economy

Intrinsic value and the world-wide Nouriel Roubini bubble

Posted by

5

Nouriel Roubini warned the world one year ago that gold was very likely in a bubble at just below $1200.

Gold prices, you will have noticed, have been rising sharply, breaching the $1,000 (U.S.) barrier and, in recent weeks, rising toward $1,200 an ounce and above. “Gold bugs” argue that the price could top $2,000. But the recent price surge looks suspiciously like a bubble, with the increase only partly justified by economic fundamentals.

Roubini has a PhD and is a professor of economics at New York University’s Stern School of Business. But still he writes that gold has no “intrinsic value”:

But, since gold has no intrinsic value, there are significant risks of a downward correction.

I found it remarkable that an economist didn’t have the slightest clue of the meaning of the term “intrinsic value”: an instrument of currency is said to have “intrinsic value” based upon the market value of the medium on which it is transmitted.  Since gold had a market value of nearly $1200 per oz, it had an intrinsic value of nearly $1200 per oz.  Since paper on that day had much less value, then dollars printed on paper had less intrinsic value than had it been minted on gold.  I therefore responded on the Globe and Mail forum as follows:

There seems to be a world-wide Roubini bubble. All his cautions are justified because in a bull market any asset class may be overbought and enthusiasm will temporarily wane. But it remains a long-term bull market for gold because there is already inflation, quite the opposite of what Roubini claims: Food, energy, and real estate (at least in Canada) are on the rise because of the “liquidity”. A “massive wave of liquidity” is a sudden excessive supply of money itself, which is another way of saying “inflation”.

Roubini is misguided about the meaning of “intrinsic value”. Gold is and has been, throughout human history, the very essence of intrinsic value; gold has never needed anything to back it, but has been used to back other kinds of money, and it maintains its value better than many other asset classes.

He is mocking us all and seeing if anyone out there will believe him. Ha ha, very funny Mr. Roubini.

A certain Anton B. Nym responded in agreement with Roubini:

Gold truly has very little, almost no, “intrinsic value”. It isn’t used in daily life; you can’t eat it, burn it, wear it to stay warm and dry, build a shelter from it, or even make much in the way of tools with it. (Though it is handy in the manufacture of electronics and a few esoteric processes.) Historically gold’s value comes from its malleability and lustre as well as its ease of refinement and relative scarcity. Whatever value we invest in gold is mainly esthetic and traditional… and thus subject to change by whim and fad. At a grand an ounce, and with the world economic situation gradually improving, I don’t see the current fad lasting much longer.

I responded to this reader of the Globe and Mail as follows:

Anton P. Nym: Your view of “intrinsic value” is far too utilitarian. Roubini is an extremist who’s gone off the deep end on this point. Gold has no intrinsic value? Give me a break.

Gold is beautiful to look, easy to forge, very malleable, and never tarnishes. It is rare and is the subject of metaphor and poetry. Many things that you can’t eat, burn, build a shelter or even make tools with have great value. Consider the song, “Happy Birthday” has made the owner of its rights millions of dollars in royalties. And what value has that except that it has become the tradition to sing it at the joyous occasion of celebrating one’s passage into another year of life. Small amounts of gold next to my wife’s heart have reminded her of my love for her and have made her feel good about herself. That is invaluable to me. Try giving your wife a barrel of oil on the occasion of your wedding anniversary and see if she says, “O thank you so much for giving me something with intrinsic value!”

Well, with gold at over $1370 a year later, I suppose Roubini is still waiting for the gold bubble to pop.  Don’t get your hopes up Prof. Roubini!

I guess the opinion editor thought that my rebuttal of Roubini and his ilk was witty (page no longer available at the globe, here is a screen snip).

“Printing money” is a worn out metaphor: reflections on what is real

Posted by

3

Our current economic system confronts us with a metaphysical dilemma.  Niall Ferguson writes in The Ascent of Money (30-31; emphasis mine):

Today, despite the fact that the purchasing power of the dollar has declined appreciably over the past fifty years, we remain more or less content with paper money … Even more amazingly, we are happy with money we cannot even see.  Today’s electronic money can be moved from our employer, to our bank account, to our favourite retail outlets without ever physically materializing.  It is this ‘virtual’ money that now dominates what economists call the money supply. … Anything can serve as money, from the cowrie shells of the Maldives to the huge stone discs used on the Pacific islands of Yap.  And now, it seems, in this electronic age nothing can serve as money too.

