A gold mine is a hole in the ground with a liar on top–Mark Twain

The above chart illustrates how historically cheap gold mining equities are to gold. Not since the Great Depression and Pearl Harbor have equities been so cheap on market cap to production, reserves and cash costs. See the XAU (Index of gold and silver miners) below as a percentage of the gold price–currently below the Great Recession lows of 2008:

For about six years, equities have under-performed due to poor management, rising input costs, dilution, and growth for growth’s sake. That’s the bad news. The good news is that many managements have been replaced and now the focus in on return ON capital. Dividend yields on the senior miners are above 20-year bond rates. The market is forcing managements to focus on returns and that bodes well for the future. And some input prices are falling.  However, many weak companies will go bust leaving less competition for the survivors. Therefore, you must diversify into a basket of WELL-FINANCED Companies operating with good properties in safe jurisdictions for mining and, of course, with proven management. Mining is extremely risky. However, the historic cheapness of mining equities give you a margin of error, but choose wisely.

Pessimism is rampant:

Note below that for a risk-free asset, gold which has no counter-party risk, there is a closed end fund holding silver and gold bullion that trades at a 2% to 5% discount (A great way to buy bullion). People want out!

Monetary Mayhem is being overlooked (Many believe central banks have solved our debt problems and can eventually “exit” when the economy reaches “escape velocity.”)  Ha! Ha!

The last two charts illustrate growing debt that as the chart below will show below is being monetized–coupled with negative real interest rates–the current environment is conducive to higher gold prices. While Western speculators flee from ETFs, Chinese Grandmas rush to buy gold for their savings.

Real Interest Rates are supportive for gold

If the US government practiced fiscal discipline and interest rates were allowed to rise to their natural level, the bull market in gold would probably be finished. When your cab driver suggests that you buy gold for safety that will also be a read flag. Gold and precious metal miners and commodities, in general, are hated, shorted and/or ignored.

Meanwhile, investors have been flocking (some by selling their insurance like gold) to buy stocks, but risks are rising in the stock market due to higher valuations. Margin debt is near all-time highs, insiders have been selling, and a Barron’s poll recently had 75% of all money managers bullish. Of course, the majority expect gold prices to decline. Note the chart below indicates the stock market relative to its Q Ratio or replacement cost of asset, a proxy for value.  

And sentiment is upbeat:

Going contrary to massive market sentiment is painful, but going where the bargains are greatest will lead to better returns and safety in the long run (2 to 5 years). Depressed prices alleviate a lot of your investment risk while elevated prices (MMM, CLX, and junk bonds) raise your risks.

But risks overall have never been so high due to central bank intervention into the credit markets. Be careful and have a great weekend. I will be back next week.

Case Study on 3M

Please use the Value-Line below to tell readers what would be an investor’s future return if you purchased MMM today?  Please support your answer with no more than a sentence or two. What’s MMM worth? What does this valuation teach you about valuations and Mr. Market?

MMM_VL and for perspective: MMM_35

Be honest and forthcoming like this gentleman:

and show some enthusiasm like this kid: http://youtu.be/1Z6PPrr29ts?t=7m13s   Jonah Rocks!

Above is the great Ed Thorp’s Princeton Partners performance graph. Learn more BEAT the Dealer AND the Market.

Black Swan Protection (Over my head but perhaps not over yours)

My Encounters With Madoff’s Scheme and Other Swindles

Uncovering Madoff Fraud by Thorp

By Edward O. Thorp

Excerpt:

“On the afternoon of Thursday, December 11, 2008, I got the news I had been expecting for more than seventeen years.  Calling from New York, my son Jeff said Bernie Madoff has confessed to defrauding investors of $50 billion in the greatest Ponzi scheme in history.  “It’s what you predicted in … 1991!” he said.

“It began on a balmy Monday morning in New York in the spring of 1991, when I arrived at the office of a well-known international company.  The investment committee, reviewing their hedge fund investments, decided at this time to add due diligence by hiring me as a consultant.  I spent a few days listening to summaries of track records, analyses of the business structures of the hedge funds, the backgrounds of their managers, and making on-site visits.  One of the fund managers was so paranoid when I interviewed him at his office that he wouldn’t tell me what kind of personal computers they used.  When I went to the restroom he escorted me for fear that I might acquire some valuable crumb of information. 

