Tag Archives: economy

An Experienced Businessman, Money Manager and Investor Discusses His Views


Mr. Ned Goodman of Dundee Corporation has over 50 years of investment and business experience. His “Buffett-like” 2012 Annual Report is a great read: Contrarian Business Man Dundee Annual-Report-2012 (Beware of confirmation bias! His views mirror mine, but he is too optimistic).

The following statement came from the CFA Institute not the regular “gold nut”  – “Swap paper for Gold”. In 1971 the US broke the final link between national currencies and gold, which had been around for millennia.  The many years since have provided continuous inflation and a series of larger and larger financial bubbles. The current situation is best described as a “debt binge.”

Why gold? “The price of gold is the reciprocal of the world’s faith in the deeds and words of the likes of Ben Bernanke”.  As the global Central bankers increase their supply of paper currency, we should all be losing faith in their promises and move to the historical form of money that just cannot be created out of thin air or by the push of an electronic button.

Why gold?  According to James Rickard there will soon be a re-linking of gold to money at a significantly higher price; i.e. an across-the-board devaluation of the world’s major currencies which will create the inflation that the central banking policymakers really want. It then allows nations to repay debt at par with  currency that is worth considerably less because it was recently printed. Mr. Bernanke does this every day when he prints new currency to buy old bonds. He is reducing the debt load of the country with devalued currency.

It is important to remember that, “In a currency war nobody wins”; we see a lot of wealth destruction unless we own hard assets that systematically increase as inflation takes place. Gold is the historical favourite.

Mountains of debt will be an insurmountable obstacle to any country’s previously loved higher standards of living. The growing gap between what the government attests to and what it spends will always threaten its financial solvency. And this, today, is a global problem – not only one for the United States.  The pending economic situation is all about debt, deficits, and inflation. Rising and unsustainable debts or deficits will potentially sooner or later lead to potentially catastrophic consequences. At the top of the list has usually been severe inflation in the future.

The whole situation mirrors the late 1960s, during a period that led up to the “Nixon Shock.” Back then, the world was on the Bretton Woods System – an attempt on the part of Western central bankers to pin the dollar to gold at a fixed rate, while still allowing the metal to trade privately as a commodity. This led to a gap between the market price of gold as a commodity and the official price available from the Treasury.

As the true value of gold separated further and further from its official rate, the world began to realize the system was unsustainable, and many suspected the US was not serious about maintaining a strong dollar. West Germany moved first on these fears by redeeming its dollar reserves for gold, followed by France, Switzerland, and others. This eventually culminated in President Nixon “closing the gold window” in 1971 by ending any link between the dollar and gold. This “Nixon Shock” spurred chronic inflation throughout the ’70s and a concurrent rally in gold.

Perhaps the entire international community is thinking back to the ’60s, because Germany isn’t the only country maneuvering away from the dollar today. The Netherlands and Azerbaijan are also discussing repatriating their foreign gold holdings. And every month, we hear about central banks increasing gold reserves. The latest are Russia and Kazakhstan, but in the last year, countries from Brazil to Turkey have been adding to their gold holdings in order to diversify away from fiat currency reserves.

And don’t forget China. Once the biggest purchaser of US bonds, it is now a net seller of Treasuries, while simultaneously gobbling up gold. Some sources even claim that China has unofficially surpassed Germany as the second largest holder of gold in the world.

Unlike the ’60s, today there is no official gold window to close. There will be no reported “shock” indicator of a dollar flight. This demand by Germany may be the closest indicator we’re going to get. Placing blame where it’s due, let’s call it the “Bernanke Shock.”

…..Let me warn my readers if you decide to read through the full length of this report you will continue to

read that I am more bullish on the price of gold than ever and that I am expecting a future global inflationary scene. The warning is that you should know that I am well aware that the price of gold currently is down by more than 15%, the biggest drop since 1980, and according to most “street” players does not look so good for the future. The last six months has been the worst stretch for the gold price since the early 1980s but also from which time the price of gold is still up by over 500%, after twelve years of rising prices.

Clearly the number of obvious fundamentals working for a higher gold price is in decline other than several of my personal favourites.  The mania of fear about global money printing and the continuous purchase of gold by central bankers, especially from China, is very much still intact. The herd of every day investors who got on the band wagon in the bear market of 2007 is probably lightening up as the fear of shorter term gold price is worse than the Armageddon than has been in place. The real gold players are still intact as can be seen in that in this same recent fourth quarter of 2012 central bankers bought 145 tons of gold bullion.

The first quarter of 2013 is not published as yet, but expect to see more buying of gold by central bankers. The purchase of 145 tons in Q4 was only eclipsed by central bank buying in the second quarter of 2012, when they bought 161 tons, the largest sized purchase by central bankers in any previous quarter of a year. The recent fourth quarter purchase of 145 tons is the second largest purchase of central bankers, ever. I ask you to consider that in my view the central bankers of the world are the only people who have full access to inside information and whose job description demands that they use it for their quest to keep the economy, as seen by others, to look very stable.

And today the world does not look very stable.

We have trouble in the Eurozone and of course, today, Cyprus; the US GDP in the fourth quarter of 2012 “grew” at an annualized rate of 0.4% which was deemed positive as most thought that there would be a 0.1% negative figure. This “show” of better numbers than expected of course has a negative effect for the US gold odd lotters who use the GLD ETF. In addition, the Federal Reserve in the US managed to somehow, since the end of 2012, move the value of the US dollar up by 4%. Obviously because gold is priced in those reserve currency dollars that automatically causes the price to go down. However, a 4% increase in the dollar is a move that looks very anomalous as compared to previous dollar valuation.

Fortunately, for Mr. Bernanke his job is made easier by the “currency war” that actually is in place, notwithstanding the many denials. As a result, while some central bankers are major buyers of gold, there is at least one in Washington who needs the gold price to remain quiet, or down, to achieve his country’s needs for stability. However, there is a bigger picture and the two largest buyer nations, Russia and China, have recently had a very friendly tête-à-tête meeting of the Presidents. Newly elected President Xi Jinping of China used the term “international strategic partners” to describe the new Russian-Chinese relationship.

