Tuesday, December 1, 2009

Metamorphosis


Let's spin this globe and take a look at things from a slightly different angle. If we could inventory the entire planet, every real, solid, tradable item we came across would belong to someone. Someone somewhere, or a group of someones would have bragging rights to each and every thing on this planet.

Each one of these items that is the least bit tradable would have some sort of value attached to it. Of course some things are not tradable. For example, a mountain in the United States that has been designated by the collective as public land is not a tradable property. Neither is Antarctica.

But those things to which property ownership rights can be transferred must have a value of some sort. And this value is a numerical representation of their relative usefulness or desirability to humanity when compared to everything else. Of course, less tradable items, like the Kremlin or the White House, need not have a calculable value in any real sense.

Equity versus Debt

Equity is the value of a person's interest in a piece of property in excess of all other claims against that property. If you financed your home you probably pay a little principle and a lot of interest each month on your loan. The principle portion of your payment generally gets added to your equity position in your home.

In the modern world you can obtain bragging rights to a piece of property in a number of ways. But that doesn't necessarily mean you own it. If you purchase something for cash then you have full equity in that item, and no one else has a claim against it. Or you can also obtain bragging rights by borrowing, leasing or financing that same item. This is different than paying cash because it delivers to you the use of that item, but not the full ownership.

Now some items that we find in our planetary inventory are productive equipment items. These are things that if used properly can increase the amount of wealth in the world. A giant crane, for example, can be used to build new structures that can then be valued and traded relative to everything else in the world.

With nearly 7 billion people in the world today, the various tasks of production have been divided to the extreme. For example, you will be hard pressed to find a man operating a crane, who also owns that crane, and also owns the project he is working on as well as the land underneath it. If such a man exists, then it is surely a very small project in his own backyard.

So cranes are generally loaned, leased or financed to those who want to build, by those who want to own (productive capital). And the return to the owner of the crane is a function of the value of the use of the crane. Not the appreciation in the tradable value of the crane itself. Can you see the difference? If someone owns a full equity position in a piece of productive capital, he does so in order to earn a return, a yield based on the value of the USE of that capital. He does not count on the value of the crane increasing in the future so that he can sell it for a profit. There is a big difference! Think about this.

Ponzi Value


Let's imagine I personally paid cash for my home. It was not my best investment as it turns out. But at least I have a full equity position in it. (Let's ignore the separate issue of property taxes to the collective for the sake of this discussion).

My next door neighbor, on the other hand, financed his home. Earlier this year he realized that his equity position had gone very negative and he walked away. Today, 9 months later, his home still sits empty.

But here is my question: Who actually owns that home next door? And what do they actually own? What value (relative to the rest of the real world) do they actually hold? And how does that true value they own compare to the numerical value they believe they own, the one that is printed on their monthly portfolio statement?

The answers to these questions are not as clear as they might seem, at least not the answers I am seeking. We could simply walk down to the county recorder's office and pull the title to that property. It would give us a name, perhaps two names, and a value number. But even the bank's name on that title does not represent a full equity position in the house.

If we were to look at the bank's balance sheet we would see that house (now that my neighbor has left) listed in the asset column and a corresponding number in the liability column (the remainder of the loan my neighbor abandoned). The two numbers will probably cancel each other out. Perhaps it says $400,000 next to the house in the asset column, and -$400,000 in the liability column, for a net position of zero. The problem is that the house can only sell for $250,000 in today's market. This makes the bank's true net position a negative number, -$150,000. And that is only AFTER the bank sells the house. In the meantime, there are costs associated with holding the title, which the bank currently must pay. So who owns the house next door?

For the answer I am looking for we need to play things out the way they should have played out and drill down to who would end up with a full equity position on that house next door. I am also interested in what would be the true relative value of that equity position and how that number compares to this person's or group of people's perception of the value they hold today. Who is it? What do they think they have? And what do they really have?

Drill Down

If the bank was left to its own devices it would have to reconcile its assets and liabilities which would leave that bank insolvent with a negative net worth. So the bank is obviously not the true owner (with bragging rights) of the house next door. What about the bank's managers? Nope, they will be out of a job after liquidation of this insolvent bank. What about the bank's stockholders? These are the real owners of the bank. Nope. As it turns out, they own nothing but a really big negative number. In other words, they own a very real debt that must be paid! Funny how this bank stock traded at hugely positive numbers for the last two years while what was really traded was ownership of a debt!

So in a full liquidation of the bank's assets, who gets them? Well, the way it is supposed to work, the holders of bonds issued by the bank would be the ultimate recipients of the liquidation value of the bank. These are the people that loaned money to the bank. But in the case of commercial banks this seniority ladder is further complicated by an even more senior creditor, the depositor.

Now, in a full liquidation of all insolvent banks we would need to see all homes "owned" by the banks (REO's) go on the market until they were sold. We would see prices fall until they reached a level in which the entire market could be cleared and all debt positions change hands into equity positions.

A rough estimate of this scenario would mean an additional haircut of 50% from current housing price levels. So in the case of my next door neighbor, the empty house of debt would likely be filled with a full equity position (along with all others) at, say, $125,000 (50% of $250,000).