“With one exception, I approved the investments.  The story from Bernard Madoff Investments did not add up.  My client had been getting steady monthly profits ranging from 1% to more than 2% for more than two years.  Moreover, they knew other Madoff investors who had been winning every month for more than ten years.”

(Editor: How did the SEC’s examiners miss the swindle? All they had to do was check the OPPOSITE party on the Madoff’s trading tickets.  So if Madoff had a purchase of 1000 options on Coke, the examiner would check the counter-party’s back office to verify the transaction–a sale of 1,000 coke options to Madoff’s firm. A few more random checks would take 20 minutes.  DID the SEC EVEN DO THIS? If not, then why wouldn’t the government be liable for the fraud?)

Thorp’s website  (Excellent!)

Is the Federal Reserve “Printing” Money? This is a question YOU must answer BEFORE you invest. 

POP QUIZ:  If the Fed can buy government debt by paying with electronic credits (purchase debt with money created out of thin air) then shouldn’t that mean a new paradise on earth?  The government can provide ALL goods and services to the American people by issuing unlimited bonds and not worry about who will buy and at what price the government can sell their debt, that is incurred to pay for the goods and services purchased for ALL Americans, because the Fed can purchase the bonds in unlimited quantities and forever. Therefore, there is no need for Americans to work or pay for services. We have perpetual wealth. Does ANYONE disagree with that “analysis?”

From http://jessescrossroadscafe.blogspot.co.uk/2013/05/as-reminder-fed-is-not-printing-money.html

Keep in mind that my argument here is not the true nature of excess reserves, but rather, is the Fed ‘printing money’ by expanding its Balance Sheet.

Normally the Fed does not have to print money.  The Federal Reserve Banks do that for themselves under their charters with the consent and oversight of the Fed, and subject to the prevailing capital requirements.

But when the real economy, as typified in the recent collapse and the continuing plunge of the velocity of money indicators, the Fed picks up the ball and prints money for the benefit of the economy.  They use this to ‘lower interest rates’ except in a liquidity trap wherein that is like pushing a rope.

I think what some of these helpful pundits are trying to say is that the Fed is not ‘printing money’ so that it is becoming an inflationary problem.  They are giving that ‘money’ to the Banks, and they hold it for safekeeping.  And for their gambling stash. And for credit cards and food stamp distributions and other fee generating activities.  And for loans to pay dividends, and fund share buybacks, and the occasional industrial activity.

And among other things it involves the payments on excess reserves that they are paying to the Banks to sit on that money.  And the gaming of the financial markets to which they turn a blind eye.  And the enormous abuses in the financial system which have still not been reformed.

And keep in mind that the purpose of my writing this is not to argue about ‘excess reserves’ but rather with regard to the question of whether the Fed is ‘printing money.’  Yes they are.  The quibble is what is being done with that money, which the Fed is providing in its function as the lender of last resort by buying Treasuries, and sometimes dodgy paper at non-market prices, and providing a subsidy to the Banks in the process.

That the Banks are NOT getting that money to the real economy in sufficient amounts is another matter perhaps.  There is a difference between liquidity and risk.

And I think that there is a strong indication that the interest rate policy mechanism of the Fed has broken down because Banks, or at least those holding those Reserves, are not making the bulk of their profits from conventional lending any longer.

They are making their profits through various forms of private investment and the many permutations of prop trading.  And their lending preferences tend towards further financialization of the economy.  This is the downside of the lack of serious reform.

Click on the subject link ‘Excess Reserves’ below for more on these Tales from the Vienna Woods (the play, not the waltz) from our financial sophisticates, and sophists, who like to argue what the meaning of is,is.    And there are some related articles and essays at the end that might be useful.

Or just start by clicking here.

More on the Fed creating chaos. http://www.mises.org/daily/6429/FDR-Sowing-the-Seeds-of-Chaos

 And as investors expect the low inflation environment to continue, they have responded by reducing commodity and emerging market exposure and pumping more money into bonds. A net 29% of global asset allocators are underweight commodities, the BofA Merrill study finds, up from 11% in March and at the lowest level since December 2008. Asset allocators are avoiding energy stocks as well.

https://www.coursera.org/course/accounting

About the Course

Accounting is the language of business.  Companies communicate their performance to outsiders and evaluate the performance of their employees using information generated by the accounting system.  Learning the language of accounting is essential for anyone that must make decisions based on financial information.

