…Calmly observing the changing world

Wouldn’t It Be Loverly?

Usually when there are rumors flying around the internet about commodity intrigue, with deliveries potentially causing a shortage and a subsequent price spike, we are talking about gold or silver.  In this, very unusual case, we are talking about… chocolate.

An originally mysterious investor stood for delivery on a massive number of cocoa contracts causing wild theories to circulate.  Just how much was it?  About a billion dollars worth.  The markets will have to wait to see what kind of impact such a wild and unexpected investment has.

Japan’s Unwanted Strength

The Japanese politicians and bankers have been struggling under what they see as their currency being far too strong in recent months.  It now looks like China has been pouring money into Japanese treasuries instead of American bonds for a change.

A Chinese economist commented, “Investing in Japanese bonds is safer because so much of the country’s debt is held domestically, and the yen is on course to strengthen further.”    The irony in the economist’s statement is that Japan and China are the foreign holders of all of that American debt and that China’s actions of purchasing so much Japanese debt seem sure to be the driving force behind the yen’s “course to strengthen further.”

Rare Earth

So called rare earth metals are a crucial component of modern technology (especially the “green power” technologies).  August was a pretty big month as far as this behind-the-scenes portion of our world goes.  Just as China (which essentially controls the rare earth market) was nearly banning exports to potentially corner the entire market, the American company MolyCorp (MCP) launched it’s IPO.

It turns out that there are some great rare earth deposits in the US for MolyCorp to exploit, it’s just that the Chinese made it so wildly attractive for companies to mine it on their soil that all of them closed up shop and moved to the Middle Kingdom.  Now that all of the world’s rare earth mining companies are well-established in China, almost none of the rare earths are allowed to be exported out of the country.  Neat trick.

Investing In Yourself

Not enough people buying your country’s shaky bonds?  Sure, you could have your central bank buy them like the US does, but why not just use the national pension system to hold interest rates down?

Spain, at least, thought this sounded like a great idea, and the Spanish version of social security now holds a full 90% of its worth in very dubious Spanish treasuries.  In for a penny, in for a Euro, I guess.

More often than not, the Federal Reserve presents a united front in as many of their statements as possible.  So we should take notice when – like now – there is a high profile departure from the consensus opinion.

“Monetary policy is a useful tool, but it cannot solve every problem faced by the United States,” Mr. Hoenig told local Chamber of Commerce members…

NY Times

Well, it’s a start, but something tells me that the members of the Chamber of Commerce already had a pretty good idea that 0% interest rates weren’t exactly a panacea.

“In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long.”

A thinly veiled attack on Alan Greenspan? Give me more!

“I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no shortcut.”

Okay, okay – calm down.  This is not, I assure you, a glimmer of hope that sound monetary policy will return to the United States.  For one, Hoenig is still advocating “accommodative” policy – he just wishes it weren’t quite an insane policy.  Even that does sound good at first.

But what sets Hoenig apart from his collegues is that he believes the economy is even stronger than they do, and that we are sending the wrong signal to the market that it still needs help.  The country has already been turning around – in his mind – and he’s looking back on Greenspan’s failure to raise interest rates more quickly an example of what not to do.

While it’s hard to begrudge Hoenig for standing up and speaking the truth, it is perhaps a bit too bitter a pill to support him.  Firstly, he is still a true believer in the entire fractional-reserve fiat-money central-banking disaster of a system.  And secondly, the economy is – and this should be apparent to all – limping along rather poorly at the moment.  Yes, we’ve long heard of green shoots and corporate balance sheets… but this recovery just doesn’t seem to have teeth.  It never did.

Therefore, at best, I can only sympathize with Hoenig.  Since he is so optimistic about the economy, he has come to a different conclusion from his fellow co-conspirators.  Despite his advocacy of what sounds like reasonable monetary policy, we can only lament its foundation of sand: the false belief that we are growing our way out of yet another recession.

That the Federal Reserve has at last reached “the long run” that has been so artfully delayed, has not yet been understood by even the most well meaning officials.  To be sure, even Hoenig with his logical words, is still stuck thinking firmly within the box.  That the entire box is in free fall just isn’t something he can deduce from inside of it.

