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Guest Post: What If "What Everyone Knows To Be True" Is Wrong?

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Submitted by Charles Hugh Smith from Of Two Minds

What If "What Everyone Knows To Be True" Is Wrong?

When the consensus is confidently weighted on one side of a trade or view, reality has a nasty habit of introducing blowback and/or unintended consequences.

In a followup to yesterday's entry A Contrarian Take on the Dollar's Demise, here are some other contrarian views culled from readers and recent news items. When does a contrarian view or bet become mainstream? Sometimes the answer is ambiguous. When do you look around and realize (usually with some dismay) that "everyone" now agrees with your once-lonely point of view?

Consider gold as an example. I am a fan of gold for the simple reason that it won't go to zero--something that cannot be said of purely financial assets. But as a technical observer, I can't help but notice just how lopsided the trade in gold has become.

According to the CFTC data, there are now 192,838 long contracts on gold and only 3,636 short contracts. That is a remarkably one-sided trade, and one that is technically ripe for a major reversal. When everyone agrees you can't miss on a trade, and punters are betting 50-to-1 that the trade can only go one way, then that's when it reverses and crashes.

As a technical observation, this is completely disconnected from all the fundamental reasoning behind owning gold. In other words, if you are one of the many readers who own gold long-term for peace of mind and insurance, then a 20% decline in gold is merely a "buy the dip" opportunity. For traders, it may offer an opportunity to gain on the downturn and then again on the inevitable upturn.

Correspondent Martyn T. recently made what I consider an important and contrarian point about the financial consequences of Japan's devastating earthaquake and tsunami.

So far you have not noted the way in which the Japanese insurers will affect stock markets. The Japanese government has long insisted that insurers prepare for a major event. This was expected to be an earthquake hitting Tokyo.

Obviously, they would need to have massive reserves, and these should be abroad, so that secure cash can be found.

In their rush to bring in some cash they have sold some and bought yen. This has resulted in other central banks helping to reduce the value of the yen.

But this is only the first tranche of selling. So far they won't know what liquidity they need, but as it rises so will selling, all across the developed world.

In other words, if the rebuilding and insurance claims will end up costing $300 billion, a significant chunk of that will come from insurers and re-insurers who will have to liquidate globally distributed assets such as stocks and bonds to raise the cash.

Let's assume the Japanese government will cover half of the costs of rebuilding and insurers will have to cover the other $150 billion. What will the liquidation of $150 billion in financial assets do to a vulnerable market? I hesitate to offer a prediction, but it is unlikely to be bullish.

Frequent contributor Dr. Ishabaka offered up this menu of other consensus views that "everyone knows to be true":

    - the U.S. dollar will continue to decrease in value indefinitely
    - U.S. real estate will continue to decrease in value indefinitely
    - the standard of living in the U.S. will decrease
    - the U.S. stock market is in a bubble
    - commodities will continue to rise
    - China will overtake the U.S. as the next great power
    - U.S. manufacturing is dead
    - U.S. debt will increase indefinitely
    - emerging markets will provide the economic growth of the future (along with China)
    - everyone in poor countries wants to eat more meat, and own a car
    - energy will increase in price indefinitely
    - wars and revolutions will continue to increase, perhaps leading to another world war
    - Social Security and Medicare will go bankrupt
    - defined benefit pension plans are dead
    - health care costs will continue to increase at a rate that outstrips inflation indefinitely
    - unemployment will be serious in the U.S. for the foreseeable future
    - Fenders beat Gibsons hands down (pre CBS Fenders, I mean)
    - the gap between the wealthy and the rest of us will continue to increase
    - government in the U.S. is controlled by lobbyists, unions, and other big money interest groups (banks)

    What if all these things "everybody knows" are wrong?

I am not at all sure that "everyone" knows Fenders beat Gibsons, but the list is certainly food for thought. As someone who has played both Stratocasters and my Gibson Les Paul Deluxe, I would say it's more like the difference between a cabernet and a zinfandel wine: sometimes you're in the mood for one or the other, but arguing about which is "best" is pointless, as both are superb but in slightly different ways.

Mark Twain commented on the dangers of consensus thusly: "Whenever you find yourself on the side of the majority, it is time to pause and reflect."

As I concluded yesterday:

When Bears have been eradicated, then the trade has become so lopsided that when it rolls over, it does so suddenly. When everyone agrees, then things become highly unstable. It's ironic, isn't it; on the surface, when everyone shares the same convictions and is on the same side of the same trade, things look rock-solid. Yet that very unanimity guarantees instability.

There is always someone on the other side of a trade, of course: someone originated the option or futures, and someone sold the shares that someone else bought. The problem arises when a "can't lose" trade rolls over, then there are no longer enough buyers to offset the panicky, underwater sellers who are overleveraged via margin or other forms of debt.

This is in effect what still plagues the U.S. housing market: there are still plenty of sellers in the wings, hoping to unload properties, and a dearth of buyers willing to gamble that "the bottom is in." Even worse, there is a dearth of buyers qualified to buy properties at today's prices. That will become even more of an issue as interest rates rise.

As a reminder of how things can play out at real bottoms
: in the depths of the 1930s Depression, a Manhattan skyscraper was sold for the original cost of its elevators. In other words, the rest of the building was "free."

People talk about replacement cost as a metric of value in homes and buildings. In other words, this house can't drop much below $200,000 because it would cost that much to buy the lot and construct a replacement house.

That is another thing "everyone knows to be true" that is actually not true at real bottoms. Stocks can end up trading for less than the cash the company is holding.

We might conclude that being contrarian is simply considering very few possibilities as being "impossible," especially when it comes to herd behavior and investments.

 

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Sun, 03/27/2011 - 15:01 | 1106172 malek
malek's picture

Then it's a true black swan!

Sun, 03/27/2011 - 15:38 | 1106295 Popo
Popo's picture

Charles Hugh Smith wrote:

"That is another thing "everyone knows to be true" that is actually not true at real bottoms. Stocks can end up trading for less than the cash the company is holding."

Scenarios like that occur when liquidity vanishes completely, and desperation trades start to occur.  People need cash so badly that values collapse.

The potential for that happening is entirely dependent on policy -- both domestic and that of FCB's.

Domestic policy is a given -- Bernanke will print.   It's his only weapon, and he's awfully proud of it.   FCB's are a slightly different story -- but thus far, they appear to tolerate, if not support Bernanke's approach.

 

 


 

Sun, 03/27/2011 - 16:12 | 1106397 Doña K
Doña K's picture

KING RICHARD III:
A horse! a horse! my kingdom for a horse!

Sun, 03/27/2011 - 17:30 | 1106580 rich_wicks
rich_wicks's picture

King Richard sure liked horses.

Sun, 03/27/2011 - 18:52 | 1106827 I think I need ...
I think I need to buy a gun's picture

one other thought if gold goes to 750.00 like someone suggested the chinese will still buy it all from us we will be holding monopoly money and they will have all the real stuff

 

Sun, 03/27/2011 - 21:02 | 1107095 DavidC
DavidC's picture

100%

DavidC

Sun, 03/27/2011 - 16:19 | 1106420 Mike2756
Mike2756's picture

"Domestic policy is a given -- Bernanke will print" because everyone knows it's true...

Sun, 03/27/2011 - 16:27 | 1106432 cosmictrainwreck
cosmictrainwreck's picture

hmmm.... isn't that an interesting notion? what if......?

Sun, 03/27/2011 - 17:27 | 1106576 Bicycle Repairman
Bicycle Repairman's picture

OK, what if?  What's your scenario?  You know what people at ZH think.  What have you got?