The course is designed to provide an understanding of financial accounting fundamentals for prospective users of corporate financial information, such as investors, creditors, employees, and other stakeholders (e.g., suppliers, customers).   The course focuses on understanding how economic events such as operating activities, corporate investments, and financing transactions are recorded in the three main financial statements (i.e., the income statement, balance sheet, and statement of cash flows). Students will develop the technical skills needed to analyze financial statements and disclosures for use in financial analysis.  Students will also learn how accounting standards and managerial incentives affect the financial reporting process.

Course Syllabus

The course is broken up into ten weekly modules:

• Introduction and Balance Sheet
• Accrual Accounting and the Income Statement
• Cash flows
• Working capital assets
• Ratio analysis and Mid-course Exam
• Long-lived assets and marketable securities
• Liabilities and long-term debt
• Deferred taxes
• Stockholders’ equity
• How to read an Annual Report and Final Exam

Recommended Background

The course is recommended for students with little or no prior background in financial accounting that want to improve their financial literacy.  There are no academic prerequisites for the course.  Although we will work with numbers in the course, the only required math knowledge is addition, subtraction, multiplication, and division.

Suggested Readings

The course is designed to be self-contained.  Students wanting to expand their knowledge beyond what we can cover in this course or who want more practice problems or more in-depth explanations can consult any Introduction to Financial Accounting textbook that is geared toward MBA students.  Because the material in the course has been fairly unchanged for the past few years, any used prior editions of textbooks should be acceptable.

Course Format

The course will combine video of the instructor with Powerpoint slides to the deliver the material.  The lectures will be “interactive” in that the instructor will periodically ask students to pause the presentation and guess an answer before proceeding.  The videos will also cover “case studies” of real companies to illustrate the course concepts.  The course will provide eight short homework assignments and two exams.

FAQ

Will I get a Statement of Accomplishment after completing this class?

Contingent on academic performance, you will get a Statement of Accomplishment stating that you completed this course.  However, no certificate will be given from Wharton / Penn and successful completion of this course does not make you a Wharton / Penn alumnus.

What resources will I need for this class?

Everything you need will be provided via the Coursera platform.

What is the coolest thing I’ll learn if I take this class?

You will not only better understand what people in the business media are talking about, you will also be able to notice when they don’t know what they are talking about!

About the Instructor

Brian J Bushee-University of Pennsylvania

Categories: 
Economics & Finance
Business & Management

–

The French Revolution and Speculator Joseph Fouche

SSOL_Issue_05

Investors have flocked into financial assets while shunning commodity companies because of China slowdown fears and less “inflation.” What if they are wrong?

‘How to think’:

It may sound peculiar that contrary thinking is required to achieve creative thoughts… This, however, becomes self-evident when we realize that thinking the way someone else thinks results in mimicry — a “copy-cat” requires the minimum of creative thought… Therefore, the inference is that to achieve any creativeness, some change has to be made. From this, it stands to reason that the optimum in creativeness must approach the maximum change… and the maximum change must be close to the opposite.

— Zuce Kogan, Founder of the Creative Thinking Institute

1.      Rid Yourself of Nebulous Terms – Define, Redefine & Refine.

Unless you’re an orator or something it’s highly likely that nebulosity is your enemy. If you speak and think in vague terms, then simple, logical deductions are likely to evade you. But since life involves doing one thing or another, chances are that you’ll default to linking concepts in the ‘default’ way — the way suggested by the crowd. In that case it is likely that the succession of vague, emotive images will govern your action.

The power of words is bound up with the images they evoke, and is quite independent of their real significance. Words whose sense is the most ill-defined are sometimes those that possess the most influence. Such, for example, are the terms democracy, socialism, equality, liberty, etc. whose meaning is so vague that bulky volumes do not suffice to precisely fix it. Yet it is certain that a truly magical power is attached to those short syllables, as if they contained the solution of all problems. They synthesise the most diverse unconscious aspirations and the hope of their realisation.

— Gustave Le Bon, The Crowd, A Study of the Popular Mind

Since eccentricity involves a capacity to deal with reality in a supposedly ‘odd’ manner and since the crowd deals mainly in vague images, one clear way to surpass them is simply to define the terms in which you speak and think.