Stay tuned on the gold price, the true buyers of gold would rather see a lower price. The central bankers outside of the United States may have a different vision than the US central bankers who are entrapped by the Keynesian view as they try to dismiss gold as having any value from a self serving logic to keep the reserve currency of the world stable. And besides, once Goldman Sachs covers their short position they will probably falsely seduce as much gold buying as they did on the announcement of their short sale on April 10.

……………..While most of the obvious outlook for the year 2013 carries total uncertainty, there are three things of certainty for this writer:

1. Inflation will go higher

2. Yield of any kind will be the attraction and will be at higher and higher rates

3. The commodity super-cycle is not over

Gold Stocks:

John Templeton always told us, “Do not tell me where the news is best – tell me where it is the worst”. Guess what?  Today it is the worst in the mineral industry, especially in gold. I continue to consider that gold and gold stocks are still in a long term secular bull market that began in late 1999 and early 2000, and today gold and gold stocks are recovering from their recent lows created by the  Goldman Sachs “go-short warning” of April 10 th, 2013. At current prices (April 11th, 2013), gold as a commodity looks historically inexpensive when compared to historical prices.

Gold as an ETF is under siege today and maximum pessimism is being delivered in the midst of a very Long-term secular bull market for gold in bullion format. This is a very unique set of timing, not unlike the early days of the 1970s when gold at $100 an ounce was a pure giveaway. Prices have been created by false and manufactured pessimism.  Within a more secular bull market we can expect unbelievable opportunity for significant gains. The overall market for gold is still in a bull market but the current situation is acting like a bear market. As John Templeton said, “Buy at maximum pessimism”.

There can NEVER be a taper

The US Federal Reserve led by Ben Bernanke is talking out of both sides of his mouth. In late February he said that due to signs of improvement in the economy (that only he saw) he might stop buying debt and printing money. Nonetheless, the $85 billion of debt he buys each month continues like clockwork, even today, in May.

The Future of Asset Management

I have been a professional asset manager for over fifty years. Many years which included portfolios of publicly traded stocks and bonds for wealthy families, banking institutions, pension funds of major companies, mutual funds of diverse holdings as well as the creator and provider of “tax flow through” investment dollars to a hybrid of junior and senior Canadian resource companies.

I have come to realize that a lot has changed since 1962. In fact, a lot more has changed since 2002. According to the CFA Institute whom I quote herein: “In 2002 asset managers were still smarting from the fact that ‘Yahoo’ did not take over the world.” “Institutional investors were firing balanced managers and replacing them with “specialized ones” (whatever that is). ETFs were just coming out as a niche product which really did not look any different than an index fund or most similarly specialized mutual funds. Spreading risk through structured derivatized vehicles like collateral debt obligation was incorrectly thought to lower risk not to increase it. And so, said the CFA Institute, it was generally unrelievedly agreed that Alan Greenspan “was the wisest man in the world”. Of course, says the CFA Institute today, things look different now. It is safe to say that very few people projected those ten years from 2002 to 2012 as they turned out.

So how do they think it is now going to be for asset managers in the next ten years?

• revenues are not going to grow as fast

• margins will be compressed

there is a shift out of high margin to lower margin products

• profitability will be down

• competition will be increased

• the ETF market will continue to grow

• enhanced indexation or engineered beta (whatever that is) will take on market share

• along with a host of other negatives as related to asset management participants


The world is awash with contradiction with stocks rising to new highs as interest rates reflect a slowing economy. The stock market rally is not believable and is unloved by those of us who are deemed to be pro. In 2009 when I was being bullish and stating that the US Fed and Monetary policy could return the US to growth as well as inflation there was much skepticism. The reverse is now true. Other than me, equity investors seem to have a very high degree of faith that the central bankers can pull all off those variables which they thought were not possible in 2009. My view – the faith in the US Fed is totally misplaced. After four years of extreme monetary policy the Fed (Bernanke) has failed to create real economic growth.

Today, even China has too much debt. They are likewise addicted to debt to achieve growth, but they at least are smart enough to be ridding themselves of US Treasury Bills. Nothing is normal. Not the economy. Not the financial system. Not the financial markets. And not the political system.

…Clearly, it would appear that Dr. Bernanke has no real exit strategy, other than his personal exit. If the

Fed actually raised rates as a result of one of its movable goal posts being hit, the result could be a much

greater financial crisis than the one we lived through in 2008. The bond bubble would burst, interest rates and unemployment would soar, housing prices would collapse, banks would fail, borrowers would default, budget deficits would swell, and there would be no way to finance another round of bailouts for anyone, including the Federal Government itself.  It’s not really safe out there.

In order to generate phony economic growth and to “pay” the US debts in the most dishonest manner possible, it appears that  the Federal Reserve is  leading the world to the destruction of the dollar.

Anyone with wealth in the U.S. dollar should be concerned that the economic leadership is firmly in the hands of bureaucrats who are committed to an ivory tower version of reality that bears no resemblance to the world as it really is.  And the Chinese and the Russians are aware and do have that very concern.

There is no exit strategy for the monetization of debt. Any increase in interest rates would blow away the monetary policy of the United States and will likely undo the reserve currency privilege of the dollar.

The US household debt today is at all-time highs as compared to household income, and most credit cards and home equity lines are maxed out. To increase consumption, earnings must rise and unemployment has to be reduced.  Further, the lack of domestic savings and an aging population with more and more retirees would actually mean less consumption and growth over the near term and at current debt levels, as well as deleveraging on a global basis.  There is likely insufficient even global savings to fund the American’s Squanderville even though the Federal Reserve in the US continues to issue Squanderbonds and creating pieces of paper, causing many foreigners of Thriftville to grow uneasy about the long-term value of the American Squanderbonds that are continuing to be created.


Let me bring back gold and tell you why I am a totally convinced gold nut. The story of gold has no ending but I was impressed by a fellow Canadian by the name of Robert Mundell who – in December 1999 – won the Nobel Economics prize and said as he accepted the prize, “The main thing we miss today is universal money, a standard of value. The link between the past and the future and the current linking remote parts of the human race to one another”. He went on to remind his audience that gold had filled that role from the time of Augustus until 1914 and that the absence of gold as an intrinsic part of our monetary system today “makes our twentieth century unique in several thousand years”.  It now seems that in 44 BC all roads led to Rome, In 1944 all paths led to the USA and today and 2014 all roads lead to gold.

