since it’s 70% short the market, and 30% long on gold mining stocks. Now it’s June; I’m investing another $5,000 into my Roth, (my 2008 contribution), and also continuing to invest in Prudent Bear.

Here comes a September to remember. We see the bankruptcy of Lehman, and the stock market rallying on the news. I’m basically sitting flat in my portfolio for the whole year — quite frustrating. I’d positioned myself well to profit from all of the bad news, and despite the copious amount of it, I’ve yet to show a profit. In fact, the stock market’s flaunting its irrationality by rallying strongly on Lehman’s failure. Over the next couple of days, it’ll proceed to fall, only to rally again as a Keynesian trifecta of Paulson, Bush, and Bernanke totally blow my mind announcing the TARP program.

Now, I’m in totally uncharted territory. I knew the period of history I was living in would show a stock market deflation in comparison to gold, but I wasn’t sure if it would from stocks falling, or gold rising. At the time, it seemed the Powers That Be would be combating the falling market with inflation, and so betting the market would fall, wouldn’t be a winning choice. Going forward, I figured that either: inflation would take hold, raising all boats, (favoring gold particularly), or the market would crash, causing people to then rush to gold in the panic. So, either way, gold was the way to go.

But here is where I made a critical error, choosing to liquidate my short positions just prior to the October crash. I wasn’t sure where to put my money, so half of it went into Barrick gold mining stock (ABX) @ $37, and the other, just sat in cash. A week later, the market’s started crashing, as the credit markets freeze. Barrick’s up to $38, but everything else is uncertain. Volatility has overtaken the market, values bouncing all over the place.

The now frozen credit market prompts me to look into bonds; and, sure enough, I find some South Trust, rated AAA, maturing six weeks from the day I bought them, yielding an annualized 30%. Having done my homework, I knew South Trust, recently acquired by Wachovia, had now been taken over by Citigroup. Seemed pretty clear from all of the TARP madness that Hank, George, and Ben were peddling that Citi wouldn’t be allowed to go bankrupt. So, I sold most of my Barrick stock (for a small profit) and put the $20,000 into the South Trust bonds.

Turned out, it was a great move. Not only did I make $800 in six weeks when they hit maturity, but I say out the bulk of the decline in Barrick. I’d been actively trading it up and down in my traditional brokerage account, pretty much breaking even once all was said and done. But, as the bonds matured, I was still able to scoop up a ton of Barrick Gold close to the bottom. It was a decision at the time, trying to figure out if I should put the whole $21,000 to work in Barrick, or only half, instead. At this point, Barrick was range-bound between $20 and $25, so I decided to invest $11,000 into Barrick at $20.50, leaving the rest in cash to buy more, should it have fallen any further.

Of course, this was a decision I’d come to regret as Barrick took off — and never looked back.

But, by year’s end, Barrick would be trading in the neighborhood of $36 a share, my $11,000 investment now worth $20,600; had I bought in with everything, knowing I would’ve made even more.

Ah, well. It beats losing money.

As 2008 came to a close, I broke even in my traditional brokerage, (funded up to $9,000), my VUL had fallen to $2,200, or so, with my Roth sitting pretty at $32,000.

Okay, I know my math isn’t exact here, because I’ve not annualized any of these figures to correct for the fact that a lot of the money was added mid-year. If I did, my ROI would be even higher. But why be greedy?

All that being said, my final scorecard was:

Start 2007            Money Added         Subtotal          Year-End
Roth IRA                   $17,000                           $5,000                          $22,000                       $32,000
Traditional                 $1,500                           $7,500                           $9,000                         $9,200
VUL                            $3,500                             $260                           $3,750                          $2,250

Totaling up the subtotal field, I get $34,750 and a year-ending of $43,450. That’s right at 25%. As I mentioned, if I’d have corrected the ROI by factoring in the added money only being used for half the year, that ROI would be even higher.