This can seem daunting — especially at first. However, since the crowd remains ever-ponderous and dogmatic, it takes but a very small amount of clarity to achieve oversized gains. One need not plan out the redefinition of one’s entire vocabulary — just start with one concept that you use a lot in your daily life. I expect that the incentive gleaned from the initial reward will be enough to prompt further redefinitions and refinements.

2.      Allocate All of Your Available Resources Contrarily.

Contrary allocation of capital seems to be well-acknowledged as a key to success in certain investment and entrepreneurial communities. However, it also seems to remain compartmentalized as a theory about allocating capital and capital only – I say that if you wish to reach the honourable status of the ‘Mad Man’, it is prudent to apply this theory to all of the resources at your disposal:

Everything that should be managed lies here. Click to enlarge.

The truth is that you should allow your mind ruminate contrarily for more than just your money – but also for your time, energy and your attention. The integrated eccentric is he who doesn’t give up in any of these fields.

Whenever you are next faced with a seemingly trivial matter (such as whether or not to read a newspaper, take a taxi or express interest in an uninteresting matter) allow yourself to consider what the ‘common way’ is and just try the opposite.

3.      Adopt a Kantian Distaste for Intellectual Discussion & Stop Checking with Others.

Sometimes, if not most of the time, it is quite unnecessary to acquire the opinions of others before you act. Yet nevertheless I see a strong tendency for people to check and verify trivial and non-trivial matters with one another. This brings about two serious hindrances to the wannabe wacko; 1) it forces you to adapt your language to that of someone that is probably confused and using nebulous terms and 2) it will likely introduce unneeded emotions into your mind.
In order to acquire a sense of creativity I suggest that you act before you tell others about your actions and – in particular – adopt a Kantian distaste for intellectual discussion:

By and large Kant, unlike Socrates, avoided the company of philosophers and philosophically minded fellow citizens. He did this not because of any conviction that philosophers as a breed are inevitably frivolous or consumed by the need to prattle on about their most recent publications; some are, to be sure, and these one would seek to avoid in any case. He was certainly aware that in his field of study there existed colleagues with whom he could talk about bank accounts, ball games or battle plans. But philosophers tend to talk about philosophy. And even if such talk is motivated by infinite charity and fraternal goodwill, it provokes some response, comment or counter-argument to the ideas and theories presented. In print the same arguments have quite a different impact; they can be simply registered without requiring an immediate response, or can be interpreted to suit one’s frame of mind, and as a last resort a page can be turned and a book can be closed. But in conversation courtesy demands that the addressee react and relate himself. And this, in Kant’s view, is a dangerous exercise and one that certainly lacks the productive element that Socrates may have found in it. Philosophers, or so Kant thought, work best in isolation…

4.      Test Your Revelations in Small Ways. Proceed to Fail Small & Win Big.

So by now hopefully you’ve defined at least one term that has significance to your life, considered allocating your time, attention and money contrarily and considered doing something big without checking with anyone at all. Chances are that you may have thought of something interesting. The default consensual reaction is to elaborate a plan in a manner that requires significant resources (be that money, time, energy, attention or whatever else). I urge you to take a step back and consider how you might test it in the smallest possible way.

I’m always astounded by the degree to which people attempt to impose the property of permanence upon themselves. [facepalm] Why oh why? [/facepalm] Permanence through life is most frequently a large and onerous speculation — and indeed a type of speculation that is likely to be unattainable due to the ever-changing nature of each and every living individual. I suggest that if you wish to maintain your newfound eccentric temperament and demeanour, then risk little, lots rather than lots, little. If you risk little, lots you will not suffer the emotional turmoil that accompanies a large drawdown – and if you’re thinking contrarily you’ll likely be risking little for lots.

5.      Acquire Refined Senses of Ignorance & Stubbornness

The final step to eternal quirkdom is to maintain both a refined sense of ignorance and a refined sense of stubbornness. In the first instance, I should define my terms:

By ignorance, I mean a lack of knowledge. By stubbornness I mean an unwillingness to move from one’s intellectual position.

The former ‘sense of ignorance’ is merely a sustained application of point 2) about properly allocating all of your resources. By carefully selecting what enters your mind, you can maintain a temperament where you decide the content of your ignorance (or more precisely the content of your non-ignorance). This term – most commonly used as an insult – is in this sense quite neutral. We all must be lacking in knowledge (since we are not beings of perfect intelligence). Acquiring a refined sense of ignorance is merely rejecting the notion that the crowd should determine what you are not to ignore (and to be sure that determination is perilously nebulous anyhow!).

