2015-06 ABBA Part I Investing Checklist (Helpful)
Actual pre-flight checklists http://freechecklists.net/
Have a Great 4th of July Weekend!
2015-06 ABBA Part I Investing Checklist (Helpful)
Actual pre-flight checklists http://freechecklists.net/
Have a Great 4th of July Weekend!
cfa-society-of-chicago-june-2015-final Note pages 16 through 18 on Grainger and Fastenal. GWW_VL Jul 2014 and Fast VL. Since the prices are high and their gross margins are way above the competition, what can change that? Ask the right questions.
When you account for the fact that GTU’s sector – precious metals ETFs/trusts/closed end funds – has been flooded with a variety of competing instruments which have superior redemption features, and that metals sentiment has been waning for a solid 2 years now, it’s not surprising that GTU had recently been trading at apersistent discount to NAV.
Enter: Polar Securities, who purchased a stake in both GTU and SBT.TO, and then made an effort to get the Trusts to change their bylaws in such a way that would likely narrow the discounts to NAV that both trusts were suffering from. Polar wrote a letter to unit-holders, and forced each board of directors to call a special meeting to vote on amending the bylaws.
None of this struck me as odd: this is something funds do all the time: buy cheap assets and try to unlock the value discounts that are present. Amazingly, however, in goldbug-land, Polar Capital taking steps to try to close the massive discount to NAV that these two precious metals trusts were facing turned into cries of Polar attempting to “raid” the metal from the trusts. While one might expect shareholders to be excited about the prospect of a narrowing of the massive NAV gap they’ve been languishing under, many instead rallied the wagons to fight this proposal!
GTU itself fought back, attacking the points of Polar’s proposal. The GTU board of trustees noted that
1) Polar’s proposed redemption feature would be available to only a small number of holders, due to minimum size in the redemption requirement. This is true, but largely irrelevant: all investors would benefit from a narrowing of the NAV discount if arbitrageurs came in to buy cheap GTU shares and redeem them to close the discount. Although:
2) The board also noted the tax effects of redemptions, where the gains on sale of bullion would be taxable, and be borne by remaining shareholders. This is true, but the effect would be miniscule compared to the massive discount to NAV that could be closed.
3) U.S. Mutual Funds may sell GTU to avoid these adverse tax consequences. Reality suggests that GTU’s largest unit-holder, a U.S. based mutual fund, is eager to see the discount narrowed – but more on that later.
4) Polar’s proposal would increase GTU’s operating expenses. Again, this is true, but we’re talking about matters of basis points – not percentage points that could be gained by the adoption of the proposal and closing of the massive NAV discounts.
So Polar replied with a PR of their own, repeating that the Trustees had no means of closing the discount and no plan to do so. A common refrain you’ll hear from holders of GTU is something like: “when the price of gold is going down, GTU trades at a discount to NAV. When the price of gold goes back up, the discount will narrow.”
Well: *maybe* it will narrow – or maybe the market has been saturated with superior competing products that have equal “safety” and pareto-superior redemption features that can actually insure that discounts to NAV will be closed. GTU lacks these features, and thus there is no reason why the discount must close if/when the price of gold rallies. As I noted in a past post, just because a closed end fund traded at a premium in the past doesn’t mean it will/should trade at one again in the future, *especially* when there are a plethora of other ways to get the same exposure with other products.
Anyway, GTU responded to Polar’s latest PR quickly, noting:
1) Polar is not aligned with long term holders of GTU – I don’t know what this means: Polar wants the discount to NAV closed, which is exactly what the other holders should want.
2) Polar’s proposal is not “the answer” and the consequences of their proposal are real, explaining:
“In fact, Polar’s proposal can only be proven to eliminate the discount for the less than 1% of Unit-holders (including Polar) that could utilize Polar’s proposed physical redemption feature. The remaining 99% of Unit-holders are being asked to trust Polar’s opinion while Polar exits its position.”
That, of course, is nonsense. Again: if I’m a GTU holder, I don’t care that I can’t buy and redeem enough units to get a gold bar: the act of others doing it will drive the price up and close the discount! Yes, again we have that tax issue addressed above, if the redemptions actually happen – but more on that later….
3) etc etc etc
Amazingly, next, Institutional Shareholder Services, a proxy advisory firm, came out on the side of the Trust, and recommended that unit holders vote against Polar’s proposal! ISS wrote:
“Overall, the short-term and opportunistic nature of the dissident proposal constitutes a cause of concern for long-term unit-holders. In addition, by just amending the trust’s Declaration of Trust and not providing a detailed business plan with new strategic initiatives on how to better manage the trust, the dissident’s request to replace the majority of the board appears overly demanding”
I was surprised by this, as there’s nothing “short-term” about a redemption feature that would protect all shareholders from future NAV dislocations.
Polar, of course, “disagreed” with the ISS recommendation, noting, among other things:
“ISS displays lack of capital markets understanding” – which I completely agree with.
Polar added a few more bullet points, which I agree with:
This week, Polar figured they’d try to counter some of the GTU Board of Trustees responses that were off base, so they committed to not redeeming any GTU shares for the remainder of 2015. Why did they do this? Because again: they’re not interested in “raiding” GTU’s gold: they’re interested in capturing the NAV discount that should be remedied. Polar knows that even if they don’t redeem, the discount is highly likely to close if a redemption feature is added. Either the market will correctly price the units to reflect their NAV, or other arbitrageurs will come in an ensure that the price reflects the proper value – redeeming if necessary.
