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The Daily Reckoning | Saturday, April 20, 2013 Pining for aggressive inaction...and getting the opposite... Readers weigh-in on our favorite yellow metal... Plus, all this week’s reckonings neatly compiled for your Saturday perusal... --------------------------------------------------------------- The Embarrassing FACT We Found on Page 210 of the White House Budget... On Page 210 of Obama’s latest budget, we found a fact that should embarrass... or enrage... every single American. It doesn’t matter if you’re a Republican or a Democrat. What exactly did we find? Click here to find out. Joel Bowman, checking in today from Buenos Aires, Argentina... The Central Planners are at it again, Fellow Reckoner. Greasing the gears...feeding the engines...and speeding headlong and strapped to their seats towards the next crisis. Leaders of two of the world’s largest criminal organizations gathered in Washington, D.C. this week for the World Bank/IMF Spring Meetings. The Mob fête was attended by all the usual suspects...central bankers...trade secretaries...finance ministers...policy wonks and assorted other rapscallions and reprobates. Their wooden pledges sounded nice enough... U.S. Treasury Secretary Jack Lew called for “universal women’s empowerment.” World Bank President Jim Yong Kim called for “universal education.” As for the IMF’s own Managing Director, Christine Lagarde, madam had ideas of her own: “What we need is a full-speed global economy,” she told the audience, “growth that is solid, sustainable, balanced, but also inclusive and very much rooted in green developments.” “Why stop there?” we wondered. Why not promise strawberry ice-cream for the elderly...and winning lottery tickets for all inner city families of five or more...and high-speed Internet for orphans...and...and...and... It’s easy to make pledges, Fellow Reckoner, to promise every downtrodden dolt and hard knock story something for nothing. The hard part comes in actually paying for it all. As everyone knows, strawberry-flavored Internet lottery jackpots don’t come cheap! And yet, the powers-that-won’t-stop-being don’t seem overly concerned in the face of this inconvenient accounting truth. Shocker! Their masterly payment plan is, to quote the Talking Heads, the “same as it ever was.” As we remarked in these pages a couple of Weekenders ago, the Fed, the BoE and the ECB are providing a massive “jolt” of freshly inked currencies to their respective economies, hoping to prop up optimistic asset prices. The rate of expansion is, says Bill Bonner, “unprecedented in world history.” We’re talking, of course, about ZIRP, QEI, QEII, Operation Twist (OP) and other such dubious, acronymic concoctions. All the tools’ tools, in other words. But wait! Doesn’t EZ money policy lead to rank malinvestment and moral hazard...the exact same recipe that baked the world economy into such a sordid mess the last time? Well, yes. As CounterPunch’s Mike Whitney explains, using this graph: Investors have boosted their borrowing to near-record levels to load up on stocks. The last time that margin debt was this high was just before the bubble burst in 2007. In January, New York Stock Exchange (NYSE) margin debt tipped $366 billion, just shy of the 2007 peak of $380 billion. The Fed’s zero rates and $85 billion per month bond buying program (QE) have sparked the same irrational exuberance that preceded the Crash of ’08. Investors are piling on the leverage because they feel confident that Fed chairman Ben Bernanke will not allow markets to fall too sharply. (This is called the Bernanke Put.) Skeptical Reckoners might be wondering, therefore, how do these Ph.D. ponies know where they’re going? How do they know their “extraordinary” measures will work? Even by their own admission, they don’t. Speaking at the same D.C. gabfest, Lorenzo Bini Smaghi, a former member of the European Central Bank’s executive board, admitted, “We don’t fully understand what is happening in advanced economies.” Yes, Mr. Smaghi, we all know that you don’t know what you’re doing. Rest assured, your ignorance was never in question. It is your -- and your colleagues’ -- arrogance that is on trial. Like Smaghi, Sir Mervyn King, the outgoing governor of the Bank of England, must have been caught off-guard when he let it slip that, “there is the risk of appearing to promise too much or allowing too much to be expected of us.” Again, Sir King (...Jr. III Highness Earl Duke etc.), let us repeat: Far from expecting too much from you, we would happily settle for nothing at all. In fact, we want nothing from you. No cure-all levers. No magic buttons. If only you and your meddlesome ilk could stay your