Goldman Sachs’ Jeffrey Currie created gold’s biggest collapse since 1980 after the recent April 10 Th because he recognized two very essential technical points. Firstly, presumably, without his assistance the price chart of gold had just gone through the technical point called “The Death Cross”. Secondly, he had the power of Goldman Sachs behind his negative thrust,. As such, the price of gold as measured by the ETF traded down as GLD broke down after twelve straight years of a rising price. However, while the public at large was selling their ETF as a follow up to Goldman, the central bankers of the world used the price drop to bulk up their purchases of gold bullion and China for one was a significant buyer of the metal as well.

When it comes to gold, the central bankers have more power than Goldman and we are treating the drop in price as a Goldman Sachs’ profit ploy and expect that it will take some time to overcome the technical damage with the likelihood of more bottom testing to come. We are more impressed by the response of the physical buyers of gold bullion in Asia and the US where there was a rush to buy physical gold at the Goldman-created lower price. There are indications that some Indiangold retailers were actually paying a premium of $8 to $10 per ounce over the derivative ETF price in order to meet immediate customer demand. They have paid premiums before but these numbers are four or five times the previous premiums to satisfy Indian retail demand. And to top it off, the China Gold Association has reported that Chinese retail purchases of bullion tripled across China on the 15 Th and 16 th of April following the Goldman inspired price collapse.

Further, according to CLSA,  it was reported that trading of gold on the Shanghai Gold Exchange, a proxy for gold demand in China surged to a record 43.3 tonnes on April 22 and is averaging 36 tonnes per day of buying as compared to a daily average of less than 10 tonnes per day for the first quarter of 2013 and according to CLSA again, “Hong Kong jewellers have said that they have effectively run out of gold holdings”. And in the US, the mint said that they have suspended sales of its smallest one-tenth ounce gold bullion coins as “surging demand ran down government inventories”.

To quote CLSA once again, “It is interesting to note how the technical breakdown in bullion seems to have been triggered by massive selling of pap er gold, in what increasingly looks like a classic “bear raid”. This is all part of a process where ownership of gold is passing from weak hands to strong hands. That is long term bullish”.

We agree with the CLSA comments and congratulate Goldman Sachs for ach We agree with the CLSA comments and congratulate Goldman Sachs for achieving a profitable “bear raid”; not their first and highly likely, not their last.

My personal gut feeling is that we are heading towards a seismic move for the price of gold – a seismic move upwards – just to make it clear. It will happen because governments and central bankers are more likely to step-up fiscal and monetary actions as the economic growth outlook continues to deteriorate. We are on the threshold of a new gold standard being formed. The world is moving step by step towards a de facto gold standard or a new facto gold standard take over by the International Monetary Fund.

Background on the Gold Market



What’s done is done. Inflation is ongoing.   Deflationist Error

Ganging up on gold http://www.acting-man.com/?p=24310



Our Future

The fundamental problem facing the federal government (and for all the governments of Western Civilization), namely, that it has overextended its promises vastly beyond its ability to deliver on these promises.–Gary North

Ok, I have beaten this subject to death, but I will leave the subjects of debt, deficit and default–for now– with this important post for easy reference.

Hyperinflation Is Not Inevitable (Default Is)

Mises Daily: Monday, August 20, 2012 by Gary North

Hyperinflation is always a possibility for any national government or central bank. If a national government is running massive deficits, it can call on the central bank to buy treasury bills or treasury bonds with newly created money. This digital money is transferred to the treasury, which then spends the money into circulation.

There have been cases of hyperinflation in the past that have become legendary. The most famous of all of these hyperinflations is Germany from 1921 through 1923. Simultaneous with that hyperinflation was a hyperinflation in Austria. These were not the worst cases of hyperinflation in history, but they were the worst cases in industrial societies. The worst case was Hungary for two years immediately after World War II. The second-worst case took place a few years ago in Zimbabwe. Both were agricultural nations.

No other nations in western Europe have ever experienced anything like the hyperinflations of Germany and Austria in the early 1920s. Their currency systems were completely destroyed. Farmers were able to pay off debts that had been accumulated prior to World War I by selling one egg and handing the money over to the creditor. This of course destroyed the creditors. It is generally believed that the middle class in both Germany and Austria suffered enormous losses. They had been creditors.

There have been hyperinflations in Latin America after World War II. One of the worst was in Brazil in the 1980s and 1990s. The statistics of catastrophic inflation are available here. This went on for two decades. I know of no other case of hyperinflation that lasted more than three years. This is why I regard Brazil’s inflation as the worst hyperinflation in modern history. The political authorities did nothing to stop it, and the central bank inflated. The devastation to the middle class was almost total. If people did not get their money into gold and silver and foreign currencies, they were wiped out. The country went to barter.

If this form of hyperinflation ever comes to the United States or any other Western industrial nation, it will lead to the complete destruction of long-term creditors. Anyone who bought long-term bonds of any kind, anyone who invested in mortgages of any kind, anyone who is the recipient of a government pension, or anybody who is dependent on Social Security and Medicare could not survive this kind of hyperinflation. It would always be paid off in money that is worth far less than when the debt was contracted. When we think of the delay in payments that already exists with respect to Medicare reimbursements to physicians, we get some idea of what it would do to the healthcare industry. The delay of 90 days would basically eliminate the debt.

Destroying Creditors

When we think of the traditional arguments in favor of hyperinflation from the government’s point of view, we think about the ability of the government to pay off creditors. As I will show, this argument no longer is valid.

It is valid for private corporations. Some large business that has issued a 30-year bond is in a position to pay off those bonds with money that is essentially worthless. The person who extended credit to the company did so when the currency had far higher purchasing power. Then comes hyperinflation. Most bonds allow the debtor to pay off early. This will destroy the creditors.

