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David Einhorn Explains Why Only Gold Is An Antidote To The Fed's Destructive "Jelly Donut Policy"
David Einhorn who crushed it this week with huge profits on his short positions in both Herbalife and Green Mountain, finally takes on the ultimate challenger: the Federal Reserve, seemingly unaware to never "fight the Fed", likening its "strategy" to a Jelly Donut policy, and explains what everyone who has been reading Zero Hedge for the past 3 years knows too well: "I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote for my portfolio. While I'd love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn't even have quarterly conference calls." Or, as Kyle Bass said last year, "Buying Gold Is Just Buying A Put Against The Idiocy Of The Political Cycle. It's That Simple!" Not surprisingly, it is only the idiots out there who still don't get what these two investing luminaries are warning about.
From David Einhorn, posted first in the Huffington Post
The Fed's Jelly Donut Policy
A Jelly Donut is a yummy mid-afternoon energy boost.
Two Jelly Donuts are an indulgent breakfast.
Three Jelly Donuts may induce a tummy ache.
Six Jelly Donuts -- that's an eating disorder.
Twelve Jelly Donuts is fraternity pledge hazing.
My point is that you can have too much of a good thing and overdoses are destructive. Chairman Bernanke is presently force-feeding us what seems like the 36th Jelly Donut of easy money and wondering why it isn't giving us energy or making us feel better. Instead of a robust recovery, the economy continues to be sluggish. Last year, when asked why his measures weren't working, he suggested it was "bad luck."
I don't think luck has anything to do with it. The blame lies in his misunderstanding of human nature. The textbooks presume that easier money will always result in a stronger economy, but that's a bad assumption. Here is a good example of how a real family responds to monetary policy.
Consider my neighbors, Homer, Marge, and their three adult children, Bart, Lisa and Maggie. Homer has retired from the nuclear plant, and he and Marge live off savings and Homer's pension. Bart is in a bit of trouble with too much credit card debt and an underwater mortgage. Lisa has been putting away her salary and has enough for a downpayment on her first home. Maggie owns her own business and is ready to expand.
When interest rates are high, Homer and Marge park their savings in CDs or Money Market accounts and get a decent return. There is no incentive for them to take much risk with their money. Bart gets into trouble very quickly and defaults on his loans. Lisa decides she can't afford a mortgage until rates fall. And Maggie, who's been helping out Bart with some of his expenses, believes that she'd make money if she grew the business, but possibly not enough to service the debt she'd be undertaking.
When interest rates are low, everything changes. Homer and Marge are getting only a little interest on their savings, and are struggling to live off Homer's pension. They need to rethink their finances. Bart can manage to keep up the minimum payments on his credit cards and stay in his house. Lisa can get a cheap mortgage, and Maggie doesn't need to make such optimistic assumptions in order to expand her business.
Everyone agrees that low interest rates are a good way to stimulate a stalled economy. The Fed takes this logic a step further. It believes that if low interest rates are good, then zero-interest rates must be even better. As a brief emergency measure, such drastic behavior is reasonable and can even be necessary. In 2008, Chairman Bernanke had near unanimous support for his decision to drop rates to near zero. At the peak of the crisis, it made sense. But that was four long years and many jelly donuts ago. In the 2012 economy, a zero rate policy not only adds no benefit, it's actually harmful. Just ask the Simpsons.
When Homer was approaching 65, he and Marge met with a financial planner to figure out if they had enough money saved for retirement. They assumed they'd live to be 90, and could count on receiving a fixed amount from Homer's pension and social security checks. Marge, the cautious one, has not forgotten that stock market meltdown better known as the bursting of the tech bubble. She didn't want to take any investment risk and was content to have just enough for regular haircuts for herself, a bowling and beer budget for Homer, and visits with the children. They were told that, with nominal interest rates at 3%, they could safely retire with $200,000.
"What happens if interest rates go to zero and stay there?" Marge asked the advisor.
"You mean indefinitely? If you weren't willing to start taking investment risk, you'd need 50% more in savings, or $300,000. But why would you ask such a silly question?" asked the advisor.
To which Marge replied, "Well, we were thinking about moving to Japan..."
Homer and Marge aren't the only ones doing this sort of math. Every single day for the next 19 years, more than 10,000 Baby Boomers will turn 65. Those who started saving for retirement 15 years ago are suddenly finding themselves with insufficient savings to do so.