I’ll give you one guess what happened next: GTU’s board responded again, in a PR titled “Polar’s Empty Promise To Delay Their Redemption Does Nothing to Correct the Fundamental Flaws in Their Proposal.” Shockingly, GTU basically seems to be accusing Polar of lying about not redeeming, because GTU, like the ISS, seems to lack an understanding of how capital markets work. GTU’s Special Committee Chairman added:
“…Such a delay does not level the playing field for the over 99% of Unit-holders who could not utilize their proposed physical redemption option, and who would be inheriting the increased cost and potential tax liability that come with it”
Again, this is ludicrous: GTU holders do not have the ability to redeem their shares at NAV. Under Polar’s proposal, small shareholders would *still* not have this ability, but they’d be massive beneficiaries of the fact that others do have this ability. Yes, again we have that tax issue, which is like complaining about pennies when someone is offering you dollars.
I already loved this story, as it was a back and forth between some guys who just wanted to help shareholders (and themselves, of course) realize the underlying value of their investment, but were being fought on all fronts by some shareholders and by the Trust itself. But wait – today the drama kicked up a notch when none other than Sprott Asset Management jumped into the fray, making an unsolicited offer to exchange shares in GTU and SBT.TO for newly issued shares of its own physical bullion trusts: PHYS and PSLV. Sprott (I’m using “Sprott” for “Sprott Asset Management” here, not to indicate “Eric Sprott”) is basically proposing a takeover of the Central Trusts, where shareholders would receive shares of Sprott’s trusts instead, and Sprott would merge the underlying metal into their own trusts.
Brilliant! I would expect that not a single goldbug site will write about Sprott trying to “raid” the Central Trusts, although that’s exactly what they’d be doing: piling the bullion under the Sprott umbrella so that Sprott Asset Management can get the management fees that Central Trust has been getting. Never mind the fact that Sprott’s total fees are roughly 20 bps higher than Central Trust’s, or that when units are redeemed from Sprott’s trusts there are tax consequences like the ones Central Trust has been complaining about – if I were a GTU shareholder I’d be psyched for this offer! Well, we don’t know the exact terms of the offer yet – Sprott filed an SEC doc with some details, including that the exchange would be on a “NAV for NAV” basis, but I’d like to see the final details before blessing it.
Basically, though, I very much agree with Sprott’s CEO, John Wilson, who noted:
“It’s really just a very simple solution,” he said in an interview. “Why would you own that unit when you have opportunity to own a more liquid unit that does all the things you want and trades at its intrinsic value?”
Indeed! I have been critical of Sprott on these blog pages in the past, but this one is a no-brainer for Sprott Asset Management, and probably for Central Trust unit-holders as well (side notable: Eric Sprott is no longer the man in charge – at least not officially – at Sprott Asset Management). Sprott Asset Management knows – or perhaps GTU’s largest unit-holder, Pekin Singer Strauss, told them – that while Canadian retail precious metals investors might be distrustful of some evil arbitrage fund trying to raid the metal from their trust, Canadian retail precious metals investors love and *trust* Sprott! Hence, the beauty of this exchange offer, which, if successful, would result in PHYS increasing its assets by roughly 50%! You can do the math yourself, but Sprott Asset Management is looking at more than $ 3MM in additional annual management fees alone. Synergies!
Of course, Polar already put their 2 cents in, issuing a PR that said that they welcomed the Sprott Exchange Offer– which, well, of course they do! The Sprott exchange offer, if it’s truly on a 100% NAV to NAV basis, will narrow the NAV discount that the Central Trusts are facing.
Nothing on this page should be construed as investment advice, which I couldn’t possibly give since we don’t know the details of the exchange offer anyway, but if I were a GTU shareholder, I’d be ecstatic about the Sprott Exchange offer’s preliminary details. I can’t wait to see how the GTU board of Trustees reacts to this approach, especially since they’ve already pounded the table on the tax issue, while Sprott’s trusts face similar tax issues. GTU’s board has also brought up management fees, but Sprott’s funds have significantly higher fees. In other words, I think that it will be very hard for GTU’s board to deny the significant accretion that their unit-holders are likely to see under the Sprott exchange, but it’s also going to be odd to see them ignore the complaints they brought up multiple times in the back and forth with Polar.
Sprott’s CEO insinuated in a Bloomberg interview that it was GTU’s largest shareholder, Pekin Singer Strauss (probably nervous that Polar’s proposal was meeting resistance from GTU’s exceedingly naive shareholder base) who approached Sprott with this master win-win plan: “through that process some of those unit-holders reached out to us and thought we might offer a better solution” – I can’t wait to see how GTU’s Board reacts to this whole thing…
Stay tuned – this is pure gold for closed end fund geek drama…
I have no positions in GTU, SBT.TO, PHYS or PSLV
I recently listened to a podcast with some all-star [there are awards for everything now] “Black Box” equity trader. It was quite a “telling” interview & I thank him for his insights but I’d heard it all before. His confidence was staggering considering the general unpredictability of the future and, of course, the equity markets. He explained how he had completely converted from a generally unsuccessful, discretionary technical trading style to a purely quantitative and scientific trading mode. He seemed to be so excited that his models, according to him, were pretty much “bullet proof”. Having had more than just some tangential experience with black box modeling and trading myself I thought … you know … some people will just never learn.