Furthermore, since the major gains all came in the Roth account (which is TAX FREE, don’t forget) that means that my “tax equivalent yield” is even higher. That’s just a fancy way of saying, that since I don’t have to pay taxes on the gains in the Roth, the return is the same as making a greater amount that I would pay taxes on.

All in all, it was a profitable year.

The End of Deflation

About a month ago I made a prediction that the whole deflation story was done and that we would start to see a rise to inflationary expectations once more. I’m feeling pretty good about that prediction despite the price cuts many retailers were making during the holiday season. I even experienced one myself in going to get a last-minute Christmas gift for my mother. So, dropping by Best Buy and picking up Curb Your Enthusiasm – The Complete First Season, I went to the cashier expecting to pay the full $36 retail; unbenknownst to me, they were instead running a half-off all HBO-series sale — I got out of there for less than $19. You might say I experienced a bit of holiday deflation first hand.

You know, I have to say, it actually felt pretty good. Suddenly, I wanted to buy every season they were selling past the first I was already getting. That just goes to validate one of the oldest truisms in Economics:

The Law of Demand.

When the price falls, demand increases. So, you can ignore all of those Macroeconomic wonks who tell you that deflation causes people to hold off spending in anticipation of lower prices. It, and almost every other aspect of Macroeconomics, is just not true. The real reason central bankers hate deflation is because it’s primarily caused by people going broke from overextending themselves in credit, and now can’t afford to pay. That would be a tragedy for the bankers; because they’re the ones who made the loans to begin with, now they would be looking at losses. Bankers hate losses. They hate them so much, they’d much rather hide behind some cooked-up lie about the harmful effects of deflation in order to call for bailouts.

Going forward, we may see some prices fall, but the deflationary scare of October and November is starting to fade. With Obama coming in and promising to stimulate the economy by deficit-spending some $1 trillion dollars or so, in combination with our pal Ben cutting interest rates to zero, we can expect that the spectre of deflation has safely been put to rest.

Although, I am expecting one more strong down leg in the market in the next few months: expect to see the Dow approach 5000 or so in 2009. What’s going to be curious to see is if gold follows it down, as it did in October, or instead, rises as gold is supposed to do. It can be hard to figure these things out, but I’m expecting it to rise this time. There should also be less forced liquidation by hedge funds, because I figure they got rung out of the market already.

Gold stocks, like Barrick, aren’t nearly as cheap as they were in October and November — when it was trading at a PE of roughly 10. It just ended the year trading at a PE of 18 or so. That stock rewarded me greatly this year. I was able to buy in at close to the bottom and nearly double my investment.

I think I’ve got the fever of just sitting on my cash and waiting for the next plunge. Of course, the problem with that is, you never exactly know when it’s going to come.

An American Christmas Carol: Part II; A Ghost of America’s Present

Today, we are a people that would best be characterized as sheep. Having taken control of our money as well as the most important functions of our Government, the banking sector is fulfilling its traditional role in support of it by creating all the money it wants to spend. The two major political parties of our nation have lost any meaningful distinction, and both favor a strong central government that oversees most areas of American life underneath layers of bureaucracy. They only differ in terms of how that power should be used: Republicans favoring the traditional fascist agenda of allowing government to work closely with large corporations to enhance their profits, while leveraging the military to open up and further expand the influence of both. Democrats favor using the power of government to reallocate wealth and correct for the errors of a free market. Both seek to expand government powers that were never granted by the US Constitution to begin with.

Instead of being outraged at the continual depredation of the American Government and way of life by moneyed powers and power-hungry politicians, Americans look to television to tell them what they should care about and how they should feel. Television serves to do little but distract them from what’s going on around them; even the news channels do little outside of featuring infotainment designed to titillate our infuriate its viewers regarding some contrived controversy epitomized by Fox News’ “War on Christmas.” And so Americans have come to look at politics much as they do sporting events: they have the team they’re rooting for and sympathize with, and the opposition they love to hate. They don’t seem to care whether the party sticks to its principles or not. Sometimes they don’t even know what those principles are.

