Category Archives: Economics & Politics

Today’s Distorted Production/Consumption Structure


As a general rule….people ask for advice only in order not to follow it; or, if they do follow it, in order to have someone to blame for giving it. –Alexandre Dumas

This l o n g post is critical in understanding our current investing environment.   I copied the entire post from because of its importance. Value investors seek bargains. We look at the particular shoe, car, asset, or business and seek to buy below what we estimate it to be worth. Outguessing the market or the economy is a hopeless task, nevertheless, one must be aware of distortions in order to normalize earnings–how would you have normalized earnings for housing stocks in 2005 and 2006, at the peak of a massive distortion?  Currently, we are making economic history with the current distortion of the country’s production structure.

Boom and Bust

Be aware of what that means for your investments! Read on.

Summary: Since this is a long post, let’s cut to the quick.  If interest rates are pushed below their natural free market rate (our time preference or how much do we consume today vs. save for tomorrow), then businessmen are fooled by how much real savings are in the economy to utilize or bid for. Say with a 5% loan we see in our spread sheets that building a factory would generate a nice profit, so we begin building our three-story building, but since there are not enough real savings in terms of bricks, steel, cement, as we build, the prices of those materials begin to rise. Now our building is no longer profitable because our input costs have risen or worse–there are no more bricks available to complete our factory. We abandon the project halfway through.  Look at the empty and uncompleted housing complexes outside of Las Vegas from the busting of the housing bubble in 2005/06 as a recent example.

Background: Structure_Production_Reconsidered (a full review after you have finished this post). For the fanatical student: Economic Depression Their Cause and Cure

The Goldilocks Illusion  May 11, 2015 | Author  Pater Tenebrarum

Why Market Participants Liked the Payrolls Report

Some people have wondered why the stock market reacted with such a big rally to last Friday’s payrolls data. After all, the report wasn’t much to write home about, especially if one  ponders the details. In addition, the already weak March payrolls data were revised lower to an even worse figure.

However, the report certainly did one thing: it kept the “Goldilocks illusion” alive. While jobs data are a lagging economic indicator and would likely be completely ignored in an unhampered free market (if anyone even took the trouble to collect them, that is), they are regarded as decisive for Fed policy. Few things illustrate more vividly that the central planners are driving forward with their eyes firmly fixed on the rear-view mirror.

The Fed has little choice though, since its mandate explicitly includes employment as one the things central bank policy is supposed to support (which it does mainly by fostering artificial booms and malinvestment of capital). The market’s focus on the jobs data has increased greatly in recent years as a result of this, which incidentally illustrates how utterly dependent the markets have become on a continuation of easy money policies by central banks.

The “Goldilocks” idea is that it is best for risk assets if economic data are strong enough not to signal recessionary conditions, but weak enough to keep ZIRP and monetary pumping going. Friday’s data point was presumably considered almost perfect in terms of this playbook.

SP 500

SPX, 10 minute chart: stocks bounce back to the upper end of their recent range

Normally the stock market is held to reflect the past successes or failures of listed companies, as well as expectations about their future performance. To some extent this is still the case, but as the market has come to increasingly depend on monetary pumping and the associated perceptions, this factor has diminished in importance.

We can indirectly discern this from certain data points, such as the fact that  the median stock has never been more expensive than today. This is a sign that intra-market correlations have greatly increased. However, it is actually impossible for such a large percentage of listed companies to be equally successful in terms of real wealth creation. Along similar lines, the strong rise in the Q-ratio (it is currently two standard deviations above the mean) is a strong sign that market valuations are driven by the “money illusion” rather than a rational assessment of value.

Q Ratio

A long-term chart of the Q ratio shows that loose monetary policy frequently distorts market valuations. If it tops out near its current level, it will be the second highest peak in history – click to enlarge.

What Will Shatter the Illusion?

Not everybody thinks that the “not too hot, not too cold” jobs data will keep the Fed from going through with its long-announced “policy normalization” plans. However, the conviction is growing that this will once again be pushed back to a later date. Here is an excerpt from  a Bloomberg report on the payrolls report that illustrates the current consensus on the topic:

“U.S. job growth rebounded last month and  the unemployment rate dropped to a near seven-year low of 5.4 percent, suggesting underlying strength in the economy at the start of the second quarter that could keep alive prospects for a Federal Reserve rate hike later this year.