Image via iwatchapple.it
You see some years ago I was particularly focused on quantitative investing. Basically, “screw” the fundamentals and exclusively concentrate on price trends/charts and cross security/asset correlations [aka “Black Box” trading]. I was fascinated with the process and my results were initially stellar [high absolute returns with Sharpe Ratios > 2.0]. And, after looking at the regression data many others agreed. I was in high demand. So I “made the rounds” in Manhattan and Greenwich to a group of high profile hedge funds. It was a very exciting time for me as the interest level was significant.
As it turned out I had the good fortune of working with one of the world’s largest and best performing hedge funds. Their black box modeling team had been at it for years … back-testing every conceivable variable from every perceived angle … twisted/contorted in every conceivable/measurable manner … truly dedicated to the idea that regression tested, quantitative trading models were the incremental/necessary “edge” to consistently generate alpha while maximizing risk-adjusted, absolutely positive returns. We worked together for some time and I became intimately involved with their quantitative modeling/trading team … truly populated with some of the best minds in the business.
While in Greenwich Ct. one afternoon I will never forget a conversation I had with a leading quantitative portfolio manager. He said to me that despite its obvious attributes “Black Box” trading was very tricky. The algorithms may work for a while [even a very long while] and then, inexplicably, they’ll just completely “BLOW-UP”. To him the most important component to quantitative trading was not the creation of a good model. To him, amazingly, that was a challenge but not especially difficult. The real challenge, for him, was to “sniff out” the degrading model prior to its inevitable “BLOW-UP”.
And I quote his humble, resolute observation:
“because, you know, eventually they ALL blow-up“
… as most did in August 2007.
It was a “who’s who” of legendary hedge fund firms that had assembled “crack” teams of “Black Box” modelers: Citadel, Renaissance, DE Shaw, Tudor, Atticus, Harbinger and so many Tiger “cubs” including Tontine [not all strictly quantitative but, at least, dedicated to the intellectual dogma] … all preceded by Amaranth in 2006 and the legendary Long Term Capital Management’s [“picking up pennies in front of a steam-roller“] demise one decade earlier.
Years of monthly returns with exceedingly low volatility were turned “inside out” in just 4-6 weeks as many funds suffered monthly losses > 20% which was previously considered highly improbable and almost technically impossible … and, voilà … effectively, a sword was violently thrust through the heart of EVERY “Black Box” model. VaR and every other risk management tool fell victim to legitimate liquidity issues, margin calls and sheer human panic.
Many of these firms somehow survived but only by heavily gating their, previously lightly-gated, quarterly liquidity provisions. Basically, as an investor, you could not “get out” if you wanted to. These funds changed the liquidity rules to suit their own needs … to survive … though many did fail.
Anyway … to follow up on my dialogue with the esteemed portfolio manager … I asked “why do they all “BLOW-UP”? What are those common traits that seem to effect just about every quantitative model despite the intellectual and capital fire-power behind them? And if they all eventually “BLOW-UP” then why are we even doing this?”
He answered the second part of the question first … and I paraphrase …
“We are all doing this because we can all make a lot of money BEFORE they “BLOW-UP”. And after they do “BLOW-UP” nobody can take the money back from us.” He then informed me why all these models actually “BLOW-UP”. “Because despite what we all want to believe about our own intellectual unique-ness, at its core, we are all doing the same thing. And when that occurs a lot of trades get too crowded … and when we all want to liquidate [these similar trades] at the same time … that’s when it gets very ugly.“.
I was so naive. He was so right.
We all knew what the leaders wanted and, of course, we wanted to please them. Essentially they wanted to see a model able to generate 4-6% annual returns [seems low, I know, but I’ll address that later] … with exceptionally low volatility, slim draw-down profiles and winning months outweighing the losing months by about 2:1. They also wanted to see a model trading exceptionally liquid securities [usually equities].
Plus the model, itself, had to be completely scientific with programmable filtering and execution [initiation and liquidation] features so that it could be efficiently applied and, more importantly, stringently back-tested and stress-tested . Long or short did not really matter. Just make money within the parameters. Plus, the model had to be able to accommodate at least $100M [fully invested most of the time as cash was not an option] and, hopefully, much more capital. This is much easier said than done but, given the brainpower and financial resources, was certainly achievable.
First of all, a large number of variables in the stock selection filter meaningfully narrowed the opportunity set … meaning, usually, not enough tickers were regularly generated [through the filter] to absorb enough capital to tilt the performance meter at most large hedge funds…as position size was very limited [1-2% maximum]. The leaders wanted the model to be the hero not just a handful of stocks. So the variables had to be reduced and optimized. Seemingly redundant indicators [for the filter] were re-tested and “tossed” and, as expected, the reduced variables increased the population set of tickers … but it also ramped the incremental volatility … which was considered very bad. In order to re-dampen the volatility capital limits on portfolio slant and sector concentration, were initiated. Sometimes market neutral but usually never more than net 30% exposure in one direction and most sectors could never comprise more than 5% of the entire portfolio. We used to joke that these portfolios were so neutered that it might be impossible for them to actually generate any meaningfully positive returns. At the time of “production” they actually did seem, at least as a model, “UN-BLOW-UP-ABLE” considering all the capital controls, counter correlations and redundancies.