In the midst of these sheep, the banking industry is content to make itself the power behind the curtain. Let Americans look to their government for guidance; they’re happy to just keep creating the money and lending it at interest for all of our ridiculous wants.

And why shouldn’t they? It’s not their money, after all. It’s ours.

The US Dollar is our obligation, and the bonds we take out to finance the whole circus are our childrens’. Why should the banking industry care if we spend it frivolously? It didn’t cost them anything — and they’re happy to make the interest.

At every turn in American political life, the banking industry is there to guide us. And, when it turns out that they’ve loaned Americans money they can’t afford to pay, they’re ever quick to exert their influence with Washington politicians to receive a bailout — courtesy of the tax payers, of course.

The game bankers play reminds me a bit of how parents pacify children; they know that children have short attention spans and a primitive understanding of the world, and so are happy to play on both in order to mold their behavior towards the parent’s own ends. And so it is with bankers and the American people: bankers know that Americans’ eyes roll into the back of their heads when they mention interest rates or the mathematical models of Keynes and his almighty multiplier effect, so they make what they’re doing artificially complicated as to purposefully misdirect everyone away from the obvious scam being perpetrated against us. And when they need to translate it out of economistspeak and into ordinary terms, they always do so with the most dire of warnings: Ben Bernanke himself told Congress that if they did not act to save the economy this week, that there might not be one to save come Monday. Of course, there was, but people were still scared enough to grant the Treasury and the Federal Reserve additional powers.

This can only go on for so long before we lose our prosperity and complete, in the words of FA Hayek’s book, The Road to Serfdom. And here we are, at the end of the road. Looking to our shepherds for guidance as we face a crisis that they previously promised us would never happen. Today our shepherd is Barack Obama and the Democratic party, and they are convinced that they can spend enough money to stimulate us out of the hole that naturally resulted from all the previous efforts at stimulus. As if to somehow show solidarity with Socialism, Dick Cheney recently scolded Congress for not bailing out the auto industry.

And so, we again are ready to rally around the leader and follow whatever plan he outlines to get us out of these dark times. We march forth, not really understanding the problem we are facing, but determined to do our best to fix it anyhow. Ben Bernanke has said that we have to lower the value of our money in order for us to beat this recession, and he has offered to do that for us by creating money out of nothing and loaning it out until interest rates fall to absolutely nothing. I’m sure that the average American feels somewhat suspicious of that course of action, just as they were somewhat suspicious of the Wall Street bailout, but they figure that the middle of a crisis is no time to question the orders being handed down. If the plan is to devalue the dollar, then here we go:

Printing presses: maximum warp!

This can only lead to one inevitable destination. We’ll look at that in the final installment of this series, when visited by the Ghost of America’s Future. Until next time.

Ben Bernanke Proves He’s Good for Nothing

Today the Fed made history by lowering the fed funds rate to a target of between .25% and zero. That’s right, zero. Nada. Nothing. Ben Bernanke proved that he was a man of his word. Before he was elected chairman, he said that he would lower interest rates to zero to combat the dreaded forces of deflation, and now he’s proven he’s good for it.

Ben’s Christmas gift to the world is an interest rate of nothing.

I read a lot of superhero comics as a kid, and as an adult I love the movies made from them. The figure of a guardian watching over people ready to swoop down and deal a couple of solid punches to evildoers was very reassuring to me as a child. The world painted on the pages of the comic books made the hero indispensable. Without the protection of heroes like Spider-man, the world would be overrun by criminals. Not to mention supervillains.

I’d say that the world we live in today views itself through that comic book prism. Free societies will soon be overrun by fraudsters and criminals if we don’t have super powerful regulators to protect us. Similarly, free markets would soon fall prey to their own excesses were it not for super powerful bankers who can sweep in and defeat the business cycle with a couple of handy rate cuts.