Nonfarm payrolls increased 223,000 as gains in services sector and construction jobs offset weakness in mining, the Labor Department said on Friday. The one-tenth of a percentage point decline in the unemployment rate to its lowest level since May 2008 came even as more people piled into the labor market.

However, wage growth was tepid and March payrolls were revised downward, leading financial markets to push back rate hike bets. “We see this report as reducing concerns that weak first-quarter growth represents a loss of economic momentum,” said Michael Gapen, chief U.S. economist at Barclays in New York. Nevertheless, he said the bounce back was not strong enough to think the Fed could bump rates higher before September.

Considering that even most mainstream observers these days are usually admitting to the increasing importance of central bank policy to stock prices, it is slightly baffling that they almost never mention the money supply. The growth momentum of the money supply strikes us as the most important factor determining boom and bust conditions in the economy and the stock market.

As can be seen below, the annual growth rate of the broad US money supply measure TMS-2 (= true money supply) has slowed to approx. 7.4% in March. Historically this growth rate is still quite brisk. It also remains within the “sideways channel” within which annualized money supply growth has oscillated for more than two years. It also remains still well above the previous “bust thresholds” we have indicated on the chart. Therefore it isn’t sending a strong alarm signal just yet.

However, such thresholds are not a fixed magnitude. At what level precisely the boom-bust threshold will turn out to be depends to a large extent on contingent data and market psychology. Our hunch is that this threshold is higher than it used to be, mainly because the economy’s underlying performance continues to be quite weak compared to previous post WW2 era recoveries.

Money supply TMS-2, annual rate of growth


How much monetary pumping is required to keep assorted bubble activities on life support is unknowable. However, we can be sure that the economy is becoming ever more imbalanced and structurally weaker the longer strong monetary pumping continues. This is another reason to suspect that the “bust threshold” is likely higher than it used to be. Moreover, the lagged effect on economic activity from the peak money supply growth rates recorded in late 2009 and late 2011 has to be diminishing by now. As newly created money continues to ripple outward from its points of entry into the economy, the likelihood that “bad effects” become visible increases.

Currently there are two firmly established consensus opinions that are based on the irrational faith that  this time, central bankers somehow know what they are doing. One is the idea that strong economic growth is “just around the corner”, where it has been suspected to be lying in wait for the past six years. A corollary to this is the belief that the economy cannot possibly weaken to the point of entering an official recession.

A second, related conviction is that no “inflation problem” can possibly appear on the scene. Inflation problem in this case means: a noticeable increase in CPI. There are many good reasons for this consensus opinion. A number of contingent trends are helping to keep consumer prices in check. They comprise large consumer debt overhangs in nearly all developed countries, negative demographic trends, subdued wage growth (due to global labor arbitrage and tepid economic activity) and ongoing productivity growth in manufacturing (which seem to be waning lately). Moreover, in the post 2008 era, newly created money hasn’t primarily been borrowed into existence due to growing credit demand in the real economy. Instead it has entered financial markets more or less directly, as central bank debt monetization leaves major market participants with first dibs on new money.

All these trends affect demand for consumer goods, and even though we cannot truly measure their impact, some empirical confirmation is provided by related data points such as weak growth rate in retail sales. However, the demand side is only one part of the equation. Years of monetary pumping have left their mark on the economy’s production structure (KEY POINT!), and we want to briefly look at the problem from this angle.

The Balance between Production and Consumption

The chart below shows the industrial production index for capital goods (business equipment) compared to the production indexes of consumer goods and non-durable consumer goods. Given extensive global trade, domestic US consumer goods production has been partly replaced by imports, but the history of these indexes still conveys useful information.

capital goods vs consumer goods

Industrial production: capital goods vs. consumer goods and consumer non-durables

When interest rates decline, long-term projects that yield a consumable output only after a long period of time appear to become increasingly profitable. The decisive factors are firstly that the profitability hurdle declines as interest rates fall (for instance, it makes no sense to borrow capital at 4% for an investment yielding only 3%, but the situation obviously changes if borrowing costs decline to 2%), and secondly, that the net present value of long-lived capital goods increases sharply when they are discounted at a lower interest rate. The longer the time period involved, the bigger the effect will be.