Gary Shilling has maintained that the electronic money that the Federal Reserve has been creating has remained on the bank books as excess reserves because the banks are too afraid to lend it out.  On the other hand, Gonzalo Lira has argued that all the virtual money that the Federal Reserve created and used to buy up toxic assets was in turn lent to the Federal Government by the banks.  Then, the Federal government spent that virtual money on government employees, welfare recipients, medicare, social security, food stamps etc.  Thus, Shilling misses a big point that the bank’s toxic assets and debts of the government have been monetized by this arrangement–and the virtually inflated money is now already in circulation, forcing up the prices of commodities.  Lira calls this phenomena “stealth monetization”: in Weimar Germany, people needed wheel barrels to carry their money.  Today, all that virtual money can be carried in a credit card or a food stamp debit card.  I would estimate that over 95% of my transactions are done with virtual money.  The scary thing is that now central banks are able to create stealth inflation, while lying about the inflation rate which they erroneously confuse with their manipulated Consumer Price Index, because most of the money that exists today is not real–it is not even printed on paper presenting the people with a tangible, visible clue as to how fast it is expanding.  At least in Zimbabwe today, three zeros are added at each new print run–this is inflation that you can see. The US Federal Reserve, the Bank of Canada and the other central banks today create virtual money which gives us nothing tangible with which to see the inflation which is taking place.  The Federal Reserve, until a few weeks ago, was keeping its books a tightly guarded state secret, and so no one except the members of the cabal knew how much virtual money Bernanke was creating or who benefited from it (see Monty Pelerin and My Budget 360).

Now I think of my virtual trading account in which I create virtual wealth through electronic trades on a virtual trading floor, where after three days virtual money and virtual shares change hands.  Then it is recorded in a virtual trading e-confirmation and I’m provided a monthly e-statement with my virtual holdings.  I have healthy net worth, but only as long as others are willing to accept my virtual money, or I can liquidate my virtual assets which are in the form of stock shares that my brokerage account holds for me electronically.  I feel that my investment life is trapped in the Matrix, and I wonder when someone will offer me a choice between the red or the blue pill.  “Welcome to the real world”.

There are today investors insisting upon physical delivery of precious metals.  Banks have perhaps taken massive short positions, selling virtual gold and silver without having much or any of the real stuff.  The word on the street, e.g., is that J. P. Morgan has a massive short position in silver (see Eric Fry); Mish argues that J. P. Morgan probably has a hedged position, but he is admittedly speculating:

If JPM is hurting as the silver bulls claim, pray tell why does it not show up somewhere? Where is the proof JP Morgan is naked short silver?

To be fair, I do wish JPMorgan would comment on this. Why don’t they?

Why don’t they indeed?

Is it possible to create virtual inflation?  What would it look like? I know this: the metaphor of saying that the central banks are “printing money” is worn out and does not adequately reflect the vast quantity of virtual wealth that has been create ex nihilo.  So I suggest we call it instead “virtual money”–or the like, so that we the people can began to get our heads around what the banks are doing to our assets.

Warren Buffet redux

Posted by

4

Warren Buffet is worshiped by many investors.  Personally, I respect his ability, follow some of his principles, but remain nevertheless skeptical.  I’ve criticized him for his support of the Obama presidency, saying it was the most costly decision he ever made.  But it turns out I’m wrong, if those who say that he profited from the bailouts, stimuli and generally easy government money that has been handed out, saving the butts of banks in which he had invested (see e.g., Barry Ritholtz).  At Forbes, Drew Mason castigates Buffet aptly over his comments about gold which have apparently led many to forgo precious metals as a hedge against currency inflation, thus allowing government to rob the people through the devaluation of their savings.

But the most damning article that I’ve ever read against Buffet appeared yesterday at the American Thinker.  In it, Christopher Chantrill accuses Buffet of being a robber baron.  The life insurance lobby is apparently vying to have Congress reinstate inheritance taxes in the US.  That’s because life insurance is exempt from taxes at death, and so people with larger inheritances must protect their heirs by taking out expensive life insurance policies.  Chantrill shows how a mega-billionnaire like Buffet feeds upon the small business owners and other little people who manage to put together a nice little fortune through risk, sweat and sacrifice–at their death Buffet buys up their business which the heirs must sell to pay the death tax, or before they die, he rakes in the big bucks through expensive life insurance policies.  It should be criminal, but instead, it is the government which enforces this robbery.