Wherever creditors exist, debtors are happy to repay their loans with money that has depreciated ever since the time that the loan was established. This is especially true if the loan had a fixed interest rate. If the rate of interest cannot be hiked by the lender, he is trapped in his debt. Long-term interest rates begin to skyrocket because of the effect of hyperinflation on consumer prices. New creditors demand a higher rate of interest in order to compensate them for the expected decline of purchasing power. But when hyperinflation speeds up the process of depreciation even faster, creditors who demanded higher interest rates find that the interest rate was not sufficient to compensate them for the decline of purchasing power. So, the next time around, creditors demand even higher rates of interest.

Every time the rate of long-term interest rises, the market value of the existing bonds declines. So, the creditor class, which had faithfully extended credit to businesses, finds that it gave up money that was of considerable value, and now gets back money that is essentially worthless. This destroys the creditor class, which then proves unable to supply new rounds of credit to borrowers.

In the case of central banks that adopt policies that produce hyperinflation, there is no doubt that creditors are ruined if the lenders have the right to pay off the loan with the newly issued currency. If there are no gold contracts or silver contracts governing the payment of the loans, the creditor is helpless in the face of lenders who use the depreciated money to get out of their obligations.

Short Bursts of Hyperinflation

The important fact in all of this, with the exception of Brazil, is this: this possibility of escaping the burden of debt is available only on a relatively short-term basis, and it is available only where the borrower has the right to repay the loan at any time in the national currency. Whenever these two provisions do not exist, hyperinflation only marginally benefits borrowers at the expense of creditors.

Consider the biggest debtor of all: the US government. It has borrowed money out of the Medicare trust fund and the Social Security trust fund from the beginning. The government has issued nonmarketable IOUs to both of the trust funds. These IOUs are good for decades. They are not short-term IOUs.

The government is in a position to repay only short-term bonds bought by the public. It is not allowed to repay holders of long-term bonds before the date that the bond terminates and the monies are to be repaid.

This places the US government at a significant disadvantage with respect to creditors. While it is possible for issuers of corporate bonds to repay the creditors at any time, this is not possible for the US government. Furthermore, the largest of its debts are related to two programs: Social Security and especially Medicare. These debts cannot be repaid with fiat money, because to do so would involve paying off long-term debts early. This is not possible for the federal government, unless the federal government changes the law. If it does this, it would be an admission of total defeat. It will be open default.

When the Social Security trust fund administrators or the Medicare trust fund administrators estimate the obligations of each program, they use the figure of 75 years. They talk about what is owed over the entire 75 years. This means that any period of hyperinflation that is less than 75 years will be insufficient to abolish the political debts of the US government. It cannot escape the obligation by paying retired citizens whatever they are owed over the entire time period. Hyperinflation will enable private corporations to escape their obligations to creditors, but it will not enable the federal government to escape. The government will be able to escape the burden in the years of the worst time of hyperinflation, but when the hyperinflation ends, and the central bank issues a new currency, this does not solve the problem facing the government.

The hyperinflation ends when the money is worthless. At that point, the government cannot buy goods and services. Neither can its dependents.

The government today faces a political problem. It is not simply that it has issued nonmarketable IOUs to the Social Security trust fund and the Medicare trust fund. It has made specific promises to the entire working population. These promises have the force of law. They also cannot be escaped by means of short-term monetary expansion. It is possible for the government for a brief period of time to get its hands on money that is depreciating, but there are cost-of-living escalators built into Social Security payments.

Furthermore, if the government uses the fiat money to pay healthcare providers, and the money does not cover the cost of providing healthcare, healthcare providers will go out of business. It does no good to go to hyperinflation in order to reduce the costs to the government of healthcare. If the government attempts this, it will find that healthcare providers go into another line of work.

All those forecasters who say that hyperinflation is inevitable in the United States never discuss this problem of the 75-year obligations. They never spell out in detail how hyperinflation will enable the US government to escape its obligations. These obligations stretch out over 75 years. No hyperinflation has ever lasted longer than 20 years, and most of them have not lasted longer than about 3 years. So, the policy of hyperinflation wipes out the middle class, and it wipes out most of the creditors who transferred money to corporations in exchange for long-term bonds. The corporations will simply pay off the bonds early with depreciated money, and will then be the possessors of whatever productive assets they bought with the borrowed money. So, when the government comes to potential creditors and asks for another round of debt, it will find the creditors are too wise to provide this credit.

The on-budget debt of the United States that is owed to the general public has an average maturity of approximately eight years. The Federal Reserve System is using “operation twist” to buy larger quantities of 30-year Treasury bonds. This lowers the rate on these bonds and also mortgages issued by Fannie Mae and Freddie Mac. The private purchasers of these assets will find that, for any period of hyperinflation, the market value of these assets declines. The money, which is not much, that the government will pay to them as interest will not buy much of anything. The government cannot get rid of these debts by hyperinflation. It can pay interest on these debts cheaply only during the time of hyperinflation.

Kotlikoff’s Figures

This brings us back to the deficit in the most important category: off-budget debt. The general public is almost completely unaware of this debt. This debt comprises mainly the obligations of the government for Medicare, Social Security, and federal pensions. These debts extend out for 75 years, according to the calculations of the government. These are extremely long-term debts.

Professor Lawrence Kotlikoff of Boston University has been monitoring the growth of these debts for several years. He relies on the statistics published by the Congressional Budget Office. This is legally a nonpartisan organization that is set up to provide information on various aspects of the government’s budget.

Early in August 2012, Kotlikoff and financial writer Scott Burns published an article on the increase of the unfunded liabilities of the US government. According to the figures issued by the Congressional Budget Office, Kotlikoff concluded that there had been an increase in unfunded liabilities over the past 12 months of $11 trillion.

The total obligation of the federal government to voters that is not funded at the present time is now $222 trillion. This does not mean that, over the entire life of the program, the government will be short $220 trillion. It means that the present value of the unfunded liability is $220 trillion. This means that the government would have to set aside $220 trillion immediately, invest this money in nongovernment projects that will pay a positive rate of return, and will therefore fund the amortization of this debt. I have written about the estimate here.

The federal government at the present time is running annual on-budget deficits of about $1.2 trillion. It spends something in the range of $3.7 trillion. But it needs to have $222 trillion immediately to invest in private markets. It of course does not have this money. There is also the question of which markets could absorb a total of $222 trillion overnight and be able to gain a constant rate of return of, say, 5 percent per annum? It simply is not possible.