As a result, factors of production will increasingly be bid away from the lower stages of the production structure (those closer to the consumer) to the higher stages (capital goods production) and the economy will become more capital intensive. In an unhampered free market economy, this is generally a positive development indicating a progressing economy. A decline in interest rates will signal that people are increasing their savings. Additional savings are a  sine qua non for a  sensible lengthening of the capital structure, as new long term investments need to be funded. If people are postponing consumption in favor of saving, this funding will in fact be available.

By increasing their savings, people are signaling that they prefer to be able to consume more or better goods in the future in exchange for lowering their present consumption. The creation of a more capital-intensive production structure will make this possible, as it will lead to greater output of consumer goods in the future (the quantity, and/or the quality of output my increase, and future output may also include goods that could otherwise not be produced at all). Interest rates and prices are the  signals indicating to entrepreneurs which types of investments make the most sense and to what extent the time structure of production can be lengthened.

Things become problematic though if interest rates are artificially suppressed by administrative fiat instead of declining due to an increase in savings. Economic calculation is falsified: relative prices are distorted, and the resources required to fund a lengthening of the production structure are in reality not available to the extent indicated by the interest rate signal. The investment activities of entrepreneurs will be misdirected – too much will be invested in the wrong lines, based on an incorrect assessment of consumer wants and the amount of real funding available for long term investment projects. Initially an economic boom is set into motion. Large accounting profits accrue and will be partly paid out in the form of dividends, stock buybacks and higher wages. However, at a later stage it will become obvious that many of these profits were actually illusory and that in reality, capital was consumed.

The people engaged in the production of capital goods need to be able to consume long before their own labor yields goods ready for consumption. They must eat, they need a place to stay, etc. The more factors of production are shifted toward capital goods production and away from consumer goods production, the more likely it becomes that not enough “free capital” in the form of consumer goods is available to support these long-term activities. Obviously, this problem can only be made worse by printing more money. KEY POINT!

The boom eventually expires because it turns out that many new investments can actually not be funded. Once this is recognized, a scramble to obtain the required capital commences, putting upward pressure on market interest rates. The distortions in relative prices that originally fired up the boom begin to reverse and malinvestments are unmasked as unprofitable – the bust begins. By looking at the ratio between capital and consumer goods production indexes, one can clearly discern boom and bust periods:

Boom and Bust

Not every bust necessarily results in an “official recession”. Sometimes the bust can be concentrated in just a few industries (like e.g. oil production and S&Ls in 1986-1988) – click to enlarge.

Let us reconsider the “CPI inflation” question in light of the above. If too many resources are devoted to capital goods production, the economy will over time tie up too many consumer goods relative to the amount it releases. The economy’s pool of real funding consists of two components: savings and consumer goods that become continually available from ongoing production activities. Although it is well known that many companies these days prefer to engage in financial engineering (mainly in the form of stock buybacks and m&a activities) rather than investing in capital, what counts are  relative proportions. If bottlenecks in the supply of consumer goods develop at some point, consumer prices may unexpectedly rise even if the currently tepid level of consumer demand remains unchanged.

The Growing Amplitude of Business Cycles

David Stockman recently  posted a chart from a BIS report that shows the amplitude of financial market cycles and business cycles in the real economy:


Financial market cycles vs. real economic cycles

This chart illustrates the fact that the increasing activism of central banks in recent years has led to a commensurate increase in the amplitude of business cycles, with boom and busts in asset prices becoming especially pronounced. Since stocks are titles to capital and real estate can be grouped with long-lived capital goods from an analytical perspective, this is in keeping with the distortions in the production structure discussed above.

We have mentioned that the current cycle differs slightly from previous cycles due to the fact that “QE” injects newly created money directly into financial markets. The firms selling securities to the Fed (i.e., the primary dealers) will use the funds they receive to purchase securities again. The sellers of securities in this second round of purchases will largely tend to do the same, and so forth. However, this doesn’t mean that new money will forever stay within the confines of the financial markets in a kind of closed loop. More and more of it will “leak out” over time.

For example, the purchase of expensive trophy properties by the rich generates commissions for real estate agents and profits for real estate developers. Rising stock prices may lead individual investors to sell a part of their investments to increase their consumption. Companies are issuing lots of bonds to take advantage of low rates and seemingly insatiable investor demand. Some of the proceeds are flowing back into the financial markets in the form of stock buybacks, but a large part is used to purchase capital goods, pay wages, invest in R&D, etc. In short, the enlarged money supply eventually ripples through the economy in a variety of ways.