Sun, 03/27/2011 - 18:10 | 1106721 Muir
Muir's picture

deflation...

I mentioned it dozen of times.

A couple of Illinois, a Japan more and tad more EU problems....

Sun, 03/27/2011 - 21:38 | 1107168 Bicycle Repairman
Bicycle Repairman's picture

I thought I was replying to "cosmictrainwreck".  Is he/she a friend of yours?

Sun, 03/27/2011 - 17:04 | 1106530 Ray1968
Ray1968's picture

This is a point I've been contemplating recently. QE3 is not a guarantee... at least not immediately. It pays to prepare either way.

Sun, 03/27/2011 - 17:27 | 1106578 Bicycle Repairman
Bicycle Repairman's picture

"QE3 is not a guarantee"

Nothing in life is guaranteed.  What do you see happening if QE3 does not happen?

Sun, 03/27/2011 - 17:54 | 1106668 MachoMan
MachoMan's picture

dollar up, bonds up, stocks down, commodities down less than stocks...  combined with a wide variety of plans for domestic default and balanced budget attempts...  eventually the pain leads to austerity camp shutting the fuck up and the citizenry demanding more stimulus, except better directed (bigger share for small fish).  Stimulus implemented in progressively smaller doses in successive stimulus/austerity rounds...  eventually leading to a failed auction.  This presumes dollar hegemony remains.  Previously mentioned pains may also lead to outright repudiation, whereby B9K9's "strong man" emerges to flip the bird to the rest of the world. 

Mon, 03/28/2011 - 09:38 | 1108335 MachoMan
MachoMan's picture

There used to be alternatives before we painted ourselves in a corner...

Sun, 03/27/2011 - 19:02 | 1106843 Hugh_Jorgan
Hugh_Jorgan's picture

Dollar up depends on a lot of other factors, and I'm not sure if the citizenry even thinks to ask (erroneously I might add) for more stimulus. Maybe an expansion of existing entitlement programs. I do agree that auterity will not go over well, but it won't be as ugly as it gets in Europe.

Also, don't forget that if we remain on our current debt trajectory, we will default on our debt before 2020. Assuming your predictions are realized, that trajectory inevitably becomes more and more hyperbolic and thus shortens the time to default. This will guarantee the printing presses will no longer work as intended, and the Ponzi Dollar collapses.

What comes after that is anyone's guess. With the level of avarice and the social insanity currently infecting the "big-money" and power circles, I am leaning toward expecting some kind of governance crisis in America. Possibly a second Civil War and a breakup of the United States, unless we extricate our collective craniums from our collective rectums, ASAFP.

Mon, 03/28/2011 - 09:48 | 1108371 MachoMan
MachoMan's picture

Extension of entitlements necessarily relies upon additional stimulus.  We've already gotten first time home buyers credit, cash for clunkers, and eventually we'll get "vegetables for dirty diapers" or the like...  but, even if we don't, an extension of SS, unemployment, medicaid, etc. are all debt negative endeavors...  tomato tomahhhhto

My timeframe envisions something far before 2020...  5 more budget years tops I think.

The union will not survive.  Just like individual americans have been pitted against each other (the gutting of the middle class by the top and bottom), states will be pitted against each other.  Some type of central taxing authority will eventually be rejected as being oppressive and prone to inter-meddling with disastrous results.  This taxing authority will become much more localized.  Between now and then, we might get a super authority attempt to take hold...  but whoever it may be will not be able to hold back the tsunami.  And, the weirdest part, I think the fractional states may end up being created without a single shot being fired. 

PS, we already have a governance crisis in america...  AND not a single solution to our problems involves a scenario whereby we abstain from default... 

Sun, 03/27/2011 - 21:32 | 1107157 Bicycle Repairman
Bicycle Repairman's picture

That seems plausible.

Here's another one (I'll admit Bernanke can't do this all by himself): WWIII.

Sun, 03/27/2011 - 23:13 | 1107359 TwoShortPlanks
TwoShortPlanks's picture

@ Bicycle Repairman

Question: What do you see happening if QE3 does not happen?

Answer: Come July, the Fed will have been subsidising the US Economy for 42 months. This continued stimulus has created a new normal and possibly a lowered guard of the investor. This false sense of security will have been aided by the navigation through the recent events in Japan. This is a false impression of immortality or at least perception of strength. The Fed subsidization has presented a slightly buoyant but ultimately, false impression of the US economy; QE is a crutch on which to aid in supporting a cripple. Soon, that crutch will need to be removed so that the economy is tested, and proof as to whether it can truly stand on its' own two feet becomes a very real event. The realization that the US conomy is healthy or even doomed, may take three months...a period of nervousness with so many peoples' fingers on the trigger.

Envisaging no end to QE is itself a symptom of Normalcy Bias, likewise, seeing only minor problems (as the Fed would have you believe) post QE, is also a symptom of Normalcy Bias, and the benign view that the Fed aims to do good, while ignoring the fact that a good bush-fire is a natural cleansing event, is yet again a symptom of Normalcy Bias (Creative destruction is well understood).

With so much artillery being used since the GFC, I finally see a possible change in Fed tactics. I see a very real and deliberate attempt to place the financial system is harm's way (guised as an un-tapered end of the QE Program), a crash, brought-on through a last minute panic as a sudden realisation sweeps the markets that the Fed really isn't going to continue printing (NB in action), in essence, this is like a post-rate-hike credit contraction, a Mellon-type activity to "purge the rottenness out of the system". This speculative rottenness is what is stifling true growth, it is a speculative/debt Elephant sitting on the chest of a Cardiac arrest patient, it needs to be removed or CPR is a pointless activity (it's taken 3 years to see that). I see a deliberate end to QE which will culminate in a Credit Crunch (same as a sudden rate hike). I see Governments competing with Private sectors for Credit/Finance. I see the private sector contracting rapidly and unemployment skyrocketing as money lenders put their wagons in a circle to weather the storm. I see interest rate hikes in light of continued failing Bond Markets. I see a partial unwinding of Derivatives. I see a contraction in China and a large adjustment in Commodities. I see a run on PMs and a dive on Oil demand.

No matter which way this goes, print or don't print, the money supply has been expanded. Even if the economy stands on its own two feet, the money is still sloshing around in the system. If the economy recovers, inflation will flare-up. If the economy falters, unemployment will flare-up. If the economy collapses, it will be a series of lost decades.

The fastest road to true recovery may well come, as in nature, from the ashes of a flash fire.

No matter which way this goes, PMs will either hold wealth/value, or increase exponentially.

Mon, 03/28/2011 - 03:51 | 1107861 let-them-eat-cake
let-them-eat-cake's picture

So, the answer is 42?!

Sun, 03/27/2011 - 21:25 | 1107147 Michael
Michael's picture

Bernanke will print forever if he can because if he stops printing, the stock and commodities markets will crash, the trillions of debt will default, and we will have a depression that makes the great depression look like a picnic. We will have a good bit of inflation for another 6 months or so till the Fed ponzi scheme collapses, then we get the depression that lasts 7 years. 3 if we abolish the Federal Reserve Corporation.

Sun, 03/27/2011 - 18:33 | 1106780 Sad Sufi
Sad Sufi's picture

Bernanke will print

Yes, but it hasn't helped housing.  Is it not possible that given the right conditions, there won't be a "reasonable" bid for other assets? Can we imagine that?

Sun, 03/27/2011 - 19:19 | 1106881 eddiebe
eddiebe's picture

"Domestic policy is a given -- Bernanke will print.   It's his only weapon,"

 So sorry to disagree.