Welcome to the world of bullion coin investing, a business that has soared alongside the popularity of gold despite its disadvantages…

MarketWatch (emphasis added liberally throughout)

This certainly caught my eye.  I wondered, just what were the disadvantages?  Surely, I could read on and be informed of these.

The coin craze is part of gold’s growing investment allure, based on fears of currency debasement, inflation, a debt debacle in Europe, and rising debt levels in the U.S.

Something that even might protect me from currency debasement sounds good to me.  Still – a coin craze?  Is that what we have?  Is everyone you know buying as many gold coins as they can?  Are financial news outlets recommending gold, or still bashing it despite 10 years of incredible gains?

The article goes on for a while, roughly comparing those would buy coins to those who might speculate in penny stocks.  And yet, who will step forward and actually explain the disadvantages?  Wait for it…

“Coins are unable to give you the most bang for your buck,” said Jon Nadler, an analyst with Kitco Metals Inc., a dealer of coins and other bullion products.

Ahh, our old friend Jon Nadler.  Just when you thought a coin dealer would try to sell you coins – enter Kitco.  And yet, it sure makes you wonder about the “other bullion products” bit, doesn’t it?

“Secondly, you are going to have questions about liquidity … it’s not going to be as easy as you think to sell them.”

While it’s difficult to predict the future, for past few thousand years gold coins have been an extremely liquid investment.  Establishments in every medium-sized city have been willing to provide local currency for a little gold.  Unlike complicated modern transactions, you don’t even need to speak the local language… a little pointing and grunting should suffice.

Coin owners are also exposed to total loss in case something happens with their storage arrangements, Nadler said.

I suppose investors should… buy stocks and government debt to avoid exposure to total loss then?  What a joke!  Or maybe he is touting Kitco’s gold pool account – which can never be stolen by virtue of the fact that the gold probably doesn’t actually exist.

But just when you want to say that the article is simply encouraging investors to avoid higher-margin coins in favor of bars, we get this:

The financial breakdown scenarios invoked by some die-hard gold coin and bar buyers also don’t work for Nadler. With the collapse these scenarios envision, “you probably need lead, not gold. And who’s going to make you change?”

No bang for your buck there, eh?  So, gold is a good investment – but not actual real gold that you can hold in your hand.  After all, that won’t save you anyway.  What you want is the world to collapse just enough that gold goes up and you can make money in your Kitco pool account, but not enough that you wish you had bought the real thing.  And think of all those storage costs you save on by owning virtual gold!

And while I guess it’s true you can’t eat your gold, you certainly can’t eat an electronic entry in a Manhattan computer that says you lent a bankrupt nation money at no interest and are due federal reserve notes of unknown value.

Modern economics’s ongoing failure in Japan is an especially intriguing spectacle to behold.  The country has an enormous debt – more than it could ever hope to pay off, and all efforts to revive the Japanese economy by the intellectual class have failed to do anything besides creating more debt.

You might expect that after this decades-long failure, that voices in Japan would rise up in protest of discredited economics and reject the absurd policies of the past.  Sadly, the newest voices in Japan are stating just the opposite:

“Insufficient monetary easing has been the reason why Japan hasn’t been successful in getting rid of its deflationary gap, and there is nothing more to say than that,” Mr. Watanabe told Dow Jones…

MarketWatch

And yet by monetary easing we  know that Mr. Watanabe doesn’t think that the Bank of Japan should lower interest rates – they are already at 0.1% and cannot realistically go any lower.  Monetary easing in this sense can only refer to the outright printing of money or a more underhanded version of the same thing.

In a sense, of course, Mr. Watanabe is right.  If the Bank of Japan printed enough money, the currency would cease to exist and deflation would not be Japan’s problem.  However, the ingrained belief that inflation will stimulate an economy seems as outmoded as a Made in the USA sticker.  He’s hoping for a “2% inflation target” to be set – but once inflation is loose, it ceaselessly erodes the value of currency through its stealthy exponential nature.

