Oct 31

Solutions for Everything, Answers to Nothing

Gold Price Comments Off on Solutions for Everything, Answers to Nothing
Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Jun 27

Gold Price vs. Pundits: Can’t Both Be Wrong

Gold Price Comments Off on Gold Price vs. Pundits: Can’t Both Be Wrong
Gold prices up, yet media and market sentiment down like a hangover…
 

THIS is more like it. Something like capitulation in gold at last, writes Adrian Ash at BullionVault. And even as gold prices rise, too.
 
How come?
 
The noise is all about Iraq, with medieval fanatics turning the desert sands red. Or blame gold’s rally on Ukraine if you like. Fresh violence near Russia’s borders must be good for the ghouls who buy gold, right?
 
Yet crude oil prices are little changed beneath this month’s highs. So even the latest chatter about the return of inflation – announced by analysts at J.P.Morgan, and dismissed by the Fed – seems to be wide of the mark. 
 
So instead, we suggest…and with only half a smirk…that gold’s recent rise is because the consensus is finally pointing the other way. That is most clearly flagged, we think, by a detailed, thoughtful article from Bloomberg.
 
In the face of gold’s strongest Jan-June gains since 2010…up 9.4% with the kind of rise that saw analysts and pundits urging fresh gains to come back then…gold investors are now “heartbroken”, it says. So hurt, in fact, they won’t ever get back together again with the metal.
 
Gold ETF holdings this month got back to new 2009 lows. US gold coin sales have dropped 60% so far in 2014 from the same period last year. Analysts are bearish everywhere except the amateur internet.
 
Google searches to “buy gold”, we’d add, have also dropped off a cliff. And with stock markets knocking on or above all-time highs, who can blame Western investors – or households around the world in fact – for getting over gold at last?
 
Sure not money-manager and columnist Barry Ritholtz. You can “kiss the gold bull market goodbye” according to him and his sub-editors. Because “all of the factors that led to the huge rally in gold from 2001-2011 are no longer present,” apparently. Factors such as fear of inflation (not here, never will be) or a stockmarket crash (remember those? Thought not) just don’t apply anymore.
 
Hence the “golden years are gone” says Motley Fool UK, going on to call gold “a store of risk, not wealth.” It gives the sad example of an elderly couple who sold their home, put £100,000 of the cash into gold ($150,000 at the time), and are now down 20%. At current prices, that suggests they bought either spring 2013 or midsummer 2011. So hindsight says they should have bought shares (if you’re interested, down 20% from 3 years before 8.2% of the time since 1975) or just stuck with housing (likewise according to the Nationwide’s inflation-adjusted HPI). Stocks and bricks are plainly better than gold (down 20% or worse from 3 years before 7.0% of the time since 1968), because – according to the Fool – gold “is the riskiest investment”.
 
Got over gold yet? There’s more. Because it isn’t even an investment says Kiplingers. No, it’s merely a commodity, and so “I loathe gold,” says columnist James Glassman. Sure, gold goes up sometimes (times like every year from 2001 to 2012 for instance). “But over the long term, I’d rather have my money in stocks, which put the brilliance and the imagination of the human mind on my side…” (and which tend to fall when gold rises, pitting that ingenuity against a lump of metal that does so little, it doesn’t even rust).
 
So we’re really motoring now, getting anti-gold sentiment from the very people a contrarian would want. Because louder than his Bush-Cheney cheerleading, and louder even than his consistent anti-commodities jibes, Glassman is most famous for co-writing Dow 36,000 – “perhaps the most spectacularly wrong investing book ever” (copyright, the Washington Post) – just as the Tech Stock bubble was about to become the everything crash at the turn of the century. That 1999 pratfall was so unfunny for equity bulls, anyone reading Glassman’s gold loathing today might feel 15 years younger and start planning a Y2K party. Only this time, you’ll know trouble lies ahead.
 