Some will stay in the work force longer, some will drastically reduce their spending, and some will do both. In a recent survey, 20% of U.S. workers say they have postponed their planned retirement age at least once during the last year. And those who have already retired have fewer options. Returning to the workforce could be challenging. David Rosenberg points out that the workforce for those 55 and older has expanded by 4 million since the start of the recession, and they are returning to the workforce at lower wages. Even more challenging is trying to find safe investments that generate a decent yield.
Zero-rate policy makes traditional riskless investments, such as CDs and Money Markets, unattractive to savers. Rather than view this as an unfortunate consequence of policy, Chairman Bernanke sees this as a benefit. He subscribes to the philosophy that rising stock prices will contribute to a 'virtuous cycle' of economic growth. He's hoping that those approaching retirement, and even the retired, will abandon the idea of making safe returns, and put their savings into equities instead.
In a similar vein, the Fed believes that by lowering interest rates, it makes bonds unattractive compared to stocks. Using logic worthy of Montgomery Burns, Homer's old boss at the Springfield Nuclear Plant, the Chairman is hoping to create a Wealth Effect. I can almost hear Mr. Burns and his sycophantic aide Smithers now:
Smithers: "Sir, you're saying we need the stock market to go up?"
Burns: "Yes, that's the fix we're looking for."
Smithers: "And why would that be, sir?"
Burns: "Don't you get it? A rising stock market allows people to feel wealthy. And a seemingly wealthy person is a profligate person."
Smithers: "Profligate, sir?"
Burns: "Profligate. It means they spend money they don't have on things they don't need."
Smithers: "So instead of enabling people to actually have more disposable income, we'll get them to spend more by simply making them feel rich?"
Burns: "Exactly! Now how can we do that?"
Smithers: "Well, we can always encourage them to sell their bonds and buy stocks."
Burns: "Now how would we ever convince them to do something as foolish as that?"
Smithers: "Just set interest rates to zero indefinitely. Then no one can afford not to invest in the market."
Burns: "Why, Smithers, that's brilliant! This is exactly the kind of counter-intuitive thinking we've been needing around here!"
Only it's not counter-intuitive; it is simply misguided thinking that persists among the Fed Chairman and other government ivory tower thinkers. They do not understand or relate to the prime component of capitalism and a free market: greed. And because they do not understand greed, they also do not understand fear, which presents a double whammy for making bad policy decisions.
****
Let's think about it from an investor's perspective: For about 30 years, bonds have mostly risen in value. By directly intervening in the bond market and by promising zero percent short-term interest rates through 2014, the Fed has all but guaranteed that it will do what it takes to keep bond prices from falling. Right now, Homer and Marge own bonds that yield 2%, practically risk-free. What rational investor will sell when there is no downside?
For years, people have talked about the 'Greenspan put' or the 'Bernanke put' on the stock market. Some question whether such a put is deliberate, others question its effectiveness, and some even question whether or not it exists at all. The Fed has always explicitly denied using monetary policy to create a floor on the markets, and its inability to do so should have been settled when the NASDAQ fell 78%. As for whether or not the Fed puts are a myth, I think it depends on where you look.
It isn't where you think: The real Fed put is under the bond market.
If the Fed's hope is to drive investors into equities, propping up the bond market is counter-productive. While there are many parts of the cycle where higher bond prices fuel higher stock prices, at this point in the cycle the relationship has reversed. In recent months, stocks and bonds have developed a strong negative correlation -- what is bad for bonds, is good for stocks. The Fed does not understand investor psychology: If you want to get people to sell bonds and buy stocks, the best way to do that is to show them that bond prices can, and do, fall.
Another flaw in the Fed's logic is that many savers aren't willing to participate in the virtuous cycle experiment. Some might be convinced to take on this risk. But others who, like Marge, have seen the market get cut in half twice in the last dozen years, will resist. They don't believe it is prudent to gamble their nest egg in the market.
Those who have given up on earning more will have to save more and spend less. This is the antithesis of a wealth effect, and their reduced spending is a drag on the economy.
This reduced spending has unintended consequences for the Simpson kids as well. Chairman Bernanke is unwilling to raise rates, even by a modest amount. He's hoping that his zero-rate interest policy will encourage Lisa to buy that house and persuade Maggie to start expanding the business. He worries that a rate hike will discourage them from doing so. What he cannot seem to acknowledge is that it's been three years of ZIRP, yet credit-worthy borrowers still are not looking for loans.
Interest rates are only one consideration when looking to invest. If it makes sense to build a factory in a 2% ten-year note environment, it probably still makes sense to build it with long rates at 4%. Long duration investments of that nature have so many other risks that, once rates are low enough, further reductions in the marginal cost of money no longer make much difference.