Although we’ve become accustomed to thinking about 2% inflation as “low”, this is far from reality.  In 20 years, a currency with 2% annual inflation will have lost a full one third of its value – that such currency destruction can be openly advocated by essentially all of the world’s countries seems strange, but then – what doesn’t seem strange lately?

Countries around the world openly complain that their currencies aren’t losing value quickly enough, and blame their neighbors for “cheating” by sending too many goods in return for their currency.  How US politicians can repeatedly complain that US dollars buy too much cheap junk from China coupled with China’s verifiable “cheating” shows that both countries are run by completely incompetent individuals.

Yes, the Chinese are run by morons too – it’s just not nearly as obvious yet.  As the countries around the world continue this so-called “competitive devaluation” (all countries trying to make their currency the least valuable in the belief that they must increase exports), we will certainly see things we have never seen before.  Although its hard to predict what will happen, it certainly won’t be good for bondholders.

In the 97 years since the creation of the Federal Reserve, the US dollar has lost just about 97% of its value, while it retained essentially all of its value from the founding of the country up until the creation of the fed in 1913.  I don’t think I’m the only one worried about the last 3 percent in the next 3 years.

If your weather hasn’t cast a pall over June as it has here in the Pacific Northwest, the news and the economy surely have.  The oil spill in the Gulf of Mexico highlights governmental incompetence, the G20 lacks unified economic policy, some place called Kyrgyzstan is a complete basket case, and currencies and markets gyrate wildly.  Good riddance, June.

Digging deeper, the back-burner news did everything to deepen the impression of an incompetent, out of touch government…

EPA focuses on … the Amish

As the Gulf Coast faces an existential threat, you might think the EPA has better things to do than pick on the Amish – but you’d be wrong.  Apparently, those filthy Amish polluters got caught red handed!  Yes, it seems they are polluting the environment by dumping waste into rivers.  A bunch of manure, indeed.

Russian Spy Captured, then Lost

The whole Russian “spy” situation is a little bit ridiculous.  Did Obama not have a clue that right after his high profile French-fry-eating visit with Medvedev  that word would break that a decade long investigation resulted in Russian “informants” being detained.  Turning the ridiculous into the insane, the detainee in Cyprus was let go on bail and hasn’t shown up since.  It certainly seems like amateur hour for the bureaucracies.

Bernanke’s Not Golden

When representative Paul Ryan was bold enough to call gold’s recent high prices “a vote of no confidence against fiat currencies” and solicit Federal Reserve Chairmen Ben Bernanke’s response, he stunningly played dumb:

“I don’t fully understand movements in the gold price,” Mr. Bernanke admitted. But he suggested it might be another example of investors fleeing risky assets and flocking to assets that are perceived as less risky, not only Treasury bonds, but also ones like gold.

Wall Street Journal

Someone should needs to tell Bernanke he isn’t one tenth as slick as Greenspan.  Hmm… just what would Greenspan have said?  Well, we can imagine that he wouldn’t have said he didn’t know.  Probably something more like, “While the recent price action of various commodities, including precious metals, might, no doubt – in part – be attributable to perceived fiscal and monetary policies, I could only speculate as to the specific driving forces behind the relative strengths of individual asset prices.”  Sure, he’d be lying and talking in circles – but… isn’t that practically the Fed Chairman’s job?

In any case, June was a gloomy month, and has set the stage for a summer of thunderstorms.  The best advice I can give is to simply be prepared.  I can’t be wrong because I’m not predicting anything, and few people ever regret being prepared.

Supposedly, countries around Europe are tightening their belts.  Gone are the days of reckless spending, they say.  The Tories are ruthlessly slashing services after taking power:

Chancellor of the Exchequer George Osborne announced today a 25 percent cut in spending over the next four years, excluding overseas aid and the National Health Service. The move will depress revenue essential for growth, Blanchflower said in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“These are absolutely draconian spending cuts,” said Blanchflower…

Business Week

And although less severe, the proposed German spending cuts put them on the defensive as they contradict Keynesian doctrine:

Reducing the budget deficit by 10 billion euros ($12 billion) per year “won’t put a brake on the world’s economic growth,” Merkel said, relating what she told Obama yesterday. Germans are more likely to spend money if they feel the government “is taking precautions” to ensure solid finances, she said.