 He could pull a Volker for one thing.
 Or he could link to gold for another. And I'm quite sure he can come up with all kinds of other 'weapons' that I cant think of.

Sun, 03/27/2011 - 17:46 | 1106582 Pegasus Muse
Pegasus Muse's picture

"According to the CFTC data, there are now 192,838 long contracts on gold and only 3,636 short contracts."

Not sure how Smith arrives at his lopsided numbers.  Does not agree with the Gold COT Report - Futures (as of Tues, March 22, 2011) on Harvey Organ's blog.  In total there are 50K net short positions (487K) over long positions (437K).  The majority of these short positions belong to the large Commericals (the Bullion Banks). 

http://harveyorgan.blogspot.com/  


On an off topic issue, Jim Rickards is out today with a new interview on King World News in which he discusses in more detail the Fed's Trillion$$ Balance Sheet and its ability to conduct QE in Perpetuity.   http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/27_Jim_Rickards.html 
Sun, 03/27/2011 - 18:55 | 1106832 Howard_Beale
Howard_Beale's picture

http://www.cftc.gov/dea/futures/other_sf.htm

That is the link for the Commitment of Traders report for 3/22.

I suspect the author was using the managed money data which is overwhelmingly long. Still doesn't match his numbers but managed money stands at:

183,912 long vs. 5037 short.

Sun, 03/27/2011 - 20:22 | 1107009 Math Man
Math Man's picture

According to the CFTC data, there are now 192,838 long contracts on gold and only 3,636 short contracts. That is a remarkably one-sided trade, and one that is technically ripe for a major reversal. When everyone agrees you can't miss on a trade, and punters are betting 50-to-1 that the trade can only go one way, then that's when it reverses and crashes.

 

Bingo!  We have a winner!  Every one should be buying puts on GLD.  20 implied vol - you're almost a fool not to.  And throw in some silver puts while you're at it...  you'll make a mint.

The precious metals markets have gotten way ahead of themselves.  Everybody's buying because the dollar is supposedly devauling... so what?  PMs are sky rocketing, so you're going to get crushed - the moves up are just not justified realitive to the dollar.

Since Sept 1, the dollar index is down 8%.

However, silver is up close to 100%....

PMs are a mania - plain and simple.   And we all know how they end.  Do yourselves a favor and sell now before it is too late... or if not, at least buy some puts and hedge yourselves up.

Mon, 03/28/2011 - 03:54 | 1107865 doggings
doggings's picture

the only thing that's ever certain is the PM trolls lack of understanding of history and fundamentals. 

Sun, 03/27/2011 - 15:02 | 1106181 Hang The Fed
Hang The Fed's picture

The only thing that is ever certain is that nothing is.

Sun, 03/27/2011 - 15:15 | 1106226 Bazooka
Bazooka's picture

In other words, the more things change, the more things remain the same. This is the universal prinicple of duality....per Buddha.

Sun, 03/27/2011 - 15:45 | 1106308 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The Buddha was not referring to fiat money creation.  Think about what fiat is; it is not a real asset.  It is backed by nothing.  It is a piece of paper with the head of a dead man on it. 

Also, there is no difference betweem a paper dollar and a digital one.  I think about the system crashing everyday.  I imagine people thorwing paper money at goods.  I think of the expression on people's faces when they are bargaining and they realize everyone has dollars.  Once created a dollar is forever in "existence", there is no debt destruction of dollars.

You are saying that reality is not real, and what is real is not.  That is a simple fallacy.

Sun, 03/27/2011 - 16:21 | 1106424 Doña K
Doña K's picture

Used to live in a country where bullion gold was not legal. Inflation at the time was running at 150%/year. On payday, my friends would run to the jewelry store and buy simply made gold chains. Every month they will convert their savings into gold chains. Easy to sell, easy to hide, easy way to preserve savings.    

Sun, 03/27/2011 - 16:38 | 1106468 BigJim
BigJim's picture

If by 'dollar' you mean physical dollars, you're correct (though they do get withdrawn from circulation and destroyed as they age)

However, if by 'dollar' you mean all the money aggregates (like M2, M3) then you're mistaken - all those dollars disappear when the loans that created them get paid back. That's one of the problems - when the money is created, it is used to buy assets and thus bids up the price of those assets. But when the loan is paid back, the money 'vanishes', yet the asset is still 'valued' (at least, psychologically by the purchaser) at the same value as when the loan was created. This isn't a problem if loans are being destroyed and created at the same rate, or more loans are coming into existance than are being paid back, but in a downturn, when fewer loans are being made, there's literally less money in the system to bid for that asset.

Sun, 03/27/2011 - 17:04 | 1106531 stewie
stewie's picture

If by 'dollar' you mean physical dollars, you're correct

No he isn't.  If all loans got paid back, all physical currency would end up in the Fed's vault, essentially destroying all buying power.


Sun, 03/27/2011 - 17:21 | 1106568 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

all those dollars disappear when the loans that created them get paid back.

No; the bank sits on the cash, until they use the cash to facilitate new loans.

Sun, 03/27/2011 - 19:04 | 1106829 stewie
stewie's picture

No; the bank sits on the cash, until they use the cash to facilitate new loans.

Well, no.  The bank doesn't get to keep all the cash paid back.  The Asset (the loan) is offset by the liability (the cash).  Left & right side of balance sheet cancel each other out.  They do keep the interests however.

This is my understanding of how things work.

 

Basically banks create money by making loans and profits from the interests.  If the loan is defaulted on, they loose the Asset part of the transction but retain the liability.  So they suffer a loss if they can't liquidate the collateral and cover the remainder of the principal.  With this model, they have an incentive to make loan to clients that they believe can repay the principal & interests.    

This worked pretty well, until Clinton screwed it all up by cancelling Glass-Stegall.  A decision that he made at the same time he faced a Monika-induced impeachment.  I think he was black-mailed into doing it.

 

 

 

 


Sun, 03/27/2011 - 16:45 | 1106478 equity_momo
equity_momo's picture

Youre half right, or half wrong.

Debt money can and does die. Given our model is built around this credit , or debt money , real defaults cause real deflation that can absolutely destroy "dollars" in circulation , creating more value for existing "dollars". There is more debt in existance than the ability to repay said debt. We have a system about paying interest , not principle.  What happens when the principle is defaulted on?  Liquidation. liquidation happens before we can move on , and that is the deflationary part of the cycle.

Think of all that printing versus the collapse in credit. Then think about how much "real money" people have. Also dont forget the demographic cycle we are in right now. The baby-boomer leaving the work force is something that economists should spend more time analyzing.

I think its telling that corporates are sat on record amounts of "cash". The media portray this as bullish. I see it as a creepy omen. Stock buy backs are another ominous sign. They're ultimately top of cycle , defensive plays. Whilst rates are low , or the ability to service existing interest obligations is manageable , corporates will remain relaxed. Once interest payments become difficult to manage , there will be a rush to repay principle. Those that cant , will default , and then liquidation will commence.

The tipping point for that will be cash flow analysis , and this is why the commodity complex is hastening this move to the liquidation part of the cycle , which will cause demand destruction to said complex.

 

Sun, 03/27/2011 - 17:29 | 1106571 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

A default destroys the loan, not the cash.  The cash was loaned into existence prior to the default.

Sun, 03/27/2011 - 17:40 | 1106611 equity_momo
equity_momo's picture

Go one step further. What happens if i loan you x dollars and you default on that loan?  You are forced to liquidate what you can.  Your house , car , business.  I take them.Obviously the big ball drop with subprime was the amount of non-recourse loands but in the wider world , every default has a liquidation attached.  