Another common trait of these models that was that, in order to minimize volatility, the holding periods had to be much shorter than a lot of us had anticipated. So execution [both initiation and liquidation] became a critical factor. Back then a 2-3 day holding period was considered acceptable, but brief, although there were plenty of intra-day strategies … just not at my firm … at least not yet. With these seemingly high velocity trading models [at the time], price slippage and execution costs, became supreme enemies of forecasted returns. To this day the toughest element to back-testing is accessing tick data and accurately pinpointing execution prices. Given this unpredictability, liberal price slippage was built into every model … and the model’s returns continued to compress … not to mention the computer time charges assessed by the leadership [which always pissed me off].
So, given all of this, what types of annual returns could these portfolios actually generate? A very good model would generate a net 5-7% … but 3.5-5% was acceptable too. So how then could anybody make any real money especially after considering the labor costs to construct/manage/monitor these models … which … BTW … was substantial?
Of course there was only one real way … although it would incrementally cut into performance even more, in the near term, but ultimately pay off if the “live” model performed as tested. The answer = LEVERAGE … and I mean a lot of it … as long as the volatility was low enough.
Back-tested volatility was one thing and live model volatility was another thing so leverage was only, ever so slowly, applied … but as time passed and the model performed, the leverage applied would definitely increase. Before you knew it those 5% returns were suddenly 20-25% returns as the positive beauty of leverage [in this case 4-5x] was unleashed.
Fast forward 10 years and the objectives of hedge funds are still the same. Generate positive absolute returns with low volatility … seeking the asymmetrical trade … sometimes discretionary but in many cases these “Black Box” models still proliferate. And BTW … they are all “doing the same thing“ as always … current iteration = levered “long” funds.
What has changed though is the increased dollars managed by these funds [now > $3.5T] and the concentration, of these dollars, at the twenty largest funds [top heavy for sure]. What has also considerably changed is the cost of money … aka leverage. It is just so much cheaper … and, of course, is still being liberally applied but, to reiterate, in fewer hands.
Are these “hands” any steadier than they were ten years ago? I suppose that is debate-able but my bet is that they are not. They are still relying on regression-ed and stress tested data from the past [albeit with faster computers & more data]. They may even argue that their models are stronger due to the high volatility markets of ’08/’09 that they were able to survive and subsequently measure, test and integrate into their current “Black Boxes” … further strengthening their convictions … which is the most dangerous aspect of all.
… Adds up to a Combustible Market Cocktail.
Still a catalyst is needed and, as always, the initial catalyst is liquidity [which typically results in a breakdown of historic correlations as the models begin to “knee-bend” … and the perceived safety of hedges is cast in doubt] followed by margin calls [the ugly side of leverage … not to mention a whole recent slew of ETF’s that are plainly levered to begin with that, with the use of borrowed money, morph into “super-levered” financial instruments] and concluding with the ever ugly human panic element [in this case the complete disregard for the “black box” models even after doubling/trebling capital applied on the way down because the “black box” instructed you to]. When the “box” eventually gets “kicked to the curb” … that is when the selling ends … but not after some REAL financial pain.
So can, and will, this really occur once again? It can absolutely occur but it is just impossible to know exactly when … although there are plenty of warning signs suggesting its likelihood … as there have been for some time.
However, I am quite confident of the following:
industry multiple (still using the same from CLD) is 8.91
for approx 58.65 – 61.8 TBV is 6.8. Current price is 8.42.
Gold is a current asset, with no future cash flows–it is the financial opposite of biotech. This is why gold is the ULTIMATE LOSER during the growth of a credit bubble, but a SURE WINNER when it collapses. It is why gold mining companies will go from being worth next to nothing to something, a nearly infinite percentage increase. –Dan Oliver, Myrmikan Capital http://www.myrmikan.com/port/
* * *
Ms. Bennett: Seth Lipsky is the author of a book titled “The Floating Kilogram and Other Editorials on Money from The New York Sun.” Before the Sun, he spent 20 years at the Wall Street Journal where he served on the editorial board and helped launch the Asian Wall Street Journal as well as the Wall Street Journal Europe. Recently, Seth authored a column in the New York Post titled “Why does the Federal Reserve Fear a Real Audit,” which is a question much on my mind. Seth, welcome.
Mr. Lipsky: Thanks, Dawn. It’s nice to be with you.
Ms. Bennett: To put it charitably, Janet Yellen appears to be very alarmed that some members of Congress want to conduct a comprehensive audit of the Federal Reserve for the first time since it was created. If the Federal Reserve is doing everything correctly, why should Mrs. Yellen be alarmed and what does she have to hide?
Mr. Lipsky: Well, that’s a great question. The Federal Reserve is already audited, in the sense that an accountant comes in and goes over its books. But what the Congress is talking about is a much broader look by the Governmental Accountability Office of how the central bank forms our monetary policy and what its relations are with foreign banks. The Fed has been fighting this tooth and nail as an intrusion on its independence. What Congress knows is that the Constitution gave the monetary power precisely to Congress.
Congress has a constitutional obligation and power to establish the American monetary system and regulate it, to coin money, regulate its value and that of foreign coinage. This has become a big issue where we have not taken a really systematic look at how the Fed operates in the hundred years that it’s been in existence. We’re starting the second century, and there is growing sentiment in the Congress to take a look at this. The audit of the Fed measure passed the House as recently as of September by a vote of 333 to 92, with 109 Democrats joining the Republicans. So the Fed is certainly growing concerned.
Ms. Bennett: The only reason Janet Yellen has the power to coin money is because Congress delegated its own power to the Federal Reserve in 1913. Isn’t congressional oversight of that power something that should be considered commonsensical by the Federal Reserve?