Bloomberg

You might understandably get the impression that European countries are taking aggressive measures to balance their budgets.  But here, you’d be completely wrong.  In fact, all of these countries – and virtually all countries – are continuing to slip farther into debt.

That’s right, the Tories’ “draconian cuts” still won’t balance their budget.  They will still spend more than they take in.  Apparently, draconian cuts only means we need to make sure that we don’t spend too much more than we make, or else we won’t be able to borrow the money that we need to spend – or something like that.

Here, we must seemingly ask, “why?”  If the world’s economic problem is debt (consumer debt, sovereign debt, corporate debt), then why shouldn’t the solution be to pay off our debts?

The answers are grim.  The debt, you see, is never actually intended to be paid off – we are intended to be debtors in perpetuity.  In our strange world that we’ve created for ourselves, it’s not even clear that it could be paid off mathematically (where do you think the money comes from to pay the interest?), but it certainly isn’t going to be.  No one actually believes any longer that the US will repay $13,000,000,000,000 anyway.

Right now, no one cares either.  As long as we keep making our minimum payments, and borrowing more each year.

Retailers are struggling to turn out consumers.  It seems like they are only willing to spend money when they think are getting a good deal – imagine that.

On Saturday, I was unwittingly part of such a consumer response myself.  My wife had strategically placed me in line at Old Navy with shirts (not men’s shirts) that were on sale for two dollars each.  The store was flooded with shoppers of $2 flipflops and $2 shirts.  The 5 per-person per-item limit necessitated my position in line.

I was pretty impressed by the number of shoppers who turned out for the sale.  With 8 checkout counters going, the line wrapped around the store.  You can see a small portion of the line here:

In the same vein, Starbucks announced free wi-fi beginning next month in their stores – in an attempt to lure consumers.  This really makes a lot of sense, as Starbucks’s current system is simply a hassle.  With so many consumers using PDA and cell phones to connect, it’s definitely a hindrance to use the AT&T login system, and it’s not very intuitive.

So far the trend for consumers remains intact.  They’ll readily accept “cash for clunkers” and the homebuyer tax credit – and they’re happy to go out of their way to purchase if there is a truly good deal to be had.  But the old days of spending freely seem to be gone, and rightly so.  When will the government follow suit?

With the pace of economic news vastly exceeding the amount of time I currently have to dedicate to this blog, there is no point in trying to keep up.  Despite this, I’d like to quickly post regarding a comment made by Germany’s finance minister Wolfgang Schäuble:

“I’m convinced the markets are really out of control. That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism.”

CNBC

I believe this remark belies a deeply rooted but often hidden truth.  If the markets are out of control… out of whose control are they?  A bit of a trick question perhaps, because the markets never were in anyone’s control.  There is nothing to fear here except perhaps the “really effective regulation” which will soon burden the markets.

And yet, not in the gloomiest, grayest, most sterile corner of the seemingly all-powerful Soviet Union was the market ever truly in anyone’s control.  It found a way to survive because market forces are neither idealogical nor political, they are simply human forces which continuously bubble to the surface to astonish well-meaning and diabolical bureaucrats alike.

Don’t worry when things seem out of control… rather worry when they seem too controlled.  And yet, know that the appearance of control and control itself are not at all the same.

It’s both heartening and unsettling to see one of MarkOnMarket’s key issues come to its initial fruition.  Greek bonds – never the bedrock of stability – have finally been shown to be worth just about nothing.  Interest rates soared passed double digits after S&P belatedly rated the bonds as “junk” which caused a wave of forced selling by funds who aren’t allowed to hold junk bonds.  The truth is, if these funds didn’t know that Greek bonds were junk before S&P told them, then they have no business investing in sovereign debt in the first place.