Look, up in the sky. It’s a bird. It’s a plane.

It’s… THE CHAIRMAN!

His super powers include the ability to run the printing presses faster than a speeding bullet… and in so doing make your money lose value. That’s all inflation is, you know — money losing value. Ben hopes that the tonic of a little inflation will get the markets started again. Keynes himself theorized in The General Theory of Employment, Interest and Money that inflation was the great trickster which could get labor to work for lower rates of compensation then they had anticipated. He figured that laborers would be slow to catch on to the difference between nominal wage rates (the number of dollars they were being paid) and real wage rates (what those dollars could buy). Keynes figured that by using the trick of inflation, business would be getting a discount in their labor costs (because he figured labor is slow to catch on) and would therefore become profitable.

It’s never worked, mind you. It didn’t pull us out of the Great Depression despite being tried year after year. It didn’t do a lick of good in Japan, either. Inflation has not cured deep recessions then, and it’s not going to solve this one today. In fact, it was these efforts to use the power of inflation to resist economic downturns that caused the greater downturns down the road in the first place.

In William Feckstein’s short little book, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve he meticulously traces how Greenspan did little but cut rates through his tenure as chairman. First, he did so at the start of the ’90s to prevent the ’91 recession from deepening. These lower interest rates pushed a lot of savers out of traditional interest-bearing bank accounts and into the stock market in pursuit of higher returns. Greenspan then found that he was powerless to bring the rates back up without crushing these newly-made stock market investors. So he just kept them low despite the “irrational exuberance” he felt was getting priced into the market.

The end of the millennium came, and Greenspan worried that nervous individuals would pull too much liquidity from the system with their Y2K concerns. So in anticipation, he pushed liquidity into the system and helped spike the stock market of ’99 to be one of the best stock market years on record. He again found himself unable to raise interest rates, because of the downturn that ensued after the bursting of the stock market bubble. So, Greenspan just lowered rates AGAIN, inciting a housing bubble. Now his predecessor, Ben Bernanke, is finding that he also could not raise interest rates back to where they were without crushing the bubble and causing a depression. And now he’s having to lower interest rates even lower than Greenspan ever did. To drive this point home, I took the historical data for the fed funds rate from the Federal Reserve’s website and plotted it in Excel. Have a look.

As you can see from the graph, every attempt to raise interest rates after they were lowered caused an economic downturn that necessitated still lower interest rates. As most anyone could guess, this can only go on for so long. Once the fed funds rate hits zero, there’s no more room to cut. And here we are at the bottom. I suppose it’s possible that there may be one more bubble cycle in the American economy, but that will only prolong the inevitable. In real terms, there’s nowhere for the American consumption-driven economy to go but down.

“Fear not,” our chairman, turned-superhero seems to say, “I have other ways to cause inflation.” And he does. As he detailed in his speech on making sure deflation “doesn’t happen here,” the Fed chairman can use all kinds of shenanigans to keep inflation rolling. The fed funds rate is a short-term rate, but Ben wants us to know that with the flip of a switch, the Fed can just start printing up money and using it to purchase bonds in order to drive down interest rates all across the spectrum. So we may be down to a short-term interest rate of zero, but we still have room to cut the mid- and long-terms ones next.

Of course, if one takes this to its logical conclusion, one would figure that once the Fed has manipulated interest rates all across the board down to zero, the inevitable fall that they’ve been prolonging must come to be. That’s assuming that no one catches onto the fact that the Fed is creating trillions of dollars out of nothing in the meantime and just flees the whole monetary system.

Speaking of, gold did very well today, and it’s going to do even better in the future. The more inflation Helicopter Ben forces on us, the more it’s going to reward those who flee the dollar.

If you know of anyone who needs to learn more about this, I’d encourage you to buy them a copy of my book What Do You Mean My Money’s Worthless for Christmas.