The corollary is that if it doesn't make sense at 2%, it isn't going to make sense at 1% or even at zero, because there must be some other reason not to build. The cost of money has long since passed the point where it is a constraint on otherwise sensible economic behavior in the real economy. Incrementally lower rates no longer trigger large refinancing, let alone construction booms, in the mortgage and housing markets.
Putting money back into the hands of savers would stimulate the economy and might be just the push that Maggie needs to go ahead with that business expansion.
Another blob of jelly that we are still working to digest is the Fed's promise to keep rates at zero for a long time. Chairman Bernanke hopes this will encourage borrowing and investment, but it may have the opposite effect because it undermines any sense of urgency. By setting the time value of money to zero, the Fed devalues time.
Retailers know that to create short-term demand for a promoted special, you have to create a reason to Buy Now! -- "One day Bonanza," "First 1,000 customers through the door," and even the softer, "Good while supplies last," incite action. The promise to keep rates low invites procrastination. Why should anyone make a marginal decision to borrow and spend or build today, knowing that low-cost financing will still be available through the end of 2014?
Chairman Bernanke's strategy of bringing Walmart's Every Day Low Pricing to central banking has not worked. If the Fed Chairman wants to light a fire under Lisa and Maggie, announcing a small rate increase with the possibility of more to come could provide the incentive they need to buy or build rather than risk missing out.
****
Some will argue that if the Fed raises rates, it will cause deflation. Just the word 'deflation' makes Chairman Bernanke break into a cold sweat and reach for the Jelly Donuts. Fear of deflation should depend on what, exactly, is deflating.
The sort of deflation that puts pressure on wages is a clear negative, as it leads to a lower standard of living. On the other hand, lower prices caused by scientific progress and higher efficiency are unambiguously positive.
Apple's newest iPhone has twice the memory, a better camera, and other small improvements and carries the same price as the prior version. Government statisticians see an improved product at the same price and count it as a price cut, or deflation.
There is no reason for the Fed to conduct monetary policy to offset advances that improve our standard of living, in particular when it results in driving up the price of something else, like oil.
Yet, while the Fed seems compelled to respond to innovation as if it were a bad thing, it throws up its hands when confronted with rising oil prices. Unfortunately, when the Fed sets policy with a goal of driving prices higher, it doesn't get to choose which prices are most affected.
When asked about the rising oil price, Chairman Bernanke concedes that it is a negative for consumers. He then disclaims any responsibility, and states it is beyond the power of the Fed to affect it. He blames oil prices on emerging markets, political turmoil and speculators. If we take him at his word that speculators are causing the problem, it's worth considering what might be causing the speculation.
From the 2010 Jackson Hole speech that kicked off the QE2 frenzy, spot oil went from $73 to $114 a barrel in eight months. The price of food and most other commodities went up even faster.
While Chairman Bernanke hopes that flooding the market with dollars will get people to buy stocks, he appears less willing to accept that many respond by scrambling for hard assets in fear of dollar debasement. The rush into commodities is further exacerbated by cheap money that enables the inexpensive financing of speculative, levered positions. Again we see the two drivers -- fear and greed -- at work. The consequences of this speculation are reflected in the prices of food and energy.
Worse is that, even if Chairman Bernanke believed his policies were influencing oil prices, it's not clear that it would change his behavior. He seems to believe that inflation is a necessary by-product of growth, and that as long as it is kept under some control, accommodative monetary policy will help the economy.
In the current economic cycle, I do not believe this is true. There is nothing that slows the economy faster than rising oil prices, and most recessions have been preceded by rising or even spiking oil prices. Money spent at the gas pump is not available to be spent at the Kwik-E-Mart on other items.
Inflation has ceased to be an unfortunate by-product of growth. Rather, it is a direct hindrance to growth. We see the evidence in the disappointing growth during the first half of 2011. When the Fed finally signaled that there would be no QE3, commodity inflation stopped, oil prices retreated, and the economy began to improve. Oil prices again rose with the serving of the "Operation Twist" Jelly Donut, putting 2012 growth estimates at risk.
Tighter monetary policy would limit inflation and in all likelihood trigger a pronounced reduction in oil and food prices, which would provide a substantial boost to the real economy. While this thought runs contrary to Fed groupthink, it is consistent with recent experience. In light of this, I cannot understand why we are even discussing, let alone hoping, for QE3.
****
Chairman Bernanke recently gave a series of speeches outlining his view of the role of the Fed and its performance during the financial crisis.