The loans into existence created artificially high values on assets from cars to houses to stocks. Once bondholders start to get the shaft and those loans reneged on , their pound of flesh will come from forced liquidation. Cash is not the right term. There is a fraction of cash in existence compared to the loans outstanding.

Sun, 03/27/2011 - 18:00 | 1106682 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

If you make a loan to me, then you gave me what at one point was cash, and I spent it.  So after the loan, the money was put into circulation.  Somone else has it now.  Sorry I can not pay you back.  You will have to eat the loan.

Sun, 03/27/2011 - 18:14 | 1106729 equity_momo
equity_momo's picture

Thats why you were half right. I will eat the bad loan but i will also eat whatever you have thats considered a productive asset in lieu of your default.

Money is loaned into existence and its defaulted out of existence.

Sun, 03/27/2011 - 18:28 | 1106768 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You make me a loan for $100.  I spend it, and then I tell you off.  You say you want collateral.  I have none.  The default is on the loan; the dollars are still circulating.

Sun, 03/27/2011 - 18:42 | 1106792 equity_momo
equity_momo's picture

You're over simplifying what i admit is a relatively simple concept.  If you were right in your belief that money cannot die through default , then there would be no need for QE now would there and the banking sector wouldnt have become insolvent through negligent lending.

The dollars are not still circulating , theyre being/were used to pay down the original bad loan on the original overpriced asset.

Sun, 03/27/2011 - 19:35 | 1106909 kaiserhoff
kaiserhoff's picture

No need for QE

 

Hell yes.  Why is that a difficult concept?  Capital destruction is the event de jour.

Mon, 03/28/2011 - 03:28 | 1107836 AnAnonymous
AnAnonymous's picture

How?

Following the previous example, the person is insolvent (he can not repay you), it does not mean that the other people who get his money are insolvent through circulation.

An entity loans money to another. The latter used up the money and it is circulated, has no counter value against the loan, ends the Ponzi. The money is still there in the pockets of another entity.

QE is necessary because the money still exists but not in the right pockets. So new credits put money in the right (assumedly) pockets and it is necessary for that.

Apparently, QE has been all about recapitalizing banks that circulated their money to other actors playing different parts than the banks. As banks are wished to play their parts, they need QE, which does not mean that the money the banks circulated prior that is dead.

The USD is circulating but not from the entities US economics would like.

Mon, 03/28/2011 - 10:31 | 1108498 equity_momo
equity_momo's picture

Wrong. The dollars are not circulalting. You understand fractional reserve lending i hope.  The dollars are sat on banks balance sheets (or stored at the fed) waiting for the deflation wave round II.   When a house goes from 100k to 300k and then back to 100k on 10 to 1 leverage and the 200k difference has been spunked by the consumer on I-Pads and home improvements (ie , they ate or set fire to those dollars) tell me how those dollars are still circulating. They didnt exist - a credit did. It was spent. Its gone. All we are left with is a mark to market clusterfk that banks are ignoring whislt they desperately try to conjure ebough dollars back from QE to mitigate when the day of reckoning comes. Theres no magic island full of dollars to offset the destruction of capital since the housing bubble burst. FFS.

Sun, 03/27/2011 - 19:07 | 1106862 stewie
stewie's picture

Nobody will make you a loan if you don't have collateral.  But if that happens anyways, the bank will loose the $100, so the newly created $100 will be offset by the Bank's loss.

Sun, 03/27/2011 - 21:04 | 1106775 Quaderratic Probing
Quaderratic Probing's picture

The Creature from Jekyll Island book does a good job of explaining money as debt instruments and the creation destruction of it.

Sun, 03/27/2011 - 17:01 | 1106525 stewie
stewie's picture

Fiat is not "backed by nothing". It is backed by a loan, a promise to pay back the principal AND interests.

 

.

Sun, 03/27/2011 - 17:19 | 1106558 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

A promise.  Shit, I will have to revise my thesis.

Sun, 03/27/2011 - 21:26 | 1107150 Natasha Fatale
Natasha Fatale's picture

Promises, like pie-crusts, are made to be broken.

(caveat emptor. at least you can EAT the broken pie crust!)

Sun, 03/27/2011 - 18:20 | 1106746 cranky-old-geezer
cranky-old-geezer's picture

Fiat is backed only by confidence the ponzi will continue on, which it has for 80 some odd years now ...while the fiat steadily loses value  ...because the fiat supply must constantly be expanded to keep the ponzi going.

A promise to repay does not constitute backing.  I can't imagine where you got the idea it does.

Sun, 03/27/2011 - 19:29 | 1106885 stewie
stewie's picture

Yes that's what I meant too.  Fiat Money is backed by the confidence that everybody will honor their contractual obligation of re-paying the loan with interests.  Just as Treasuries are backed by the confidence that the US Gvmt will generate enough revenue to service those loans.  That's what I meant by "Promise to repay".  

 

Also, the fact that the money supply needs to constantly increase is not due to the Fiat currencies, but usury.  You'd have the same problem under a Gold Standard if you charge interests on loans.  

A pure gold standard has the benefit of limiting money supply growth to mine output. It also has the disadvantage of limiting money supply growth to mine output.

 

The problem doesn't lie with Fiat currencies, or even fractional reserve banking.  It lies with banks lending to each other.  Banks should be strongly regulated and treated as Uitlities.

Sun, 03/27/2011 - 20:24 | 1107011 LooseLee
LooseLee's picture

Amen to the 'utilities' function; been thinking that for years!

Mon, 03/28/2011 - 03:29 | 1107838 AnAnonymous
AnAnonymous's picture

Fiat is backed by what you can buy with it.

You've got your scheme reversely.

Sun, 03/27/2011 - 15:43 | 1106314 Hang The Fed
Hang The Fed's picture

Duality appears to be the only real metric that exists.  Would someone ever understand love without hate, or pleasure without pain?  Besides, duality is so heavily woven into the basic fabric of the universe as we know it, I have a hard time believing that it isn't manifest in almost any event, micro, macro, or otherwise.

Sun, 03/27/2011 - 17:25 | 1106574 SilverDOG
SilverDOG's picture

The assumption in duality is; opposites are two separates entities.

Sun, 03/27/2011 - 20:42 | 1107060 bonderøven-farm ass
bonderøven-farm ass's picture

The assumption in duality is; opposites are two separates entities.

 

The assumption of duality is that there are two opposing entities.  One cannot exist without the other, so, in fact, they are one and the same....

Sun, 03/27/2011 - 15:54 | 1106341 falak pema
falak pema's picture

In biological terms : we will be the same person if we eat with our shit holes and shit with our mouths. From inside the factory the result is the same. We don't see ourselves doing it. But from outside it looks very different. From inside it 'feels' different; from outside it is 'felt' the same by others. The human paradox is all there : feelings (inside vision) and acts (outside manifestation) are so different. Elizabeth Taylor was the sexiest woman of the world from outside. From inside, she felt her sexual appeal so banal, she lived through her heart not her 'cunt'. We were all convinced of the contrary about her physical presence...

Sun, 03/27/2011 - 18:58 | 1106841 Sad Sufi
Sad Sufi's picture

Thanks Conrad.  That gave me a few laughs on a Sunday afternoon.

ss

Sun, 03/27/2011 - 17:30 | 1106586 Bicycle Repairman
Bicycle Repairman's picture

"In other words, the more things change, the more things remain the same. This is the universal prinicple of duality....per Buddha."

Buddha isn't the head of the FED.  Did you know that?  Bernanke is.  Do you think QE3 will happen or not?  Why or why not?