Kotlikoff’s figures indicate that the federal government at some point will have to default on large portions of the long-term debt. The numbers do not lie. Kotlikoff’s numbers are larger than most estimates, but other economists have estimated the total unfunded liability in the range of $90 trillion. This number is as unmanageable as $222 trillion.

The Congress of the United States could not come to an agreement in 2011 on how to solve an official deficit of $1.2 trillion per year. Congress kicked the can down the road until January 1, 2013. At that point, the government will have to slash spending, according to the agreement made in 2011. The Bush tax cuts of 2002 will expire unless Congress extends them.

It is obvious that Congress cannot come to an agreement to solve the problem of $1.2 trillion annual deficits. What Kotlikoff and Burns reveal is something far more extraordinary. They indicate that the actual increase of the federal deficit over the last 12 months is in the range of 10 times greater than the increase in the official government deficit. This means that the compounding process that is taking place in the area of unfunded liabilities dwarfs the compounding process that we see in the on-budget statistics.

If Kotlikoff’s figures are incorrect, then some government economist or other expert should publish a detailed study of the correct methodology to examine the figures issued by the Congressional Budget Office. If he has made a mistake, the public deserves to know what this mistake was, and what the correct answer is. I am aware of no such study as yet, but perhaps it will be issued soon. The question will then be this: to what extent did Kotlikoff exaggerate the figures? If it turns out that he is wrong by, say, $50 trillion, the critic will have a point, but the point will be essentially irrelevant to the future crisis of the US government.

Even if Kotlikoff is wrong by $100 trillion, it becomes clear that Congress is completely incapable of dealing politically with this problem. It could not possibly raise the funds to balance the budget if the budget really is increasing by, say, $5 trillion per year. The difference between $5 trillion and $11 trillion is huge, but irrelevant in relationship to the ability of the government to deal with it. The government does not have the money, nor does the free market provide sufficient investment opportunities to enable the US government and all of the other Western governments, including Japan, to solve the problem.

This is not simply an American problem. This is the problem of Western civilization. This is a problem created by every group of politicians in the world who have overpromised what each national government is going to be able to deliver in the future.

If Kotlikoff’s figures are wrong, there should be a hue and cry in Congress over the magnitude of his misrepresentation. There is no hue and cry. We hear the silence of the Congressional Budget Office and also the silence of Congress in general. This persuades me that Kotlikoff’s figures are sufficiently accurate, so that we can make judgments about what is likely to happen to the solvency of the US government and its ability to send out checks every month to its recipients.

Kotlikoff and Burns do not estimate the year in which the crisis will become obvious. I don’t blame them. We cannot be certain about this date, because we cannot be certain about Federal Reserve policy. We can be certain about this: there is no way to repay the obligations that the federal government has negotiated with the voters. It has pretended that it can continue to make its payments on time, but it has not shown how this is going to be possible over the long haul. Meanwhile, millions of baby boomers have started to retire.

The Federal Reserve System

The Federal Reserve cannot solve the problem of the 75-year debt which has unfunded liabilities in the present of $222 trillion. There is no way that the government of United States can solve this problem without simply going into default. So, it does not pay the Federal Reserve to adopt a policy of hyperinflation, which is necessary to destroy the debts of the various levels of civil government in the United States.

The Federal Reserve may go to mass inflation. By mass inflation, I have in mind rates of consumer price increases of 25 percent or thereabouts. We have never seen this in peacetime America, but it is possible. It will enable Congress to sell some of its rollover debt as this debt matures. The average maturity of the federal debt now is about eight years.

This does not solve the major problem, which is the unfunded liability of the federal government for long-term old-age retirement programs. The central bank could hyperinflate for a few years and enable Congress to kick the can down the road for another three or four years. But this does not solve the fundamental problem facing the federal government, namely, that it has overextended its promises vastly beyond its ability to deliver on these promises.

Economists at the Federal Reserve understand this as well as I do. I ask this: What possible incentive is there for the Federal Reserve System to hyperinflate the money to zero value, when the political obligations of the old-age retirement system will survive the time of hyperinflation? What is the advantage of the Federal Reserve to hyperinflate the money supply?

Maybe it would do this in order to intervene to save specific large New York banks, but their obligations are minimal compared to the total obligations of the US government.

I am convinced that, unless Congress nationalizes the Federal Reserve, the Federal Reserve will not adopt a policy of hyperinflation. That would be to the detriment of the banking system in general.


This is why I am not persuaded by those people who say that hyperinflation in the United States is inevitable. I don’t think it is. I think default is inevitable, but I don’t think it needs to be default by hyperinflation. That is because the government cannot get out of its obligations by fiat money. It cannot default by using hyperinflation, because hyperinflation will only last a few years, but the obligations last for the next 75 years.

In other words, the default will be much more open. The government is going to have to renege on promises made to the vast majority of people who are now dependent on the federal government for their retirement income, and it will also default on the workers who are still in the workforce, who are paying each payday into Social Security and Medicare.

Anyone who makes the case for inevitable hyperinflation needs to present evidence on how hyperinflation will enable the US government to escape the political obligations of the promises that it has made to retirees.

If Congress nationalizes the Fed, then we could get hyperinflation, just to meet present bills. But this will not solve the long-term problem: government unfunded liabilities. After the currency dies, the debt will still be there.

Blink! U.S. Debt Just Grew by $11 Trillion

By Laurence Kotlikoff and Scott BurnsAug 8, 2012

Republicans and Democrats spent last summer battling how best to save $2.1 trillion over the next decade. They are spending this summer battling how best to not save $2.1 trillion over the next decade.

In the course of that year, the U.S. government’s fiscal gap — the true measure of the nation’s indebtedness — rose by $11 trillion.

The fiscal gap is the present value difference between projected future spending and revenue. It captures all government liabilities, whether they are official obligations to service Treasury bonds or unofficial commitments, such as paying for food stamps or buying drones.

Some question whether “official” and “unofficial” spending commitments can be added together. But calling particular obligations “official” doesn’t make them economically more important. Indeed, the government would sooner renege on Chinese holding U.S. Treasuries than on Americans collecting Social Security, especially because the U.S. can print money and service its bonds with watered-down dollars.

