QBAMCO On Precious Metals And The Coming 'Great Reset'

Tyler Durden's picture

Authored by Lee Quaintance and Paul Brodsky of QBAMCO,

Volume Triage

Last Sunday we closed the macroeconomic portion of “Imperial Constraint” with the following:

“So we ask again, are there really unpredictable market shocks or are investors paid not to care? To us, all signs point towards the next currency reset. We think monetary authorities are compulsively destroying the current global monetary system; they simply have no choice if they are to keep it afloat in the short term. We further think they will have no choice but to replace it with a gold exchange standard they oversee (i.e., a gold-standard-light, “Bretton Woods” type reset). Perhaps this explains the current redistribution away from unreserved paper gold to physical gold? We would not be surprised if, in 2014, someone like Larry Summers or Tim Geithner takes control of the Fed and oversees such an operation.”

Two days later the Fed announced Ben Bernanke would not attend the Jackson Hole summit, for the first time in twenty five years. A couple days after that the New York Times (on the first page, no less) ran an in depth profile of Janet Yellen, the heir apparent to run the Fed. Beneath her profile there were three other candidates “being discussed:” Roger Ferguson, Tim Geithner and Larry Summers.

We normally do not spend time handicapping presidential appointments. In this case; however, we think the choice for next Fed Chair may have profound economic implications, and that it would not require expertise in econometric modeling, credit policy management, and maintaining the public perception of economic stability. As we wrote last week, we think the next Fed Chairman will oversee a conversion of the global monetary regime. A thick skin, diplomatic skills, and strong relationships with global banks and monetary policy makers will be the skill set most needed. We think Tim Geithner (with Bill Dudley as an alternative) will take over the Fed when Ben Bernanke steps down next January, and it seems by all indications that the table is already being set.

We attended a small dinner party a few years ago at which an iconic financier (and major Obama supporter) let it slip that he questioned one of Obama’s most senior aides just prior to the 2008 Democratic convention about taking over the economy when it was imploding. The aide waived it off and exclaimed; “oh don’t worry, Bobby has it covered!” Most of the table was relieved that Bob Rubin still had their backs and that banks would keep priority. Such was, and remains, US economic policy.

Neither growth nor austerity nor gloom of night will stay these currencies from their appointed devaluations. Bank balance sheets must be preserved; ergo sufficient inflation must be manufactured. We think the dull but persistent economic malaise amid increasingly aggressive monetary intervention policies will soon engender fear among the not-so-great washed – net savers. This happier band of brothers cannot maintain an edge when the real economy contracts and interest rates are already at zero. Base money is already being manufactured in the form of bank reserves and the total money stock is not growing because there is very little natural economic incentive among the rest of us to consume (much) or take risk. Something and someone new is needed.

Ben Bernanke seems like a brilliant political economist and a decent guy, the top of his field in terms of comportment, academic credentials and specific competence in understanding historical monetary policies during a counter-cyclical (i.e., de-leveraging) period. Perhaps Janet Yellen is too? But such qualities are not what we think will be preferred by the powers that be now that global resource producers are openly questioning US, British, Euro and Japanese monetary policies and reserve holders are realizing their stash is being methodically turned to trash.

Meanwhile, aggregate leverage is growing and real economies are withering. Does anyone believe that Ben or any other monetary authority has been proactive, or that any fiscal authority has enacted legislation that promises to help achieve “escape velocity?” Can’t we all agree that the rationale for economic policy may be boiled down to the counterfactual: “yes, but imagine if they withdrew liquidity or enforced true austerity – it would be worse!”? Is there a serious analyst who still believes economies can grow their ways out of being over-levered without leveraging further?

Whether or not contraction has to come-a-knocking prior to a monetary reset is anyone’s guess, but it would be difficult to imagine monetary system change without a generally-recognized economic tragedy that precedes it. This implies disappointing GDP prints, declining corporate revenues and maybe even a swoon in stock and real estate markets. We have already begun to experience the first two. Now that we read global central banks have begun buying equities, perhaps equity prices may be controlled too (as are the level of interest rates via large scale asset purchases like QE and relative currency exchange rates via timed interventions)? Negative output growth and asset price busts would certainly open the door for our hero to enter.

The role of a central banker in the late stages of de-leveraging seems to be volume triage, as they say in intelligence circles – reacting to an increasing barrage of events as they occur, wherever they may occur. In economics as in policing, the bad guys always get to take the first shot. From the central banker’s perspective, the bad guy in the current regime is the real economy. If it continues to shrink, as we think it must, then TPTB must change the way they do business.

We think the box we drew in Imperial Constraint is the key metric in understanding the forces behind economic growth and market pricing. An inflationary leveraging perpetuates imbalances while deflationary deleveraging threatens the survival of the banking system at large. Hopes for organic credit growth, which would promote the former, are now fleeting. This, in turn, engenders the threat of the latter. Continued ZIRP, increasing asset purchases and a steep decline in the universal efficacy of it all suggests the time to press the reset button is quickly approaching. May to December 2013 may turn out to be the darkness before the dawn; a time we look back upon and choose to forget.

