Friday, September 19, 2008

Relativity and Painted Reality

Today at the closing bell I saw that Kitco and CNBC both agreed on the price of gold... almost. CNBC had it at $876 and Kitco had it at $871.60. But the bigger difference was that CNBC had the red arrow next to gold saying it was down $20 while Kitco shows that it is UP $19.60. So which is it? Is gold up or down?

I suppose the answer is that "it depends". It depends on what you compare it to. Everything is relative.

Perhaps the red arrow on CNBC was a simple mistake. But it was up on the screen the whole time I was watching.

How about the Dow Jones Industrial Average? Well, next week they are going to remove the ailing insurance company AIG which has been dragging down the DJIA and in it's place they are putting the more buoyant KFT (Kraft Foods Inc.).

How about inflation? The CPI is the CONSUMER Price Index. That is the barometer for what you and I pay. And when the price of gas or milk was running the CPI up, they simply stopped counting those prices. Instead they count flat screen TV's which are going down in price. If the price of steaks are going up, they make the "assumption" that people will just eat cheaper ground beef and they show the price of "meat" is falling.

How about the money supply? The M3 was the broadest calculation of money. M0 is all the physical currency in circulation. M1 is M0 plus the money in demand deposits like checking accounts. M2 is M1 plus time deposits like CD's. And M3 is M2 plus everything else that is "liquid" including large liquid assets, institutional money market funds, short term repurchase agreements and so on.

M3 was the broadest measure of money in the system commonly used by economists and published by the Federal Reserve. And when liquidity is pumped, it generally lands in the system somewhere in the form of an M3 category and takes a while to filter down to M2 and M1.

But in March, 2006, the Fed stopped publishing M3 data. Wikipedia says, "They explained that M3 did not convey any additional information about economic activity compared to M2, and thus, had not been used in determining monetary policy for years. Therefore, the costs to collect M3 data outweighed the benefits the data provided."

How about our nation's gold? No one is allowed to go in and count it. When Congressmen visited Fort Knox they were only allowed to look at the pile that had been placed in front of them (behind the security bars). When one of them asked to look behind the pile to see how much more was back there they were told they could not.

When our national gold is lent out for various purposes it is replaced with an IOU. That IOU says that the gold will be returned some day. On the books, that IOU is counted the same as a bar of gold. There are not two separate columns. So we have no way of knowing how much of our nation's gold is real and how much is "paper". And the problem with paper gold is that when there is a shortage of real gold, those paper IOU's get settled in Federal Reserve Notes, or dollars.

So what is reality? Where is truth?

It is out there. It is right behind the facade. And the facade is wearing thinner by the day. You see, in reality there are real consequences for actions. There are inevitabilities. You can fool all of the sheeple some of the time and some of the sheeple all of the time, but you cannot fool all of the sheeple all of the time.

Our markets may be manipulated, but they are manipulated within the structure of a free market, where the world is allowed to participate. So while they can fool the world for a while into thinking that it is safe to jump back into financial securities, they can't do that forever. Sooner or later the consequences of the past will blast into the present and reality will be overwhelming. That almost happened this week.

This week we went into full meltdown. But Wall Street was so hungry for some good news that even the mention of Uncle Sam coming to the rescue made the Dow soar.

Today, the chairman of the Senate banking committee, Democrat Chris Dodd, said the United States could be "days away from a complete meltdown of our financial system" and Congress is working quickly to prevent that.

Today Jim Sinclair listed out the implications of the current action under consideration by our elected officials:

Dear Friends,

1. Today's reported potential infinite bailout of all and any portends, if adopted, is the largest increase in dollars outstanding since the Jurassic Age.
2. It closely models actions undertaken regarding the production of currency liquidity seen in the "Weimar Republic."
3. It is reported now that more than 1000 hedge funds are on the rocks. This has the potential for a significant financial impact.
4. The only way to hide the numbers from the statistics produced by the suspected actions of the Fed is to value the indebtedness purchased at 100%, claiming a wash transaction.
5. The only conclusion is that when the smoke clears and the advertised actions have been adopted, nothing more dollar negative than this has ever occurred due to the potential expansion of T bills and therefore dollar supply explosion.
6. Gold is the only currency with no liability attached to it which, as you have seen recently, will be selected as the currency of the people.

Respectfully yours,
Jim Sinclair

I think I agree.


Dave said...

I don't know why people play along anymore. Nothing is as it seems; everything is phony and manipulated. All this manipulation adds a huge element of uncertainty to any investment strategy.

Now the government wants to set up an $800 billion garbage can fund to suck up all the worthless securities. Uh, one question: Where's the money going to come from to fund this? On top of that they want to stuff another $400 billion into the FDIC. Same question as above.

Would not this $1.2 trillion debase the dollar somewhat? Nevertheless, if implemented, the markets will probably go wild.


FOFOA said...

Bill Gross who made $1.7 billion on the Fannie and Freddie bailout said the other day that we shouldn't even give a thought to inflation while making these bailouts.

The talk lately has been about the "infinite balance sheet" of the Fed and the Treasury.

This is all connected. It shows the depth to which they believe we can print our way out of this.

If you click on the Weimar link in my post it will take you to Wikipedia. There is an interesting quote there from John Maynard Keynes.

"The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance."

FOFOA said...

Also, there is an interesting dynamic in hyperinflations. If you are a borrower and you have a fixed rate loan like on your house, that loan gets hyperinflated away. Your monthly payment may become the same as the cost of one sheet of toilet paper. So the lenders get screwed.

But if you have an adjustable rate mortgage (ARM), your payment goes up along with the crazy inflation theoretically.

So in the case of governments that create hyperinflations, it can make the national debt go away. In some cases the govt. actually has an incentive to do this. In effect, if the national debt was $10 Trillion, that will become a very manageable number in the future. Look at Zimbabwe where the new $1,000 bill is actually a $10 Trillion dollar bill because they lopped off ten zeros.

Here's the problem. Most of the recent US debt has been put out in short term Treasuries. This amounts to an ARM loan for the US Govt. Basically the govt. has put itself in the same position as the subprime borrowers who are now facing foreclosures. The only difference is the govt. is now going to make it's problem infinitely worse. Real geniuses.

FOFOA said...

bgmact on USAGold explains the difference between CNBC "gold DOWN" and Kitco's "gold UP".

"It’s due to the different close prices used. Kitco now ‘closes’ after 5, somewhere between 5 and 5:30. That’s when all the trading is over. CNBC is using the prior day close figure of 3PM I believe. Gold closes on the Comex at 1:30, then trades in Chicago (I think) till 3. Where it is after that, I have no idea. So CNBC is using either the 1:30 or 3PM close. Nymex, uses the 1:30 close, so trades after that reflect that change."

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