In Canada we don’t have death taxes. No, the law here states that immediately upon death the estate must pay the full amount on RRSP (retirement) savings accounts and retained earnings in any companies that the deceased may have built up.  “Retained earnings” refers to the increased book value/equity that the business owner has in his business.  Let’s say you started a business from nothing 50 years ago and today it is worth $10,000,000 and you own a 100% stake in that business.  Your retained earnings could be as much as $10,000,000 and you would have to pay all the tax all at once the day you die (only a spouse, as with the RRSP, may inherit it without paying the tax).  This has the same evil effect on business in Canada as does the death tax in the US.  I know because someone close to me is forced to pay for a large life insurance policy because when he and his wife have finally both died, all the taxes on the retained earnings are immediately due, and the heirs, his children, would have to shut down the family business to pay the taxes, putting 30 people out of work; his life insurance policy thus is to pay these taxes so that the company can remain intact.  This is a great thing to fear if you are working in a second generation family company, but to be welcomed, if you like Buffet, are selling life insurance.

If that is what it takes to invest like Warren Buffet, then please count me out.  I think righteous investors should steer clear of investments which prey upon hard working business people in collusion with state power.  That just doesn’t seem righteous at all.

The gold ponzi scheme II: Jim Rickards’ anecdotal evidence

Posted by

2

A few days ago, I suggested that paper gold was ponzi scheme.  Banks are selling unallocated gold certificates to customers on a fractional reserve basis.  This is what is called a “naked short”.  It is naked because the banks don’t have access to the assets to cover their short.   Jim Rickards reported an anecdote that would verify this very point in an interview with (hat tip Business Insider’s Gus Lubin):  The owner of a ton of physical gold, who had placed it in safe keeping at a Swiss bank, recently asked for delivery, and it took the bank a month to comply with his request, only after requests from lawyers and threats to expose the bank publicly.  The story is told at about the half way point on the MP3 that can be heard here.  The best explanation for this delay in delivering their client’s gold is that that the bank had shorted it, and it literally took them a month to buy back the ton of gold; but they were supposed to be holding it in their vault for the client.

Needless to say, I’m not investing in banks–even the “safe” Canadian banks like the Bank of Nova Scotia; my last position was closed when I bought back a put option on BNS on 21 Oct–I’ve become convinced that banks are far too complicated for a simple guy like me to own.  When they have to cover the gold and silver that they’ve shorted, it will make the sub-prime mortgage crisis seem insignificant by comparison.  Yes, they have shorted silver too.  This is the conclusion of this video (@ 26:35):

Peter Schiff is a mensch

Posted by

1

I enjoy the tenacity of Peter Schiff and his willingness to speak against the consensus. Schiff has been consistently critical of the debt bubble in the US and he predicted the fall of housing prices in the face of mocking and shouting down by other “experts”.  Consider this 2006 video from Fox News:

For a long time, Schiff has recommended precious metals and continues to do so despite many who say that gold is “hyper-overbought” (Dennis Gartman, September 29–when gold was trading at $1300).  Against those who think that there is a gold bubble, Eric Sprott claims, “I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it.”  Now, there is a new Tech Ticker debate between Peter Schiff and Gary Schilling.  If it is appropriate to call people who insist that gold is the best investment as “gold bugs”, then Gary Schilling is a “bond bug” because he is inflicted with a disease now appropriately named as “Fiat Currency Fever“, the irrational view that the US dollar is a the best and safest investment–despite the severe and secular bear market that the dollar has suffered since 1971 when it was taken off the gold standard.  At a certain point, Gary Schilling claims that the Federal Reserve doesn’t create money–a trillion dollars that banks have received from the Fed is just sitting in the banks.  But unfortunately Schilling seems to be dead wrong on this point, because the banks have been lending this money to the US government, and it has actually gone out into circulation in the form of food stamps, federal employee wages, unemployment benefits, Social Security benefits, etc.  There is some serious monetization of debt going on in America (cf. Monty Pelerin), for Bernanke is trying to re-inflate all the bubbles.

Despite being right most of the time, Peter Schiff still faces fierce opposition from critics, including economists–you know the guys with PhDs, who claim that gold is barbarous relic.  I agree with Schiff.  For I believe that only God can create something out of nothing, and when a central bank expands the volume of fiat money inflation is the inevitable result.  This is an immutable law of economics.  When hyperinflation hits in earnest, then all those who own precious metals will be very thankful that they listened to Peter Schiff.