All in all we think the most efficient Fed Chair in advance of a reset would be Paul Krugman. He seems willing to destroy the current global monetary system with swift dispatch, without consultation, declaration (or second drafts). Alas, capitalist economies in liberal democracies require level-headed responses to market forces. There is no place for rogue pro-actionists. Institutions like the Fed are meant to appear as first responders working on behalf of the societies their banks serve.

And so we think that circa 2070, our children will write and read (140-word) biographies about how Timothy Geithner saved the world from economic darkness. Geithner will save the day and bring glory to the Obama presidency by reducing the burden of debt repayment while maintaining the nominal integrity of debt covenants and bank balance sheets. The only way to accomplish this would be by destroying the currencies in which those debts are owed. Net debtors will rejoice and net savers (all 1% of them?) will suffer, finally realizing their unreserved currencies and levered financial assets were never sustainable wealth in the first place.

Our little narrative could certainly turn out to be wrong, but we discuss it here (against all political wisdom) because we cannot find another one that better fits current macro and market pricing trends. If we are wrong about Mr. Geithner, we think it would imply that TPTB (raise your hand if you think the Fed’s shareholders do not choose/approve the Fed Chairman) believe a clear-headed and decent academic political economist can figure out what all past ones could not: how to support asset prices beyond ZIRP and central bank asset purchases. (Ben is gone, long reign Janet!) That is not our projection.

When and if it becomes clear that Tim Geithner will ascend the steps at Eccles, we think it would already be too late to buy physical gold and resources. The only play remaining for financial asset investors looking to get full value after the reset would be shares in precious metal miners and natural resource producers holding reserves in nature’s vault. Properly held bullion and shares in precious metal miners would act as the most efficient store of purchasing power over the course of the devaluation and conversion. (Worst to first? Get ‘em while they’re cold!) Futures, ETFs, unallocated bullion holdings and other fractionally reserved claims on physical reserves easily replaced with cash would not participate.

If our scenario comes to pass, then bank, government and consumer balance sheets would be quite healthy following the reset and would be ready to expand. We would think consumable commodities and shares in their producers would lead equity markets higher and that interest rates would remain low, as further inflation would be mitigated by the discipline of a full or partial peg to precious metals.

We think all should question whether we are 100% wrong. If not, then prudence dictates some allocation to properly held precious metals. (Presently, it is less than 1% of all global pensions.)

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Stackers's picture

I've looked into the Reset Button - the science is impossible


Ignatius's picture

The problem I see with this analysis is that they seem to be reading events at face value while ignoring the pistol(s) under the poker table.  High stakes game, no?

THX 1178's picture

The problem I see with this analysis is the part where we remember Timmy for saving the US and contributing to a smooth transition. HA! No roundtable of funtionaries in the wolrd can smooth out whats comin'. Other than that I think this analysis has a lot to offer.

philipat's picture

Yellen, Dudley, Summers and Geithner? We're truly fucked.

TwoShortPlanks's picture

"When and if it becomes clear that Tim Geithner will ascend the steps at Eccles, we think it would already be too late to buy physical gold and resources. The only play remaining for financial asset investors looking to get full value after the reset would be shares in precious metal miners and natural resource producers holding reserves in nature’s vault."

I have been sitting on a Semi-Synthetic Gold & Silver Derivative idea for some time now. It allows Miners to ramp-up production today, even thought Gold and Silver prices remain low. I feel it solves many issues involving ongoing costs to mines as the Derivative price links metal prices to future mine production, at each site.

A knock-on benefit is to the miners' share price. It ties-in each mine site with future metal prices and allows mines to extract ore body now, keep high employment, and it boosts bottom lines today, not down the track when metal prices rise again. It also entices Banks to invest in future projects and it keeps mines honest in their production estimates.

Gold Bugs would love it as you own physical, for this reason I believe entities like Sprott would buy big. The reason for this is simple, you own something which is real, not Synthetic. How the Synthetic part works, well that's the key.

I ran the concept past a mate who's an Economics Major who is well aware of all the major issues facing Gold Mines today, and he nearly fell off his chair. He said it needs to get out there, right now.

I just don't know anyone to present it to in the mining or financial world who would immediately understnd the spin-offs, pros', con's and most importantly, how to get it off the ground (how do you get something like SPDR off the ground?).

If I were a miner, I'd be scrambling for this Derivative right now.

Ignatius's picture

TSP, I'm a fan as you've written some brilliant pieces before, but I'm thinking the dominant meme at this time is trust, or better, the lack thereof -- in the hand is gonna count.  JMHO.

TwoShortPlanks's picture

Hi Ignatius, yes, I get that.

About 18 years ago I got talking to a guy in an elevator. He had what he thought was a great idea for a soft drink and was travelling from country to country looking for capital.

He ran it past me but I scoffed and said I'm not sure it would fly. I asked him how come he's so open about his idea and not guarded at all. He said that sometimes you just have to put it out there and hope people realise that the originator of the idea is the real key to its' future success.

He got off at his floor and went to do some presentation on the concept...I often wondered what became of this guy.