Moving from Debt into Equity Positions

So in the above scenario we have moved all property from a position of debt ownership to a full equity position that can be balanced against the rest of the real world. And in the process we have completely wiped out the original homeowner (who lost all perceived equity in his home), we wiped out the bank (which became insolvent and had to be liquidated), we wiped out all the banks stockholders (debt owners), and we, at best, gave the bondholders a 70% haircut on their savings. At worst (with an insolvent FDIC) we also wiped out all the bondholders and gave the depositors a haircut on their deposits!

Of course this didn't happen because of the FDIC, which is really just a fancy façade in front of a printing press. But if the FDIC was needed to make the depositors whole, then the bondholders were wiped out anyway.

This is the deflationary collapse scenario. This solution for changing debt into equity preserves the sanctity of the senior debt holder (only to the extent of the true value of the physical assets) and the numéraire (denominator) of the debt (the dollar). It keeps the dollar intact and, had it been allowed to play out, would have likely allowed the US Treasury to continue issuing bonds for another whole cycle. But this scenario was never meant to be. It wasn't even an option.

Some people have proposed a different way that debt positions could have been forced and crammed into equity positions had it been done early in the crisis. You see, the difference between debt and equity is that debt is denominated by the numéraire (the dollar), ranging from 0 to infinity, while equity is denominated in percentage terms of ownership, ranging from 0 to 100.

This is why the stock market is known as the equity market, and the bond market is the debt market. When you buy a stock, you are buying a percentage of ownership in that company. But when you buy a bond, you are buying a debt specifying a fixed payment denominated in dollars.

In the stock market you share in the profits or losses of the company, but you are theoretically isolated from the volatility of the numéraire. In the bond market you are theoretically isolated from the performance of the company or public entity, but you are exposed to the risk of total loss through a purely symbolic currency.

The way some say they could have forced debt positions into equity positions would have been to forcefully convert all debt (bonds) into percentage shares of the debtor. Then they would give enough shares to the debtor to match his initial starting capital (down payment). His initial equity position. This keeps the debtor in the game, which keeps the underlying asset valuable to a greater degree than in a massive liquidation of like-kind assets. (This would work similarly for underwater public companies and underwater homeowners alike).

Let's say the ultimate bond holders owned 75% of a $400,000 house upon loan creation and the homeowner put down a 25% down payment. Then the value fell by half. Now the entire asset is worth $200,000 and the debtor is in the hole for $100,000, while the bondholder is still showing a $300,000 "asset" on his books. Choice A; the debtor walks away and the house liquidates for $125,000 and the bond holder gets $125,000. Choice B; the homeowner gets 25% equity in $200,000 and stays... no liquidation! Now the bondholder has a real equity position of $25,000 or 20% more than under choice A! And the system becomes stable and sustainable once again because it is now based on equity, not debt!

There is a precedent for this type of non-usurious system in the Bible and other religious texts. [1] But alas, it would be too logical to do it the easy way. So instead we will do it the hard way. Since we didn't do it by force (forced equity), or allow it to happen within the system's "rules" (deflationary collapse), this highly unstable system will be forced to stabilize itself.

Sustainable Stability, Stable Sustainability

Say that ten times with your eyes closed! :)

Debt is inherently unstable. This is because debt can be destroyed instantly by non-payment, by default. "I'm not going to pay" or "I can't pay" simply destroys debt instruments held as a wealth reserve. In today's marketplace new debt is created extremely easily and casually. A new debt instrument is issued with the ease of a single signature, and then that debt is traded into the marketplace, marked to market as time passes and paper circulates.

Here is a news story that demonstrates the marked to market instability embedded in a fixed debt. Nakheel, the developer of palm tree-shaped islands off the coast of Dubai asked to have marked to market trading of its debt paper halted while it worked out the details of its default because the trading itself could affect the details yet to be worked out. [2]
DUBAI – Dubai's Nakheel asked for three of its listed Islamic bonds worth $5.25 billion to be suspended pending details of restructuring plans at its parent company, a move likely aimed at dampening speculation on the bonds.

The request briefly stalled but did not stop trading in the bonds, which are exchanged over the counter and not on the bourse, where the listing is regarded as a technicality.

The request also added to confusion that has reigned in the markets since the Dubai government last week said it would seek debt standstill agreements from creditors to Nakheel and Dubai World...


"Speculation on the bonds" means the marked to market trading of this "over the counter" debt instrument. Even the anticipation of a debt default can crash a system built on debt! And non-payment is not the only path to default.

If you are the world's largest engine of easy and casual debt creation and also the maker of the paper that denominates it, there is another way to default. And there is another kind of default the market can anticipate. Devaluation!

Another threat of extreme instability in a debt-based system is the chain reaction effect. Almost every entity that issues its own debt also holds the debt instruments of other entities as its reserves. So when one large entity defaults, the falling domino effect can be systemically catastrophic. And to complicate things even more, the methods of stemming systemically catastrophic consequences themselves have an even worse systemically catastrophic outcome; the collapse of the numéraire.

Debt is unstable because it is entered into (created) so lightly, and it is based on the assumption of a fixed future performance by an entity or individual. An assumption that is currently proving to be flawed during an economic contraction.


A system that is built upon equity positions is much more stable as equity agreements are entered into with much more gravity. If both parties share in the risks and rewards of future performance they will take everything more seriously. Also, equity agreements are based on the flexible assumption of variable future performance! A much more realistic assumption.