chubby little hands. Alas, the possibility of aggressive inaction seems unlikely to prevail... Reports CNBC: “The IMF was clear in its global financial stability report that it did not want to see an end to the extraordinarily loose monetary policy being implemented across rich countries.” José Viñals, the IMFs head of financial stability, even went so far as to claim that central banks’ efforts were “absolutely necessary.” And so, as their engines careen toward the precipice, the central planners busily shovel loads of blind incompetence into the blazing hot furnaces of their own ego. “Full steam ahead!” they holler. “Full steam ahead!” Regards, Joel Bowman The Daily Reckoning’s Editor at Large Follow Joel on Twittter: @JoelBowman P.S. In this week’s feature column, The Australian Daily Reckoning’s Dan Denning takes a look at the unintended consequences of meddlers’ actions. Please enjoy... [NB. This column originally appeared in these pages on Wednesday, April 17, 2013] The Daily Reckoning Presents: It’s important to know your limitations as a human being and not to mistake good fortune with personal brilliance. But we suspect gold’s days as the premier monetary asset are far from over. In fact, we suspect that gold will be around long after the yen, euro and dollar are being used for toilet paper. Read on... Trees Don’t Grow Gold By Dan Denning If you’re the sort of person who keeps a diary, put a star in the corner of this week’s entries. Ten years from now, you’ll look back on this week and be amazed at what people were saying. What will be even more amazing is that some people were doing exactly the wrong thing at the right moment. More on that below. First, the facts. The gold price plummeted nearly 10% on Monday, or about $147. Its two-day loss of 13% was the biggest in 30 years. Gold is not alone, either. The U.S. stock market is also slumping. On Monday, the Dow Jones industrials suffered its biggest one-day loss since the U.S. election in November last year. Within the S&P sectors, materials and energy both fell by nearly 4%. What’s going on? The fall in the materials and energy sectors was not matched by the finance sector. Financial stocks were down, but not nearly as much as anything commodity related. That’s worth noting. There are at least some sectors of the market taking note of underlying events in the real economy. Energy and materials are not sectors likely to be driven by enthusiasm for more quantitative easing by the Federal Reserve. In fact, the fall in commodities and most of the stocks in extractive industries can be seen as a market repudiation of the healing power of QE. Bernanke may be pumping up financial stocks and financial earnings, but he’s doing a whole lot of nothing for the well-being of the real economy. It should be noted that all of this price action in gold, commodities and the stock market happened before two explosions near the finish line of the Boston Marathon late Monday afternoon. Markets have become less sensitive to these types of events over the years. But the explosions in Boston will certainly contribute to a sense of fear and uncertainty in the markets. In the past decade, those two sentiments have usually been accompanied by rising gold prices. But gold is currently in the grip of an epic liquidation. Who is selling and why? Those are interesting questions. But ultimately, both are unknowable. It could be leveraged hedge funds who were long gold or who used gold as collateral to lever up on stocks. It could be owners of large positions in ETFs. It could be manipulation. It could be panic. Yet look at the chart below. Shares in Apple are down 42% in the last eight months. After the last two days, the gold price is down exactly half as much -- 21%. Which one has crashed? Or have both simply corrected? Our friend Marc Faber made this point (the inspiration for the chart) in an interview with Bloomberg TV. Dr. Doom said: “I love the markets. I love the fact that gold is finally breaking down. That will offer an excellent buying opportunity. I would just like to make one comment. “At the moment, a lot of people are knocking gold down. But if we look at the records, we are now down 21% from the September 2011 high. Apple is down 42% from last year’s high. At the same time, the S&P is not even up 1% from the peak in October 2007. Over the same period of time, even after today’s correction gold is up 100%. The S&P is up 2% over the March 2000 high. Gold is up 442%. “So I am happy we have a sell-off that will lead to a major low. It could be at $1,400, it could be today at $1,300, but I think that the bull market in gold is not completed. Nobody knows for sure, but I think the fundamentals for gold are