Away from the talking heads and columnists, bank analysts have also been bearish on gold right down to their socks as well. Technical analysts, noting the upturn in gold’s short-term picture, can’t get past advising clients to fade rallies and look for lower prices ahead. Fundamental analysts weighing supply against demand point either to the return of ETF selling by Western funds, or the missing millions of Chinese buyers who’ve now taken net imports to the world’s No.1 consumer nation more than 20% lower for three months running.
 
Thing is, those commentators dismissing gold as “speculative” and driven solely by emotion are right. The above-ground stockpile of gold is so large – equal to 40 years of global demand – that mining or buying one more ounce changes little. Prices rise when buyers pay more, and sellers ask higher. Gold falls when jewelry consumers become the marginal buyer, and existing owners accept whatever they can.
 
What flicks that switch is sentiment, whether towards gold or away from other, more typically “productive” assets. Behind that sentiment may sit many different financial or economic back-drops, chief among them the direction of real interest rates. But since gold’s utility is always and only social – whether for adornment, monetary exchange, or trying to defend or grow spending power – then human emotions really do drive. And right now, the major-league pundits feel more down on gold than any time I can think of in the last decade.
 
Columns advising against gold have reached a crescendo this month, far louder even than when prices bottomed a year ago, in June 2013. Capitulation on gold was lacking at last year’s 3-year lows. Might this be it for sentiment, a near-universal rejection?
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May 15

M.Rentier & M.Charlatan

Gold Price Comments Off on M.Rentier & M.Charlatan
Maybe the FT‘s star columnist doesn’t really believe his position either…
 

The OXFORD ENGLISH DICTIONARY defines rentier simply as “One who makes an income from property or investment,” writes Tim Price on his blog, The Price of Everything.
 
We must suspect that Martin Wolf has a somewhat more morally judgmental definition, as befits someone who does a passable impression of being a confused Marxist.
“Low interest rates are certainly unpopular, particularly with cautious rentiers. But cautious rentiers no longer serve a useful economic purpose. What is needed instead are genuinely risk-taking investors. In their absence, governments need to use their balance sheets to build productive assets. There is little sign that they will. If so, central banks will be driven towards cheap money. Get used to it: this will endure.”  – Martin Wolf, ‘Wipe out rentiers with cheap money‘, Financial Times, 6 May 2014
In any event, his recommendation that rentiers should be ethnically cleansed from the economy was not met with universal acclamation by FT readers. Here are some of the fruitier reader responses:
“The FT at its worst, from the stable of big brains and small minds. Summary – stuff all savers and pensioners; reward stupid and feckless borrowers, especially governments. MW misses the essential point that if savers are paid even modest interest rates they will have money to spend which unlike the feckless they deserve and are likely to spend wisely. This spending will boost consumption and investment in the economy, instead of being used to support lost causes and fools.” 
 
“All you have to offer the world is more of the same unsustainable credit booms ! You and your profession failed before the crisis and do so now.” 
 
“This is a frightening and surreal article from a failure in an utterly discredited profession. Shameful.” 
 
“This is why economics as a subject at university must be abandoned…there is just no point to its study.” 
 
“I’ll be sure to tell my grandparents they need to become ‘genuinely risk-taking investors’.”
 
“Blow it all up with cheap money. Perfect strategy, perfect execution. Bravo!”
 
“Thank you so much for reducing the endeavour and purpose of my entire life to nought, with one casual phrase. Those who have worked hard all their lives and saved do have feelings, even if despised by you.”
 
“So Wolf wants to reduce pensioners to abject poverty unless they take equity risk. Does the FT offer a defined benefits scheme?”
 
“I often think MW inhabits a different universe from me. One in which the Soviet Union had never existed. Where the Japanese hadn’t blown 100% of GDP or more on government-sponsored infrastructure. Where the Chinese hadn’t spent the last six years specifically following the hackneyed Keynesian prescriptions of Wolf and the IMF and astonishingly now found itself with a colossal Pandora’s box of insolvencies…”
 
“The rentiers in this system are those feeding off QE – not those trying to squeak a living on savings.” 
 