Yet, it’s important to remember that this is only the “end of the beginning”, and Greece is not really what this is about.  As a first step, it’s part of the erosion of respectability that Southern European debt artificially gained as it was subsumed into the Euro-zone.  In a much broader context, it’s yet one more signal of the passing of the economic torch from West to East.

As the dominoes fall across Southern Europe – and investors must assume they will – we should be cognizant of the implications.  The German-dominated ECB will eventually be forced to shed the fiscally lax “PIGS“, or to successively and continually bail them out.

In fairness, the problem is not with Southern Europe intrinsically, but rather the idea that the entire continent could be united in a single currency despite very different mentalities and cultures regarding money.  What Southern Europe so desperately needs (inflating away their debt) is the one thing that the Germans can’t give them in good conscience.

The most serious and broadest issue poised by the Greece case, however, has only been hinted at on this blog.  As investors get used to the idea that government promises are sometimes quite literally worth only the paper they are written on, a serious threat to the global monetary system arises.  When investors start questioning everything they are bound to find answers that are less than satisfactory: Just how does the West plan to pay back its debt? Or even just keep paying the interest?

This is not of course to say that this threat is bad and that the current system is good.  At the same time we must not be naive about the future.  No matter how inequitable we perceive the current system, it’s possible that the future system will be far worse.

We must then, walk a fine line.  Let us first realize that the current debt levels of the West are completely unsustainable.  And yet – let us not cheer on the end of the ridiculous financial position of what so often appears to be the twilight of Western Civilization.  Whether through debt defaults or massive inflation, the situation will be poor.

There will be a few choices to make along the way.  Choices somewhere between terrible and disastrous.  What starts in Greece will come to many of us as investors slowly (painfully slowly) come to realize that the West is simply not credit worthy.

Across the country today (note to media: April 15th is not called the “Ides of April”), so-called Tea Parties were held to protest – well, to protest against a lot of things.  I was on site at the rally in Salem, Oregon.  If you’re a little lacking in your Tea Party knowledge (or if you’ve been watching too much TV), here’s a summary of what most Tea Party members believe:

• The US has taken on unsustainable debt
• “ObamaCare” should be overturned as quickly as possible
• People are Taxed Enough Already (TEA)
• The Federal Reserve should be at least audited, and possibly disbanded
• The federal government is too intrusive and has overstepped states’ authority
• Illegal immigration threatens national sovereignty
• Don’t even think about more gun restrictions
• The IRS and/or the income tax severely harm their freedom

In addition to these basic tenets, there seemed to be a strong pro-life contingency at the rally.  For casual political observers this may not make sense, but the reality is that Roe v. Wade is seen as a huge attack on the right of states as well as a typical example of the insane lengths the Supreme Court will go to in its efforts to distort the Constitution.

Today being April 15th, the event largely focused on curtailing government spending and reducing tax burdens on future generations:

Despite being in Oregon where there was a planned attempt to infiltrate the Tea Party movement with fake members who would feign radicalism, there were no Nazis, racists, or anything of the sort.

Political observers should note that the organizations seemed to all play nicely together.  The Republican Party was clearly in charge of much of the event, but did so without monopolizing the time, and minor parties were allowed to freely circulate.  So while some might cast the Tea Party movement as having been coopted by the establishment, for now, it’s in everyone’s best interest (Republicans, FreedomWorks, 912 Project, etc) to spend their energy focused on common enemies.

Still, the Republicans would do well to take care.  The Tea Party movement wouldn’t have coalesced if the Republican Party had been on its toes in the first place.  For the moment, Republicans seem likely to make huge congressional gains in November.  Whenever the Republicans do finally gain power, they are likely to be viewed at least as suspiciously as the Democrats – because at least the Democrats don’t pretend to agree with the Tea Party movement.  If the Republicans in power prove once again that they are “Socialist Party B” to the Democrat’s “Socialist Party A”, don’t expect any punches to be pulled or any protests to cease.  Whatever is clear about the Tea Party movement, it is that there has been a complete disintigration of any party loyalty formerly held by its adherents.