Mr. Lipsky: The Fed was created in 1913. The Coinage power was first acted on in 1792, and coinage was given not to any Federal Reserve but to the United States Mint. When the second central bank came up to the Supreme Court it was really the tax and the borrowing power that the courts were looking at when they okayed the authority of the central bank.
Ms. Bennett: We are all accountable to someone or something, so what is wrong about the Federal Reserve being accountable to Congress?
Mr. Lipsky: Nothing whatsoever. Even Chairman Yellen acknowledges that Congress has the power. She’s just pleading and warning that it not interfere. Why is Congress growing concerned about this in the first place? It’s because the Great Recession has lasted six years and we still do not feel like we’ve recovered. What is the Fed’s role in this? Could the reason that the Great Recession lasted so long be attributable to monetary policy? The value of the dollar has been allowed to collapse below one 1,100th of an ounce of gold. It was a 265th of an ounce of gold when George W. Bush was sworn in. These are huge questions, and somebody needs to ask them.
Ms. Bennett: It is quite clear to me that the Federal Reserve doesn’t want the rest of us to actually be able to see what they really up to. If we did know what they’re doing, do you think most Americans would just want it shut down? To your point, since 1913, the dollar has actually lost over 97% of its purchasing power. And of course, the economy has been subjected to one painful depression and a series of what I call Fed-created recessions. Despite the poor track record, we continue to support them. At the end of the day, does it matter if we even have a Federal Reserve?
Mr. Lipsky: I think the monetary questions do matter to every American in all positions. My favorite statistic is that between 1947 and 1971 the average unemployment rate was below 5%. From 1971 until today it was above 6%. What happened in 1971, when the unemployment rate began souring? What happened is we abandoned the Bretton Woods Gold Exchange System, under which the dollar was linked to gold, and the money began flowing not in the productive enterprises, but into the money markets and hedge funds and all these sorts of things and not so much into the kind of investment that created the great industrial base in America.
Ms. Bennett: Let’s talk about that type of investment. According to a government report I’ve read, the Federal Reserve made $16.1 trillion in loans to big banks during that financial crisis. In my opinion, [it once] created the dotcom bubble and the housing bubble. Now, I think it has created the financial bubble that our markets are experiencing.
Mr. Lipsky: Asset inflation. The debate over inflation is one of the most important debates in the country. The left wing likes to say there is no inflation, but the dollar is worth only a tiny amount of the constitutional specie, which is gold and silver, compared to what it used to be worth. This is what people feel when they hear the government say there’s no inflation but they try to go to the grocery store and they spend $50 or $100 on a tiny plastic bag with a few items in it.
Ms. Bennett: Yes, I know shelf inflation is huge, but I want to talk about commodities for a bit. The Department of Justice has recently said again that they’re going after the big banks that have been, on an ongoing and continuous basis, manipulating gold and silver. What are your thoughts on that? Will it work this time? And, if so, is there a simple solution to stop them from doing this? They seem to get their hands slapped, apologize, and then come back and do it again, and again.
Mr. Lipsky: The news that the Justice Department is looking at something like ten or twelve major banks for possibly rigging the price of gold broke the same week that Mrs. Yellen was up on Capitol Hill testifying against an audit of the Fed.
Ms. Bennett: That’s right.
Mr. Lipsky: One of the questions that The New York Sun raised is what is she afraid of then? Is it the danger that the Fed has been meddling in the gold market the way the Justice Department is alleging commercial banks have been doing it? It’s the Fed that regulates commercial banks after all. I don’t want to carry that argument too far. I asked it then in an editorial more in the nature of a question. But there is a movement in Congress to open up what is called a Centennial Monetary Commission that after the first hundred years of the Fed, would just take a look at how the whole system is working.
We’ve been in a period of fiat money, meaning dollars that have no connection in law to any gold or silver or other constitutional money. We’ve been in a fiat system since 1971. Previously, our dollars were always defined in terms of gold and silver, suddenly they’re not. The unemployment average is much higher; the bankruptcy rate is much higher; the inequality rate has been much higher since the mid 1970’s. Could this be related to the fact that we abandoned sound money in the mid 1970s?
Ms. Bennett: De-dollarization has been going on now for the last few years, and I think it’s because the dollar is continuing to get weaker. Our political system and economic system aren’t what they used to be. Do you think it’s possible that if China, for example, standardizes the renminbi it will start taking power away from the U.S. dollar?
Mr. Lipsky: The abandonment of sound money by the U.S. has brought forth a whole chain of foreign governments that are alarmed and wonder whether a new system should be set up. China. There is talk of Russia going on a gold standard; the European Union is having its own catastrophe with the Euro, and it’s wondering whether the dollar ought to be replaced as the international reserve. The United Nations, for crying out loud, has gotten involved in this.
One of my favorite moments happened in 1965, when the President of France, Charles de Gaulle, called a thousand reporters into the presidential palace sat them down and addressed them on the importance of restoring gold as the international standard. His argument was that it puts all countries on the same basis: America, France, England, China, little countries, and it takes a lot of the partisanship out of the monetary question internationally, or it takes the politics out of money. It’s ironic that Fed loves to talk about how we shouldn’t politicize the monetary system. If one really wants to de-politicize the monetary system, restoring a gold standard or something like it is exactly the way to do it.
Ms. Bennett: Mrs. Yellen claims that opening the Fed to an outside audit would “politicize” — her word — monetary policy.
Mr. Lipsky: Right.