To summarize his version: The crisis wasn't the Fed's fault; the Fed did a heroic job in reacting to the crisis; and the Fed isn't going to repeat perceived mistakes from 80 years ago.
Chairman Bernanke made a number of comments that while historically questionable, reveal his point of view and lend credence to the theory that he has and is likely to continue to under-price the cost of money:
- He points out that to encourage stability central banks are supposed to mitigate financial panics or crises, but pays no similar thought to the idea that they should encourage stability by preventing bubbles.
- He said, "Tightening of monetary policy in 1928 and 1929 to stem stock market speculation" was a "policy error."
- In discussing the causes of the Great Inflation of the 1970s, he said "monetary policymakers responded too slowly" but made no mention of abandoning the gold standard as one of the causes.
- He said that the housing bubble was created by deteriorating underwriting standards and downplays the role of the overly accommodative monetary policy.
Taken together, the message is that when monetary policy proves inadequate, the Bernanke Fed's response has been, and will be, even more aggressive intervention.
So, where are we now? Real GDP is growing between 2-3% and reported inflation is running at between 2 and 3%. Excluding the calculated deflation from technological progress would add about another 1% to inflation. On that basis, nominal growth is probably about 5-7%.
In the face of this, we have a policy of near zero cost money with promises to keep it that way for years, and an open debate as to whether we need more quantitative easing. When this monetary policy is combined with a large fiscal deficit, it leaves policy makers very little flexibility should we enter another recession or encounter another crisis.
I know this isn't conventional thinking, and it certainly isn't the way the Fed looks at it, but I believe that raising short rates -- not to a high level, but to a still low level of 2 or 3% -- would be much more conducive to both growth and stability.
The household sector balance sheet has a negative duration gap, meaning that it holds proportionately more short-term floating assets like bank deposits and money markets compared to its liabilities, which are disproportionately long-term fixed obligations including mortgages.
Raising rates would directly transmit income to families, enabling them to spend more freely and boost the economy -- a stimulus so to speak.
Unfortunately, it appears that Chairman Bernanke is more focused on financial institution balance sheets. While the Fed recently declared most of the largest banks to be healthy, and approved programs to reduce bank capital, continuing with zero rates several years into the recovery reveals a focus to support banks rather than households.
Zero rates allow the banks to carry non-performing and other questionable assets indefinitely. When the cost of money is nearly zero, dead beat borrowers can appear current by making nominal payments. When banks can finance their non-performers for free, they have little incentive to work them out. This lengthening of the work-out process supports banking profits and defers needed pain for some underwater borrowers. But, it also prevents the markets -- particularly the real estate market -- from clearing. This in turn delays the economic recovery and postpones job creation.
Income inequality remains a headline issue. Democrats argue for higher taxes for top earners, and increased transfer payments to those on the other end of the spectrum. Republicans remain opposed to any redistributive policies. Ending the Jelly Donut monetary policy would do more to alleviate income inequality than any of the widely debated changes in the tax code.
For the super wealthy, zero rates supported by a Bernanke put on the bond market encourage outsized income through leveraged speculation. For everyone else, zero rates reduce the standard of living because greater food and energy costs soak up income. Ironically, it is some Republicans that are beginning to question the Jelly Donut monetary policy, while Democrats generally support it. Democrats who sincerely care about income inequality should speak out against the Fed's policies.
It is a reasonable concern that a sudden change in rate policy would be destabilizing to current leveraged investment positions. The market for interest rate derivatives is the largest in the world. Many institutions continue to manage interest rate derivative risk through Value-at-Risk, a flawed concept that I warned about the last time I was here in early 2008. Given the crisis that ensued later that year, and the now-understood meaning of VaR to be 'value of some risks in a normal environment,' it is a remarkable testament to our lack of true reform that the measure is nearly as widely used today as it was then.
As a result, it is important that any policy shift has to be delivered through considered messaging and preparation, as a shift in policy could cause problems for some institutions that are very deeply positioned in the zero-rates-forever camp.
If you haven't exercised in a while, going for that first run is indeed a painful experience. So, yes, policy makers should pay attention to possible disruption, but this is not reason enough to forgo the needed change in rate policy. After jogging for a few days, exercising becomes easier, and as exercising gets easier, the desire for more exercise goes up and the desire for Jelly Donuts goes down.