One day, I saw his product hit the shelf and the advertising on TV. It's now one of the leading Guarana based soft drinks.

Sometimes you just gotta get it out there.

If I don't manage to get it out there soon, I'll probably just write it up and present it here on ZeroHedge, and let the chips fall where they may. I reckon in full swing it would have a market cap in the order of $50-$150 Billion, I know SPDR is around $102 Billion.

Oh, unlike Allocated/Unallocated Gold & Silver, you can't get robbed on this one, even though it's physical. And it's way better than BitCoin!

Dr. Richard Head's picture

No one should EVER yell pressure cooker at a marathon. Derivatives be damned.

Acet's picture

Let me tell you something I've learned from doing Business Analysis and Technical Analysis within IT and later looking at people's Business Plans in the Tech Startup world:

- The really important bit is not what you do when everything goes perfect, it's what to do when things don't go perfect.

The overwelming majority of business ideas produced by amateurs are all about the ideal situation and rarelly describe or address the potential risks.

I've seen tons of "great ideas" with one small weakness that turned out to be the thing that would made the whole business collapse if things didn't work perfectly (and when do things ever work perfectly in real life?)


In the case of PM derivatives, the weaknesses that need to be addressed are "How do you get enough people on board up front to create critical mass?" and "How do you solve the trust issue when it comes to any kind of paper certificate versus direct, immediat possession of the physical commodity?"



Professorlocknload's picture

If we are doing "The problem I see with this," I'll critique the article with Timmy will most likely not be remembered on down the road as the Lone Ranger, but instead as WC Fields for his part in not only not saving the day, but instead advocating throwing a "TARP" over it all.

Every punk at a Ramones Concert knew this thing was bigger than $750 billion.

That meet up with reality, of course, after the Keynesian Monkey Wrench hits the cogs, and a modicum of common sense resurfaces.

Geithner as Fed Chief? Carumba!

thewhitelion's picture

"In economics as in policing, the bad guys always get to take the first shot."

Tell that to the guy in the boat.

jimmytorpedo's picture

"..Bernanke seems like a brilliant political economist and a decent guy,.."

 I laughed at that part.

jekyll island's picture

Next fed chairman should be Ron Paul.

SilverIsKing's picture

Ron Jeremy has a better chance.

hapless's picture

Who the fuck are we kidding?  It's going to be Corzine.

Vagabond's picture

He does have the required skillset.  Expert vaporizer.

Big Corked Boots's picture

"We attended a small dinner party a few years ago at which an iconic financier (and major Obama supporter) let it slip..."

Yup. You have named the destroyer.

espirit's picture

Miners? Oh, Really?

Come on, too easily nationalized.  If you don't hold it, you don't own it.

FieldingMellish's picture

Not if they actually want the gold out of the ground. Productivity of nationalized mines is abysmal.

Cacete de Ouro's picture

Ron Jeremy acquired the name hedgehog when he arrived at a shoot one day after driving his motorbike through icy weather and the director thought he looked like a hedgehog when he walked in with frozen hair....
Many people assume the name refers to his dexterity....coincidence?

FieldingMellish's picture

I thought it was because of his hairy back but I like your story better.

prains's picture

i thought it was because he looked like a hairy round ball, much like a hedgehog

TheSilverJournal's picture

Free banking please. No Fed chairman necessary.

Shell Game's picture

+1  That's exactly what Dr. Paul would say...  ;)

fonzannoon's picture

I am just waiting around for the JPM vault report right now. I see Tyler is keeping us in suspense.

WelfareFTW's picture

haha, me too. hitting the refresh button every few minutes on the home page :-)

Alpo for Granny's picture

If it's empty I'm thinking the post would certainly be deer worthy.

THX 1178's picture

If it's gone up, I think it's probably a lie. Or its just some odds and ends from 'Eccles' across the street. The jig is up no matter what and we all know it.

McMolotov's picture

I think Ben knows what's coming and wants to be safely away from any major cities. The next Charmin (spelling intentional) will preside over the Great Collapse.

fonzannoon's picture

who the hell would want that job knowing they are taking the fall?

Here are some other options. The fed outsources the Chairman job to some chinese factory worker and blames everything on him?

They replace Bernanke with a robot...because that is essentially what he is?

McMolotov's picture

I think the job calls for a certain level of ego, so it would have to be someone who believes 100% in his or her ability to use Fed policy to "fix" the economy. I think Bernanke has lost a bit of his Keynesian faith at this point.

Krugman has the ego and his faith is strong, and he really would be the perfect choice, but he's too busy playing with his pussy, I mean cat.

espirit's picture

Yep.  When the going gets tough, the tough get going.

EndGame near.

TeamDepends's picture

Will this create a new phrase, "jackson-holed".  i.e.  "Boy, we sure got jackson-holed on that deal."

nmewn's picture

Dear Prudence.

IridiumRebel's picture

Patience folks, patience.

sitenine's picture

Patience is so yesterday. There might be another buying opportunity. Maybe. Felling lucky? Well, are you? ;-)