Tuesday, September 2, 2014

Gold Breaks, but Watch the Equities

As of this writing, gold prices are off more than 1% and depending on the chart you may be looking appear have to broken some support lines. For instance, look at the GLD. This is as traders have come back from their August vacations and as a few wire houses have been noting that maybe September will not be as seasonally as strong as in past years.

That said, gold has not broken the 1,265 support line positioned by some, including Kitco's Wagner.

More importantly, the equities are still holding in their. As I have stated (supported by others' and my own analysis) numerous times, the equities tend to lead the yellow metal on the upside and the downside. Numerous equities can be held up as examples, but one of the companies most leveraged to the price of gold is Royal Gold- RLGD, and the stock refuses to break the support line. Just look at the chart of RGLD below.

The same pattern, albeit not showing the same relative outperformance, can be seen in the GDX and the XAU. As long as the equities hold the line, I will side on the thesis that we will see higher prices in the precious metal investment complex.

Keynesian Economist Uses The “D” Word And Why Q2 GDP Was Overstated

by Hunter Lewis at the Mises Economics Blog

Most Keynesian economists do not want to admit that we are in another depression.  They find the word painful.

They find it painful because it contradicts the idea that Keynesian economic ideas have ended depressions forever. It also contradicts the idea that the massive and continuing Keynesian stimulus applied by world governments since 2008 has worked. For this and other reasons, euphemisms such as the Great Recession have been embraced not only by Keynesian economists, but by their allies in government and in the mainstream press.

I argued that we were in a depression in a January article and again in April. Now Brad DeLong, one of the most prestigious Keynesians, a professor at Berkeley and former deputy assistant secretary of the Treasury under Clinton, says that he agrees. It really is a depression (http://www.project-syndicate.org/commentary/j–bradford-delong-argues-that-it-is-time-to-call-what-is-happening-in-europe-and-the-us-by-its-true-name).

DeLong doesn’t blame Keynesianism; that would be too much to expect. But he does call the thing by its right name, which is a major departure from the usual Keynesian style.

These are after all the people who call the government creating money out of thin air “ quantitative easing,” “ bond buying,” and the like, all of which are parroted by the press. When Keynes did this, he was often being impish, as when he called newly created money ““green cheese,” echoing the old nursery nonsense that  “the moon is made of green cheese.” His acolytes have adopted the style of dissimulation, but without the slightest trace of a sense of humor.

Although we are in a depression, it is not a depression for everyone, as is by now well known. Even so, the full hit on the middle class and the poor relative to the affluent is not adequately understood. Consider these figures from Larry Lindsey, who served Bush 2 as chief economist at the beginning of the first term, only to be booted from the White House for too much truth telling:

US Household Net Worth 2007- 2013

Top 1%         Up       1.9%
Next 9 %       Up       3.4%
Next 15%      Down   0.5%
Next 25%      Down  16.7%
Bottom 50%  Down   44.2%

None of the economic statistics we get from the government are reliable. Inflation is understated. Economic growth is overstated. Unemployment is understated.  But this chart of net worth is about as reliable as we can expect to get.

It tells the story of a middle class in the process of  being destroyed and of poor people who will never be able to get into it. It is also noteworthy that the nine percent below the top one percent have done best of all. Although a great many government employee households are in the top one percent, a larger number are in the next nine percent.

Sometimes the economic statistics are intentionally manipulated. It cannot be a coincidence that the method of calculating inflation changed so much under Bill Clinton. But keep in mind that the statistics also reflect Keynesian assumptions that do not make  sense.

In Keynesian theory, it doesn’t matter whether money is spent or invested or what it is spent on or invested in. In this cockeyed view, spending more money to put people into Medicaid, paid for by borrowing from overseas or printing new money, is just as good as Apple investing in new jobs.

We saw an example of this in the recent Gross Domestic Product numbers released by the government. Most of the new spending in the first quarter of this year was for health care and most of that for Medicaid expansion. But it wasn’t even actual, documented spending. It was just a wild, finger-in-the-wind guess by the government.

As a result, the first quarter was initially reported with a minus 1% economic growth, then revised to minus 2.9%. One idea floating around is that the Commerce Department’s revision reflected a decision to make the first quarter look worse in order to move healthcare spending to the second quarter and thus make it look better. If so, why would the second quarter have been deemed more important? Because it is leading up to the fall elections. The second quarter is currently reported at 4.2%.

The destruction of common sense economics by Keynesianism is a major reason for what has happened to the American middle class and poor. But our governing elites and special interests do not just love Keynesianism for its own sake. They especially  love the opportunity for crony capitalism that it affords. Keynes himself was not financially corrupt, and would have been appalled to see the corruption he unleashed.

Nor did our present problems arrive in 2007-08. They can be dated at least to the beginning of bubbles and busts during the Clinton administration and arguably even further back.

For example, if we look at what has happened to poor people since the War on Poverty began in the 1960’s, we see them earning less and less on their own and sinking even further into poverty, if we exclude growing welfare payments. Analyst John Goodman  (http://healthblog.ncpa.org/why-we-lost-the-war-on-poverty/) has calculated that economic growth cut the rate of poverty in half between the end of World War Two and 1964, when the War on Poverty was launched. Since then the percent of people poor would have increased, but for the extraordinary $15 trillion spent by the government, much of it with borrowed funds.

There are those among the top one and top ten percent of households who are working on this problem every day. They help the middle class and poor by working hard, saving, making wise investments, and hiring, or even by not investing or hiring until conditions are right. There are many others who make it steadily worse by feeding off a corrupt and swollen government and wasting trillions of borrowed of manufactured dollars.

We Are All Predictable Irrational

Having read many analyses on behavioral finance, the idea that we are all 'predictably' irrational presents a compelling case for active investment management, that is if you know what look for. Not that I am saying I have the tools or the talent to see the biases, but nonetheless.

Friday, August 29, 2014

Two Alternative Outcomes iwth Jim Grant

The below video is a reply of an interview with Jim Grant where Mr. Grant lays out his probabilistic outlook resultant from the Federal Reserve's efforts. Enjoy

Thursday, August 28, 2014

The End of The Bottoming Process with Ronald Stoeferle

Mr. Stoeferle. managing director at Incrementum AG, lays out the case for the end of the bottoming process now underway in gold and what this could mean for precious metal investors.

While the followings provide a background around various future scenarios based on growth and inflation/deflation assumptions.

and the below report lays out the case in its entirety. 

In Gold We Trust Report 2014

Keynesian Economics 101- Lesson 4

Keynesian Economics 101 Lesson 4

Keynesian Economics 101- Lesson 3

Keynesian Economics 101 Lesson 3