****
It's time for Chairman Bernanke to begin restoring the markets to their natural balance. Provide the proper incentives for Lisa and Maggie to start investing in the economy again. Let Bart possibly default on his unsustainable debts so that the banks can start getting those loans off the books. Stop giving Mr. Burns access to free money that he can use to speculate in bonds and commodities at the expense of the middle class. As for Homer and Marge, quit trying to fool them into thinking they're wealthy and instead give them the opportunity to retire with some financial security. With a little extra money in their pocket, Marge can go back to the beauty parlor, and Homer can support the beer and bowling economy.
I'd like to turn my attention to the stock market. There are a lot of cheap and even very cheap stocks. The companies in the S&P will earn over $100 per share collectively this year, and the consensus for next year is for higher earnings and no recession. The market is at 14 times earnings and only has to compete with 2% ten-year Treasury notes. Even with the recent rally, equities are cheap enough that they should not need the Fed to push risk-averse savers into stocks or a Bernanke put in order to do well. What gives?
I believe that stocks are depressed because there is a pervasive feeling that something awful is going to happen. What is this enormous tail-risk? It's the intersection of reckless fiscal policy with Jelly Donut monetary policy.
There is a fear that our Fed Chairman is an academic willing to take great systemic risks in an experiment to prove out his thesis as to how we should have fought the last Great Depression.
I believe that removing the tail risk that Chairman Bernanke will feed us a coma inducing dose of Jelly Donuts would go a long way toward restoring the relationship between P/E multiples and long-term interest rates to the benefit of stocks, at the expense of bonds. If the Fed were to stop trying so hard to prop-up the stock market, the reduction in tail risk would probably fuel the market going up on its own.
I think we've reached the point where even Homer can see that the last thing he needs is another Jelly Donut, but the Fed Chairman is oblivious.
We can all say "D'oh!"
****
While I hope that you found this discussion thought-provoking and persuasive, as an investor my job is to figure out what will happen rather than what should happen. If we didn't have a Jelly Donut monetary policy, I would sell gold, sell bonds and buy stocks. But, the Fed is filled with academics who thoughtlessly rely on econometric models that reflexively indicate that repeated Jelly Donut orgies are the best way to get a sugar rush into the economy. And, the Fed Chairman seems to have no trouble rationalizing any policy failure on the basis that "monetary policy cannot be a panacea," or "it's bad luck," or as proof that he just hasn't force fed us enough Jelly Donuts, yet. As long as this is the case, it seems unlikely the Fed will change course.
As a result, I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote for my portfolio. While I'd love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn't even have quarterly conference calls.
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Gold and donuts, ya gotta love it. (silver too)
Meanwhile, they are spending billions supressing gold and silver prices to prove these guys wrong and discourage shift to PM's.
The put that Kyle Bass was talking about only works with Physical PM's.
Get on it.
"Meanwhile, they are spending billions supressing gold and silver prices to prove these guys wrong and discourage shift to PM's."
Your mistaken! Suppressing gold prices from rising is a good thing. It permitts people to aquire more gold at a subsidized price. Enjoy the subsidy while it lasts! I really wish they would work harder to suppress price increases even further. A nice plunge below $1000/oz would be a dream!
Hopefully, they will not be able to subsidize forever.
It is only when you accept that the goal is collapse, does everything start to make sense.
As fear is a much stronger emotion then greed, a rally lead by fear will be far greater of a rally.
Keep traditionally stackin!
I'm losing patience with gold somebody cheer me up.
Stop waiting, it probably won't go much lower anytime soon.
Thank you.....just the words I needed.
"Hopefully, they will not be able to subsidize forever."
No it doesn't, but then they'll go make private gold ownership illegal and confiscate all your gold! Since gold bugs are a small majority of the population it will be easy for TPTB to demonize them and rally the have-nots against them. Instead of Kristallnacht we'll experience gildennacht. Don't expect to become rich hording gold. At best it will only make you less poor than everyone holding on to FRNs.
It's exactly because gold bugs are such a small percentage of the population that confiscating their gold would be economically unnecessary. Back in 1933 FDR had to do it before devaluing the dollar because EVERYONE had gold - it was money.
Of course... they might confiscate gold (or raise capital gains taxes on it to 80%) just out of spite. But that would drive the gold offshore... not the smartest policy if they want to re-institute a new gold standard.
Sorry your argument holds no water. Name one thing that the TPTB did that made economic sense? Why did Corzine & crew steal MF customer Bullion holdings, it was only worth a few billion right? As long as people like him can steal wealth, they will do it!