Sun, 03/27/2011 - 19:22 | 1106888 eddiebe
eddiebe's picture

As far as I know Buddha was quite adamant about the issue of duality. That indeed there is none and that duality is ' the disease of the mind'.

 ( But do keep digging there!)

Mon, 03/28/2011 - 04:21 | 1107878 Shylockracy
Shylockracy's picture

Also, the devil of dialectics, if I recall correctly.

Sun, 03/27/2011 - 15:32 | 1106278 Popo
Popo's picture

> " That will become even more of an issue as interest rates rise."

 

Charles, Speaking of things that "everyone knows to be true".    That's one that should have been added to your list.

 

What if interest rates aren't going to rise, because an efficient price-to-risk market for debt no longer exists in any real sense?

 

Sun, 03/27/2011 - 16:44 | 1106481 4xaddict
4xaddict's picture

Would that not just force them even higher as lenders will always err on the side of caution.

If an efficient price-to-risk market no longer exists this doesn't remove the capacity for individuals/companies to lend money to others. 

There will simply be lower valuations afforded to property and higher interest rates as well to help offset the unknowns. These will continue lower/higher until people start completing transactions. Don't need a bank to orchestrate lending, and valuations in a log cabins and ammo world don't have to be in fiat currency either.

 

Sun, 03/27/2011 - 16:07 | 1106384 terryg999
terryg999's picture

That is certainly true, but I have been actively trading for about 15 years now and the most basic truism still applies.

 

Never go against the trend.

Sun, 03/27/2011 - 16:28 | 1106439 cosmictrainwreck
cosmictrainwreck's picture

can't argue that. only question remains what form the "trend change" will take. can't see anything but a crash. anybody wager on a smooth and orderly roll-over?

Sun, 03/27/2011 - 17:35 | 1106599 chistletoe
chistletoe's picture

Oliver wendell Holmes, Sr.

wrote a peom entitled, "The wonderful one-hoss shay"

about a contraption made "perfect" via equality of strength and durability of each part.

Its worth reading for the end, at least, I find it instructive.

What is so unique about our situation today is that everything has become so interconnected.  Look at why we keep rescuing the Greeces and Portugals.

Look, also, at what is happening to all the GM plants around the world now that

critical parts from Japan are not arriving.  This was, in fact, the rationalization

for Paulson's bailouts, not that the banks did not deserve to take their losses

but that they had their fingers in so many pies, not to mention each other,

that allowing that to happen could bring down the entire financial system.

And that situation has only deteriorated since then.

 

My vote is that when the crash comes, there will be no trade whatever

which will succeed or make a profit or show a gain;  everything will lose.

Not sure exactly of the dynamics, but pretty darn sure of the consequences.

Mon, 03/28/2011 - 15:41 | 1109850 johan404
johan404's picture

So if everybody knows gravity to be true, then it will cease to exist. Am I following this?

Sun, 03/27/2011 - 15:03 | 1106191 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The question is of those guaranteed things, which will come true? As in most cases, it is never an all or nothing result.

Sun, 03/27/2011 - 15:26 | 1106200 What does it al...
What does it all mean's picture

NONE of them are absolutely true or false, that I am "fairly" certain.

As far as I know, one thing is true, we all have to die.  So hopefully, you either did what you wanted to and be around people you care about and go out peacefully on your own terms.  Nuclear Radiation doesn't fit the vision I have for myself, but it is mostly out of my hands.

As far as the markets. go, it will certainly go up and down.  Hopefully, you get most of the path right before you are stopped out on margins.  ie.  The mkt is higher than it was back in March 2009, but still lower than the high of the internet bubble..  So it is all about relative movement.

And speaking of bubbles, look at Japan, http://en.wikipedia.org/wiki/Japanese_asset_price_bubble, can you believe that one city block of the Impirial palace is worth more than the entire state of California? http://en.wikipedia.org/wiki/Tokyo_Imperial_Palace (Although CA itself, is also suspect due to San Andreas fault...)  Not any more....  I "think".  ;-)

All these landslides in CA, (Big Sur and elsewhere) they are on the same pacific plate, so something moved as well...  Good luck to all coastal properties owners everywhere on the west coast.  

Enjoy it while you can.

Sun, 03/27/2011 - 15:04 | 1106196 I think I need ...
I think I need to buy a gun's picture

i think there is a big difference in the paper vs physical market....everyone maybe long but do they own anything at the end?

Sun, 03/27/2011 - 15:18 | 1106216 What does it al...
What does it all mean's picture

Here is the ultimate "widely-held truth" possible.  In a true catastrophe, do you have guns and crow bar and physically pry your safe open for the gold bars underwater and waves of firestorms?  

I don't.

Sun, 03/27/2011 - 15:08 | 1106204 jesse livermoore
jesse livermoore's picture

the value of gold is stable ..... it is the value of fiat currency that is dropping...very few people understand this simple fact

Sun, 03/27/2011 - 15:12 | 1106218 Bazooka
Bazooka's picture

No. Credit and physical dollar have an inherent difference: duing deflation, credit becomes worthless but the value of the physical dollar becomes greater as it is scarce.

The Fed has been printing credit not physical bills. When credit implodes, the value of physical dollar goes up, which means gold will go down because it will take less physical dollars to buy gold.

So, go ahead, hold that gold and hope for $5,000/oz....I'm not buying gold until it's much, much less..perhaps $750/oz?

Got it?

Sun, 03/27/2011 - 15:47 | 1106252 cowdiddly
cowdiddly's picture

I will say this. Im not hoping for 5000 an ounce any time soon. I am confident that my gold will be worth more in buying power than your $1440 of fiat in 1-2-3-5-10 or15 years, take your pick. Will I be any richer? Probably not a dime but at least it will not lose purchasing power.With that said, I heard a miner say that his profit margin is about $950 right now so I would not expect gold to ever see about 750 bucks ($480 mining cost + profit+ refining and minting cost+markup)ever again especially with the price of fuel. 

Sun, 03/27/2011 - 16:10 | 1106393 dark pools of soros
dark pools of soros's picture

when it costs too much to get gold, they don't get it..  lol - hey gold is on Mars, it will cost $80,000 ounce, I guess that should be the price!!  never lower!!

Sun, 03/27/2011 - 17:35 | 1106600 rich_wicks
rich_wicks's picture

when it costs too much to get gold, they don't get it..

Yes, that is exactly what happens.

lol - hey gold is on Mars, it will cost $80,000 ounce, I guess that should be the price!!  never lower!!

Well, you have explained why we don't mine it on Mars.

I imagine air is pretty expensive on Mars too, but it's free here. Why is it free?  It's abundant.  If gold is sufficiently abundant, it will go down in price.  However, you know what is super abundant?  Money.

Sun, 03/27/2011 - 15:28 | 1106266 Quinvarius
Quinvarius's picture

LOL.  No dude.  In a real deflation, you can't get a loan or credit.  Real money, gold, becomes more valuable.  Maybe you didn't notice gold was at all time highs the day the stock market was bottoming in 2009.

Sun, 03/27/2011 - 15:29 | 1106269 css1971
css1971's picture

Credit doesn't become worthless. It becomes difficult to obtain, it's based on physical dollars. The problem with physical dollars is they are easy to make. I mean, the FED can add lots of zeros to the paper at any time. No problem with supply there.

But I agree there is a fundamental difference between credit and physical dollars. When a physical dollar pays a bank debtt, the physical dollar still exists to be spent again, a credit dollar is annihilated.

 

Sun, 03/27/2011 - 15:44 | 1106307 Tejano
Tejano's picture

"Physical dollars"?  You mean FRNs, right?  So, can you tell me how many are out there?  Where are they?