The latter ‘sense of stubbornness’ is merely the unwillingness to forego logic for the vague images of the crowd. Once again – it is a rejection of the crowd’s vague concept of when you should and should not give up your intellectual positions.

Recommended Reading:

• The Art of Contrary Thinking – Humphrey B. Neill [or here]
• The crowd a study of the popular mind – Gustave Le Bon [or here]
• The psychology of revolution – Gustave Le Bon [or here]
• English eccentrics and eccentricities – John Timbs [or here]
• The Effective Executive – Peter Drucker [or here]
• Instincts of the Herd in Peace & War – Wilfred Trotter [or here]
• Memoirs of Extraordinary Popular Delusions – Charles D. Mackay [or here]
• The Laws of Imitation – Gabriel De Tarde [or here]

Free Book on Crowd Psychology: http://archive.org/stream/crowdastudypopu00bongoog#page/n6/mode/1up

http://greshams-law.com (A Great WebSite on Financial History)

Buy or Sell in May and Go Away?

My thoughts exactly: http://www.321gold.com/editorials/moriarty/moriarty051313.html

Is the Market Expensive?

Where The Cheap Stocks Are—Come Hell Or High Water

Is “value investing” dead? Far from it, says Jon Shayne, whose bargain-hunting style will likely endure no matter who wins the presidential election or what horrors Mother Nature might whip up.

If you follow the stock market, Jon Shayne is worth a good, long listen. Especially now. (Also, check out his blog: http://www.jonshayne.com/2013_04_01_archive.html)

A disciplined buy-and-hold guy, Shayne manages $180 million for high-net-worth individuals, corporations and foundations, mainly in Tennessee. Like all value investors, he thrills at unearthing solid companies trading at below-average prices. The kind of companies that, as Warren Buffett said, would still be around if the market were to shut down for 10 years—let alone for two days after a devastating hurricane.

This game takes patience, and Shayne’s has served him well. Since his firm’s inception in March 1995, his stock picks have returned a smidgeon over 13% a year (net of a modest 1% annual management fee), versus 8.4% for the S&P 500 index. Including cash and Treasury bonds, Shayne has clocked a net 10.2% annualized return, with less than half the volatility of the broader stock market.

Trouble is, truly good values have been increasingly hard to find. While the market retreated a tad after a rash of weak corporate earnings reports and ominous pronouncements by the International Monetary Fund, stocks are still very expensive by historical measures. And as for finding safety on the sidelines, the Federal Reserve’s tireless printing presses have done to Treasury yields what Hurricane Sandy just did to the northeastern coastline.

Shayne’s dilemma and ours: Get in the game—even if you have to pay up for the privilege—or watch your capital get gnawed by inflation. “There are periods when it’s easy to find stuff, and periods when it gets pretty hard,” says Shayne. “The environment is more difficult than it has been because it is more uncomfortable to hold cash.”

Read More…….Where the Cheap Stocks Are

Top 5 Videos on Warren Buffett

http://blog.variantperception.com/2013/05/07/nyse-margin-debt-going-parabolic-signals-increased-risks-for-equities/

“For as long as I can remember, veteran businessmen and investors – I among them – have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips… The professional investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. The seeds of any bust are inherent in any boom that outstrips the pace of whatever solid factors gave it its impetus in the first place. There are no safeguards that can protect the emotional investor from himself.”

- J. Paul Getty

The above video gives you a short analysis of the causes of the financial crisis from a businessman’s perspective.

Books on the Federal Reserve and Banking

The books below will make you an expert on how the FED and the banking system work to create fiat, irredeemable money and credit out of “thin air” or by key-stroke.

• Book on How the Fed Works
• The Case Against the Fed Rothbard
• Mystery of banking by Rothbard
• The History of Money and Banking in the US_Rothbard

After reading those books, can YOU tell me how the central bankers EXIT strategy will work?  Watch Japan for a preview.