For its part, economic theory sees through labels and views a country’s official debt for what it is — a linguistic construct devoid of real economic content. In contrast, the fiscal gap is theoretically well-defined and invariant to the choice of labels. Each labeling choice changes the mix of obligations between official and unofficial, but leaves the total unchanged.

Dangerous Growth

The U.S. fiscal gap, calculated (by us) using the Congressional Budget Office’s realistic long-term budget forecast — the Alternative Fiscal Scenario — is now $222 trillion. Last year, it was $211 trillion. The $11 trillion difference — this year’s true federal deficit — is 10 times larger than the official deficit and roughly as large as the entire stock of official debt in public hands.

This fantastic and dangerous growth in the fiscal gap is not new. In 2003 and 2004, the economists Alan Auerbach and William Gale extended the CBO’s short-term forecast and measured fiscal gaps of $60 trillion and $86 trillion, respectively. In 2007, the first year the CBO produced the Alternative Fiscal Scenario, the gap, by our reckoning, stood at $175 trillion. By 2009, when the CBO began reporting the AFS annually, the gap was $184 trillion. In 2010, it was $202 trillion, followed by $211 trillion in 2011 and $222 trillion in 2012.

Part of the fiscal gap’s growth reflects changes in policy, such as the Bush and Obama tax cuts, the introduction of Medicare Part D, and the expansion of defense spending. Part reflects “natural” growth of existing programs, including growth in Medicare and Medicaid reimbursement rates. And part reflects the demographic time bomb U.S. politicians are blithely ignoring.

When fully retired, 78 million baby boomers will collect, on average, more than 85 percent of per-capita gross domestic product ($40,000 in today’s dollars) in Social Security, Medicare and Medicaid benefits. Each passing year brings these outlays one year closer, which raises their present value.

Governments, like households, can’t indefinitely spend beyond their means. They have to satisfy what economists call their “intertemporal budget constraint.” The fiscal gap simply measures the extent to which this constraint is violated and tells us what is needed to balance the government’s intertemporal budget.

The answer for the U.S. isn’t pretty. Closing the gap using taxes requires an immediate and permanent 64 percent increase in all federal taxes. Alternatively, the U.S. needs to cut, immediately and permanently, all federal purchases and transfer payments, including Social Security and Medicare benefits, by 40 percent. Or it can mix these terrible fiscal medicines with honey, namely radical fiscal reforms that make the economy much fairer and far stronger. What the government can’t do is pay its bills by spending more and taxing less. America’s children, whose futures are being rapidly destroyed, are smart enough to tell us this.

(Laurence Kotlikoff, an economist at Boston University, andScott Burns, a syndicated columnist, are co-authors of “The Clash of Generations.” The opinions expressed are their own.)

To contact the writers of this article: Laurence Kotlikoff at kotlikoff@gmail.com.

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net.

Videos of Ray Dalio (Global Economics) and Amit Wadhwaney (International Investing) Update on VALUE VAULT

Thanks to www.greenbackd.com/

International Value Investing (TAVF)

Read his transcript: Amit Wadhwaney TAVF Interview on International Value Investing

Ray Dalio of Bridgewater Associates on Global Economics

Ray Dalio on International Economics http://www.cfr.org/business-and-foreign-policy/conversation-ray-dalio-video/p28984

Thanks to a reader–Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, L.P., discusses global economics.

This meeting is part of the Corporate Program’s CEO Speaker Series, which provides a forum for leading global CEOs to share their priorities and insights before a high-level audience of CFR members. The series aims to educate the CFR membership on the private sector’s important role in the policy debate by engaging the global business community’s top leadership.


Don’t panic if you are wondering what happened to the Value Vault. I moved the files. I will place the video files into separate folders and books into other folders. This should make for easier access and better organization. Though I go under the knife within two weeks, this will get done.  Thanks for your patience. An email will go out to all Value Vault key holders with updates.

Free Course, Avoiding Scams and Book Donation: The Asian Financial Crisis (History)

Thanks to a generous, gracious reader who donated this book:


For a short synopsis on the 1997 Crisis: http://wiki.mises.org/wiki/1997_Asian_Financial_Crisis

An addition for those who wish to learn from past financial crisis. However, I am a bit skeptical that you–as a student of Rothbard, Mises, Hayek and De Soto–will learn much except how an insider (a central banker) viewed the crisis.  My job is not to censor but to share information that you can accept or reject.

Free Course on the U.S. Constitution


Excellent based on my taking the prior course on the Constitution. You can download the readings then view about 10 lectures each week.

Of Interest

Capital Account: news video/channel on Wall Street news. Learn about high frequency trading (“Mr. Market” on speed!), Wall Street personalities, etc. http://www.youtube.com/user/CapitalAccount

For example: Tips on avoiding financial fraud from a financial fraudster, Eddie Anton. http://www.youtube.com/watch?v=Egfiqr8TcK8&list=UU8eFERtcxPZ-M3Cxkh7zhtQ&index=13&feature=plcp


Someone begins their investing journey: http://learningvalueinvesting.wordpress.com/2012/08/29/clone/

Why did Lehman and Long-Term Capital Management blow up? (See article on Casino Banking) http://www.thefreemanonline.org/archive/issues/?issue=6&volume=62&Type=Issue

Kill the Rich, Confiscate All S&P 500 Profits, and Pay the Debt?




The National Debt and Federal Budget Deficit Deconstructed – Tony Robbins

Tony Robbins deconstructs our debt and deficit problem. How long could we fund our government if we took 100% of all income and assets of the rich and the S&P 500 companies? Two Years? Ten Years?  The answer would shock you–five months. But then what would we do the following year after all the wealth has been confiscated and sold? A fascinating 19 minute video with Tony Robbins: http://www.youtube.com/watch?v=jboTeS9Okak

Obama, Regulations, and Small Business


Or in the case of 13-year old entrepreneur Nathan Duszynski in Holland, Michigan, who tried to start a business, and somebody else (government bureaucrats) made that not happen. Here’s what happened, or more accurately, what didn’t happen, according to the Holland Sentinel:

“Nathan Duszynski (pictured above), 13, decided he wanted a hotdog cart, so he could earn some money. But as he was setting up shop Tuesday in the parking lot of Reliable Sports at River Avenue and 11th Street — across the street from Holland City Hall — a city of Holland zoning official shut him down. Now, after spending more than $2,500 to start-up his business, Duszynski is throwing in the towel, his mom said.”

