|
Overview
Last week systemic
risk was in the air. General Motors and Ford's bonds reduced
to junk status. Rumors of at least one hedge fund and possibly
others on the ropes. Talk of several major American corporations
in financial trouble. Amidst all of this, the Chairman of the
Fed raised the specter of systemic risk citing Adam Smith's "invisible
hand" and the forces of chaos and creative destruction in
the market.
The message
seemed to be that if something happens to go clunk in the night,
so be it. That is the nature of markets. While the academic in
Mr. Greenspan can be somewhat clinical about financial chaos
and the creative destruction of market entities, the rest of
us might be well-served by heeding the words of Moses Naim in
this week's masthead quote: "The shock waves inevitably
hurt innocent bystanders."
Doug Nolan
of Prudent Bear sees the Fed chairman as an enabler: "Mr.
Greenspan's protracted chairmanship has provided an astonishing
windfall (wealth transfer) to the leverage speculating community."
Now he questions if "the Fed and leveraged community interests
have diverged."
With the specter of a multi-trillion
derivative industry hanging over the world economy, we may have
come to a place where the old adage "too big to fail"
might have evolved to "too big to save." Perhaps that
is what Alan Greenspan has been thinking about lately and that
is what is behind the remarks immediately below.
Chaos and Creative Destruction
by Alan Greenspan
Editor's Note: The following are remarks delivered
by the Fed chairman during a question and answer session following
his speech before the Federal Reserve Bank of Chicago's Conference
on Bank Structure. The question was likely inspired by rumors
making the rounds in the financial markets that a major hedge
fund was in trouble. These remarks are worth posting for the
record.
If there's a lesson to be drawn
from what you are about to read below, it is that a physical
gold hedge should be a feature of every asset portfolio if for
no other reason than to weather a crisis which suddenly looms,
blossoms and wreaks havoc on the financial system without warning.
As Mr. Greenspan tells us, 'chaos' and 'creative destruction'
could occur at any time. We have warned repeatedly here that
a derivative crisis could reach critical mass in a heartbeat.
Thousands of financial institutions worldwide would be affected
overnight. Billions, possibly even trillions of dollars, would
evaporate in a rolling systemic crisis. You will not want to
be scrambling for gold when that occurs. MK
__
Question: Can more (hedge
fund) transparency be required should it be required?
Chairman Greenspan: "You
have to remember, that the one extraordinary important issue
relating to the hedge funds is they act to increase liquidity
in markets. And you have to be very careful to make sure
that, on the one hand, that the hedge funds are completely transparent
to their investors and that the investors are acutely aware of
the nature of the risks and the level of the risk they are taking.
But you also have to be careful about imposing regulation on
these funds to the extent that you inhibit their actions.
Remember, collecting data on hedge funds may appear to give you
a degree of transparency, but most of the data you get
at best will tell you about their strategy of last night.
This morning they have a new one. Consequently, the type
of data which is supposedly to be collected to create a degree
of transparency and knowledge about how these funds are behaving
is actually history. And it's usually quiet unusable, because
it's their very nature to be innovative, changing and never actually
to anticipate necessarily what they are going to find next in
the marketplace which will suggest to them some imbalance
some potential exceptionally large profit arbitrage which they
haven't even anticipated would exist 48 hours earlier.
So I think the question here is to be very careful to be sure
that the people we want to protect are the counterparties to
the hedge funds meaning they have to get all the information
that they need. And that will protect the marketplace and
all their investors."
Question: Are there any
financial crises brewing at the moment?
Chairman Greenspan: Well,
not really. I mean, the problem that I have is that crises
that you can see are probably already behind us. You have
to remember, that the vast majority of imbalances that occur
in markets are addressed very quickly by prices and we never
hear of them. So, it strikes me that what we have to recall
is the terrific insight of Adam Smith that there is something
equivalent to an 'invisible hand' which continuously is readdressing
market imbalances towards equilibrium is indeed what we are seeing
virtually everyday in fact, every hour and every minute
in the markets in which we deal. And I would suspect
that the international context looking at the increasing
degree of globalization that we see almost on a day-by-day basis
that there is something attuned an international invisible
hand that seems to be at work. Markets are always by their
nature driving towards equilibrium. It looks as though
it's chaos- indeed it's that chaos which was disposed of by Adam
Smith in the great insights of more than 200 years ago
which in some respects hold up with very little revision to this
day. In a certain sense that so called 'creative destruction'
in markets which is what Schumpeter defined the process as many,
many years later obviously, is a continuous train which is always
creating a sense of nervousness about something going wrong.