Ms. Bennett: Isn’t it political when Senator Schumer, for example, tells her to keep rates low every time she testifies before the Senate Banking Committee? Isn’t it already happening?
Mr. Lipsky: You’re exactly right. Why is it always the conservatives that are doing the politicizing and not the liberals? The big politicization of monetary policy happened in 1978 with the passage of Humphrey-Hawkins, which said that the Fed has to have a second mandate of increasing the employment rate or decreasing unemployment, in addition to affecting the value of our dollar. That opened the door to an enormous political interference in monetary policy.
Ms. Bennett: I know you’re not a gold trader or silver trader…
Mr. Lipsky: I’m a newspaperman.
Ms. Bennett: There you go. But I’m certain you follow the markets. What do you think would be a simple solution to fix the ongoing and continuous manipulation of gold and silver so that we can get more stability? It does seem, whether it’s a Federal Reserve or some other central bank, that they’re interfering with it in order to make the fiat currency look stronger than it really is.
Mr. Lipsky: I favor a definition by law, enacted by Congress under its constitutional powers to coin money and regulate its value, and fix the standards of weights and measures — a law passed by Congress defining the dollar as a fixed amount of gold or silver. Silver was the main specie used in early years of our republic. The debate over whether gold or silver was better went on through the 19th century, and we basically decided in 1900, with the passage of the Gold Standard Act, to make gold the true national money. I think that would go a long way toward solving this problem. There are a lot of questions as to exactly how to do it, whether there should be a system like Bretton Woods, which said dollars had to be redeemed in gold if they were held by foreign governments.
Ms. Bennett: In physical gold, not paper gold. In physical gold.
Mr. Lipsky: Right.
Ms. Bennett: There’s a big difference there.
Mr. Lipsky: Therefore the price at which one fixes the dollar, the value, the amount of gold, has to be carefully worked out. But the gold standard is not some flaky thing. This was believed in by George Washington, Thomas Jefferson, James Madison, Alexander Hamilton, and almost every president since, up until Richard Nixon. John Kennedy, Woodrow Wilson, Grover Cleveland — they all believed in it.
Ms. Bennett: Seth, “The Floating Kilogram and other Essays on Money from The New York Sun.” For any listeners not familiar with the Sun, can you bring them up to speed?
Mr. Lipsky: The New York Sun is an online newspaper that I edit. We published in print until several years ago. It’s a leading voice in journalism for a sound dollar. It supports a sound dollar, limited government, and a restoration of constitutional dollar based on gold or silver. This is the first radio interview about the book.
Ms. Bennett: Thank you.
Mr. Lipsky: This book contains on this issue 130 editorials that have been issued in the Sun in recent years. Steve Forbes calls them “brilliant,” “irrefutable,” and “the Federalist Papers for the gold standard.” James Grant calls the book both “persuasive” and “unfailingly entertaining.” It’s a book for every person, not just the experts, and it’s available on Amazon.com, the online bookstore, and you’ll have a copy in a day or two if you place your order. “Pure gold” is the way the economist Judy Shelton described this book. The title, Dawn, comes from the discovery that the kilogram, which is the last metric weight measure based on a physical object, has been losing mass — atom by atom. The Sun in one of its editorials said, “Why don’t we float the kilogram just like we float the dollar?” That’s from where the title of the book comes.
Ms. Bennett: If President Obama, or our next president, were to become motivated to make reforms, what do you think the takeaway from this book would to be? Definitely a gold standard?
Mr. Lipsky: So I think the takeaway is going to be that in our monetary system at some point, the dollar has to be defined in terms of something real rather than just another dollar. At the moment, if you take your dollar to the central bank to redeem it, they’ll give you another dollar. There’s no reference to anything real and no classical measure of value. We have what Jim Grant likes to call the Ph.D. standard, and I think we need to move away from that to the kind of standard that sustained our country during its periods of greatest growth and strongest employment.
Ms. Bennett: We always seem to make changes in the United States when things break down, but not beforehand. What is going to be the instigator to standardize our currency?
Mr. Lipsky: People say things could become a disaster. The last six years have been a disaster.
Ms. Bennett: Exactly.
Mr. Lipsky: Huge amounts of unemployment, not just for a short period, but for six years. It’s consumed almost the entire Obama presidency. People are still trying to figure out their homes, still trying to figure out how the price of college got more than halfway to $100,000 a year — you know, all these things. We’ve been living through this, and I think events have energized Congress to start looking at this. The Sound Dollar Act, or Centennial Monetary Commission Act, or Audit the Fed Act, or Free Competition in Currency Act. This is why Janet Yellen — to bring it back to where we came in — is fighting so hard against the Congress doing this. We’re in a constitutional moment here where Congress is going to take a look at this, I predict.
Ms. Bennett: Do you think they’re going to have the guts to do it?
Mr. Lipsky: I think the American people have a lot of guts.
Ms. Bennett: Me, too.
Mr. Lipsky: And at the end of the day, the Congress has to listen to the American people.
Is the Coal Industry Dead?
The key point is to try to disprove your thesis. Seek out the negatives and the counter-arguments, then make a reasoned decision to invest, not invest, short, stand-aside and wait, or dig further.