It makes an excellent stocking stuffer.

A Sign of the Times

“Billboard improvement” is a colorful way to describe vandalizing a billboard in order to give the advertisement a totally different meaning. I recently ran across one such billboard improvement that I found rather hilarious.

Improved Wachovia Billboard — "Improved" Wachovia Billboard

The thing is, I’ve always thought that when I saw these Wachovia billboards ever since they were sold to Citigroup with the “assistance” of the FDIC. At the time I thought this was the classic case of the FDIC guiding a weak bank on the verge of failing into a merger with a stronger bank, but not less than a month or so later and Citigroup was begging for a bailout less they would fail.

In order to ensure the survival of our banking system, literally trillions of dollars has been injected into the American financial system. The ultimate effect of all this money creation will be to cause inflation, just as Ben Bernanke told us it would back in his speech on how to fight deflation. The other, somewhat temporary, side effect of all this money creation will be to drive down interest rates; anyone who wants to borrow money can get some of the newly created money that was just pumped into the banking system on the cheap. Lower interest rates will also offer people less reason to save, and that’s why I find that Wachovia billboard so hysterical.

In essence, Wachovia was a part of the banking system that reaped profits by engaging in making mortgage loans to people who couldn’t afford them and them repackaging the loans and selling them to Wall Street. We are now having to pay the price for the sins of the banking system and the Fed has decided the form that this price shall take: inflation and low interest rates. Yet they advertise that they will help “your little ones grow.” I have to say that this billboard was indeed improved. Now the billboard plainly says what Wachovia (and the entire banking system) will do to your money… And they say that there’s no truth in advertising.

Of course, these lower interest rates won’t last forever. Eventually people will come to understand how precarious the value of their money really is, and then they’ll start demanding higher interest rates. Not to mention, we’re going to see a much higher value of gold- the canary in the cole mine of the monetary system. Which is just what we’re starting to see. Gold moved from $764 at the start of the week to close the week at $808. Similarly, Barrick Gold has gone from $27.44 to $31.32.

As an investor in Barrick Gold, I had a nice week, and I think we’re going to start seeing some nice moves in the gold sector over the next few months are markets realize that all of these deflationary fears are overblown. Bill Bonner is predicting that the system has one final bubble to blow and that will be government debt; that the price on government securities will go from overblown to in the tank as interest rates have to rise as inflation worries persist. I would have to agree. Going forward, gold is a very exciting place to be. As we goldbugs sit back and watch the financial system collapse, we will get to do as that old song by Everclear goes “Watch the World Die.”

The Liquidation That Stole Our Christmas

December is traditionally a wonderful time for the stock market. It tends to rally strongly towards the end of the year, for some reason. So, it’s unprecedented that we start the month off with a 7.7% one-day drop in the Dow. This after a stronger than expected “Black Friday” sales season.

What gives?

Don’t ask the media. It’s not of much help. “U.S. stocks slid the most since October, wiping out more than half of last week’s rally, on growing concern the global economic slump is deepening and consumers’ access to credit is shrinking.” Media headlines are excellent examples of how markets make opinions.

I can imagine the reporter being told, “The market’s going down. Quick! Come up with a headline as to why!” One of my favorites is why the COMEX price of gold declined as much as it did today. (That’d be 5.6% for those of you keeping track at home.) Why the gold price would’ve declined, I have some suspicions, but the one thing I do know is that it’s not, as Bloomberg said, due to reduced “commodity use.”

How would I know this?

Easy. Just take a look at the latest Gold Investment Digest release from the World Gold Council. The report states:

Gold demand, in tonnage terms, rebounded strongly in Q3 after several quarters of weakness. Identifiable demand totalled 1,133.4 tonnes, up 170.1 tonnes (18%) on the levels of a year earlier. In US$ value terms, this represented a 51% rise to $31.8 billion, an all-time record high and a 45% leap from the previous record set in Q2. The recovery in demand was triggered by a fall in the gold price, which coincided with sharply escalated levels of economic and financial uncertainty.