In fact, it's normal. And it strikes me that crises are
very difficult to forecast. Or, let me put it another way:
the numbers of forecasts of crises that one gets day-by-day,
week-by-week, is far in excess of the number of crises that actually
occur. This is the reason why I've argued previously that
since we really cannot know that we are about to get a crisis
until we are right up against it, economic policy-making should
be heavily focused on the issue of creating and sustaining the
flexibility of markets so that when we get pressures of one form
or another, the markets respond in a balanced manner and essentially
remove the disruptions that are causing the difficulties.
Short
& Sweet.
. . . . .
The big news
last week was the lowering of Ford and General Motors' bond
rating to junk status. "This
is the beginning of the end of the U.S. auto industry as most
people have come to know it," says Sean Egan of the Egan-Jones
Rating Company. "In another two years, we're likely to
see substantial layoffs and bankruptcy filings by possibly one
or both of these companies and massive restructurings of
most of the U.S. auto manufacturers" (from TheStreet.com).
. . . . .Add
India to the list of countries declaring that they will be paring
their dollar reserves, according to a Financial Times report.
"Asian reserve
diversification could be disastrous for the dollar -- with the US needing to attract
$2 billion a day to fund its current account deficit -- if central
banks were to stop buying Treasuries and actively sell dollars
instead. Redeker predicts this, with the dollar's share of global
reserves likely to fall back from 64 percent at present to the
53 percent level of the early 1990s." . . . . . . . . .
. . Those
of you who have been with us for a number of years know that
we do not see gold stocks as a proxy for real gold ownership.
We have always said that gold stocks are stocks first and gold
second. As such they need to be assessed on the basis of their
management and future prospects, i.e., production, minable reserves,
etc. They have their place in the portfolio but should not be
viewed as a substitute for gold coins and bullion . . . . . .
. . . . . . CBS MarketWatch columnist Peter Brimelow points out
that "gold
is up 8 percent since the November 2004 peak in the HUI [the
gold stock index] -- yet the index is 30 percent lower." Gold stocks in other words
have taken a beating. Why? Aside from the currency related problems
and escalating costs in material and labor, Brimelow brings up
another point: "Alert observers have also noted the failure
of the big miners generally to reduce their disastrous hedge
books last quarter. This raises the possibility that these
may be more intractable ('toxic') than generally realized --
a.k.a. they pose financial risk.". . . . . . . . . . . .Zurich
Capital's Sean Corrigan points out that "Though the euro's
own woes ahead of the French referendum on the Union's new Bonapartist
constitution are sufficient to keep the rival greenback in relatively
good shape, at present, not everyone has become sanguine about
the dollar's prospects." He goes on to say that the euro
is increasing its share of reserves despite concerns that a vote
against the constitution in France and/or Netherlands could
deal a deadly blow to the single currency . . . . . . . . . .
. . . . . . . Britain's Financial Services Authority is launching
an investigation into hedge funds in London. "The probe,"
says The Independent, "was prompted by concerns that certain
of the 'cutting-edge' trading practices in the £500bn industry,
much of which is based in London, could lead to market abuse
and financial instability. There are also fears that a massive
financial scandal could be brewing after what was described by
an industry insider as "a few near misses. . . .Alan
Greenspan, the chairman of the US Federal Reserve Board, warned
last week that a disaster might be brewing in the hedge fund
sector because of the level of borrowings. In the US, unlike
in the UK, the industry is not directly regulated."
An ABCs
of Gold Investing Update
A is for
Asset Preservation:
Disturbing Trends - Is
Now the Right Time for Gold?
Updated 4/28/05
From time to time I update
this essay - the nuts and bolts of which first appeared in my
book, "The ABCs of Gold Investing: Protecting Your Wealth
Through Private Gold Ownership" almost seven years ago.
Some might find it odd that I update the same essay on a regular
basis, but the fact of the matter is that the message hasn't
changed since the book was written, and the remedy for most investors
- gold ownership - still outweighs all other remedies available.
Judging also from the number of requests for reprint permission,
this short analysis remains a popular educational tool with a
great many investment advisors across a spectrum of specialties.
Since the last time Disturbing
Trends was updated - in September, 2004 - it has become evident
that the tendencies summarized did directly affect the U.S. economy
(though at the time only a handful realized just how pervasive
those conditions would become), and many of the outcomes predicted
did actually come to fruition. For one, the government fiscal
and trade deficits did intensify as predicted until the
phrase 'twin deficits' became part of the daily financial vernacular.
The decline of the dollar did "prove to be the most
dangerous and devastating disturbing trend for the average American
investor and the one most directly linked to a bull market
in gold." And the strong dollar policy did become
"a thing of the past" right down to Alan Greenspan's
apparent and very public abandonment of it in his Congressional
testimony of February 11, 2004.