Someone will always have to hold the additional cash balances, and while strong demand for money since the 2008 crisis has so far contributed to keeping consumer price inflation in check, this state of affairs cannot be taken for granted (the demand for money may actually have been egged on a bit by ZIRP as well, as savers of modest means likely feel they have to set aside more money in light of the lack of interest income). We can already see though that those with the largest amounts of cash at their disposal are treating it as a hot potato (hence the frantic bidding for expensive properties,  high end art works, etc.).


We can be certain that the vast expansion of the money supply in recent years has once again led to the erection of an unsustainable capital structure. Should money supply growth rates continue to falter, a bust is likely to arrive sooner rather than later, as investment projects that depend on monetary pumping to keep up the appearance of profitability will quickly turn out to have been misguided.

Moreover, the large amount of new money that has been created in recent years continues to move through the economy and the possibility that people will reassess their demand for cash balances cannot be dismissed, in spite of the contingent trends that are currently keeping a lid on consumer demand. This may become especially pertinent if the Fed reacts to the next bust by immediately kicking money supply inflation into high gear again. After all, the strong demand for money is  inter alia predicated on the belief that the inflationary policy of recent years isn’t going to continue indefinitely.


This article is actually a continuation of the “Echo Boom” articles we have published previously (see here for  part 1 and  part 2). In the next installment we will look at the relationship between “price inflation” and the stock market. This relationship is not as straightforward as is generally believed.

All in all we can conclude Goldilocks is treading on increasingly thin ice.

Charts by: BIS, St. Louis Federal Reserve Research, StockCharts, Doug Short / Advisorperspectives

Time Preference: The Future is Today


I was walking down the street wearing glasses when the prescription ran out. —Steven Wright

Time Preference

People value present goods over future goods. Would you pay 50 cents for a glass of beer today or a year from now?

An increase in time preference implies that a higher ratio of income is devoted to consumption vs. savings and investment for the future. Central banks with their policy of financial repression (Zero Interest Rates Policy or “ZIRP”) want to “correct” underconsumption.  Please take me to meet an “underconsumer.”

While aggressively seeking to increase time preferences with all its negative implications, on the one hand, central banks are trying to give the impression that time preference is lower than it really is by making current levels of consumption seem more sustainable by forcing down interest rates and replacing savings with cheap credit. This artificially extends time horizons and increases confidence. However, a rising time preference is indicative of a weakening economy, not a strong one and one which is more vulnerable than it appears…..

If central banks induce businesses to make incorrect capital investment decisions, the end result will be that production is out of line with consumption preferences. This will distort the ratio of capital and consumer goods. In such circumstances some of the increased capital goods will turn out to be mal-investment. Capital will decrease both in terms of physical wastage and loss of value, and decisions on new investment will be cancelled.  Look at the cyclical iron ore and coal markets today! Note KOL (Coal ETF)


If you invest in any business that is cyclical then read this:

Selling-Time What is happening today due to central bank distortion of time preferences. Must Read!

The Pure Time-Preference Theory of Interest_2 The following essays parse through the uniquely Austrian insight of the pure time-preference theory of interest, but more importantly go to the core of why modern central bank monetary engineering leaves the economy further from recovery while at the same time providing a Petri-dish for speculation and mal-investment–Douglas French

For those who want to go even further:


The Gold Market

The twilight zone in gold (from Monetary-Metals): Spot Gold trades at a premium to distant contracts.  Financial historians will look back in fifty years and ask what were they thinking? We live in the biggest global credit bubble in history.

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph: The Gold Basis and Cobasis and the Dollar Price


Along with the rising dollar (green line), we see rising scarcity in gold (i.e. cobasis, the red line or the bid for spot gold is rising relative to the offer for future delivery). One could now earn 0.34% annualized, to sell a bar of gold and buy a June contract. Where else can one get that kind of return on a two-month bill or note? This opportunity should  never exist in the gold market, but it does. The August contract is not backwardated yet, but it’s close.  (Source:

A scramble to obtain physical gold is indicative of a rising time preference or time horizons are becoming shorter in the gold market. I want possession of my gold NOW rather than not risk obtaining it in the future. A sign of increasing risk awareness.