Lots of bad news hitting the coal industry: China slow-down, EPA Rules, falling natural gas prices, falling met and steam coal prices, President Obama says he will put coal out of business (supposedly) http://www.washingtonpost.com/blogs/fact-checker/wp/2014/10/08/the-repeated-claim-that-obama-vow
2015 is the reckoning for coal: http://www.oilandenergydaily.com/2013/11/22/coal-2/
EPA Regulations Hit Economic Reality: https://www.scribd.com/doc/266957890/Walker-May-2015-Letter
Will there be a coal industry over the next few decades in order to determine whether to use liquidation or going-concern value?
We seek to buy cyclical assets when there are NO REASONS to buy, the companies in the industry have depressed profits or large losses, and there seems to be no hope for the industry (Remember Airlines 9/11). However, we wish to avoid investing in Canal companies during the advent of the steam locomotive because then there is a permanent decline in asset value because long-term cash flows are driven by capacity constraints and customer demand changes. Thus, we first try to answer this post’s question.
Books on the Coal Industry and Coal’s History
Long dismissed as a relic of a bygone era, coal is back — with a vengence. Coal is one of the nation’s biggest and most influential industries — Big Coal provides more than half the electricity consumed by Americans today (2006) — and its dominance is growing, driven by rising oil prices and calls for energy independence. Is coal the solution to America’s energy problems?
On close examination, the glowing promise of coal quickly turns to ash. Coal mining remains a deadly and environmentally destructive industry. Nearly forty percent of the carbon dioxide released into the atmosphere each year comes from coal-fired power plants. In the last two decades, air pollution from coal plants has killed more than half a million Americans. In this eye-opening call to action, Goodell explains the costs and consequences of America’s addiction to coal and discusses how we can kick the habit.
We need fossil fuels
Current policies to supplant fossil fuels with inferior energy sources need to incorporate a deeper understanding of the transformative role of energy in human society lest they jettison the wellsprings of mankind’s greatest advance.
The thesis of this paper is that fossil fuels, as a necessary condition of the Industrial Revolution, made modern living standards possible and vastly improved living conditions across the world. Humanity’s use of fossil fuels has released whole populations from abject poverty. Throughout human history, elites, of course, have enjoyed comfortable wealth. No more than 200 years ago, however, the lives of the bulk of humanity were “poor, nasty, brutish and short,” in the words memorably used by Thomas Hobbes.
This paper aims to articulate and explain some startling, but rarely acknowledged, facts about the role of energy in human history. Energy is so intimately connected to life itself that it is almost equivalent to physical life. Virtually everything needed to sustain the life of a human individual—food, heat, clothing, shelter—depends upon access to and conversion of energy. Modern, prosperous nations now access a seemingly limitless supply of energy. This cornucopia, however, is a very recent advance in mankind’s history. Fossil fuels, methodically harnessed for the first time in the English Industrial Revolution, beginning in the 18th century and taking off in the 19th century, have been a necessary condition of prosperous societies and of fundamental improvements in human well-being.
Adequate treatment of this topic is a daunting task for anyone. The unprecedented stakes in today’s contentious energy policy debates about carbon, however, make it a morally necessary topic. As a former final decision-maker in a large environmental regulatory agency, I urge current officials and concerned citizens to reflect on energy policies within a broad but fundamental context: human history and the physics of material lives.
My research was initially inspired by a comprehensively researched monograph by Indur Goklany titled “Humanity Unbound.” His paper took me to a dozen books and twice as many academic papers. With gratitude, I acknowledge the books listed below as the most enlightening, persuasive guides on the topic. And I highly recommend them for more thorough analysis than allowed by the confines of this paper. May those policymakers entrusted with the authority to make binding decisions about energy consider these books as “a look before an unreflective leap” that could unravel mankind’s greatest achievement—
the potential enjoyment of long, comfortable, healthy lives without the gnawing hunger of subsistence poverty.
Yes, fossil fuels have fueled our progress through the industrial revolution into the information age. But we have over-used them and fouled our nest. We could and can shift rapidly to renewables, but big oil greed obstructs us. (Really?) As Pope Francis says, we have made the earth into “an immense pile of filth.” Own it.
The first big flaw that tragically happens to be the binding of the entire book (and in the title) is his thesis that fossil fuels is what causes human flourishing. No. INDUSTRIALIZATION is the underlying mechanism hat has created the exponential increase in human progress. Fossil fuels was just the first way of converting potential energy to mechanical energy. And it was a good one, but we need to move on to a more advance potential energy source. Luckily exponential growth in renewables and other advanced technologies has just started to gain heavy heavy steam.
By Donald Prothero on February 8, 2015
As an actual Ph.D. geoscientist who HAS WORKED for oil companies, written textbooks in geology of oil, and also done actual published research in climate change in peer-reviewed journals, I can say this work is pure garbage. Epstein cherry-picks climate data he doesn’t understand (as the review by Kathy Moyd pointed out), denies the conclusions of an entire scientific community who are NOT paid to shill for industry, and denies the obvious evidence of climate change going on worldwide. Then he distorts the benefits of fossil fuels and neglects or underplays the problems. The biggest problem of all is that (as all of us who are in the industry know so well), we’re past the peak of Hubbert’s curve and oil isn’t going to be cheap for the uses he brags about much longer. (CSInvesting: Whether fact-based, true or untrue, all this critic asserts is not backed up with evidence–an assertion is not an argument.) Appeal to authority argument–I’m in the industry and brilliant, you’re an idiot, so listen up!