still intact.” What are the “fundamentals”? That gold is an asset that is no one else’s liability, for starters. Beyond that, the last month has provided you with evidence that in a pinch, the political and monetary authorities will confiscate your savings. Central banks across the planet continue to print money and monetize government debt. These are all facts too. It tells you that the people who control and profit from the printing and use of paper money are willing to do just about anything to retain their rank and privilege. It’s their system, and it works well for them. They do not like the gold price acting as a signal of public confidence (or lack thereof) in paper money or public finances. But take all the emotion of wild price swings out of it, if you can. Ask yourself whether you think paper money will gain or lose value over the next 10 years. And then ask yourself if you would rather have money in the bank or precious metals in your hands. The answer to that question will tell you all you need to know. Besides, speaking from experience, this is the first time in almost 10 years that we can remember gold being a hated asset. It was hated in the early part of the decade for all the same reasons: It had no real economic use... it produced no yield, but imposed storage costs... it didn’t do anything other than sit there and look pretty in a cold, dark room. The people who didn’t understand gold then don’t understand it now. The only difference today is that the horrible price action has brought out the gold bears from the woodwork. They are exacting their verbal revenge. The crowd is bleating for lower prices. Of course, it could be that we are so embedded in our own position, so wedded to our own beliefs and so complacent after 12 years of rising bullion prices that we’re incapable of considering the evidence in front of us. It is possible we’re refusing to see the gold bear market because we’re emotionally attached to a long-term gold bull market. Yes, of course, it’s possible. It’s important to know your limitations as a human being and not to mistake good fortune with personal brilliance. But we suspect gold’s days as the premier monetary asset are far from over. In fact, we suspect that gold will be around long after the yen, euro and dollar are being used for toilet paper. Even artists -- not famous for their interest in financial matters - - seem to know this. One of the exhibits we relished at Hobart’s Museum of Old and New Art took some time to sort out. This is as it should be with a good piece of art, whether it’s a book, a movie or something else. The meaning -- if there is one -- shouldn’t come right out and hit you on the head. If it’s too obvious, it’s either a soup label or a traffic signal. The exhibit in question looked like a long line of leaf patterns on colored paper, at least from a distance. As you got closer -- and you’d have to lean in really close to examine the paper each leaf was matted on -- you could see that the colored paper was really a collage of old paper currencies. Most of them were from places in South America or Southeast Asia. This work of art conveys many different emotions and messages, depending greatly upon the individual mind that absorbs it. But for the narrow purposes of today’s essay, the leaves of defunct paper currencies convey a monetary, and perhaps ecological, message. All those forests cut down to make paper currencies that are worthless. Something real turned into something unreal. Something valuable lost; nothing worthwhile gained. That is one meaning you might extract from this canvas. Paper money possesses value only because everyone tacitly agrees that it does. When that agreement breaks down, the money becomes worthless. That’s why paper money is ephemeral, everywhere and always. It has always come and gone through history, because those who print it cannot resist the temptation to print more. They always do. But gold is untreelike. It doesn’t grow on trees. And you can’t extract more of it from a printing press. That’s why people have always used it as a store of wealth and a medium of exchange. Its physical properties give it a reliability you can never get from paper money that’s backed by nothing but the “full faith and credit” of a government. Are we articulating an overly orthodox or unfashionable view of money? It certainly looks like it, based on the last few days of trading in the gold market. Does gold care? Not a jot. Will today’s paper currencies be the museum exhibits of tomorrow? Only if they don’t all get burned to produce something useful first, like heat. For now, however, all the heat is on gold owners. Regards, Dan Denning for The Daily Reckoning Ed. Note: True, gold