After briefly testing levels above US$950/oz early in the quarter, the gold price fell back, briefly touching levels under $750/oz in mid-September. Nevertheless, the average for the quarter, at $872/oz, was 28% higher than Q3 2007’s $680/oz.

The biggest contributor to the increase in total identifiable demand in Q3 was identifiable investment, up 137.5 tonnes (56%) relative to year-earlier levels. Jewellery demand rose 45.5 tonnes or 8%, while industrial and dental demand declined 11%.

So, Bloomberg is incorrect in saying that this crisis has caused any sort of reduced demand, because that’s just not the case. I’ll write more about the conspiracy against gold this week, but it appears that I did not get the COMEX short squeeze for Christmas I was hoping for.

In other news, Ben Bernanke has told us that the Fed might need to buy US Treasuries to aid the economy. That’s code for “print money.” You see, the Fed’s reserves are US Treasuries, and it’s recently swapped those for toxic debt to keep banks from failing.

So, where would they get the money to buy up US Treasuries?

Easy, they print it.

As told most clearly in G. Edward Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve, the Federal Reserve Committee creates the money it uses to purchase US Treasuries. So, the Fed is going to be doing a lot of printing. Not only that, they are going to be doing so in an effort to keep interest rates low.

Let’s see here … Printing lots of money, low interest rates …

Looks like it’s time to buy gold!

Printing Presses: Maximum Warp!

The auto industry was really pressing for a bailout today. They’ve tried everything from appealing directly to Congress, to posting videos on YouTube. I’m tempted to say, “give it to ’em.” After a $750 billion bailout of Wall Street, plus an extra $2 trillion in lending in the last couple of months, what’s an extra $25 billion? Honestly, these numbers all start to seem quite meaningless; they’re thrown around with such casual aplomb. I printed a book back in September that said the US national debt was roughly $9.5 trillion dollars, but now, two months later, and it’s $10.6 trillion.

So much for my book being up to date!

We went through a trillion dollars in a couple of months — and that doesn’t even include the liabilities that Fannie Mae and Freddie Mac may have on their balance sheets! Now that we’ve gotten started with the big earth-shattering figures, here come the also-rans in the auto industry trying to get in on the action. Of course, if the auto makers get their bailout, then will come another group equally deserving. It seems everyone is too big to fail these days.

Where will it end?

I say, it shouldn’t end anywhere. We should all get bailed out. Everyone of us. Why not?

Oh, wait … I know why not. Because society doesn’t work like that.

Government does not have a great font of wealth that it can dispense as it pleases to those who deserve it. All they have is a printing press, and every time they run it, it’s a tax that we are all being made to pay. Perhaps now we can realize that Frederic Bastiat was right when he wrote, “government is the great fiction through which everybody endeavors to live at the expense of everybody else.” Never have truer words been written.

But right now, no one seems to understand that. We are seem to be living under the illusion that the government can come to rescue us with wealth that did not originate with us to begin with, and Ben Bernanke is certainly helping work to make that happen.

According to John Williams at Shadow Government Statistics, the money supply has grown 38% this year over its level the previous year. That means that for every 1 US dollar floating around out there in electronic IOU-land last year, there are $1.38 today.

That seems like a lot.

Now, I understand why everyone is freaking out about deflation — because the stock market is going down as well as the COMEX price of gold. But fear not, I say. With monetary inflation like that going on, it’s not going to be the greater buying power of the US dollar that we need to concern ourselves with.

Don’t believe me? Well, why not let Ben Bernanke tell you himself? In a speech he gave that is now right on the Fed’s website:

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Well said, Ben.

Trust me, with 38% monetary inflation year-over-year, it’s not deflation that we’re going to need to concern ourselves with. And so right now Ben’s got the printing presses going in high gear, and it seems that it’s drawing petitioners for government largesse the way blood in the water draws sharks. Everybody wants a piece of those fresh dollars coming piping hot, right off the press.