We live in interesting times.



So How Does This Happen to a Country? On the Road.


Ask how can a country become wealthier or poorer?


I am on the road but will be back later on in the week.

Meanwhile, listen to this harmonica:



Dollar Panic; Valuation Ratios; Buyback Mania, CEFs


If you think nobody cares about you, try missing a couple of payments.- Wright.

Long-term view of the Dollar (DXY)

Oil service, oil producers, mining companies etc. are being hammered by a dollar “shortage.”  Opportunity may be knocking. Remember what Klarman said about forced selling.

An overview of the situation: Dollar Shortage. With money supply rising in the US there is no dollar “shortage”, but there is a fear of inter-bank lending.

Dollar Leverage BIS Report

Dollar Crisis 2009

JPM-dollar-shortage funding

A Guide to the Swap Market

Now the “experts” say confidently cnbc Dollar Euro Parity. Perhaps a bit late in a trend!   If you are to follow a trend then The Whipsaw Song

A Reader’s Question on Valuation Ratios.  This sheet may be good as a guide to go through an annual report, but none of those ratios means anything without context.   Is growth good? It depends. Only profitable growth within a franchise.  How about asset turnover?   For some companies like Costco asset turnover is critical but not for Boeing (gross margin).   Why not take those ratios and work through the financials of these trucking companies.  Which company is doing the best? Why? Follow the money!   Those ratios may help you structure the information you pull out from the financials. But first focus on how does the company provide a service to its customers and then trace the financial effects back to your returns as an investor.

  1. HTLD VL
  2. JBHT VL
  3. KNX_VL

Buy-Back Mania (a yellow light of caution) Stock Buybacks Hit RecordTotal 2 Trillion Since 2009

Emultate Henry Singleton

Case Study in capital allocation: Dr. Singleton and Teledyne A Study of an Excellent Capital Allocator (must read!)

Gold is in a hyper bubble……………….

Gold Bubble

But now not so much…………………Gold Bubble Not Quite as much

Gold is stupid-cheap compared to all the money out there…………………Gold hyper undervalued

What determines the price of gold

2010-06-21 IE Special Report GOLD

A Case Study in investing in Closed-End Funds

Prof. Greenblatt once said that sometimes people just go crazy.

A Lesson in CEF Investing TRF


Investors ran to pay a 90% PREMIUM to NAV AFTER a six-year boom and now after a seven-year decline they sell at a 10.5% DISCOUNT. Go figure.

Interesting video on China–a country brimming with centrally planned mal-investment. Is China Already in a Hard Landing?

Read more at reality-check-how-fast-is-china-growing.

We will get back to Deep Value next week and I will post links to valuation class videos.  Have a great weekend and if you do try to emulate someone, then:

How Cheap It Was: The 1920-21 Stock Market


Chapter 19: America on the Bargain Counter (The Forgotten Depression, 2014) (pages: 197 to 200)

On August 24, 1921, the low point of the Dow, many stock prices translated into multiples on 1923 earnings of less than five times. That held true of the steel companies but also of the kind of consumer-products companies that had enjoyed a relatively prosperous depression. Thus, Coca-Cola, at $19 a share—500,000 shares were outstanding, providing a stock market capitalization of all of $9.5 million—was valued at what would prove 1.7 times 1922 earnings and 2.5 times 1923 earnings; the shares provided a dividend yield of 5.26%. Gillette Safety Razor Company, which was selling as many razors and blades in 1921 as it had in 1920, was quoted at a little more than five times forward earnings and yielded 9.23 percent. Radio Corporation of America, not yet revealed as one of the great growth stocks of the 1920s, could be purchased in the market for about as much as the company earned in 1923: $1.50 a share.


As a matter of course on Wall Street, bargains hold no appeal at the bottom of the market. In August 1921, stock prices had been sliding for almost two years. At such junctures, the memory of losing money is usually more vivid than the imagined prospect of making it.