Finally, equity agreements by their very nature are more tied to the size of the real physical world than are debt agreements which are created at the drop of a hat.


This is why the global equity markets are about half the size of the debt (bond) markets. It is also why a virtual mountain of derivative "insurance policies" has grown around the debt markets like a terminal cancer while no such equivalent monstrosity strangles the equity markets. Credit default swaps and interest rate swaps are all a futile attempt to make an inherently unstable debt-based system stable and sustainable. There is no such need or incentive in an equity-based system.

In an equity-based system, any entity can still issue unlimited paper notes if it wants. Just like the US government does in its crazy debt-financed world. The difference is that the marketplace will price that paper against the real underlying property as it is issued. If a company doubles its issue of stock certificates to raise cash, then the price of each outstanding share will be cut in half. If a sovereign money-printer doubles his currency base to pay his cronies, then the value of each currency unit will be cut in half. But in today's debt world, a company can keep issuing more and more bonds until it ultimately collapses under the weight of its debt service. The same goes for countries.

Sustainability


Instability is the greatest burden the current system places on the real economy. It is what makes it unsustainable. As I read in a recent article:
Business is complicated enough without being inadvertently drawn into the [currency] exchange rate business...

Companies can hedge [this currency risk], to the tune of a notional value of roughly $600-trillion these days. But whereas larger companies, and those in developed countries, can rely on such hedging, companies in all the developing world cannot. [3]

So the instability of this debt-based system grows ever more dangerous as efforts are made to stabilize it. The growing mountain of derivatives is truly a house of cards capable of bringing down the whole system! How's that for stability and sustainability?

The question then becomes how will Mr. Market convert debt into equity and bring the system back to a state of sustainable stability and stable sustainability? Obviously our money masters have refused to go there willingly. Obviously our banks have refused to give up their debt positions. So what is next?

Metamorphosis


I found this great line in Topaz' Time Currency blog:
The first rule of Faith-based systems is that any and every thing must have a paper equivalent for "valuation" purposes ...in order to compare apples and apples.

This is a great quote on many levels. Today we use these paper equivalents not only for valuation purposes, but also as a way to "save the real thing for future use". The quote also shows the mind set of the system. Paper compares with paper as apples to apples. But can this really be true when comparing equity paper with debt paper and its cancerous tumor of derivatives? With global equity markets at around $35 trillion and global debt markets ($70T) plus their derivatives at more than a quadrillion?

If Mr. Market is going to bring things back in line with reality, how will this be accomplished given the disparity of value between debt and equity?

Remember earlier I said this:
In the stock market... you are theoretically isolated from the volatility of the numéraire. In the bond market you are theoretically isolated from the performance of the company or entity, but you are exposed to the risk of total loss through a purely symbolic currency.

The purely symbolic currency. This is how Mr. Market is going to bring the paper world back into balance... apples to apples. In one fell swoop a foundation for stability and sustainability will emerge through natural morphosis!

Deflation?

If today's deflationists are correct then the numéraire will remain strong or even grow stronger while the world runs from equity ownership of the physical world into the warm embrace of casual debt creation stabilized by its own Ponzi-like exponential growth pattern.

Think it through. We don't just muddle through from here. We either shift toward equity or debt. We are currently not in stasis.

Perhaps at some point the Fed would like to crash the equity markets in order to drive you into its warm (debt) embrace. As someone from London once said, wash, rinse, repeat. Right? Will this be enough to convince Mr. Market to give up on equity positions? Could a stunt like this be enough to convince a world full of realists, producers and savers to hand their claims on real property over to the paper pushers in exchange for a signature?

For those of you who can't already see the obvious answer, as Another once said, "time will prove all things."

What about Gold?

Gold is a little different. Yes, it is the ultimate equity position with assured future global liquidity. Yes it is the ultimate wealth reserve as a known timeless claim on anything you may need in the physical world of your future. But it is also a multi-generationally depressed numéraire of the value of the entire physical planet.

Yes, apples to apples. Paper to paper, physical to physical.

Let's try a simple word replacement in Topaz' quote:

The first rule of [physical equity]-based systems is that any and every thing must have a [physical numéraire] equivalent for "valuation" purposes ...in order to compare apples and apples.

I will leave you to do your own math on where the real value of physical gold will come to rest on the other side of morphosis. I have already presented my calculation in other posts.

The bottom line is that debt (credit) markets appear to work great in a seemingly perpetually-expanding economy, but they are completely unstable, unsustainable and deadly in a severe contraction.

An equity-based system is stable and sustainable and a debt-based system is not. Mr. Market knows this in the same way a million individual ants can find the same piece of meat a mile away. And for the record, I don't buy the idea that an evil cabal can stop the tide from coming in.

I leave you with this little ditty from Bloomberg last Friday...
Nov. 27 (Bloomberg) -- Wall Street’s system for determining payments on derivatives linked to the debt of defaulted companies is showing cracks less than a year after securities firms changed practices to avoid “Draconian” regulation.

Credit-default swaps tied to Thomson SA, the Paris-based owner of film processor Technicolor Inc., paid some holders 30 percent less than those with contracts expiring a day later. In Japan, owners of swaps on Aiful Corp. haven't been compensated, though one of its banks said the consumer lender skipped loan repayments. Dealers can't agree whether to reimburse investors in Mexican cement maker Cemex SAB’s debt swaps.