And, I am once again reminded of the words of Bastiat; who wrote:

“Finally … we shall see the entire people transformed into petitioners. Landed property, agriculture, industry, commerce, shipping, industrial companies, all will bestir themselves to claim favors from the state. The public treasury will be literally pillaged. Everyone will have good reasons to prove that legal fraternity should be interpreted in this sense: “Let me have the benefits, and let others pay the costs.” Everyone’s effort will be directed toward snatching a scrap of fraternal privilege from the legislature. The suffering classes, although having the greatest claim, will not always have the greatest success.”

For someone who died in 1850, he certainly seemed to know how these things would turn out.

I suppose the problems we face are not as new as we like to make believe. I’d recommend that we pick up a copy of the Bastiat Collection and get familiar with the ideas that he expressed. We’re in the process of a getting a first-hand education in them.

Ben Bernanke’s Kick…. It’s Good!

Today the Fed announced that it was lowering the Fed Funds rates to 1%. The market rallied strongly late in the day, and then gave it all back to close at a loss. Barrick Gold, the stock I follow and am an investor in, announced that they were doubling their dividend and rose nicely to close the day up some 12% or so. Combined with a similar rise where Barrick mirrored the entire stock market in a 10% rise and I’ve had a couple of good days. The strange thing is that, outside of the announcement of this dividend today, Barrick has not had any newsworthy events or announcements for the entire month yet their stock has fallen from $37.36 on October 1st to trade at $18.14 on October 27th. When a company with a good balance sheet loses 50% of its value on absolutely no news, you know it’s a volatile market.

I feel the stock’s going to make it all back though, so I’m not particularly worried. Still, as someone who’s been watching stocks for ten years or so, I’m not used to this kind of volatility. Usually if a stock loses 50% of its value, it’s because it announced it was being investigated by the SEC or something, but in today’s market it seems like anything goes. To try to understand what’s happening, you have to understand that basically the price that a stock trades at is really just a game being played by various players. Everyone comes to the game with money, but they borrow a lot more because that’s how big profits (and loses) get made. When someone in a leveraged position (i.e. they bought stock with borrowed money) takes a big loss they will often face having to liquidate their entire position just to pay off their creditors, and I believe we are seeing some of that happening with Barrick’s gold price.

In Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation he discusses the stock market of the late 1800s- the so-called “Gilded Age of the Robber Barons.” This was back before the days of the SEC; in fact, the SEC was created in part to stop the very activities that these guys would engage in. The market had various players, men like Jay Gould or JP Morgan, and each was playing with plenty of leverage. These men would often take interests in thinly-traded stocks because their stock price was easier to manipulate. Such stocks came to be known as “footballs” because they would be kicked by the various players to almost whatever price was desired. Fortunes where made and lost on these manipulated stock prices of these footballs.

Fast forward more than a century, and it seems like the rules have changed, yet the game remains the same. Except now, instead of thinly traded stocks, the world market for everything from the price of oil to gold to the stock market seems to be kicked about by the various players of hedge funds, central banks, and governments. So I wasn’t too worried much about the loses I’d taken on Barrick this month. I figured it would only be a matter of time before one player or another would kick the stock back into play, and along came Ben Bernanke to cut the Fed Funds rate to 1%. Thanks Ben! I needed that.

Of course, I’m not sure that was the right now for the American economy as a whole. Fundamentally, we just need to get our house in order. Both our government and our people need to start spending less money than they take in for starters, and I’m afraid your interest rate cut is actually just an attempt to get them to do just the opposite. Making it easier for people to borrow money by lowering the key interest rate just discourages savings, and that’s actually the opposite of what needs to be happening now. But, what’s bad for the US Dollar is good for gold. It also seems to be good for the sales of books related to the collapse of the American Dollar.