When FDR confiscated gold, few people had any gold, as most people were dead broke, It was the Great depression! Only a small majority of Americans had any significant amounts of gold in 1933. Today there is more gold (in weight) held by people than there was in 1933, and in nominal terms is certainly worth more than it was in 1933. There is not enough gold to save the country, but thats not the goal! Gold Confiscation will be all about concentrating wealth for TPTB. The few at the top in power could continue to live wealthly at the expense of the rest, Much like the majority of North Korea's live in undescrible poverty while the gov't officials wine and dine on the world's very finest.
"raise capital gains taxes on it to 80%) just out of spite. But that would drive the gold offshore"
There will be no safe haven for gold ownership. Have your gold oversea is much worse than having physical control over it. You think Britian, Austraila and every place else won't do exactly the same? Its stupid to put your gold overseas because the minute the global fiat currency crisis begans, all Gold assets will be nationalized all over the globe. Consider that Europe already has a law that provides them the means to prevent foriegners from moving money outside of the EU during a crisis. Also consider that the Swiss have agreed to hand over all banking records for americans. PM assets included.
When the currency crisis does unfold, PMs will be useful only in the black\unground market.
Sorry your argument holds no water. Name one thing that the TPTB did that made economic sense? Why did Corzine & crew steal MF customer Bullion holdings, it was only worth a few billion right? As long as people like him can steal wealth, they will do it!
When FDR confiscated gold, few people had any gold, as most people were dead broke, It was the Great depression! Only a small majority of Americans had any significant amounts of gold in 1933.
MF were able to do this so easily because they already had the customers' funds in their possession. And FDR was able to do it because virtually everone's gold was sitting in bank vaults - all FDR had to do was order the gold to be transferred into Federal possession. Although they made private ownership of gold (above a piffling amount) illegal, the vast bulk of the gold seized came from taking it directly from the banks, not from directly seizing it from people's homes.
Getting gold bugs to cough up their hoards would be a whole nother proposition.
Today there is more gold (in weight) held by people than there was in 1933,
Evidence, please.
and in nominal terms is certainly worth more than it was in 1933.
really? That's not what my gold price vs M2 charts tell me.
"Today there is more gold (in weight) held by people than there was in 1933, Evidence, please."
How about 80 years of gold mining? The amount of gold in circulation is higher because there is more gold available becausing of mining, Especially since gold mining has been industrialized with very large open pit mines using trucks the size of large homes. There is definately more gold above ground today than in 1933. The USA has been one of largest gold mining country in the world during the past 80 years.
"and in nominal terms is certainly worth more than it was in 1933. Really? That's not what my gold price vs M2 charts tell me.."
Uhh, the price of Gold was about $35 an ounce in 1933. Today its above $1600 an ounce. You're not reading those charts right buddy!
" And FDR was able to do it because virtually everone's gold was sitting in bank vaults"
By 1933, there had been numerous bank runs. the majority of hard assets and cash were either under mattresses or buried in the backyard before FDRs banking holiday. Nobody trusted the banks to hold their money by 1933. Today is virtually the opposite. Few people have large amounts of cash or hard assets at home. The bulk of gold is held in Bullion vaults and its an easy target. The issue was that people needed money to buy food and energy. Gold held by idividuals was cashed for FRNs so they could put food on the table. Most likely Gold bugs holding on a few coins will cash them in to also put food on the table when the currency crisis comes home, just like they did during the great depression
"Getting gold bugs to cough up their hoards would be a whole nother proposition."
Imagine a new law that rewards neighbors to snitch on their neighbors that hold PM's. Amazing things can convince people to disclose wealth, Perhaps its being beaten very hour on the hour for a few days, or just sleep deprevation for a few weeks. Perhaps they will just label Gold Bugs as terriorists, since only terriosts use gold, and imprision them indefinately. Perhaps you'll get off easy by just water boarding you into a confession and releasing you after, or perhaps they will assign you to a work camp for your remaining days.
The MF global theft is a clear signal that the rules are different for the elite, and laws can be changed to suit there needs at the expense of the common man. The trend is that things will get much worse in the future. Do not bet that the rules in place to safe guard your futue will be present. During the 1930's and early 1940's A certain country had no problem getting people to give up their gold fillings for the good of the Wealthy^h^h^h^h Country.
There seems to be a concerted attempt to INVERT REALITITTY. I can't even tell if it was you or other posters above or both. Must be troll talking points/strategy because nobody could actually be that dumb.