In short, these disturbing
trends did not go away like many politicians, Wall Street analysts
and university economists predicted, but marched relentlessly
on. Former Chairman of the Federal Reserve Paul Volcker recently
put it this way: "[U]nder the placid surface, there are
disturbing trends: huge imbalances, disequilibria, risks -- call
them what you will. Altogether the circumstances seem to me as
dangerous and intractable as any I can remember, and I can remember
quite a lot. What really concerns me is that there seems to be
so little willingness or capacity to do much about it."
He also remarked that the nation is "skating on thin ice."
We invite you to delve into
this latest version of Disturbing Trends: Is Now the Right
Time for Gold? Though the analysis and the uncertainties
it underscores should be cause for concern, there is a commonly
available remedy - gold ownership - which has a long history
of balancing such risks and offering protection against the uncertainties
to which they give rise.
 NEW Disturbing Trends: Is Now the Right Time
for Gold?
Please
call our Trading Desk for quotes and assistance buying gold coins
and bullion.
1-800-869-5115 Extension #100
4:00am - 7:00pm MT |
Nuggets
Treasury to re-issue 30
year bonds, any takers?
by Peter Schiff
The prospect of the U.S. Treasury
returning to a more fiscally responsible method of financing
its debts has profound implications for the U.S. budget and current
account deficits. While it makes perfect sense for the government
to borrow for 30 years, I would question the intelligence of
any one foolish enough to lend. While it is no secret that individual
American debtors have temporally benefited though the use of
low-cost, short-term financing, most notably through the proliferation
of ARMs, many have neglected to notice that the Federal Government,
the world's largest debtor, has employed the same tactics. .
.
With the national debt approaching
8 trillion, every 100 basis increase in the average rate at which
that debt is refinanced adds 80 billion in additional interest
expense which the federal government must pay annually. Since
the government is already operating in a deficit, this increase
will also have to be borrowed. My guess is that over the next
several years, 100s of billions will be added to the annual budget
deficit merely as a result of increased interest payments.
Full article/321Gold
Prepare
for the Strongest Inflation and Boom in a Generation
by
Adrian van Eck
Meanwhile, behind the smokescreen
he has erected with tiny little rate hikes, Alan Greenspan has
begun the all-out effort to create a super boom by the time his
final term is up next January. Last week he and the Fed announced
the creation of $50 billion in a single week. Unlike Volcker
in 1987, he has been busy expanding the money supply. That is
why I know the economy is not going to slow down. It is going
to speed up. One reason, I am certain, is that the public will
demand and Congress will vote an accelerated program of defense
spending, and this time Congress will really demand a buy-American
plan of action. If Rumsfeld again threatens to quit as he did
the last time Congress made such a demand, he will be surprised
when this time they approve his resignation. And the President
will accept it quickly. You are right now seeing a very big chunk
of money being voted by Congress for the war in Iraq. But the
next wave of spending will be far bigger, and it will have as
its purpose the defense of America and our allies (such as Japan)
against more conventional threats from Iran, North Korea and
likely China, as popular rage against the latter nation breaks
into the open.
The talking heads on financial television are all but useless.
They either do not know the reality of today's world, including
negative things happening inside China, or they don't want you
to know. But everything will come out. So I say again, prepare
for a super boom with the strongest inflation in a generation.
This will let Greenspan go out in a blaze of glory and will give
President George W. Bush a chance to restore his now-sagging
popularity.
Van Eck Hotline on Money and
the Economy
Vethotline@aol.com
Editor's Note: Adrian van Eck is my favorite Fed
watcher. His hotlines get behind the financial news to what's
really motivating the Fed and it chairman.
Payments to Social Security
Recipients Should be 43% Higher
by John Williams
Inflation, as reported by the
Consumer Price Index (CPI) is understated by roughly 2.7% per
year. This is due to recent redefinitions of the series as well
as to flawed methodologies, particularly adjustments to price
measures for quality changes. The concentration of this installment
on the quality of government economic reports will be first on
CPI series redefinition and the damages done to those dependent
on accurate cost-of-living estimates, and on pending further
redefinition and economic damage.
The CPI was designed to help
businesses, individuals and the government adjust their financial
planning and considerations for the impact of inflation. The
CPI worked reasonably well for those purposes into the early-1990s.
In recent years, however, the reporting system has succumbed
to pressures from miscreant politicians, who were and are intent
upon stealing income from social security recipients, without
ever taking the issue of reduced entitlement payments before
the public or Congress for approval.