It didn’t take much imagination to recognize the value of F.W. Woolworth Company, the five-and-dime chain merchandiser that was finishing its tenth year as a fused corporate unit. Frank W. Woolworth himself, founder and builder of the gothic corporate headquarters tower at 233 Broadway in lower Manhattan, had died in 1919, but his successors had distinguished themselves in the depression. They had stopped buying any but essential merchandise after the break in whole sale price in June 1920, while customers, happily, had kept right on buying. Now 1921 sales were on track to surpass the total for 1920. While other chain stores had raised prices, Woolworth hewed to the letter of its five-and dime appellation (15; cents was the top ticket west of the Mississippi). And how was this exemplar of deflation-era merchandising—about to close its year without bank debt and with no mis-priced inventory—valued in the stock market on August 24, 1921?  At a price of $105 a share, or 3.7 times imminent 1922 earnings and 3.3 times what would turn out to be 1923 earnings.  The stock yielded 7.62 percent.

James Grant Explains The Forgotten Depression

The Fallacy of Goldbugs or Understanding the Law of Supply and Demand

Gold Bugs

F. A. Hayek: “The curious task of economics is to demonstrate to men how little they really know about they imagine they can design.”


As a preview to understand how the law of demand and supply works see Trading Places in the Pits  Hint: Are there more buyers than sellers?

Thus you can explain the fallacy of Eric Sprott’s sentiment that demand is overwhelming supply:

We see almost 60 tons a week being delivered on the Shanghai Gold Exchange. Well, you start annualizing 60 tons a week you’re talking 3,000 tons a year now. We saw 94 tons of gold go into India in September. We saw the Russian Central Bank buy 37 tons of gold in September. I mean I could come up with numbers that might suggest that we’ve got 400 tons a week of demand. And we only got 230 tons a week of mine supply. And I’ve only gotten to three data points. I haven’t even gone to the rest of the world.

We’ve now created a situation unfortunately in the market where between high frequency trading and algorithms and interference by the planers they can make things happen that looks like everything is OK. And it’s the “OK” part where I think we can really relate to gold not being allowed to go up. Because that’s the canary in the coal mine. If gold was above $2,000 we’d all be wondering: What the hell is going on here?  And so they haven’t allowed it to happen.

But by suppressing the price — and one of the great things about a price of $1,100/oz is that you can buy a lot of gold at $1,100 versus $1,900 — you can buy almost 50%-60% more gold than you could three years ago with the same amount of money. And you can buy 3x the silver. With the same amount of money!  35 minute podcast.

Of course, demand must equal supply or supply equal demand at a CLEARING PRICE.  Go to pages 137 to 138 to understand Reservation Demand (critical in understanding a high stock to flow good like gold) Man Economy and State by Rothbard

If you don’t understand price moves against you, then scream manipulation on price declines. But where was the “manipulation” from 2000 to 2011 while gold rose in price vs. the U.S. Dollar by 1,600 dollars!  You are a fool either way. You trade in a rigged market or you complain that you are buying a good that is artificially depressed. You are subsidized to buy gold at “below” market (read manipulated) prices yet you complain.

The amount that a seller will withhold on the market is termed their reservation demand. This is not, like the demand for a a good in exchange, this is a demand to hold stock.  Thus, the concept of a “demand to hold a stock of goods” will always include both demand factors, it will include the demand for the good in exchange by nonpossessors, plus the demand to hold the stock by the possessors.

I strongly suggest that if you wish to improve as an investor that you read Rothbard’s book along with the free study guide.  The implication that demand is overwhelming supply with a falling price is absurd!  Yet, Goldbugs howl incessantly that the price is being suppressed since demand is “overwhelming supply.”  Nonsense, everything equals AT A PRICE.

Did you view the video of trading places above? Where was Louis’ Reservation Demand? SELL 200 APRIL ORANGE JUICE AT 142!

Most analysts do not understand the law of supply and demand

Does the Monetary Base Drive the Gold Price?

ECB-could-buy-gold-to-revive-economy.html  Will that work?

Low UAE gold prices set off buying surge  Does that imply rising prices?