In 1933 the Sheople actually had gold. Full Stop. And Silver. It was still money. Rosenvelt and TJTB let the Sheople keep their silver. They stole their gold. From Everybody. IF your gold was in a bank they simply took it. IF your gold was at home they "recalled" it. The Sheople were so brainwashed and stupid/statist back then ("the statist generation") they did whatever Big Brother told them to do, like "give us all your gold and we give you worthless paper chits." Another hitlerious gag the Sheople bought was "give us your sons so we can kill them in Asia, and other silly reasons."
The Sheople ate this $#it up, and turned in their sons, and their gold, both never to be seen again (technically some of the sons came back, the gold never)
You paid trolls and other nonsense-peddlers are trying to sell this "government is going to steal the sheople's gold again" story all over the net. It as an argument falls on its own face. Because THE SHEOPLE DON'T HAVE ANY GOLD ANYMORE!!!! They turned it in back in 1933 and never got it back. The small tiny percentage of Americans who own personal gold is such a minority as to not be worth bothering with. If your Daddy Uncle Sam wants to steal gold he will have to go to Libya (done) China and India.
Hopefully you will be the first one to die in China, I will be laughing at you and you won't ever get one ounce from them, lead yes. India Maybe. China? BwaHA!!
"Today there is more gold (in weight) held by people than there was in 1933, Evidence, please."
How about 80 years of gold mining? The amount of gold in circulation is higher because there is more gold available becausing of mining, Especially since gold mining has been industrialized with very large open pit mines using trucks the size of large homes. There is definately more gold above ground today than in 1933. The USA has been one of largest gold mining country in the world during the past 80 years.
No, sorry, arguing from first principles is NOT evidence. Anyway, gold was mined in vast quantities for millenia up until 1933, so it's not at all reasonable to assume that in the last 80 years more gold has been mined. Furthermore - even if it had, that is not evidence that US citizens hold more (seizable) gold now than they did.
"and in nominal terms is certainly worth more than it was in 1933. Really? That's not what my gold price vs M2 charts tell me.."
Uhh, the price of Gold was about $35 an ounce in 1933. Today its above $1600 an ounce. You're not reading those charts right buddy!
No, it was $20.67 an ounce in 1933. It was raised to $35 an ounce in 1934. But before you go patting yourself on the back, consider my point - they would only seize gold if they wanted to back the dollar with it. And what would gold have to be revalued to today if we were to back our currency with gold at the same ratio that pertained back in 1933? THAT'S the significance of the price vs M2 charts - gold is seriously undervalued today. The 'nominal' price is irrelevant, because of this thing called inflation.
"And FDR was able to do it because virtually everone's gold was sitting in bank vaults"
By 1933, there had been numerous bank runs. the majority of hard assets and cash were either under mattresses or buried in the backyard before FDRs banking holiday. Nobody trusted the banks to hold their money by 1933.
I'm confused. When I earlier said that it was worthwhile back in 1933 to confiscate private gold, because gold was money, and therefore everyone had it, you said:
When FDR confiscated gold, few people had any gold, as most people were dead broke, It was the Great depression! Only a small majority of Americans had any significant amounts of gold in 1933.
People were allowed to keep 5 ounces ($100) worth, which was a significant amount of money back then. Now you're telling me 'few people had gold'. So where did all the seized gold come from?
Imagine a new law that rewards neighbors to snitch on their neighbors that hold PM's. Amazing things can convince people to disclose wealth, Perhaps its being beaten very hour on the hour for a few days, or just sleep deprevation for a few weeks. Perhaps they will just label Gold Bugs as terriorists, since only terriosts use gold, and imprision them indefinately. Perhaps you'll get off easy by just water boarding you into a confession and releasing you after, or perhaps they will assign you to a work camp for your remaining days.
Yessss.... so, despite your earlier claims that "Today is virtually the opposite. Few people have large amounts of cash or hard assets at home. The bulk of gold is held in Bullion vaults and its an easy target. ", apparently our government is going to go and waterboard a few million people for the three or four gold eagles they might be holding?
Look, I'm not saying our government wouldn't do such a thing. Frankly, they're capable of anything... but only if it's worth their while.
Your arguments don't make any sense.
EVERYONE did not have gold in 1933. Only a few rich dudes had gold. They mostly got their gold out of the country. Everyone else had broken promises at the failed banks. Most of them were broke. A few of them had gold certificates.
Gold, Silver, Currency Swaps and QE3 by Matt Chart
http://stocklegends.com/reports/
The truth is QE 3 is already going on, its just being hidden by currency swaps.
Printing money by any other name is STILL PRINTING MONEY!
Will we all be living in Skyrim?