Think of All the Businesses That Did NOT Happen, Thanks to Government Bureaucrats and Regulations

President Obama:

“There are a lot of wealthy, successful Americans who agree with me — because they want to give something back. They know they didn’t — look, if you’ve been successful, you didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there. (Applause.)

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen.”


Austrian Economist Savagely Devastates Paul Krugman in a Debate

Thanks PB for the heads up.

If you had any waivers about Keynesian (establishment/conventional) economics vs. the Austrian perspective then view the video in the link below.

Professor Pedro Schwartz uses facts, theory and irrefutable cause and effect evidence to destroy Krugman’s advice to get out of crisis.  The introductions are in Spanish but the debate is in English.  I do believe Krugman is ignorant about time in the structure of production, thus he esposes an endless injection of stimulus to increase aggregate demand.

I remember driving through a subdivision in 2010 twnety-five miless outside of Las Vegas wondering who would build four hundred homes for nobody? Tumbleweeds and rattlesnakes…..Had a neutron bomb struck the development? Try stimulating that.


Krugman Destroyed In Debate By Jeff Harding, on July 9th, 2012

This comes from Luis Martin of TrugmanFactor, a blog located in Spain that translates and publishes Daily Capitalist articles. You can skip the intro in Spanish and get to Krugman’s lecture (0:09:19). But the real stuff starts at 0:35:25 where Professor Pedro Schwartz responds to Krugman’s comments in excellent English. Professor Schwartz is a distinguished and well known Austrian theory economist. And in Luis’s words, “completely destroys Krugman.” In fact Schwartz tweeted later that Krugman refused to shake his hand afterward. Enjoy.

Another Krugman Debate

Robert Murphy, an Austrian Economist, explains the Austrian Business Cycle to Krugman using a Sushi Capital Theory analogy: http://mises.org/daily/4993


PS: a reader apologized for disagreeing with me. Don’t. I like disagreements or hearing another point of view or discovering that I am just plain wrong. As a fallible human, I hope to always be aware of my fallibility. We are all trying to learn.

Valuation from a Strategic Perspective, Part 1: Shortcomings of the NPV Approach to Valuation


For beginners and a review of Present Value—see these 10 minute videos: http://www.khanacademy.org/finance-economics/core-finance/v/introduction-to-present-value and  http://www.khanacademy.org/finance-economics/core-finance/v/present-value-2 and http://www.khanacademy.org/finance-economics/core-finance/v/present-value-3

and Discounted Present Value: http://www.khanacademy.org/finance-economics/core-finance/v/present-value-4–and-discounted-cash-flow

Prof. Damodaran’s Handout on NPV:DCF Basics by Damodaran

Prof. Greenwald Lecture Notes (See pages 10-13 on NPV Valuation):OVERVIEW Value_Investing_Slides

And The Dangers of Using DCF (Montier and Mauboussin)

CommonDCFErrors (Montier) and dangers-of-dcf (Mauboussin)

Part I: What are the three major shortcomings of using the Net Present Value Approach (“NPV”) to valuing companies?

The NPV approach has three fundamental shortcomings. First, it does not segregate reliable information from unreliable information when assessing the value of a project. A typical NPV model estimates net cash flows for several years into the future from the date at which the project is undertaken, incorporating the initial investment expenditures as negative cash flows. Five to ten years of cash flows are usually estimated explicitly. Cash flows beyond the last date are usually lumped together into something called a “terminal value.” A common method for calculating the terminal value is to derive the accounting earnings from the cash flows in the last explicitly estimated year and then to multiply those earning by a factor that represents an appropriate ratio of value to earnings (i.e., a P/E ratio). If the accounting earnings are estimated to be $12 million and the appropriate factor is a P/E ratio of 15 to 1, then the terminal value is $180 million.

How does one arrive at the appropriate factor, the proper price to earnings ratio? That depends on the characteristics of the business, whether a project or a company, a terminal date. It is usually selected by finding publicly traded companies whose current operating characteristics resemble those forecast for the enterprise in its terminal year, and then looking at how the securities markets value their earnings, meaning the P/E at which they trade. The important characteristics for selecting a similar company are growth rates, profitability, capital intensity, and riskiness.

This wide range of plausible value has unfortunate implications for the use of NPV calculations in making investment decisions. Experience indicates that, except for the simplest projects focused on cost reduction, it is the terminal values that typically account for by far the greatest portion of any project’s net present value. With these terminal value calculations so imprecise, the reliability of the overall NPV calculation is seriously compromised, as are the investment decisions based on these estimates.

The problem is not the method of calculating terminal values. No better methods exist. The problem is intrinsic to the NPV approach. A NPV calculation takes reliable information, usually near-term cash flow estimates, and combines that with unreliable information, which is the estimated cash flows from a distant future that make up the terminal value. Then after applying discount rates, it simply adds all these cash flows together. It is an axiom of engineering that combining good information with bad information does not produce information of average quality. The result is bad information, because the errors from the bad information dominate the whole calculation. A fundamental problem with the NPV approach is that it does not effectively segregate good from bad information about value of the project.

A second practical shortcoming of the NPV approach to valuation is one to which we have already alluded. A valuation procedure is a method from moving from assumptions about the future to a calculated value of a project which unfolds over the course of that future. Ideally, it should be based on assumptions about the future that can reliable and sensibly be made today. Otherwise, the value calculation will be of little use.

For example, a sensible opinion can be formed about whether the automobile industry will still be economically viable twenty years from today. We can also form reasonable views of whether Fort or any company in the industry is likely. Twenty years in the future, to enjoy significant competitive advantages over the other automobile manufacturers (not likely). For a company such as Microsoft, which does enjoy significant competitive advantages today, we can think reasonable about the chances that these advantages will survive the next twenty years, whether they will increase, decrease, or continue as is.