Gold wasn’t always in the dumps.  It rose right along with equities, indeed outperformed equities, from the 2009 Great Recession bottom – when central banks the world over first began implementing their unconventional monetary policies – straight through to its September 2011 top.  The reason we think it did is quite simple.  Coming out of the Great Recession, central bank credibility – their ability to “pull us out” of the Recession – was being severely questioned by investors. Thus, a good portion of investor money found its way into gold. That changed in 2011. Underwritten by these same central bank easy money policies, the as yet unresolved malinvestments of the Housing Bubble turn Credit Bust turn Great Recession, which were in the process of a healthy liquidation, were short circuited, while new, yet to be revealed malinvestments (we think the largest being anything in and around financial engineering) were starting to bear fruit.  The belief took hold that the heroic policies of these central banks were finally working, finally restoring long term vitality to the economy. Gold then sunk while equities marched ever higher. So here we are…

Gold Bars

Reading the Financial News; Microdocumentary on Boom/Bust

As Gold Rises; Gold Miners Fall Down By Johanna Bennett

The price of gold may be rising, but gold mining stocks are getting hammered today. And do you know why?

They are still stocks.  (What does THAT mean?)

On the heels of yesterday’s late-day price surge, the Market Vectors Gold Miners ETF (GDX), of fell more than 4.5% amid a broader market selloff that sent the Dow dropping more than 300 points and the S&P 500 declining almost 2%.

The dovish minutes from the Federal Reserve’s September policy meeting have gold bugs buzzing. The precious metal touched a two-week high today, amid easing concerns that the Fed is near to raising interest rates, reviving gold as an inflation hedge.

Gold prices rallied to $1,234 a troy ounce, their highest level since Sept. 23, a day after minutes from the Fed’s September policy meeting revealed officials were worried weaker growth in Asia and Europe could curtail U.S. exports. The central bank also highlighted a stronger dollar as a barrier to U.S. inflation climbing toward the Fed’s 2% target, stoking hopes for a sustained period of low interest rates.

The most actively traded contract, for December delivery, was ended the day at $1,225.10 a troy ounce on the Comex division of the New York Mercantile Exchange, up $19.10, or 1.59% after earlier today climbing as high as $1,380.

ETFs linked to the commodity prices saw little improvement today. The SPDR Gold Trust(GLD) rose 0.25% to $117.76, while the iShares Gold Trust (IAU) inched up 0.21%.

But while worries regarding a weak economy can lift gold prices they can squeeze gold mining companies. GDX has plunged more than 60% over the past two years with the likes of Barrick Gold (ABX) falling more than 65% during that same time span and Newmont Mining (NEM) falling 59%.

The above is an article from an “elite” financial publication (Barrons) where the theme is that miners are being hurt/squeezed because they are stocks.  I ask my readers how are miners hurt LONG-TERM (the next decade) if the REAL price of gold is rising?  Sure miners may have been sold today due to leveraged investors selling to go into cash, but how does that “squeeze” the mining business if gold is risng RELATIVE to input costs like crude oil and commodities? Mining is a spread business. You make money on the spread between input costs and output revenues.  Never take what you read on face value.

gold oil

Gold commodities


gdxj gold

Miners realtive to gold in the chart above.

Four Boom and Bust Cycles and the Implications for today’s Cycle (Microdocumentary)

This microdocumentary video examines in detail 4 major booms in the last 100 years and explains how monetary policy and interest rate manipulation has led to the inevitable bust:

  1. The great depression of the 30ies
  2. The recession of the 90ies
  3. The dot com bubble
  4. The housing bubble   A bit simplistic, but a good introduction to the dangers of excess credit growth.

Rap Video on the Boom Bust Cycle or Hayek vs. Keynes

Buy What is on Sale! CEF Discounts

PITSelling today in the pits-gold and silver


Above is a chart of CEF, Canadien Gold (60%) and Silver (40%) bullion closed-end fund trading at a 6.5% discount today. ON SALE!  I have no clue if tomorrow the price will be higher or lower.

Note the premiums as high as 10% and currently 6.5% discount.


Learn more about interpretating sentiment indicators:

Long term sentiment

gold Sent 1

Silver Sent 1


A Great blog, Down the Rabbit Hole:

Though, I like miners more, but now is a good time to pick up tangible money at a discount. Pay 94 cents and get a dollar of gold and silver today–I will take it.  SOLD!  Miners make money on the arbitrage between their input costs and output prices. You don’t need a rising nominal gold price; you need a rising REAL gold price.

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Gold commodities

Now is the time for me to post on Yamana (by this weekend, I pray) because it is at a price $7.33 that I have purchased in the past and it may be a reasonable choice for a BASKET of miners.

Also, you want to see analysts pile-on negatively AFTER price has fully dicounted the news. I am not being contrarian or cynical, it is just how markets work–they DISCOUNT.