Disparities are arising in spite of practices adopted in April and July to standardize settlements and curb risk in a market that exacerbated the worst financial crisis since the 1930s by contributing to the downfall of American International Group Inc. Analysts at Bank of America-Merrill Lynch, Barclays Capital and UniCredit SpA say changes are needed as dealers examine how to interpret existing rules to maintain investor confidence.

“The first cracks are being shown in the protocols,” said Edmund Parker, head of derivatives at Chicago-based law firm Mayer Brown LLP in London.

The rules are being tested as the global default rate rises...

Sincerely,
FOFOA

[1] History of Usury Prohibition
[2] Nakheel asks for sukuk suspension
[3] As the world floats

73 comments:

Andy said...

Excellent prose, FOFOA. Is a reordering of Exter's inverse pyramid then in order? Or do we simply need two distinct versions, one geared towards an equity-based economy and one geared towards a debt-based one? It seems to me that stocks, real estate, physical commodities should all be lower than stock, real estate, and physical commodity debt instruments.

FOFOA said...

Hello Andy,

Part of the problem with our current paradigm is that the equity portions of the economy are fatally entangled with debt. Publicly traded companies are being brought down by their overwhelming debt. The paper gold market is essentially a debt market denominated in gold, with a fractionally reserved numéraire. Real estate ownership is hopelessly lost in the most complex of bond instruments.

Perhaps you are right that the inverse pyramid will need to be updated after the Freegold butterfly emerges from its cocoon and the destruction of the numéraire cleanses the toxic trash from the system. But in our current debt-based paradigm I think Exter's pyramid accurately describes the flow of capital. This post isn't describing anything new that has not been covered in my past posts. As I said in the opening line, it is simply a view of the same old mess from a slightly different angle.

Sincerely,
FOFOA

SatyaPranava said...

i've been considering the notion of hyperinflation for a while, as well as the USDX and the other currencies coming down with it. since that excellent piece was put up yesterday, it got me to revisit the issue and got me thinking.

are we actually currently seeing the beginning of a global hyperinflation these past few months with all currencies dropping precipitously, and esp w/the dollar outdoing them, and all the commodity "bubbles" and such?

is this what the beginning of global hyperinflation looks like?

Martijn said...

FOFOA,

Under the previous post I put up a link where Ted Butler argued that China is/was backing the bullion banks short PMs (especially silver) bij OTCs.

What do you think of that story?

Could it be that China did so in order to keep gold prices down? By pegging to the dollar and being dependent on international trade (in paper) they have been sharing at least some interest with the US in the past. Did you happen to come across any other links on this topic?

FOFOA said...

Hi Martijn,

There are so many possible scenarios that reconcile with that story, assuming it is true, that I cannot put too much credence in any single analysis. Here is one possibility...

MK: As implied by ANOTHER's own words, his motivation for these postings was the discovery by "big traders" in the Far East of this opportune facility to buy gold at ever lower prices.

So Chinese like low prices??

Paper selling --> physical buying. Then default on your sold paper contracts. (China announces possible default on derivatives in 2009).

FOFOA

Martijn said...

FOFOA,

I was thinking the same. It would make sense to me if the Chinese started playing the same game the West did, although that by itself does not make it true.

Interesting story though. I guess we'll watch this market together...

Smiley

Martijn said...

A bit of topic perhaps, but check out how those Somali pirates attract investors.

HARADHEERE, Somalia (Reuters) - In Somalia's main pirate lair of Haradheere, the sea gangs have set up a cooperative to fund their hijackings offshore, a sort of stock exchange meets criminal syndicate.

Martijn said...

One could argue that there is a similarity between the Somali pirates and US bankers...

Martijn said...

For those who missed: here's Jesse on the comex. It's all paper now!

And here is some more: With gold rising yesterday, the OI dropped by 2389 contracts. The smaller commercials are bailing out in increasing numbers leaving the shorting to their larger brethren.

In silver, the OI dropped a further 1600 contracts to 131516. Again the smaller commercials are abandoning ship as the steam room in silver is just too hot for them.

Martijn said...

COT: The large specs increased longs by 10,390 contracts and decreased shorts by 16,244.

The commercials increased longs by a piddly 308 contracts, but increased shorts by a whopping 24,866 contracts.

Martijn said...

YOU HAVE TO BE KIDDING! Friday saw the largest volume on the COMEX gold contract in history. So how much metal moves in the warehouse when the market is on fire?...a measly 400 ozs of gold got deposited in the dealer inventory and zero moved in the customer inventory! The COMEX report is so ridiculous it is not worth the paper its printed on…I guess it's a bit like their gold promises …they are not worth the paper they are printed on either! There was a paltry 58 Kozs that was withdrawn from the customer silver inventory and nothing moved in the dealer inventory! Yep, that's credible!

source

Martijn said...

If those big investors still read this blog I'd advise them to look into the COMEX data themselves. Hopefully they've already stood delivery...

Martijn said...

in summary, we are witnessing huge demand for gold and the comex issuing settlements for cash. Looks to me like we have a default brewing.

That has been called multiple times before, but still I definitely wouldn't want be caught sitting on the wrong (paper) side these days!

Martijn said...

However, it's not only the COMEX that might default in the coming years.

Jimmy said...

Yesterday, someone talked about Alf's numbers, but I don't know who's Alf?