But it is hard to forecast exactly how fast Ford’s sales will grow over the next two decades, what its profit margins will be, or how much will be requires to invest per dollars of revenue. Likewise, for a company like MSFT, projecting sales growth and profit margins is difficult for its current products and even more difficult for the new products that it will introduce over that time. Yet these are the assumptions that have to be made to arrive at a value based on NPV analysis. (See page 10 of Greenwald notes-link on blog post).

It is possible to make strategic assumptions about competitive advantages with more confidence, but these are not readily incorporated into an NPV calculation. Taken together, the NPV approach ‘s reliance on assumptions that are difficult to make and its omission of assumptions that can be made with more certainty are a second major shortcoming.

A third difficulty with the NPV approach is that it discards much information that is relevant to the calculation of the economic value of a company. There are two parts to value creation. The first is three sources that are devoted to the value creation process, the assets that the company employs. The second part is the distributable cash flows that are created by these invested resources. The NPV approach focused exclusively on the cash flows. In a competitive environment, the two will be closely related. The assets will earn ordinary –the cost of capital—returns. Therefore, knowing the resource levels will tell a good deal about likely future cash flows.

But if the resources are not effectively, then the value of the cash flows they generate will fall short of the dollars invested. There will always be other firms that can do better with similar resources, and competition from these firms will inevitably produce losses for the inefficient user. Even firms efficient in their use of resource may not create excess value in their cash flows,  so long as competition from equally environment, resource requirements carry important implications about likely future cash flows, and the NPV approach takes no advantage of this information.

All these criticisms of NPV would be immaterial if there were no alternative approach to valuation that met these objections. But in fact there is such an alternative. It does segregate reliable from unreliable information; it does incorporate strategic judgments about the current and future state competition in the industry; it does pay attention to a company’s resources. Because this approach had been developed and applied by investors in marketable securities, starting with Ben Graham and continuing through Warren Buffett and a host of others, we will describe this alternative methodology in the context of valuing a company as a whole in Part II.


Free Lectures on Austrian Economics; Do Value Investors Add Value? Investing Wisdom for the Young

Austrian Economics

Mises Academy at www.mises.org (click on academy tab) is offering a free lecture on microeconomics. Register and attend the free lecture by Peter Klein. You will get a flavor for the courses. I have taken several and have enjoyed the interaction. Go here: http://academy.mises.org/courses/microeconomics/

The book for the course is an excellent primer on Austrian (real world) economic thinking. I suggest you read this book, Foundations of the Market Price System by Milton Shapiro before you tackle Man, Economy and State by Rothbard or Human Action by Mises.


Lecture on the Austrian Theory of the Business Cycle by Dr. Roger Garrison : ttp://youtu.be/jFqtTj7TeO0

Visual Study of the Austrian Trade Cycle (“ABCT”). Read this before seeing the above lecture to gain more insights into booms and busts.Visual Explanation of the Austrian Trade Cycle By Garrison I would never invest in commodity cyclical businesses unless I understood ABCT.

The Case For Quantitative Value Investment

My favorite investing blog has a white paper on active vs. passive investing.


Investing Wisdom for the Ages



The Secret to Losing Weight

American Prisoner Alan Gross after fours years in Castro’s Gulag

Casualties of War

Affirming the Case for Quality (GMO White Paper); Share Repurchases

Quality Companies are often under appreciated by investors

I hope my wretched scribbling will help your investing journey. We want to learn from the lessons all around us. Study failure so as not to pay a high tuition for knowledge and study success so as to develop your own investment method.  Yes, it is fun to point out the disasters like Sunpeak Ventures (SNPK)—nothing but a “pump and dump”—yet focusing on great companies is more valuable, yet less popular than you might think. Your time is best spent understanding and investing in great companies—either hidden champions that are emerging or dominate hidden niches or great franchises with dominant moats.  This is why I try to write often about competitive advantage, franchises, and quality businesses.

Here is a GMO White Paper (June 2012) that affirms the case for quality. Companies with high and stable profits (KO, PEP, EXPD, M, and GOOG) tend to have lower bankruptcy risk, lower leverage and generally higher returns compared to risk of loss. Please read carefully: GMO_WP_-_2012_06_-_Profits_for_the_Long_Run_-_Affirming_Quality

Ben Graham argued that real risk was “the danger of a loss of quality and earning power through economic changes or deterioration in management.”

The returns earned by stock investors are entirely a function of the underlying corporate profits of the stocks held in a portfolio.  Note the focus that Buffett has placed on knowing where a business will be in five to ten years—a chewing gum company versus a high tech start-up). As he says, “We favor businesses and industries unlikely to experience major change…operations that….are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.”

Oligopolies tend not to revert—note the persistence of corporate profitability of companies that operate within corporate barriers.

Look at the stability of companies like Tootsie Roll and WD-40. Tootsie Roll (Tootsie Roll_VL) has slowly declining returns on capital but it is shrinking its capital structure. Note the low price variability. Everyone knows about WD-40 (WDFC) (lubricant oil) and Tootsie Roll (candy)—the products will not disappear in the customers’ minds nor become obsolete.

Note on page 4 of the GMO White Paper: While it has become conventional wisdom that the market misprices price-based risk factors like low beta outperforms high beta, we find that it also misprices fundamental risk. . Companies that report negative net income underperform the market by a whopping 8% per annum. The market overpays for risk at the corporate level in much the same way that it overvalues the risk of high beta stocks. Conversely investors had historically underpaid for the low risk attributes of high quality companies.  To us (GMO), investing in Quality companies simply exploits the long-term opportunity offered by the predictability of profits in conjunction with the market’s lack of interest in the anomaly. Their predictability higher profits are not quite high enough to command the attention of a market in thrall to the possibility of the next big jackpot. 

Lesson: focus on quality companies to find better returns for lower risk.

Radio Show on Quality Stocks

For beginners and (those who are willing to sit through or skip the commercials), there are discussions about high clean-surplus ROE companies here: http://www.buffettandbeyond.com/radio.html

More on corporate buybacks

Assessing Buybacks from all Angles_Mauboussin


Tomorow I will post the prize to all those who lent their wisdom to: http://wp.me/p1PgpH-Qw