Once the Saudis stop flooding the market with cheap oil to drive out the competition, it will pick up again to the levels of demand that anyone in the oil futures business knows so well, and we’ll be unable to use it for cheap plastics, fertilizers, pesticides, and all the other stuff that we wasted nearly all the planet’s oil heritage on. The moral case is clearly that we need to wean ourselves OFF of using up the last remaining oil so quickly before it reaches its true levels of scarcity, and it’s irresponsible to encourage people to use it up faster.
As all of my co-workers in the oil industry (and the students I trained who are now high in the business as well) know, oil is getting scarcer and scarcer, and the last thing we need to do is use it up faster and crash the global economy. Most of my colleagues in oil also agree that climate change is a serious problem–even though the bosses at ExxonMobil and Koch are bankrolling the climate denial lobby. Before you believe garbage by an industry hack with no actual training in the field, listen to those of us INSIDE the industry and INSIDE the climate science community. Our future is at stake when we make bad decisions based on crummy books like this! (CSInvesting: I am an expert, therefore all my assertions are correct. What’s to argue? What better way to move to renewable energy than to let the free market decide to price oil at $1,000 a barrel–therefore making nuclear or hydro power more economic).
Environmentalists are evil: George Reisman-
Here’s David M. Graber, in his prominently featured Los Angeles Times book review of Bill McKibben’s The End of Nature: “McKibben is a biocentrist, and so am I (See video of debate below). We are not interested in the utility of a particular species or free-flowing river, or ecosystem, to mankind. They have intrinsic value, more value—to me—than another human body, or a billion of them.… It is cosmically unlikely that the developed world will choose to end its orgy of fossil-energy consumption, and the Third World its suicidal consumption of landscape. Until such time as Homo sapiens should decide to rejoin nature, some of us can only hope for the right virus to come along.”
And here’s Prince Philip of England (who for sixteen years was president of the World Wildlife Fund): “In the event that I am reincarnated, I would like to return as a deadly virus, in order to contribute something to solve overpopulation.” (A lengthy compilation of such statements, and worse, by prominent environmentalists can be found at Frightening Quotes from Environmentalists.)
There is no negative reaction from the environmental movement because what such statements express is nothing other than the actual philosophy of the movement. This is what the movement believes in. It’s what it agrees with. It’s what it desires. Environmentalists are no more prepared to attack the advocacy of mass destruction and death than Austrian economists are prepared to attack the advocacy of laissez-faire capitalism and economic progress. Mass destruction and death is the goal of environmentalists, just as laissez-faire capitalism and economic progress is the goal of Austrian economists.
And this is why I call environmentalism evil. It’s evil to the core. In the environmental movement, contemplating the mass death of people in general is no more shocking than it was in the Communist and Nazi movements to contemplate the mass death of capitalists or Jews in particular. All three are philosophies of death. The only difference is that environmentalism aims at death on a much larger scale.
Despite still being far from possessing full power in any country, the environmentalists are already responsible for approximately 96 million deaths from malaria across the world. These deaths are the result of the environmentalist-led ban on the use of DDT, which could easily have prevented them and, before its ban, was on the verge of wiping out malaria. The environmentalists brought about the ban because they deemed the survival of a species of vultures, to whom DDT was apparently poisonous, more important than the lives of millions of human beings.
The deaths that have already been caused by environmentalism approximate the combined number of deaths caused by the Nazis and Communists.
If and when the environmentalists take full power, and begin imposing and then progressively increasing the severity of such things as carbon taxes and carbon caps, in order to reach their goal of reducing carbon dioxide emissions by 90 percent, the number of deaths that will result will rise into the billions, which is in accord with the movement’s openly professed agenda of large-scale depopulation. (The policy will have little or no effect on global mean temperatures, the reduction of which is the rationalization for its adoption, but it will have a great effect on the size of human population.)
It is not at all accidental that environmentalism is evil and that its leading spokesmen hold or sanction ideas that are indistinguishable from those of sociopaths. Its evil springs from a fundamental philosophical doctrine that lies at the very core and deepest foundations of the movement, a doctrine that directly implies the movement’s destructiveness and hatred of the human race. This is the doctrine of the alleged intrinsic value of nature, i.e., that nature is valuable in and of itself, apart from all connection to human life and well being. This doctrine is accepted by the movement without any internal challenge, and, indeed, is the very basis of environmentalism’s existence.
As I wrote in Capitalism, “The idea of nature’s intrinsic value inexorably implies a desire to destroy man and his works because it implies a perception of man as the systematic destroyer of the good, and thus as the systematic doer of evil. Just as man perceives coyotes, wolves, and rattlesnakes as evil because they regularly destroy the cattle and sheep he values as sources of food and clothing, so on the premise of nature’s intrinsic value, the environmentalists view man as evil, because, in the pursuit of his well-being, man systematically destroys the wildlife, jungles, and rock formations that the environmentalists hold to be intrinsically valuable. Indeed, from the perspective of such alleged intrinsic values of nature, the degree of man’s alleged destructiveness and evil is directly in proportion to his loyalty to his essential nature. Man is the rational being. It is his application of his reason in the form of science, technology, and an industrial civilization that enables him to act on nature on the enormous scale on which he now does. Thus, it is his possession and use of reason—manifested in his technology and industry—for which he is hated.”
Thus these are the reasons that I think it is necessary for people never to describe themselves as environmentalists, that to do is comparable to describing oneself as a Communist or Nazi. Doing so marks one as a hater and enemy of the human race.
Climate Change Caused by Man? List_of_scientists_opposing_the_mainstream_scientific_assessment_of_global_warming
For and Against Fossil Fuels