Maybe is it him: http://www.tvshows.de/alf/poster/alf-po3.jpg

I know who's Martin (not Martijn ;o) ), he is a strong genius...

But it's really a mystery for me who's Alf???

Jimmy

Jimmy said...

And Fofoa, really nice article!

North Korea used tippex to correct his bills... New example of hyperinflation maded by tippex ( http://en.wikipedia.org/wiki/Tipp-Ex )...

Martijn said...

FOFOA,

Freegold does not seem to be Jim Sinclair's thing.

After the Federal Reserve Gold Certificate is in place the world’s economy should be able to enjoy a period of stability for a considerable amount of time, but with a total rearrangement of positions of national economic powers moving towards Asia and do not forget Jakaya Kikwete and the common market of sub Sahara African countries of merit and leadership. They are there.

What do you know about this gold certificate?

Martijn said...

couple of charts on trade

Martijn said...

Belgium refuses to decline its deficit (in Dutch).

Looks like it's not guaranteed that Europe will halt the presses.

Nothing we didn't expect, still interesting watching it unfold.

FOFOA said...

Martijn,

Jim's ideas have been evolving along with this crisis. For years he talked about gold going to $1,650 and the Fed then implementing a new Gold Certificate Ratio of some sort. This idea apparently came from discussions he had with his old friend Paul Volcker who Jim worked for in sorting out the Hunt Brothers fiasco in the 80's.

Since then Paul Volcker has been somewhat marginalized by the current regime, Jim has upped his numbers to "Alf's numbers" which means somewhere between $10,000 and $20,000 (it was reported that Jim said $17,000 in a speech), and he now says that his previous idea of a Gold Certificate will be implemented not by the Fed, but instead by the IMF as part of a Super Sovereign Currency. That's Jim-speak for a new SDR or One-World currency.

To my mind Jim is simply finding ways to tie his older statements in with his newer vision. I believe his new vision is a lot closer to mine than his words betray.

Jimmy, here is the article by Alf Field which Jim Sinclair refers to when he says Alf's numbers.

Sincerely,
FOFOA

allen said...

New $100 billion safety net for jobless in works
By ANDREW TAYLOR (AP)



Ok, so what do you do. Do you screw the taxpayers or do you tell the unemployed, tough luck buddy?

Here are some problems with continued unemployment benefits.


1. People are not as diligent trying to find a new job (until the money runs out of course).
2. Unemployment costs are also passed on to corporations that are already tying to reduce costs. Do you think this encourages hiring??? In fact it has the opposite effect!!!!
3. Money spent by the unemployed isn't really injected into the economy to spur growth because most of it is being used to pay debts!!



WASHINGTON — As unemployment spikes, the cost of compassion is going up too.

By as much as $100 billion.

That's the potential price of a push by Democrats in Congress to continue providing extra help to the jobless beyond the core 26-week unemployment insurance package provided under permanent law.

The jaw-dropping numbers combine the approximately $85 billion cost of continuing emergency benefits through 2010 for the long-term unemployed — jobless more than six months — plus an estimated $15 billion to continue subsidies to help pay health insurance premiums.

Even before the last new round of extended benefits in November, the cost of unemployment compensation was estimated by the White House to exceed $140 billion for fiscal 2010, which began in October. Just two years ago — when the unemployment rate was 4.8 percent in contrast to the current 10.2 percent — the cost of unemployment benefits was only $43 billion.

Extending unemployment benefits again is an obvious solution to Democrats preaching compassion for the long-term jobless, as well as to economists who say cutting off the flow of money could harm the economy.

"This is the most effective way to get money into the economy. It's given to people who are simply out of money," said Rep. Jim McDermott, D-Wash., a key supporter. "They're spending it. They're not socking it away in a mattress somewhere."

Martijn said...

Changing ones opinion might prove difficult sometimes. Just as the rest of us Jim also does not know where we'll end, but I do agree that his ideas seems to match yours to a certain extend.
We'll all watch this market together...

Read about the Iraqi gold purchase already?

Martijn said...

Basically, the collapse of Dubai World would lead to something the Fed is going to do anything it can to prevent. And since it already believes the “unprecedented liquidity” it pumped into the market last fall worked, it’s surely going to keep on doing what it does best – print money over any problem.

Jimmy said...

@Fofoa: Thank you for the link!

@Martijn: In Belgium, we see a record of foreclosures... And it's also possible that GM wipe Opel out of Belgium, what would means more joblosses and pain... Belgium has always been one of the best students of European class. We always paid our debts back etc... But yet we must pay more and we wouldn't do it because other lands, like Spain, France,... are in trouble with debt and pay it always retarded (or having more debt than 3%, like 10% or more, since long time... And never paid it back...) So we say fuck you against European Union to pay our debts (read: other debts, we don't made it), we could make more debts, like France or Spain, we have enough money or space to do it... So the only possibility to blow our 'european' debts away is moneyprinting...

Martijn said...

@Jimmy

So the only possibility to blow our 'european' debts away is moneyprinting
Indeed. I posted the link to show that no presses have been halted so far.

/

Chinese central bank wary of gold bubble

Ender said...

Sinclair’s Gold Value Angle

It’s been a while since we all got to view angle based magnetized gold on Sinclair’s site. But, it’s back with a string of critical points for the hefty bricks. Twelve twenty four is the first block, which I would guess correlates with the Chinese remark that recently hit the news wires. Can’t have people thinking gold is the safe store of their hard work. At least not in the west!