Sun, 03/27/2011 - 16:32 | 1106446 TBT or not TBT
TBT or not TBT's picture

Something tells me the Fed at some point stopped physically printing notes for every dollar it creates.    I mean, when the Fed buys 2 week old treasuries from the PDs, I imagine the Fed doesn't print billions in paper currency to ship to the PDs vaults.    It increments or decrements some accounts, digitally, or so my feeble imagination holds these things to probably be.    But some acountants are hopefully all over that sh*t, doing it double entry style.

Sun, 03/27/2011 - 16:41 | 1106475 DoChenRollingBearing
DoChenRollingBearing's picture

Barrons has Fed figures every week on the fifth from the back page of their market prices section.  I do not have access to Barrons right now (am in Peru), but I believe the Fed figure for currency in circulation is about $900 billion.

I read somwhere that approx. one half of that is held overseas in $100 FRNs...

Sun, 03/27/2011 - 17:28 | 1106579 kaiserhoff
kaiserhoff's picture

Barrons.com

They build walls around their best articles, but that is a failing model.

Sun, 03/27/2011 - 20:32 | 1107035 Tejano
Tejano's picture

Thanks.

Sun, 03/27/2011 - 16:02 | 1106369 SRV - ES339
SRV - ES339's picture

... a dweller on the threshold

Sun, 03/27/2011 - 17:51 | 1106651 Abitdodgie
Abitdodgie's picture

Enjoy the wait

Sun, 03/27/2011 - 15:10 | 1106208 Highrev
Highrev's picture

What's that old Wall Street adage?

What everyone knows isn't worth knowing?

Yeah, that's the one.

What everyone knows isn't worth knowing.

Sun, 03/27/2011 - 15:15 | 1106234 What does it al...
What does it all mean's picture

Exactly.  So that statement isn't worth knowing itself.  aha!

Sun, 03/27/2011 - 15:09 | 1106209 Bazooka
Bazooka's picture

DEFLATION: Credit dries up, implodes, disappears...but, CASH, physical dollar becomes highly coveted.

No one wants to part with their dollars:

-no one wants to part with their dollars and buy houses

-companies don't want part part with their dollars and hire to pay salaries

DEFLATION will ravage all who thought we were in hyperinflationary phase.

Not a dollar bull to be found....(exept me). When 97% sentiment calls for dollar demise, you might want to consider being on side lines or go opposite to these dollar doomers.

 

Sun, 03/27/2011 - 15:17 | 1106233 ik999
ik999's picture

dont tell us what we don't want to hear

 

you know how stupid I'm going to look if that happens?

I'm 80% physical gold and 20% firearms.

Sun, 03/27/2011 - 15:45 | 1106315 Popo
Popo's picture

Gold is still a good place to be during periods of instability. Don't forget that gold did well during the Great (deflationary) Depression.

That having been said -- My humble advice to you is that you might be a little overweight in gold -- and I say that as someone who likes gold.

Confiscation is unlikely in the present era -- but it is a possibility. Much, much more likely (and this is where you might want to be concerned) is that gold sales become taxed at a high percentage rate.

This is extremely easy to accomplish from a policy standpoint -- and it will have profound implications for people like you who are going full-throttle into gold.

Never underestimate the ability of the government to change the rules in unexpected ways. Keep your gold -- but think about silver, rare-earth-metals, farm land, agricultural commodities, etc.

If you're 80% in gold... a gold tax would seriously ruin your day. Watch your back bro.

Sun, 03/27/2011 - 16:47 | 1106487 DoChenRollingBearing
DoChenRollingBearing's picture

Popo and repliers just above.

It is NEVER a bad idea to have up to 6 months worth of FRNs at hand in case of an ´event´.

Beyond that, I would buy more gold instead.

Sun, 03/27/2011 - 15:36 | 1106285 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

What is a dollar to you?  I want to know why you like it so...

Sun, 03/27/2011 - 16:09 | 1106387 Sudden Debt
Sudden Debt's picture

For me, the dollar bills are one of the most beautifull paper currencies ever made with the eagle as the most powerfull graphic. That's also why I like Silver Eagles so much.

Sun, 03/27/2011 - 16:14 | 1106404 dark pools of soros
dark pools of soros's picture

so when 97% were against Lehman in the last days, that was bullish??  we aren't in the bookie mode with this

Sun, 03/27/2011 - 16:17 | 1106409 I think I need ...
I think I need to buy a gun's picture

credit and physical dollars aside how are we going to pay back our foreign creditors in real time thats the only thing that matters the rest doesn't need to be paid back

Sun, 03/27/2011 - 17:06 | 1106537 Long-John-Silver
Long-John-Silver's picture

Try telling someone in Zimbabwe that......

Sun, 03/27/2011 - 17:34 | 1106591 traderjoe
traderjoe's picture

@bazooka - I heartily disagree. First, the concept of inflation v deflation is a ruse. Biflation will reign, as needed items skyrocket in value, and discretionary items plummet. Just but one example - see what happened to KI prices recently? Hyper-inflation. See gas, food, cotton prices.

Any serious credit deflation (which I believe is coming) will quickly lead to a biflationary collapse. You might see paper gold get dumped in the wave of margin calls and defaults, but the FRN will not be highly coveted. Physical gold will maintain value vis a vis needed items. I don't think you'll see sub-$1000 ever again. The FRN system will not survive serious deflation of asset prices.

Sun, 03/27/2011 - 18:21 | 1106750 Diogenes
Diogenes's picture

Your description of biflation for some reason reminds me of a quote from a book published in the 40s. It contained an interview with a widely travelled newspaper correspondent. He had visited many countries torn by war, political chaos, inflation etc. He described them as the kind of place where the money falls apart in your hands and you can't tear the toilet paper.

Sun, 03/27/2011 - 18:49 | 1106819 Bad Asset
Bad Asset's picture

you might be the only dollar bull here because you are on zerohedge.  We are the contrarian view.

Sun, 03/27/2011 - 15:14 | 1106219 buzzsaw99
buzzsaw99's picture

That will become even more of an issue as interest rates rise...

 

Objection your honor, facts not in evidence. Sheila Bair is going to give the deadbeats $20k each:

 

http://www.businessinsider.com/fdic-21000-homeowner-plan-2011-3

 

 

Sun, 03/27/2011 - 15:42 | 1106312 rlouis
rlouis's picture

Amazing how generous bureaucrats can be when they are giving away other people's money that is increasingly worthless. 

 

Sun, 03/27/2011 - 16:04 | 1106375 buzzsaw99
buzzsaw99's picture

Being a deadbeat is lucrative. MEW (mortgage equity withdrawals), free rent, and now a move-out bonus.

Sun, 03/27/2011 - 15:16 | 1106230 unclebigs
unclebigs's picture

Everybody knows Gold is going to $2,000 and Silver is going to $50.  LMFAO!!!

Sun, 03/27/2011 - 15:27 | 1106257 Montgomery Burns
Montgomery Burns's picture

Silver to $50, no sweat. Keep laughing!

Sun, 03/27/2011 - 16:39 | 1106463 smlbizman
smlbizman's picture

silver is already 42- 44 per z on ebay

Sun, 03/27/2011 - 20:14 | 1106991 Big Corked Boots
Big Corked Boots's picture

Less +/- 9% in fees, bringing sales back down to spot.

No free lunch.

Sun, 03/27/2011 - 17:40 | 1106614 rich_wicks
rich_wicks's picture

My dollar cost average for my physical is 0 now.