Here is Jim Grant

Inflation is a state of affairs in which there is too much money. It’s not too much money chasing too few goods. It’s too much money, the thing that this money chases is variable. And in this particular cycle and for some time, it has chased commercial real estate, bonds, stocks, financial assets of all kinds. Iowa farm land. There is a huge excess of liquidity in the world. Central banks furnish this, they stuff us with it. In the interest of levitating markets that will, they think

On the Equity rally:

Yes there are terrific companies generating terrific cash flows. That is certainly true. But beneath the surface of things or not so far beneath the surface of things, as far as central banks, practicing not original policies but original sin. This is these policies are not so original. They go back to the time of Revolutionary France. You know the idea of creating currency with which to create human happiness is as old as the hills.

On Gold:

Gold has been in a bull market for 12 years. Gold is this rare thing in which you can be bullish and yet contrary and also with the trend. There is I think a general fatigue animus towards gold. The gold prices are reciprocal of the world’s view of the competence of central banks. The greater the world’s confidence in the Ben Bernanke’s of the world, the weaker the gold market. The less the world holds confidence in the institution of managed currencies, the stronger the gold market. And to me the confidence is utterly misplaced,

See videos:

http://www.grantspub.com/resources/video.cfm

The Horror!http://www.federalreserve.gov/monetarypolicy/fomcminutes20121212.htm

Next post on Wed………..Have a Great Weekend!

from: www.tocqueville.com

The Importance of Being Different

Curiously, many people argue this would be a good time to abandon gold. We don’t think so – we rather think that faith in central banks will eventually crumble, and then it will be well and truly ‘game over’ for these perpetual bubble machines. As a friend of ours frequently remarks: at that point the question of how to price gold will be akin to asking what the last functioning parachute on an airplane that is going down should be worth. http://www.acting-man.com/?p=23082

–

Hedge fund “friend” upon hearing that I own gold, “If you were a lot smarter, we could call you stupid.”

Why Gold?

No, I am not actually doing what I posted here:http://wp.me/p2OaYY-1Vv. I own gold bullion and several precious metals miners, so yesterday when the stock market is up 1/2% while my portfolio drops 1%+, I take comfort when I review why I own gold:

“In a speech in Rome, ECB President Mario Draghi said the bank would monitor incoming data closely and be ready to cut rates further, including the deposit rate currently at zero.

“For southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But It will likely consider such a step,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.”

Meanwhile, sentiment in gold and precious metals miners is at historic (20 year) lows: http://thetsitrader.blogspot.com/2013/05/gold-and-silver-sentiment-reversal-is.html and Short Side of Long

While……..China and other Asian countries buy on dips.

I don’t buy the gold bugs premise that central banks will back their currencies with gold unless forced to by the market/the public. However, central bankers buying may indicate the lack of trust in their colleagues’ fiat currencies.  Also, gold “flowing” East represents a wealth transfer from West to East.

Print, print: http://www.zerohedge.com/news/2013-05-08/germany-under-pressure-create-money

In The Wilderness by Paul Singer

[T]he financial system (including the institutions themselves, products traded, and risks taken) has “gotten away from” the Fed’s ability to comprehend. The Fed is primarily responsible for that state of affairs, and it is out of its depth. Former Chairman Greenspan created — and reveled in — a cult of personality centered on himself, and in the process created a tremendous and growing moral hazard. By successive bailouts and purporting to understand (to a higher and higher level of expressed confidence) a quickly changing financial system of growing complexity and leverage, he cultivated an ever-increasing (but unjustified) faith in the Fed’s apparent ability to fine-tune the American (and, by extension, the world’s) economy. Ironically, this development was occurring at the very time that financial innovations and leverage were making the system more brittle and less safe. He extolled the virtues of derivatives and minimized the danger of leverage and risky securities and dot-com stocks, all while he should have been putting on the brakes. It was not just the disappearance of vast swaths of the American financial system into unregulated subsidiaries of financial institutions, nor was it just government policies that encouraged the creation and syndication of “no-documentation” mortgages to people who could not afford them. It was also the low interest rates from 2002 to 2005, the failure to see the expanding real estate bubble caused by an unprecedented increase in leverage and risk, and the general failure to understand the financial conditions of the world’s major institutions.

Under Chairman Bernanke, the combination of ZIRP and QE completed the passage of the Fed from sober protector of a fiat currency to ineffective collection of frantically-flailing, over-educated, posturing bureaucrats engaged in ever more-astounding experiments in monetary extremism.