Twelve seventy eight doesn’t seem like all that far away, but people have to find a reason to see gold as cheap. Thus, it would be the ender’s gold foil hat guess that the weak hands will exchange paper for paper making it look like the value has diminished.

It has not. Nothing has changed to indicate any change in position of gold. There are structural changes underway that will change the way the gold market works, but not the way gold works.

Have strong hands.
Ender

costata said...

Ender,

"Have strong hands."

Cue: Sound of loud applause.

costata said...

Greetings All,

From Gene Arensburg:

http://www.stockhouse.com/Columnists/2009/Dec/2/Got-Gold-Report--COMEX-Commercials-position-for-go

"Backwardation in Gold, Contango Razor Thin for Silver

As it has for weeks, gold futures ended the week in backwardation, where the cash or spot price was higher than the front active contracts. Cash gold closed the holiday week at $1,177.79, which is $3.59 above the December contract and $2.29 over February as shown in the table below courtesy of Barcharts.com. The spread between cash gold and the December contract actually widened since our last full report two weeks ago when it was then $2.50."

Arensburg also cautions that the shorts appear to be loading up for a take down in the Crimex.

John H said...

This is one of the most concise and lucid articles I have ever read.

I love this site.

BTW what does FOFOA stand for?

Museice said...

"Clearly, the COMEX does not have much of any gold bullion, yet it operates formally as an exchange to sell gold, and to create a market for gold price discovery. Some call this new redemption developed appropriately a silent COMEX default, and correctly so. It is the early chapter of a COMEX default, presaged last May."

"The Wall Street crowd did effective planning. One must give a tip of the hat to their brain trust. The GLD is a tool to drain gold demand from the public and to supply it to the syndicate. It is one of the most brilliant open ploys in financial history."

http://www.marketoracle.co.uk/Article15513.html

I think India wants another 200 tons as soon as possible and China's patience for more gold will be running out if they feel a price surge could happen suddenly because of Comex.

FOFOA said...

Hello John H,

Thank you! What a great compliment. Very appreciated. :)

Re: FOFOA; there is value to be found if you discover the origin of my pseudonym on your own. All of the clues you will need are hidden in plain sight right here on the blog.

Sincerely,
FOFOA

raptor said...

FOFOA you did it again ;)
Reading your articles helped me build a core understanding of the fundamentals of
money,value,debt ..etc.. so I can make a inteligent desicions ...

fundamentals => long term => savers
trend => medium term => investors
speculation => short term => traders

Not that you can't have all goals simultaneously.
Just don't mix.


thank you

Martijn said...

Taaibibi on the permanent printing plan.

FOFOA: nice post. Still figuring out how it relates to Exters pyramid. Debt and equity seem different layers, adding to the instability problem.

Martijn said...

More printing guarantees: FDIC reserve is gone.

Jimmy said...

@martijn: Yes FDIC is gone, it would be insane (see Marketskeptics.com).

And what have I said about BOfA? Capital raise of 19 billion $ (public and 26 billion own reserves) to repay TARP 45 billion $... And they have a new CEO to sell their propaganda... Where is my old CEO? On a sailboat in Cayman Islands maybe? Thieves...

Lloyds also in trouble...

Maybe Venezuela, not Britain, will be the next in trouble with Dubai...

Greetz

Jimmy

Jimmy said...

(I means Venezuela will be the first in trouble with Dubai, then the next is Britain.)

Jimmy said...

also a good site about Ron Paul:

http://www.dailypaul.com/node/117343

Jimmy said...

http://thereformedbroker.com/2009/12/01/the-biggest-market-call-of-the-decade/#more-7278

Jimmy said...

Wow, a very strong conspiracy story of Benjamin Fulford:

http://www.bibliotecapleyades.net/sociopolitica/sociopol_fulford22.htm

Any comments on this story?

Benjamin is the owner of this site: http://benjaminfulford.typepad.com/

And who is Benjamin?

http://en.wikipedia.org/wiki/Benjamin_Fulford

http://www.projectcamelot.org/benjamin_fulford.html

Interview with Rockefeller: http://video.google.com/videoplay?docid=-3704527408635856046#


Hmmm, do you already own physical gold or silver for this 'grey swan'? (it's not a black swan anymore...)


Jimmy

Jimmy said...

And his grandfather G.T. Fulford is:

http://en.wikipedia.org/wiki/G.T._Fulford

FOFOA said...

Hi Jimmy,

Thanks for all the background info on Benjamin Fulford. He certainly needs more than just his unbelievable words and failed predictions to earn some credibility.

Here is a video interview of Benjamin Fulford. Just watch the first few minutes and judge for yourself if he is a credible source. Or if you like his spiel, watch the whole 2.5 hours...

http://www.youtube.com/watch?v=NKl3mZG6KzM

But please leave him out of our discussion here. Credibility must be earned and Fulford's poor credibility can be contagious and deleterious to the message of this blog.

You can go on his blog if you would like to discuss his secret Illuminati ninja assassin armies or US military earthquake machines.

Thanks.

SatyaPranava said...

