The Great Gold Upgrade, Report 15 July 2018

By Keith Weiner

[biiwii comment: Au & Ag supply/demand report follows opening segment]

In part I the Great Reset, we said that a reset is a terrible thing. The closest example is the fall of Rome in 476AD, in which more than 90% of the population of the city fled or died. No one should wish for this to happen, but we are unfortunate to live under a failing monetary system. Debt is growing exponentially. A way must be found to transition to the use of gold. We covered a few ways that won’t work. The Fed can’t determine the right gold price, or indeed control the price either. Nor would it work to declare the dollar to be gold backed. A high gold price won’t make gold circulate. Nothing less than redeemability will do. But you cannot retroactively declare the irredeemable dollar to be gold-redeemable. Every dollar in the system was borrowed into existence without the expectation of redemption. Changing this rule would create the greatest orgy of lobbying Washington has ever seen.

Interest Draws Gold into Circulation

Interest is the only force that can pull gold out of private hoards and into circulation. We have said many times, that interest is the regulator of flow in the gold standard. A lower rate will tend to push gold out of the market and into hoards. A higher rate will tend to draw it into the market.

Continue reading The Great Gold Upgrade, Report 15 July 2018

The Great Reset, Report 8 July 2018

By Keith Weiner

[biiwii comment: Au & Ag supply/demand report follows opening segment]

Before it collapsed, the city of Rome had a population greater than 1,000,000 people. That was an extraordinary accomplishment in the ancient world, made possible by many innovative technologies and the organization of the greatest civilization that the world had ever seen. Such an incredible urban population depended on capital accumulated over centuries. But the Roman Empire squandered this capital, until it was no longer sufficient to sustain the city (we are aware the story is more complicated than this).

After the collapse, the population fell to about 8,000 people. Some fled and arrived at safe places, but surely most perished.

Monetary Reset

This is what we think of when we hear someone say, “There will be a reset”.

A reset is not a good thing. No one should look forward to it, and you certainly cannot profit from it. Not even from owning gold. Sure, those who don’t own gold may be worse off than those who do, but no one does well in a catastrophe like that.

Continue reading The Great Reset, Report 8 July 2018

An Idea Whose Time Has Come, Report 1 July 2018

By Keith Weiner

[biiwii comment: gold & silver funda report follows opening segment]

“On résiste à l’invasion des armées; on ne résiste pas à l’invasion des idées.”

These are the actual words written by Victor Hugo in Histoire d’un Crime (History of a Crime).Translated literally, it means an invasion of armies can be resisted; an invasion of ideas cannot be resisted. However, there are many alternative translations that try to express the sentiment, if not the exact meaning. Perhaps the most famous of them is this.

“Nothing can stop an idea whose time has come.”

This, itself, is a powerful idea (we have seen it misattributed both to Ghandi and Martin Luther King). It is rife with implications. At least for ideas about how a society ought to be organized, for ideas about governance.

Continue reading An Idea Whose Time Has Come, Report 1 July 2018

The Wealth Effect, Report 24 Jun 2018

By Keith Weiner

[biiwii comment: as usual, gold & silver funda report follows opening topic]

Last week, we discussed Social Security, a Ponzi scheme that is inevitably approaching its default. That leads us to another point in our broader discussion of capital destruction. Let’s illustrate with an example.

The Fraudulent Promise

Suppose Eric works for wages. He is 50 years old. His house is paid off, he has no student loans, and owns his car outright. He has no debt (he is a rare type of person). His kids are out of college. He has no expenses except ordinary living costs, and no demands on his savings except his own retirement.

Oh, and one other thing. He gets a statement from Social Security telling him that they will pay him a pension when he retires in 17 years.

When faced with a choice to take a vacation or save for retirement, he wonders why he should deny himself a bit of pleasure. With retirement covered by Social Security, there’s no need to save for retirement. So each year, he visits a place on his “bucket list”, not worrying about how he will live when he is in his 70’s and 80’s.

You see the problem. Social Security cannot go on paying as it has promised to pay. Eric will not have the secure retirement that he plans to have. In future years, he will look back bitterly on the bogus account statements they sent to him. He will play over and over in his mind what he spent, thinking he should have saved more. His spending was based on a counterfeit promise, a fraud.

Capital Consumption

This is another way that the system drives people to consume their capital. Social Security may or may not be considered a debt, either legally or for accounting purposes. We will leave that debate to others. However, people certainly count their future Social Security checks as an asset. In order for that asset to be good, there must be a corresponding liability somewhere, and the party with that liability must have the means and intent to make good on their promise.

Continue reading The Wealth Effect, Report 24 Jun 2018

Social Security Deterioration, Report 17 Jun 2018

By Keith Weiner

[biiwii comment: gold & silver fundamental report follows 1st segment]

We have been writing about capital destruction. This week let’s look at an event which is currently making news. Social Security will begin tapping into its trust fund this year. This happens, as the Social Security Board of Trustees states antiseptically, “four years earlier than projected in last year’s report.” In other words, the economy is growing by every conventional measure, yet Social Security is spending more than its tax revenues years earlier than projected. According to those same inaccurate projections, the trust fund won’t run dry until 2034.