If you look at the history of Fed policy from Greenspan to Bernanke,you see two broad and destructive paths quite clearly. One path is the cult of central banking, in which the central bank gradually acquired the mantle of all-knowing guru and maestro, capable of fine-tuning the global economy and financial system, despite their infinite complexity. On this path traveled arrogance, carelessness and a rigid and narrow orthodoxy substituting for an open-minded quest to understand exactly what the modern financial system actually is and how it really works. The second path is one of lower and lower discipline, less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin.

Monetary debasement in its chronic form erodes people’s savings. In its acute and later stages, it can destroy the social cohesion of a society as wealth is stolen and/or created not by ideas, effort and leadership, but rather by the wild swings of asset prices engendered by the loss of any anchor to enduring value. In that phase, wealth and credit assets (debt) are confiscated or devalued by various means, including inflation and taxation, or by changes to laws relating to the rights of asset holders. Speculators win, savers are destroyed, and the ties that bind either fray or rip. We see no signs that our leaders possess the understanding, courage or discipline to avoid this.

It is true that the CEOs of the world’s major financial institutions lost their bearings and were mostly oblivious to their own risks in the years leading up to the crash. However, as the 2007 minutes make clear, the Fed was clueless about how vulnerable, interconnected and subject to contagion the system was. It is not the case that the Fed completely ignored risk; indeed, several Fed folks made “fig leaf” statements about the risks of the mortgage securitization markets, as well as other indications that they appreciated the possibility of multiple outcomes. But nobody at the Fed understood the big picture or had the courage to shift into emergency mode and make hard decisions. In the run-up to the crisis the Fed was a group of highly educated folks who lacked an understanding of modern finance. After convincing the nation for decades of their exquisite grasp of complexities and their wise stewardship of the financial system, they didn’t understand what was actually going on when it really counted.

Ultimately, of course, as the system was collapsing and on the verge of freezing up completely, the Fed shifted into the (more comfortable and much less difficult) role of emergency provider of liquidity and guarantees.

All this background presents an interesting framework in which to think about what the Fed is doing now. QE is a very high-risk policy, seemingly devoid of immediate negative consequences but ripe with real chances of causing severe inflation, sharp drops in stock and bond prices, the collapse of financial institutions and/or abrupt changes in currency rates and economic conditions at some point in the unpredictable future. However, the lack of large increases in consumer price inflation so far, plus the demonstrable “benefits” of rising stock and bond markets, have reinforced the merits of money-printing, which is now in full swing across the world. In the absence of meaningful reforms to tax, labor, regulatory, trade, educational and other policies that could generate sustainable growth, “money-printing growth” is unsound.We believe that the global central bankers, led by the Fed as “thought leader,” have no idea how much pain the world’s economy may endure when they begin the still-undetermined and never-before attempted process of ending this gigantic experimental policy. If they follow the paths of the worst central banks in history, they will adopt the “tiger by the tail” approach (keep printing even as inflation accelerates) and ultimately destroy the value of money and savings while uprooting the basic stability of their societies. Read the 2007 Fed minutes and you will understand how disquieting is the possibility of such outcomes and how prosaic and limited are the people in whom we have all put our trust regarding the management of the financial system and the plumbing of the world’s economy.

Printing money by the trillions of dollars has had the predictable effect of raising the prices of stocks and bonds and thus reducing the cost of servicing government debt. It also has produced second-order effects, such as inflating the prices of commodities, art and other high-end assets purchased by financiers and investors. But it is like an addictive drug, and we have a hard time imagining the slowing or stopping of QE without large adverse impacts on the prices of stocks and bonds and the performance of the economy. If the economy does not shift into sustainable high-growth mode as a result of QE, then the exit from QE is somewhere on the continuum between problematic and impossible.

Central banks facing high inflation and/or sluggish growth after sustained money-printing frequently are paralyzed by the enormity of their mistake, or they are deranged by the thought that the difficult and complicated conditions in a more advanced stage of a period of monetary debasement are due to just not printing enough. At some stage, central banks inevitably realize, regardless of whether they admit the catastrophic nature of their own failings, that the cessation of money-printing will cause an instant depression. Even though at that point the cessation of money-printing may be the only action capable of saving society, that becomes a secondary consideration compared to the desire to avoid immediate pain and blame. The world’s central banks are in very deep with QE at present, and the risks continue to build with every new purchase of stocks and bonds with newly-printed money.