Full article/Gillespie
Research
Editor's Note: This is an older article but a good
one.
Gold's
annualized returns:
2002:
+ 14.4%
2003: + 17.3%
2004: + 12.6%
2005: + 1.6%
(through
4/22/05) |
Please
call our Trading Desk for quotes and assistance buying gold coins
and bullion.
1-800-869-5115 Extension #100
4:00am - 7:00pm MT |
An ABCs
of Gold Investing UPDATE
C is for
Choosing a Gold Firm
With oil moving higher and
stocks in trouble, we are receiving a steady stream of inquiries
on buying gold. First-time buyers need to be careful in choosing
a gold firm. In talking with a number of clients who are in contact
with some of our competitors, we are hearing stories of aggressive
telephone sales tactics and item pricing. Long ago, we decided
to keep our staff small, our pricing competitive and our relationship
with prospective clientele more laid back. You can contact us
without worrying about being put on a call list. We are happy
to answer questions and discuss your gold purchase in full, but
we leave the ball in your court with respect to the follow-up.
That might cost us a client
now and then, but those who become clients do so in their own
time and without being constantly bothered by one of our brokers.
By this they become better clients who tend to stay with the
firm for many years. (We have clients who started with us in
the 1970s.) Most of our clientele are business and professional
people fully capable of making up their own minds. They tend
to gravitate to us because they find out we know what we are
doing in the gold market and can apply that expertise to their
gold portfolio. Contact us and discover the difference. And don't
be like some who have caved in to the pressure and found out
later that the great deal they thought they had wasn't so good
after all. We have been a part of the gold business for over
30 years. We were just certified by the Better Business Bureau
for over ten years of membership. Our volumes are large; our
clientele well positioned based on their needs and goals. We
look forward to working with you.
1-800-869-5115
Trading Desk
Extension #100
Mention
you received this Market Update and ask about our special offers.
Better Business Bureau certificate
for 10+ years membership
--About us--
Archives
2005
Gold Market Forecast
- "I foresee two
potential scenarios for the gold market in 2005. One involves
a see-saw market which culminates with a roughly 20% gain on
the year in keeping with the average over the last three years.
This would take gold to the $525 level. The other involves a
substantial price spike resulting from an uncontrolled deterioration
in the value of the dollar. In that scenario, gold would threaten
and probably exceed the $600 level."
MarketUpdate
5/02/05 - The brief history outlined
in this week's masthead quote speaks volumes why gold makes sense
for the average investor. The graph to your immediate right supports
Mr. Bonner's reference to the "5¢ dollar." Modern
nation states have a way of running their currencies into the
ground. Germany, Turkey, Argentina, Mexico, Brazil, Russia, Poland,
Greece, Hungary, China, Austria, Thailand, Chile and Yugoslavia
(just to name a few) experienced wipe-out inflationary episodes
in the 20th century. The damage was significant enough to leave
an indelible mark on the indigenous population for generations
to come.
MarketUpdate 4/25/05 - Day
to day we sometimes get lost in the heat of the daily market
battle only to lose sight of our progress with respect to the
war. This short essay is about the progress of the war.
MarketUpdate 4/18/05 - "Perhaps
the reality is that the current crop of problems defy easy answers
and short term solutions and when all is said and done, that
is probably the real message delivered by last week's stock market
plunge. If the down trend gathers momentum in the weeks ahead,
2005 could turn out to be a more harrowing year for investors
than most anticipated."
MarketUpdate
4/11/05 - "This past week was a quiet one
for gold, but it could very well have been the calm before the
storm. A vanguard of highly
regarded analysts have begun to voice concerns that there is
too much complacency in the face of some of the most far-reaching
threats to stock market stability in memory."
MarketUpdate
4/4/05 - "Europe doesn't have a huge balance-of-payments
problem as the United States does. It's not at war. Europe doesn't
have a lack of currency reserves to tap for foreign payments.
So why liquidate gold when the dollar is in severe trouble and
gold is on the rise?"
MarketUpdate
3/28/05 - "The old school will tell you
that inflation needs to be weighed in a larger context -- one
that encompasses real rate of return. (A yield bearing
asset shows a real rate of return when its interest rate exceeds
the inflation rate after taxes.) Currencies with a positive real
rate of return attract investment capital, and they rise. Currencies
with a negative real rate of return experience an exodus, and
they fall."
MarketUpdate
3/19/05 - "This is a good starting point
for those of you who are new to the gold market. The current
bull market trend began in late 1999 when Europe's primary central
banks signed an accord limiting gold sales and leases of the
yellow metal. This proved to have a liberating effect."
* * *
|