Everyone opines on Social Security. Some, like Max Richman of The Hill, claim that, “modest and manageable measures…” will, “keep Social Security solvent.” Others, like Charles Blahous at the Manhattan Institute, say the opposite, it’s “bad and getting worse.”

There are several aspects to this that are worth understanding. We will unpack this mess.

Continue reading Social Security Deterioration, Report 17 Jun 2018

Common Sense Monics

By Keith Weiner

[biiwii comment: gold and silver supply/demand funda follow opening segment]

Suppose you’re driving a car, and you turn the steering wheel left. You will feel the door and pillar of the car push your left shoulder (in a left-drive car). This is an observed fact.

Common Sense Physics

One idea—let’s call it common sense physics—is that a force is pushing you outward into the door. If you picture the center of the circle that the car is making in its turn, there is an apparent radial force on you. The direction of this force is outward. It is called centrifugal force.

Or suppose you fill a jar with water and mixed soil sediments. You put it into a machine that spins it rapidly, with the lid facing inwards toward the center. After the machine spins for a while, you stop it and remove the jar. The heavier particles are at the bottom of the jar. Above them are the slightly less heavy, and so on, to the lightest. The water is at the top. This experiment confirms the idea. Something apparently pushes the heaviest particles farthest out from the center. Centrifugal force.

In any group of people who have not studied physics, this view is entirely uncontroversial. Indeed nearly everyone who hasn’t studied physics would agree with what we wrote above.

However, if you go to a group of people who have taken a college-level physics class, you would get the opposite reaction. The above view is wrong. And not a single one (who received a passing grade) would defend it.

Any first-year university student in physics would draw the circle and the radius. But he would add an additional concept—velocity. The velocity of the object is tangential to the circle. There is a force pulling the object. That is, there is a radial force, but its direction is inward—centripetal force. The object does not fall into the center, because its velocity is tangential. The net result is that the path is a circle.

Continue reading Common Sense Monics

Pardon Him

By Heisenberg

Markets gave Trump the benefit of the doubt to start the new week after a weekend that found the President spending what certainly seemed like an inordinate amount of time assailing various (and in some cases entirely imaginary) foes on Twitter.

Seemingly oblivious to the optics, Trump regaled the world on Monday morning with his thoughts on farmers, soybean taxes, “all sorts of trade barriers”, deficits, the constitutionality of the special counsel probe, his power to pardon himself and “Witch Hunts” that he says are being conducted by “conflicted” Democrats and unnamed “others” who he says are “angry” at him for reasons he didn’t specify.

That went on for nearly three hours.

Despite that, stocks were fine, seemingly content to ignore the incessant rantings of a guy who is now openly suggesting that he’d absolve himself of responsibility for crimes he committed on the off chance anyone actually ends up producing proof of those crimes and seemingly resigned to the notion that, as Goldman put it over the weekend, “US trade policy is a conundrum.”

Continue reading Pardon Him

Liquidity Preference Rising, Report 3 June 2018

By Keith Weiner

[biiwii comment: gold & silver supply/demand report follows]

Picture a scene in one of those action moves. Two guys are fighting for control over the steering wheel. The car is going 75mph, the road is narrow, and there is a drop over a cliff on one side. And there are lots of sharp curves.

Central Planning

This is a pretty good picture of the action at our central banks. Desperate men are fighting for who gets control of the monetary steering wheel, and for which rules to use to determine when to turn left and when to turn right. One side wants central planning with discretion and the other wants central planning with rules. Among the latter, a debate now rages whether to use inflation, GDP, or another measure.

For decades, the central banks have centrally planned our economy. Just as the guys fighting in the car don’t notice the abyss they keep not falling into, these central planners don’t notice the falling interest rate.

Perhaps it’s because they scoff at the actual rate at which actual lenders lend actual dollars to actual borrowers in the actual market. This, they dismiss as the mere nominal rate. But they calculate inflation, averaging apples and oranges, gasoline, and housing. Then they subtract inflation from nominal interest to get the real interest rate. That’s what they call this fictitious number, at which no one lends and no one borrows. Their real rate probably isn’t pathologically falling, the way the nominal rate is…

Wait, let’s look.

Continue reading Liquidity Preference Rising, Report 3 June 2018

But “We Owe it to Ourselves” Report, 28 May 2018

By Keith Weiner

[biiwii comment: Gold and silver supply/demand report 2nd segment]

Have you ever heard someone say this? It falls into the category of, it’s so perverse, so wrong, and so wrong-headed that there has got to be a constituency out there somewhere, to assert this!

First, let’s head off at the pass the objection that the majority of US government debt is held by foreigners. As of March this year, the US Treasury estimates that $6.3 trillion worth of Treasury bills and bonds are owned by foreign holders. This is not even close to the majority of it.