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[And, as an added bonus, here are Singer's views on gold:]

There are many current theories as to why the price of gold had been drifting down and then collapsed in mid-April. We are trying to sort out various possible explanations, but we urge investors to be cautious in their thinking about what circumstances would likely cause gold to rise or fall sharply. The correlations with other assets in various scenarios (risk on or off, economic normalization, inflation, the rise and fall of interest rates, euro collapse) may shift abruptly as the macro picture evolves. Many people think that if stock markets continue rising, and/or if the U.S. and Europe restore normal levels of growth and employment, then the rationale for owning gold is weakened or destroyed. This perception may be correct, and it is certainly a topic that is currently much discussed, but ultimately another set of considerations is likely to dominate.

The world is on a seemingly one-way trip to monetary debasement as the catchall economic policy, and there is only one store of value and medium of exchange that has stood the test of time as “real money”: gold. We expect this dynamic to assert itself in a large way at some point. In the meantime, it is quite frustrating to watch the price of gold fall as the conditions that should cause it to appreciate seem more and more prevalent. Gold may not exactly be a “safe haven” in the sense of an asset whose value is precisely known and stable. But it surely is an asset that, in a particular set of circumstances, becomes a unique and irreplaceable “must-have.” In those circumstances (loss of confidence in governments and paper money), there are no substitutes, and the price of gold may reflect that characteristic at some point.

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Disprove Your Opinions on Gold

Pure nonsense, April 24, 2012

By Bobnoxy

This review is from: Gold Bubble: Profiting From Gold’s Impending Collapse (Hardcover)

This book will no doubt go into the proverbial dustbin of history along with Dow 36,000. Ask yourself some honest questions and then compare your answers to this book’s entire premise.

Is gold in a bubble? Well, what do bubbles look like? Luckily, we have two recent examples, the housing bubble, and the tech stock bubble in the late 90′s. What did those look like?

To me, they looked like everyone was getting rich in techs stocks and flipping houses. Regular people were quitting their jobs and day trading or flipping houses full time. The average guy, the little guy, sometimes referred to as the ”dumb money” was making an easy fortune.

Now, how many of your friends own any gold and talk about it with you? How much do you own? The writer points to all the publicity around gold, like those ads telling people to sell their gold. And ever since gold hit $1,000, people were doing just that, selling their gold.

In a bubble, those people would be loading up, but they’re selling! The world’s central banks, the smartest people in the world when it comes to money, are the big buyers. This would be the first bubble in history that the dumb money was selling into and the smartest money on the planet was buying. Do you really think that the people with the least knowledge about money are getting this right?

It would also be the first bubble to happen with almost no participation from the general public. This could be the weakest analytical book written this year. Just because the price of something is up does not mean it’s in a bubble.

If you look at the average selling price of gold in the year it peaked for the last bull cycle, 1980, or $660 an ounce, and look at today’s price, the average annual gain for that 32 years is about 3%. If stocks had risen by 3% annually for that long, would anyone be calling it a bubble?

Then look at our trillion dollar deficits and the growth in the Fed’s balance sheet, total government debt of $18.5 trillion when you include state and local debt that as taxpayers, we’re all on the hook for, and there’s your bubble, and the best reason to defend yourself by owning gold.

Readings:

• G&D Spring 2013
• Berkshire_Hathaway_Annual_Meeting_2013
• all-in-commentary-9-2012

Thanks to a reader’s contribution: Here is a good article attached on bureaucracy and leading to misguided incentives. http://www.nytimes.com/2013/05/12/magazine/the-food-truck-business-stinks.html?ref=magazine&pagewanted=print

Another reader:

I came across your website via your interview with Classic Value Investors. I like the way you try to help people learn the craft. Value investing is in principle not that difficult, as long as you have a good teacher. So well done!

On my own value investing blog (http://www.valuespreadsheet.com/value-investing-blog). I try to share my knowledge on the subject as well, but not per sé with case studies like you do. However, your approach is very informative for readers, so maybe I should try that some more.

I’ve also written a free eBook which explains three valuation models in simple words. Feel free to add it to your value investing resources if you like it:

http://www.scribd.com/doc/137908826/How-to-Value-Stocks-By-Value-Spreadsheet

Kind regards, Nick Kraakman, www.valuespreadsheet.com

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Thanks for the above contributions.