Never Mind the Bollocks, Here’s the Avocado Toast

By Keith Weiner

For about ten bucks a month, Netflix will give you all the movies you can watch, plus tons of TV show series and other programs, such as one-off science documentaries. They don’t offer all movies, merely more than you can watch. Oh, and there are no commercials.

They don’t just give you old BBC reruns, which you know they can get for a pittance. Netflix is spending money (well Federal Reserve Notes) producing its own original content.

Did we mention that there are no commercials? How is this even possible? According to CNBC, Netflix is spending $8 billion to produce 700 shows. Assuming all of its reported 118 million subscribers pay $10, their production budget eats up more than half a year of their total subscription fee revenue.

CNBC reports that Netflix is exploring the idea of putting ads in its shows. Unfortunately, a quarter of its subscribers say they would leave if that happens. The economics of free vs the economics of losing 25% of your customers in one wrong move. It’s the tiger or the tiger.

Continue reading Never Mind the Bollocks, Here’s the Avocado Toast

Illicit Arbitrage Cut by Tax Cuts and Jobs Act, Report 3 Sep 2018

By Keith Weiner

This week, we are back to our ongoing series on capital destruction. Let’s consider the simple transaction of issuing a bond. Party X sells a bond to Party Y. We will first offer something entirely uncontroversial. If the interest rate rises after Y buys the bond, then Y takes a loss. Or if the interest rate falls, then Y makes a capital gain. This is simply saying that the bond price moves inverse to the interest rate.

However, it is highly controversial for some reason, to note that X is on the other side of the trade. If Y takes a loss then it is X’s gain. If Y makes a gain, then it is X’s loss. Party X is short the bond, and Party Y is long. When the price of an asset moves up, shorts lose and longs win. When it moves down, shorts win and longs lose.

Continue reading Illicit Arbitrage Cut by Tax Cuts and Jobs Act, Report 3 Sep 2018

Another Gold Bearish Factor, Report

By Keith Weiner

Last week, we said that the consensus is that gold must go down (as measured in terms of the unstable dollar) and then will rocket higher. We suggested that if everyone expects an outcome in the market, the outcome is likely not to turn out that way. We also said that this time, there is likely less leverage employed to buy gold and that gold is less leveraged as well. And this, combined with a contrarian perspective on the consensus view, means that this time gold won’t go down before going up.

Dan Oliver of Myrmikan Capital emailed Keith to say that people in the third world use gold as collateral on their loans. When they can’t repay, the gold collateral is sold by the creditors. This time around, there is likely to be a larger crisis in the so-called emerging markets and their currencies, and hence this selling of gold will be a bigger factor. With greater selling pressure on gold, we’re back to the bearish case.

Million Ton Rock, Meet Million Ton Force

The bottom line is that we have several forces pushing gold up, and several pushing it down. On the up side (not upside, sorry we couldn’t resist) these include creditors rightly fearing dreadful losses when debtors default, speculators wrongly thinking that an increase in the quantity of dollars causes gold to go up, and even the possible path to remonetizing gold if we are successful in help Nevada to issue a gold bond. On the downside, we have speculators who front-run the consensus that gold must go down first in a crisis, and we have forced selling by leveraged gold holders in the first and third worlds.

Continue reading Another Gold Bearish Factor, Report

Cross Asset Volatility

By Callum Thomas

This unassuming chart contains a wealth of information about the challenges we currently face with active asset allocation and the global macro backdrop.  Basically what it shows is an alternative measure of the average volatility across stocks, bonds, commodities, and currencies.  The bottom line is volatility across asset classes is starting to wake up from a deep sleep.

What’s driving this?  We can talk about how you should expect higher volatility as the market/business cycles mature (and indeed they are), but a big driver is and will continue to be politics and policy.  We’re in the middle of a major monetary policy experiment (quantitative tightening or QT) – if QE was a force for volatility suppression, it’s pure logic that QT should work in the opposite direction.  So investors need to start thinking about how to deal with this in their investment process, because with greater volatility comes greater opportunity.

Continue reading Cross Asset Volatility

In Next Crisis, Gold Won’t Drop Like 2008, Report

By Keith Weiner

Last week, we discussed the tension between forces pushing the dollar up and down (measured in gold—you cannot measure the dollar in terms of its derivatives such as euro, pound, yen, and yuan). And we gave short shrift to the forces pushing the dollar down. We said only that to own a dollar is to be a creditor. And if the debtors seem in imminent danger of default, then creditors should want to escape this risk. The dollar is not redeemable so there is no way to be paid in full for the debt represented by the dollars. The only way to opt out of credit risk entirely is to trade one’s credit paper for gold. That is to buy gold. We said that Federal Reserve insolvency is not imminent.

And then we went on to the case for a rising dollar. It was good timing, as the dollar went up from 25.7 milligrams of gold to 26.5 by Thursday (that’s a drop from $1,210 to $1,175 for those of you who insist on measuring steel meter sticks with rubber bands, lighthouses from the decks of ships that are slowly sinking in stormy seas, and gold in dollars).

Traders’ Consensus

This week, Keith sat at a table with a hedge fund trader. The trader does not think of gold as money, is not into gold other than as a trade along with all other asset classes, and probably would not describe himself even as a libertarian or Austrian. He is, however, very smart and very good at what he does.

Continue reading In Next Crisis, Gold Won’t Drop Like 2008, Report

Monetary Paradigm Reset, Report 5 August 2018

By Keith Weiner

Explaining a new paradigm can be both simple and impossible at the same time. For example, Copernicus taught that the other planets and Sun do not revolve around the Earth. He said that all the planets revolve around the Sun, including Earth. It isn’t hard to say, and it isn’t especially hard to grasp.

Indeed, one of its virtues was making the universe simpler. In the old geocentric model, there is the phenomenon of so called retrograde motion—the planets appear to stop moving forward in their orbits, and move backwards temporarily. It’s difficult to describe mathematically, and worse, no one could explain the cause.

The hard part of accepting this paradigm shift, was that people had to rethink their entire view of cosmology, theology, and philosophy. In the best case, people take time to grapple with these challenges to their idea of man’s place in the universe. Some never accept the new idea.

Continue reading Monetary Paradigm Reset, Report 5 August 2018

A Dire Warning, Report 29 July 2018

By Keith Weiner

Let’s return to our ongoing series on the destruction of capital, and how to identify the signs. Steve Saville posted a thoughtful article this week entitled The “Productivity of Debt” Myth. His article provides a good opportunity to add some additional thoughts.

We have written quite a lot on this topic. Indeed, we have a landing page for marginal productivity of debt (MPoD) with four articles so far. Few economists touch this topic, perhaps because MPoD shows that our monetary system is failing. We encourage you to do a Google search, and you will see scant mention other than articles by Keith and Monetary Metals. This is tragic. Every monetary economist should be bellowing from the rooftops about the falling marginal productivity of debt!

So when Lacy Hunt wrote in the Hoisington quarterly letter about Diminishing Returns – Consequences of Excess Debt (p. 4), several readers forwarded the link to us. And this week Steve Saville wrote a response to Lacy’s discussion.

We have our own concerns with Lacy’s approach. One is his statement:

Continue reading A Dire Warning, Report 29 July 2018

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