It’s also not the point. The nature of debt is what it is, whether the creditor is the People’s Bank of China or Uncle Ernie who puts 10% of his salary into US Savings Bonds.

The constituency of wrongness is headed by Paul Krugman. He is willing to go beyond the debate of domestic vs. foreign creditors, and defend global collectivism as such. He wrote an article with a headline that is sheer irony. In Nobody Understands Debt he says, “…the world economy as a whole owes money to itself.”

Producing and Consuming

We don’t have much to say to Professor Krugman, other than collectivism is the resort of scoundrels. It is a cynical ploy to distract attention from individual action. When you drill down, you see that some people are productive and others are not. Some people produce more than they consume, saving the difference. Others consume more than they produce.

As an aside, the collectivism is not typically so naked. More often, we are just offered an aggregate statistic without explanation of why it is measured in aggregate. For example, GDP is taken as a given. The idea of “economy as a whole” is implicit in the concept of GDP. But suppose a fat man is eating two steak dinners in a restaurant. A starving man looks through the window longingly. Would you say it’s two men and two steaks, therefore one steak per capita, and therefore all is well?

Continue reading But “We Owe it to Ourselves” Report, 28 May 2018

Something for Nothing, Report 20 May 2018

By Keith Weiner

Money has a dual function. Please allow us to go deeper, and more philosophical than we typically do. We promise to tie this into our ongoing discussion of capital consumption. In the following, we will discuss some examples that use the dollar. We are not conceding that the dollar is money (i.e. the most marketable good, or the extinguisher of debt). We just need some simple cases to consider the medium of exchange. Today, that medium is obviously not gold but the dollar.

Money’s first function is flows. People experience this as income. If you work for an hour as a plumber, you might earn $25. If you work for an hour as a lawyer, you might earn $250. If you set up and operate a successful restaurant, you might earn $500,000 in a year. Every job, every profession, and every business earns a certain amount. The market value of everything is finite. These values are set by other market participants, who bid what they are willing to pay for what you do.

Money as Exchange Medium

The dollar is the general medium of exchange. This is how you take what your employer pays you, to buy something from a third party.

At any given moment in time, the market value of everything is fixed. You can take your wage or your profits to any other market participant, and buy whatever he produces. For example, the plumber might exchange an hour of his labor for a meal at the restaurant. Or he could exchange a day of his labor for an hour consultation with that lawyer.

We can abstract away the dollar, and see that there is a finite ratio of exchange of any good or service for any other. A plumbing repair is worth one restaurant meal, or one tenth as much as legal advice.

Continue reading Something for Nothing, Report 20 May 2018

Demand to Hoard, Report 13 May 2018

By Keith Weiner

[Biiwii comment: Gold and silver supply/demand report last segment]

Since 1981, interest rates have been in a falling trend. Last week, we said this trend will continue, and the present blip up in rates is just a correction. We did not argue technical analysis, nor quantity of dollars, nor the general price level.

Instead, we asked a question:

…It seems obvious that if one wishes to say that a trend has changed, after enduring for well over three decades, one needs to explain why. The Question of the Day is: what has suddenly happened?

For extra credit, no scratch that, to get any credit your answer should include an explanation of why the rate has been falling for so long. Is this too much to ask? Your explanation should contain three parts:

  1. The cause that drove interest rates to fall for most of the time that Generation X has been alive, for most of the duration of the careers of even the oldest Baby Boomers
  2. Why the old cause is now inoperable
  3. Identify a new cause, and show why it will drive the new trend for rising rates

We discussed a graph from the BIS, showing that as of 2015, 10.5% of corporations did not earn enough gross profit to pay the interest expense on their debt. Even at the lower interest rates of 2015, it is a sharply rising trend (from 5% in 2007). Who knows how much it would have risen even if rates had remained unchanged? And how much did it rise with the little blip up in interest rates we have had so far?

To answer part 1, we identified the cause of the trend. The cause is when interest > productivity (return on capital in this context), and each drop in interest drives down productivity. It’s a ratchet.

Continue reading Demand to Hoard, Report 13 May 2018

Chart Of The Week: US Dollar Index

By Callum Thomas

This week it’s the US Dollar Index.  Unless you’ve been living under a rock (or maybe that saying should be updated – unless you’ve been living out of range of wifi), you will have noticed 2 key things about the US dollar index: 1. The US dollar bull market seemed to end at the end of 2016; and 2. A violent short-squeeze kicked off in April.

But while I certainly would agree that it has all the classical signs of a short-squeeze, I would be quick to point out that there may be a little more to it than that.  The chart of the week comes from a report on the outlook for the US dollar (which also dealt with the implications for crude oil prices).  The chart shows my composite yield support indicator for the US dollar against the DXY, with a substantial gap… “the alligator’s jaws”.

Continue reading Chart Of The Week: US Dollar Index