You can do what you want, nobody here is going to try to talk sense to a fool, and people who have been in this trade for any amount of time know where it's headed.

Gold is easily going to $2000 and silver to $50.  Give me an email address, and I'll be happy to email you when it does.

Sun, 03/27/2011 - 15:15 | 1106231 duncecap rack
duncecap rack's picture

aren't those numbers for the gold positions just for the speculators or managed money?

Sun, 03/27/2011 - 15:23 | 1106246 Quinvarius
Quinvarius's picture

Explain how there can be a different amount of long vs short gold contracts please?  Do you even understand that for every long there is a short promising to deliver?

The herd is always contrarian with no basis in research to back it up.  Trust me.  You are the herd using no research to form an opinion.

Sun, 03/27/2011 - 15:36 | 1106288 kaiserhoff
kaiserhoff's picture

I see your point, but there can certainly be more calls than puts, amounting to an imbalance. 

I like gold, silver even more, but money is getting forced into commodities due to hopeless overpricing of bonds, stocks, REITS, etc., or maybe not.

Sun, 03/27/2011 - 15:24 | 1106247 XRAYD
XRAYD's picture

Then it's not about black, white or green swans. Because there are no swans!

 

Maybe swines?

Sun, 03/27/2011 - 15:25 | 1106248 XRAYD
XRAYD's picture

.

Sun, 03/27/2011 - 15:33 | 1106254 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Finance has dug its own grave.  Economics is based on greed.  Fiat is an unbacked liability.  That is why we come here, is it not?  To find the truth...

So what side of the trade matters, when people are still using old metrics?  Shamanism has been replaced by hospitals, but people are more sick than ever.  Where is the true soul of humanity?  Where is true knowledge found?

Some trends lie, because people are wrong.  Some trends lie, because there is a perpetration in the factoids.  Some trends reveal truth, by showing where the curiosity of the soul lies.

Zerohedge trend line:

http://www.google.com/trends?q=zerohedge

Sun, 03/27/2011 - 17:45 | 1106633 MsCreant
MsCreant's picture

I'd like to welcome all the Singapore readers. Wow!

What the fuck is Herndon, VA, that they are number three, after NYNY and DC?

Sun, 03/27/2011 - 18:02 | 1106692 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Maybe VA is CIA?

Sun, 03/27/2011 - 18:15 | 1106735 Hulk
Hulk's picture

#include<iostream.h>
int main ()
{
cout << "Hello World!";
return 0;
}

 

Hello World!

Sun, 03/27/2011 - 19:27 | 1106892 kaiserhoff
kaiserhoff's picture

Sleepy DC suburb.  Redskins training camp. Not far from:

Langley (CIA) or

Foggy Bottom (State Dept) or for that matter

Camp Mead (DIA)

Quantico (FBI)

I have friends in low places.  The tin hats can take it from there.

Sun, 03/27/2011 - 21:03 | 1107099 acrabbe
acrabbe's picture

herndon VA? are you kidding? either you're kidding or they removed it, because it's not there anymore. ruh roh...

Sun, 03/27/2011 - 22:39 | 1107307 Hulk
Hulk's picture

Removed! Hey Herndon, don't think we didn't notice that!!!

Mon, 03/28/2011 - 19:55 | 1108433 MsCreant
MsCreant's picture

Even better, Fort Meade, NSA headquarters, is about 40-50 miles from Herndon!!! My husband used to be a low level spook in the service.

Sun, 03/27/2011 - 15:28 | 1106265 DoctoRx
DoctoRx's picture

This article is wrong about CFTC data.  There can't be more longs than shorts, sorry, just as for every seller of a stock there is a buyer.  Prob all readers know this, but harveyorgan.blogspot.com summarizes the latest gold commitment of traders on the futures market for gold and silver.  You can see the longs = the shorts quantitatively.  Perhaps CHS is referring to speculators being net long.  But on average, speculators make money, as the commercials in essence purchase insurance on their production, giving up excess profits to protect their downside (again I refer to legit markets, not manipulated PM ones of today).

I would also add about the Japanese insurers:  IMO this one is priced in re the mostly "known knowns".   Anyone who thinks that liquidating a mere $150 B over months to years will move global markets is, well, let's just say he hasn't been looking at the numbers that the Fed and ECB routinely print up in spare moments.  It's not as if the claims will be paid in a day.  And to the extent that liquidation turns out to be a strain on the market, it prob will just be monetized and thus will be bullish indeed.  What may not be priced in is the Chernobyl scenario, however, but that remains a known unknown.

Sun, 03/27/2011 - 16:47 | 1106469 Bay of Pigs
Bay of Pigs's picture

Someone points out the glaring mistake. A poor use of numbers to say the least. Lopsided trade? Give me a break.

I might add the CFTC has done a bang up job enforcing commodity regulation/law for the last ten years haven't they?

And what about those massive concentrated shorts of JPM Mr. Smith?

 

Sun, 03/27/2011 - 17:43 | 1106631 Hansel
Hansel's picture

The futures data for this article is based on the "managed money" section of the COT report. This article is ignoring the shorts by the "swap dealers" and "producer/merchant processor/user."

Sun, 03/27/2011 - 19:46 | 1106940 kaiserhoff
kaiserhoff's picture

Well, kind of.  Every trade needs a short and a long, so someone has to lay off the risk, but...

These are the kinds of numbers you would expect in stocks, where most big players are prohibited from going short, rather than commodities, where anyone who plays can go short as easily as long.  Or am I missing something?

Sun, 03/27/2011 - 19:30 | 1106900 unwanted flatulence
unwanted flatulence's picture

yes seems his main point is blown.  Harvey Organ shows a near even market:

 

 

Gold COT Report - Futures Large Speculators Commercial Total Long Short Spreading Long Short Long Short 231,512 56,675 43,600 162,616 387,415 437,728 487,690 Change from Prior Reporting Period -9,149 -9,415 12,129 -5,714 -1,069 -2,734 1,645 Traders 199 64 72 52 53 284 163 Small Speculators Long Short Open Interest 71,403 21,441 509,131 4,105 -274 1,371 non reportable positions Change from the previous reporting period COT Gold Report - Positions as of Tuesday, March 22, 2011


Sun, 03/27/2011 - 15:29 | 1106267 kaiserhoff
kaiserhoff's picture

Thoughtful piece.

After the first Chrysler bailout (Lee Iacocca), Ford was selling for 4 times after tax cash flow (25% return).

In many small towns, an older house used to sell for about the price of a decent car.  Replacement cost is tricky with real estate, because you wouldn't build a new house the way older ones are constructed, equivalent in floor space, perhaps, but not in use.

Rules of thumb are great, until something better comes along.

Sun, 03/27/2011 - 15:31 | 1106268 WTF2
WTF2's picture

We have inflation and deflation at the same time.  At some point one force can/will overwhelm the other?

Sun, 03/27/2011 - 15:40 | 1106302 SWRichmond
SWRichmond's picture

You're looking at it wrong.  Gold is money; fiat is not.  Gold is behaving exactly as we should expect money to behave in a deflation:

  • Its buying power wrt nearly everything is increasing, including fiat
  • Demand for it is increasing and it's becoming more scarce
Sun, 03/27/2011 - 15:33 | 1106275 WTF2
WTF2's picture

replacement value means little when you can not afford the taxes or the up keep.  White elephants or perhaps White Mc Mansions?

Sun, 03/27/2011 - 15:32 | 1106279 wowser22
wowser22's picture

Mr. Smith:

You stated that there was a 50 to 1 lopsidedness in the gold futures contracts.  I thought for every long there had to be a short.