FOFOA, don't be so quick to judge here....i mean i just found this golden nugget on the site:

"On a different front, although it is still not fully confirmed, we have reason to believe George Bush Senior and his wife Barbara have been killed. That means the new Nazi leadership consists of Henry (Heinz) Kissinger, Paul Wolfowitz, Dick Cheney, Ben (deputy Fuhrer) Bernanke and that whole crowd of neo-con neo-Nazis. If I were them, I would be very scared right now."

i'm sorry. i just can't take fulford seriously. no matter how many black panthers he claims to know in japan.

Jimmy said...

Dear Fofoa,


Yes, I know his track record and his credibility about UFO's, HAARP, secret societies, etc... (like David Icke)

I'll respect your desire to hold Benjamin outside your forum (I'll do it, don't worry about it.)

But I want to provide the reader all information about the financial aspect. How strange or crazy they are, every opinion is an analysis worth. Who knows, maybe a crazy would have right...
(like 2007, Financial crisis is coming! Really? I don't see anything, you paranoïc fool. And after the big crash 2008 was he not crazy anymore, but called a genius...)

And for certitude, I'm not a conspiracist or somewhat, but I'm open to get all informations or opinions. Also my job is reading so much financial books and articles on internet (or blogs) as I can in a day. And I could say, I'm a fan of your blog, because it's honestly information (like Marketskeptics and some blogs)

Only I've dyslexion, thus my bad English writing... Sorry for this...


Sincerly

Jimmy

And this is an interesting analysis of Bob Chapman, Currency Warfare:
http://www.globalresearch.ca/index.php?context=va&aid=16373

Jimmy said...

@Satya: This is also the same reason, why I'm doubting on his credibility (also for many things, he couldn't prove it.) because it's so great or unbelievable story. But we really also couldn't prove this is NOT true...

Conspiracy or not conspiracy, that's the question...

Conspiracy books are funny to read it before sleeping... I like to do it... It's much better than a stupid romantic book or Harry Potter... :o)

Jimmy said...

Travelling to expand my knowledge is also my job... No, I'm not Jim Rogers... ;-)

Jimmy said...

And a good tip for travellers: Search a monetary museum in the country where you're travelling... Amazing knowledge and history, ask for more information or discussion with a guide... Not theory but practice knowledge... ;-)

For example: Museo de moneta in Buenos Aires... Ask for a guide, it's free and cheap to get unvaluable knowledge for your life...

FOFOA said...

Hi Jimmy,

"Conspiracy theories" (for lack of a better term) are a dime a dozen. If you throw enough of them at the wall sooner or later one will stick. Certainly this is one way to analyze an unfolding crisis. To look at each and every low probability scenario and hope that you have at least considered the one that turns out to be true.

You can also employ these various scenarios in your macroeconomic analysis. Many writers do. I don't have a problem with this as long as it is clearly stated by the author. But this kind of application does serious probabilistic damage to the analysis.

On this blog I am looking for the analysis that transcends all the other various low probability scenarios. The mega-trend. The sea change within which all other "conspiracy theories" must play themselves out.

I employ the writings of Another and FOA in my analysis, and I clearly state that everywhere on the blog. Some people consider A/FOA to be just another low probability "conspiracy theory". I don't. This is the very essence of my blog. So I would like to keep the credibility risk limited to A/FOA/FOFOA. Notice that neither I nor A/FOA rely on Wikipedia articles about ourselves, or the identity of our grandfathers, or our past jobs in order to gain your trust. Only our words.

There are plenty of sources out there that I and others quote all the time that don't pose a credibility risk. Fulford, unfortunately, does.

Sincerely,
FOFOA

Jimmy said...

And my minimum goldprice target is average 40,000 $ ounce (calculated it a year ago). When I saw your Freegold Probability Curve, I became a fan of your blog...

I think 40,000 $ will be the minimum, to begin selling your gold (of course periodically, not in one time, when the ask for gold is high, then it would be a golden bubble...).

How do you recognize a bubble: Simple: When you talk about gold with a random passer-by and he looks thinking you're crazy, then it's not a bubble. When he could tell all about it, then be warned and be alert, there is bubble creating...



Also a good clip:

http://www.youtube.com/watch?v=Gk5aRIz17fk

Jimmy said...

Dear Fofoa,


Unbelievable, I also use probability in macro-economic cases/scenario's. So I foresaw the big crash of 2008, because there were too many sounds of top-economists in 2007 for possible troubles (also IMF and ECB,...). And the probability of a bad economic situation was too high with a longer list fundamental macro-economic arguments (also Black Swans, yes I'm a fan of Nassim) for a bad case than a good case...

So I buyed physical gold and sold all shares/obligations, before Lehman Brothers crashed...


Yes, the words and trackrecord gains credibility. Only, I'm doubting if Benjamin has right this time (unlike his trackrecord). Gerald Celente warned us also for big problems...


Now the probability of big problems (mass protests, plundering, war?) in december is high (case Iran and teaparty 9/12). Good for goldprice, not for local living...


Sincerly,

Jimmy

Jimmy said...

I follow also megatrends like kontradieff, pi-trend (Armstrong), Adjiedj Bakas (dutch book about megatrends),... So I constated we are in a long time bearmarket with much of economic pain (I think minimum of 10-20 years pain)...

Aleksandar said...

Speaking of credibility, I would put Jim Willie among this Fulford guy as well. Not as extreme but yet...