“It appears that what the readers have to endure and get used to is the stuck record Martin Wolf droning on and on about increased government spending being the solution to everything, no matter what the question being asked.” 
 
“As usual Mr Socialist you have no clue. I love reading you just to know the depth of the bankruptcy of the intelligentsia.” 
 
“You, Mr Wolf, are a disgrace and may I say a Quisling hiding in the propaganda press. This is no longer a free press, it does the bidding of its masters in the corporate world who own you.” 
 
“I called Martin Wolf a socialist in a comment last week and was firmly put back in my box by Mr.Wolf when he called me ‘a misguided human being’. The tone of the comment was pretty unpleasant (because he disagreed with my point of view). But the views/suggestions he puts across do to me seem of a socialist bent rather than a capitalist one, in that I don’t read him supporting ideas such as reduced taxes, reduced government, reduced government borrowing, reduced taxes, reduced red tape, reduced governmental interference in fact he seems to propound more of these which to me is socialism but heh ho I may be wrong:-) but if he is a capitalist I do wish he would use his position to support us!” 
 
“It is time for Mr.Wolf to retire. You are proposing disincentives for accumulating capital. Money printing is not capital and since when is it the government’s right and obligation to tell us what to do with our money? Neo liberal economic policy is left wanting after 6 years of experimentation and now you propose something more radical? Let markets decide where capital should go. Your proposal is dangerous and foolhardy.”
 
“It never ceases to surprise me that people who utter these things are allowed to work in the finance industry. If you were a bridge engineer your bridge would have fallen and your licence for ever revoked…luckily you are an economist (socialist/communist) so with a bit of luck you will be nominated for a Nobel prize.”
 
“But why let facts get in the way of a tired, 3rd rate article? Having said that I have trouble believing even MW believes this garbage, so presumably it’s all just click-bait…”
 
“When you say ‘cautious rentiers’ are not serving any economic purpose, I think you are saying that after a financial crisis caused by individuals, banks and governments who over-leveraged themselves and brought on 5 years (and counting…) of financial repression, there is a long way to go to economic recovery and the debtors of this world deserve a still longer break so that they can sort themselves out at the expense of creditors. Oh, and please could the people who stayed sane and sensible please put a bit more risk on while you’re at it?”
 
“Please – do not use ‘rentier’ as a substitute for ‘saver’. I have not come across a good definition of ‘rentier’ yet – if the word is to be used, it needs to be backed by a good definition and any definition will fall short unless it captures the idea that the rentier is earning returns which are somehow unearned. In the meantime, ‘cautious savers’ trying to make a return on money saved out of fully taxed employment income deserve better from the FT than suggestions that they should be ‘wiped out’.”
Economist Shaun Richards responded to Martin Wolf’s article with this eloquent rebuttal. Our own perspective is as follows.
 
Policy interest rates throughout the developed world are at all-time lows and must remain there for some time in order to reflate a broken banking system. Central banks are desperate to avoid true deflation since that would threaten the very existence of their grossly indebted client governments. Savers (the class of people we presume Martin Wolf refers to when he uses the disdainful term ‘rentiers’) are the blameless victims who must pay the price for unprecedented government and banking sector overspending.
 
Government is not the solution, it is the primary cause of the problem. And government does not create wealth, it merely redistributes it. The rational investor of today faces an almost insoluble dilemma: shelter in cash-type investments whose purchasing power is being eroded on a daily basis by explicit inflationism; or pursue returns from risk assets which have been inflated artificially higher on a bubble of monetary stimulus. We believe the rational response is to combine diversification (across asset classes that include hard assets) with concentration (on compelling deep value). 
 
‘Rentier’ is a word with French origins. Another word with French origins is ‘charlatan’.
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