 

Sun, 03/27/2011 - 17:42 | 1106619 rich_wicks
rich_wicks's picture

Haha - I just realized you're right.

This article we're commenting on, is completely full of shit.

Sun, 03/27/2011 - 15:42 | 1106291 SWRichmond
SWRichmond's picture

I can't help but notice just how lopsided the trade in gold has become.

As a technical observation, this is completely disconnected from all the fundamental reasoning behind owning gold.

With the first sentence above you reveal that this article is about the gold "trade."  With the second one you reveal the basis for owning physical gold has nothing to do with this article.  Owning physical gold is all about the fundamentals.  When the fundamentals change, so will my portfolio.  You guys can "trade" it if you want.

Maybe I should leave the sucker "producer" class and join the ranks of society's bloodsucker class and earn a living by skimming wealth; it certainly seems to pay well.  I can use my brains to help make stuff, or I can use them just for myself alone and demonstrably to the detriment of those around me.  I'm starting to have a moral problem with this.  For all the self-justification ("we help the pricing mechanism!") traders are really just a subset of the bloodsucking banking class, aren't they?  And once you accumulate your wealth through your activities, then you can join the political class and sip the good life with Soros.  You guys, after all, don't "make" anything, either. 

Everything you have you've gotten from a zero-sum game.  It's a kind of "reductio ad absurdum" that negates the positive power of economic activity.  It doesn't add a single penny to GDP (flame away).  If everyone did that, you guys would starve, and I'm starting to think that would be OK with me.

Sun, 03/27/2011 - 18:04 | 1106691 MsCreant
MsCreant's picture

I think somewhere it used to be honest, but alas, I agree with you. HFT has made it far, far worse. There needs to be a mechanism out there for people with money to get together to make big projects happen. Stock market ain't it anymore. The way the profit motive drives us to harm the planet and each other is synonymous with the attitude and behavior of an addict-- you want more and damn the consequences. Meanwhile, the addiction is killing the individual and he or she does not know it.

I have less venom about it to express (just this minute) than you do in this post, but I keep thinking it over and over. Another poster (Miss Expectations?) said it to me a week or so ago, "They know not what they do."

To confront it is to confront the shame. They are smart and good people otherwise and it is socially and culturally acceptable, even admired. I was in the stock market for years (someone else managing it). I pulled out in 2006 because I saw the shit getting ready to hit the fan, but more to the point, I felt immoral and couldn't handle it anymore.

Peace.

Sun, 03/27/2011 - 18:24 | 1106752 SWRichmond
SWRichmond's picture

There needs to be a mechanism out there for people with money to get together to make big projects happen.

We seem to have morphed to a realm where there's too much risk in investing capital in a productive business.  The regulatory environment is unstable, the political environment is unstable, the legal framework of capital protections is especially unstable, the banking system is unstable, and in the U.S. (and I expect also in much of the rest of the West) the employment environment is dotted with landmines.  I like to think, I almost have to believe, that people will see this all has to be fixed, and that the collapse will provide a clear opportunity to fix it.  This looks to me like the final stage of the collapse: drunks at the now-untended bar on the Titanic grabbing bottles of the good stuff while the ship lies down ever more to the bow.  The drunks know the ship is sinking and are relying on their pre-arranged helicopter flight to pick them up right before the ship sinks.  Just one more bottle.  I believe a lot fewer of them are going to make it than they think.  These are the guys that are still "trading" these markets.  They're relying on, in fact taking advantage of and in many cases even trading, the ongoing interventions by the Fed, et al.  Meanwhile, the ship's crew are busy lying to the people in steerage and rescuing the wealthy.  It's a spectacle I never imagined I'd see in real time.  Spectacle is the right word for it.  I am so disgusted.

Sun, 03/27/2011 - 15:39 | 1106296 Cammy Le Flage
Cammy Le Flage's picture

Gold can go to zero if no one wants it.   That time could come ya see.

 

Sun, 03/27/2011 - 16:00 | 1106353 youALREADYknow
youALREADYknow's picture

Laughable. The time could come when nobody wants a product with so many industrial uses?

The only situation where gold goes to zero is when humanity ceases to exist.

Sun, 03/27/2011 - 16:00 | 1106357 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The first act of a bank is to buy gold.  It puts the gold on reserve.  Then it loans the gold out.  Gold is the first loan of recourse.  Without gold, there is no such thing as a bank.

Sun, 03/27/2011 - 17:55 | 1106670 naughtius maximus
naughtius maximus's picture

Uh what? Banks own gold? Why?

Sun, 03/27/2011 - 18:06 | 1106711 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

To use as an asset to facilitate loans.

Sun, 03/27/2011 - 16:18 | 1106412 mdwagner
mdwagner's picture

Yeah, but only if we ignore history and listen to the unicorns telling us that it's worth nothing.

Sun, 03/27/2011 - 17:41 | 1106615 traderjoe
traderjoe's picture

It seems to gold trolls are getting paid 2x on Sundays.

Sun, 03/27/2011 - 15:44 | 1106313 MisterAmbassador
MisterAmbassador's picture

All of the problems in the United States, other (once) great Western Nations, and really the world come down to something very simple to understand but impossible to solve in an acceptable, expeditious manner - overpopulation.

We consume the planet's resources faster than it can replenish them.  The planet simply cannot support 7 billion people for a sustained period of time.  Oil has allowed us to overshoot the carrying capacity of the planet.  We've used up much of the cheap, easy to access oil.  And, our consumption of oil and other fossil fuels, combined with cutting down trees and other vegetation, have contributed to the planet attempting to re-balance its ecology through global warming.

The problems and point of this article are not invalid.  And, there is consensus when it comes to many of the problems pointed out here.  But, they all come down to too many people chasing too few resources.  And, the consumption of those resources harming the planet's ability to absorb and replenish the damage we do.

If we suddenly discovered a couple trillion barrells of oil and the price of oil fell to $5/bbl, the economy would start booming and we could easily grow out of this debt.  That's not going to happen.  Nothing can replace oil, and the world cannot feed anywhere near 7 billion people without oil.  Global collapse is imminent.  The world will never recover to the prosperity and standard of living created during the Oil Age, at least not on a time scale human beings can fathom.

 

This professor does a good but boring job of explaining our overpopulation problem:

http://www.youtube.com/watch?v=F-QA2rkpBSY

Here are some more sources for this depressing but important topic:

http://news.bbc.co.uk/2/hi/science/nature/7865332.stm

http://www.paulchefurka.ca/Population.html

 

The Mayan Calendar coincides with the end of an era - the Oil Age.

 

Sun, 03/27/2011 - 16:00 | 1106360 mdwagner
mdwagner's picture

Yep, I've been telling this to people for a long time.  If you care about the planet, don't have kids.  World population growth throughout history was stable until oil was discovered.

Sun, 03/27/2011 - 18:16 | 1106739 mr.smooth
mr.smooth's picture

Yes, I recomend that everyone watch the Youtube link. It is an 8 part series explaining the amount of oil that needs to be discovered to keep up with the increase in global demand. We will always have oil. We will just runout of cheap oil.

Sun, 03/27/2011 - 18:39 | 1106795 False Capital
False Capital's picture

Whatever, Malthus. Firstly, without immigration there is zero population growth in many western countries. Secondly, E=MC^2 ergo plenty of energy left in the universe.

Sun, 03/27/2011 - 19:45 | 1106937 stewie
Sun, 03/27/2011 - 15:44 | 1106316 buzzsaw99
buzzsaw99's picture

That will become even more of an issue as interest rates rise...

What if all these things "everybody knows" are wrong?

 

Hoisted by your own canard.

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