FOFOA, do you remember my ramblings about the conspiracy theory with the collateralized gold accounts (OITC)? Came from Fulford's site.

Was a nice story though, calming in a way.

alek_a

Jimmy said...

And I forgot Christiaan Huygens...

Museice said...

Here is something I hadn't thought of before.

Gold and the central banks: the game theory

"The game-theoretic process which in the past has selected gold and/or silver as monetary goods, which may just as easily operate in the future, and which may even be starting to operate now, is a form of distributed coordination."
"Either Mr. Cheng and Ms. Hu do not understand the game theory of monetary formation - or they do and they are playing it close to the chests. If they - or their colleagues - ever figure out the game, God help the dollar."
"When a CB buys gold, four things happen. One: the CB insures itself against the chance of gold remonetization. Two: the chance of gold remonetization increases. Three: the gold price goes up. Four: the buyer looks good, because the assets he bought went up."
"Thus there is an entirely different Nash equilibrium out there - one in which all the central banks dump the dollar for gold. This causes the gold price to skyrocket, creating permanent profits for all the reserve-accumulating central banks."
"In other words, when gold is remonetized, the numerator and denominator on the "gold price" are exchanged. The relevant price is now the "dollar price." What is a dollar worth? How many milligrams of gold can you trade it for? This piece of paper is a financial security, n'est ce pas? Does this security yield gold, own gold, redeem itself for gold, etc? No? If you want it to be worth anything, you might want to change that..."

FOFOA said...

Thanks Muse. That was a great read.

Martijn said...

@Museice

Good one indeed!

I'm a bit skeptical on it actually being carried out, but it does at least give the impression that those central bankers still have quite some control: http://www.bloomberg.com/apps/news?pid=20601087&sid=a6BfRHhIWU5E&pos=4

Raising interest rates - if done - might at least provide the idea of renewed trustworthiness to a currency, and hence might hit gold, at least in the short run.

Jimmy said...

http://www.thedailybell.com/636/Dubai-Debacle-Offers-Power-Elite-Window.html

http://www.thedailybell.com/635/China-Wary-of-Gold-Bubble.html

http://www.washingtonsblog.com/2009/12/goldman-predicts-gold-to-rise-above.html

http://www.scribd.com/doc/9488949/Hyper-Inflation-Book

http://www.scribd.com/doc/11467022/Hyper-Inflation-and-Monetary-Collapse

http://www.scribd.com/doc/19759753/Types-of-Inflation

Jimmy said...

“(Gold) is cheap. Gold is up 33.7% this year. Copper is up 125.7%. Lumber is up 45.3%. Heating oil is up 73.3%. Palladium is up 92.7%. Silver is up 64.1%. Unleaded gas is up 98.5%. And you're telling me that gold is in a bubble? You haven't seen the gold bubble yet.”

– Richard Russell (Dow Theory Letters) December 1, 2009

Jimmy said...

http://goldversuspaper.blogspot.com/2009/12/gold-is-bubble.html

Jimmy said...

http://www.gurufocus.com/forum/read.php?2,77946

Jimmy said...

So it's my last post today, enjoy it ;-)

Have a nice day!

Jimmy

Jimmy said...

One last post again :o)

http://www.dol.gov/opa/media/press/eta/ui/eta20091476.htm

Martijn said...

“(Gold) is cheap. Gold is up 33.7% this year. Copper is up 125.7%. Lumber is up 45.3%. Heating oil is up 73.3%. Palladium is up 92.7%. Silver is up 64.1%. Unleaded gas is up 98.5%. And you're telling me that gold is in a bubble? You haven't seen the gold bubble yet.”

Although one wouldn't think so I wouldn't want to rule out (some) gold price suppression at all.

Martijn said...

Civil war in Mexico?

Martijn said...

Does any of you guys know a blog that posts positive economic news???

I don't care if the books are cooked or whether that blog would be trustworthy, but I would like to find out what the positive focus is telling us these days. Just to match it against my general sources.

Martijn said...

I mean stuff like this or this.

Thanks in advance..(?)

Jimmy said...

@Martijn: Read then the mainstraim news, always positive news... :-)

Maybe Japan will sell US treasuries:

http://market-ticker.denninger.net/archives/1693-Here-It-Comes...-Sovereign-Treasury-Sales.html

Jimmy

Martijn said...

@Jimmy

I was looking for something with a bit more brains and originality than mainstream news. Perhaps I'm looking for something that does not exist, but any help is welcome!

Jimmy said...

@Martijn: Here are some, they are rarely...

http://mast-economy.blogspot.com/

http://economicgoodnews.blogspot.com/

http://positiveeconomicnews.com/

http://www.currencytrading.net/2007/the-top-100-economics-blogs/


Greetz

Jimmy

Martijn said...

Jimmy,

Nice. Thanks, and good weekend!

Jimmy said...

u too :-)

Martijn said...

Gold and Oil...

Museice said...

Hey Jimmy:
can you put your links in a 'href' tag so they are clickable?

I'm lazy and don't want to have to swipe all your great links.
Thanks

FOFOA said...

Hello Alek,

Good to hear from you.

Yes, I do remember that fantastical story. I did not know it came from Fulford, but that explains a lot.

And yes, I do have a list of people I will read but will not refer due to credibility issues. Some of them do read this blog so I try not to disparage them either.

Sincerely,
FOFOA

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