owners are getting burned right now. But the price of gold is only one reason to own it. Historically speaking, gold is a hedge against uncertainty and unsustainable paper currencies, as Dan points out above. We recently read a book that perfectly outlined the entire “case for gold,” and we thought you might like to take a look. Click here to secure yourself a free copy. The Trust-Busters Just Created a Monopoly? Government officials have just installed one private firm as the guarantor of our lives, our liberty and our wealth. As a result its bottom line could balloon to lifting investors to double or triple digit gains. By the time it becomes mainstream news -- the chance to profit from it could be lost for good. Learn the details here. ALSO THIS WEEK in The Daily Reckoning... The Great Gold Debate By Ralph Benko Amid an ongoing decline in the price of gold, a major brawl recently broke out in the elite media over... the gold standard. What is this free-for-all all about? And why does it matter? It matters because... the gold standard finally has demonstrated that, after a long eclipse, it is being taken seriously in elite (if not uniformly polite) company. Gold Sell-off Update: 4 Things Investors Need to Know By Adrian Ash So far, 2013 isn’t proving much fun, despite fresh eurozone crisis, plus ongoing attacks on the value of currency by central banks everywhere. How come? Money managers have clearly grown tired of the financial crisis, if not blase. After a full decade of year-on-year gains, gold’s drop is a natural outcome, and by no means does this fall undermine gold’s safe haven appeal. It may well, however, be costing you money you’d really rather not lose. So what’s our take? For what it’s worth... Gold and the Wacky Human Mind By Douglas French The voting machine that is the market deemed an ounce of gold to be worth $1,600 a few days ago and then, whoops, two days later, that same market, the collection of rational minds that trade in the metal, valued that same ounce to be worth less than $1,400. Keep in mind: These prices are in dollars that are not backed by anything other than Uncle Sam’s less-than-creditworthy promise. Bernanke Might Be Getting Nervous... There’s a new alternative to the dollar, the euro and even gold that could be keeping Ben Bernanke up at night. It could potentially be the most decentralized, anonymous and tamper-proof money in human history. To learn more about this new alternative, click here. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors. This week’s topic: Gold First up, Reckoner Freeman writes... Interesting article about precious metals but it is possible that gold’s descent may have been caused by the sinister hand of the Fed Reserve taking short positions and encouraging its investment bank colleagues to do the same. A further example of how rotten and corrupt the Fed Reserve has become and this along with its other unauthorized activities such as currency swaps, etc. should be investigated. As Ron Paul said, it’s past time to audit the Fed Reserve and maybe cancel its ticket. Motive of the Fed Reserve might be that gold’s ascent was an accurate reflection of the Fed Reserve’s poor performance and something that no Fed Reserve Chairman wants to see. Next up, Reckoner C. Hackett wonders... One thought that occurred to me when I closed our gold position was that I was uncomfortable being on the same side of the trade as the central banks (who have been buyers of gold for the last several years as gold appreciated, after selling gold during the previous decade when gold bottomed). It seems a bit of a paradox that the folks that love gold so much and rant about central bank incompetence take the same side of the trade as the central banks! And finally, Reckoner RR writes... Gold is simply beautiful. It has been viewed as such since the beginning of recorded history. And for good reason, it is! I am not a rich guy., but owning gold allows me to feel rich. It is portable, not burdensome. Currently, I only own it as bullion, my next goal is to own it in many shapes and ornaments. DR: Well, Reckoner RR, your beauty just got a lot more affordable. Might be time to, as Rick Rule might say, to “back up the truck.” --- Feel free to email any thoughts you have on the matter to the address below and... ..enjoy your weekend. Cheers, Joel Bowman, Editor at Large The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at dr@dailyreckoning.com Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, feel free to cancel your free subscription here. By submitting your email address, you consent to Agora Financial delivering daily email issues and advertisements. 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