Yamana Gold suffers rash of stock price target cuts • 12:58 PM

Carl Surran, SA News Editor
  • Yamana Gold (AUY -1.2%) is lower after Morgan Stanley, Credit Suisse and Raymond James cut their price targets on the stock to $10.70, $10.50, and $10, respectively.
  • In the case of Morgan Stanley, the lower target still implies upside of more than 40%; AUY has said the Pilar mine in Brazil has shown improvements with output increasing M/M, but the ramp up is tracking modestly below expectations, thus the firm’s tempered outlook.
  • An update on Canadian Malartic and meeting quarterly expectations are potential catalysts expected over the next 6-8 weeks.

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Read the link below and the link within it to gain more understanding on gold and miners. 

Dead Companies Walking; Financial Accounting Course


The above is an interesting blog from an original thinker.

For a refresher: A free Wharton course on Financial Accounting (rave reviews)


Fed Trap; Fragile by Design


 In times of change learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists–Eric Hoffer

Why the Fed is caught between its parabola of accelerating debt and money creation and debt collapse (If short for time, start at the 18:30 minute mark).

Dan Oliver is a Director, Committee for Monetary Research and Education, one of the oldest and most respected organizations focused on our monetary system.

Some of the issues discussed were:

  1. Why has gold, when it was available, been the free-market preference for money worldwide for thousands of years?
  2. If gold is the preferred money, how come no country in the world uses it as money?
  3. Why does gold always move from spenders to savers, e.g., from the US to China?
  4. Goldsmiths/(banks) always issue more receipts for gold for which they do not have gold, sending all prices but gold higher. Reverse happens when the system collapses.
  5. Why, during a credit bubble, is gold always undervalued as compared to industrial commodities? What is the effect on gold producers?
  6. Why do politicians get corrupted by the bankers?
  7. Talk to how this plays out, especially the forcing abrogation of liberty
  8. What are the prospects for the relative valuation for gold and gold producers? What has to happen for these prospects to be realized?
  9. Where we are now: the money printed since 2008 is still mostly fallow, sitting in cash accounts.
  10. Can inflation occur in a stagnant economy or only when the economy “heats up”?

That interview of Dan Oliver of Myrmikan Capital provides a good synopsis of our (world’s) monetary crisis.  Profit from the Deluge_CMRE_Remarks_2011_05_12 and Economic-Consequences-of-Cheap-Money_Mises

Another Dan Oliver interview on Bloomberg TV:

j10177   Interview with Charles W. Calomiris who wrote Fragile by Design, the Political Origins of Banking Crises & Scarce Credit

(Csinvesting: This is an important, well-written book to understand why another banking crisis is inevitable plus you receive a history of U.S. and foreign banking systems.

Why are banking systems unstable in so many countries–but not in others? The United States has had twelve systemic banking crises since 1840, while Canada has had none. The banking systems of Mexico and Brazil have not only been crisis prone but have provided miniscule amounts of credit to business enterprises and households. Analyzing the political and banking history of the United Kingdom, the United States, Canada, Mexico, and Brazil through several centuries,Fragile by Design demonstrates that chronic banking crises and scarce credit are not accidents due to unforeseen circumstances. Rather, these fluctuations result from the complex bargains made between politicians, bankers, bank shareholders, depositors, debtors, and taxpayers. The well-being of banking systems depends on the abilities of political institutions to balance and limit how coalitions of these various groups influence government regulations.

Fragile by Design is a revealing exploration of the ways that politics inevitably intrudes into bank regulation. Charles Calomiris and Stephen Haber combine political history and economics to examine how coalitions of politicians, bankers, and other interest groups form, why some endure while others are undermined, and how they generate policies that determine who gets to be a banker, who has access to credit, and who pays for bank bailouts and rescues.

Charles W. Calomiris is the Henry Kaufman Professor of Financial Institutions at Columbia Business School and a professor at Columbia’s School of International and Public Affairs. His many books include U.S. Bank Deregulation in Historical PerspectiveStephen H. Haber is the A. A. and Jeanne Welch Milligan Professor in the School of Humanities and Sciences and the Peter and Helen Bing Senior Fellow at the Hoover Institution at Stanford University. His many books include The Politics of Property Rights.