Ben: "I used to print money, but then i took an arrow to the knee..."
You beat me to it.
Yeah i reckoned someone had to make that comment sooner or later ;)
Gimme more jelly - FUS RO DAH!
Hopefully. At least in Skyrim, there are no taxes, free markets, and politicians that lie tend to get bludgeoned to death.
that and you're free to wander around as you please, at least the makers of the game realized that humans act and don't behave in linear predictable manners chock full of assumptions that keynesian economics is full of, and disastrously so...
He gave a variant of that speech to a Grant's conference in 2010 and lamented the fact that it got no national exposure. I find it interesting that he took the opportunity rendered by his GMCR score to take a swipe at the Fed.
The only thing lacking from Einhorn's analysis is the gorilla in the room - how is the US (and all the other indebted countries, for that mattter) going to fund its deficits if interest rates are allowed to rise? What would happen to the balance sheets of all the banks holding treasuries as capital if those bonds' prices should fall?
They can't allow rates to rise, even if Homer has had enough jelly donuts.
Im packing up and moving to Skyrim then
More on growth, growth, growth. Wake the fuck up already. Real growth (not paper growth) requiresan increase in the flux of available resources (all resources) and energy. Moreover, an exponential increase is now requires as the system is set-up now (failure to understand what "exponential" equation is no excuse and nature does not give a shit if you do or don't), not going to happen, period. Damn it, where are those fusion reactors I ordered? I might just have to cancel the check I wrote after all. Too many damn useless fucks with their hands in the cookie jar, fuck the paper-pushers. Long black markets and sharecropping! That's it, I am switching to decaf.
Have no fear! "Luminaries" like David "ha ha you lost your job and I did it" Einhorn just took his illegal and ill gotten billions and plowed it into something "other than useless"! (NOT!) the irony of course is...as Goldman now knows "there are some victories better off not won." Shorting publicly? CNBC CELEBRATING THIS????!!!! it's amazing our unemployment rate isn't 40 percent!
I think you are misreading the author. He finds overpriced companies that are laced with fraud and he shorts them. He has been proven right so many times now. This guy does what the regulators fail to do: he finds the trash and takes it out. If you have ever read one of his analysis of a company he shorts, you would never--NEVER--try to short a company. You are swimming with big fish.
Another way to have growth is by population decrease.
Another way to have growth is after a huge population decrease - fixed it for you.
Killing people is relatively cheap these days. The people that replace them are forced to accept a lower standard of living, making TPTB even more profitable. The growth comes after the death, not before or during. Paging Tmosley, we have another death worshipper on ZH.
My meaning was reduction in population growth.
Contradict yourself much? So you what you meant to say was; "Another way to have growth is by a reduction in population growth". FAIL.
Simple zero sum economics. Fallacious, sure, but simple. "Less of other people means more for me!" I'm surprised you don't agree with this. Trav sure did. He believed so much that he wanted to sterilize the world and set himself up with a harem to pop out baby geniuses.
Congratulations. The Cult of Death increases by the day. Soon enough, you will be able to take over the world.
Hell, the fact that you haven't already is pretty stunning, considering that apparently 1 out of 7 people think the world will end in their lifetime, and one in ten think it will end THIS YEAR: http://www.reuters.com/article/2012/05/01/us-mayancalendar-poll-idUSBRE8...
But the final death never comes, does it?
But don't worry, the Death Cult is caught in an affective death spiral (http://wiki.lesswrong.com/wiki/Affective_death_spiral), and will continue to beleive in and secretly or not-so-secretly desire death and extinction.
Or: 6 out of 7 people believe their life will end before the end of the world.
In the long run, all of those who believe in the end of the world will be dead anyway, at which point we can move on to business.
well, we'll see; but i'm taking the other side of this bet; shorting gold & €$ futures - time horizon: yearend 2013
I agree, as the propaganda machine goes into overdrive and outright manipulation goes full force, gold and silver will be on sale, look for oil to flatline (no one is playing this game anymore as most who did are now in intensive care). I don't think it will last more than a year.
One day you may regret taking this position. The price action is already showing signs of being a coiled spring waiting to explode to the upside. The supply of physical simply isn't meeting the demand out there. I take one thing into consideration - what central banks around the world are doing. They are buying gold by ton at a record pace. If central banks are buying then I am buying. They see the handwriting on the wall and it says the days of metals manipulation by the corrupt banks of the West are near an end.
Sorry for the confusion. Let me be more direct. I have my physical already, playing paper markets with paper may be a be a zero sum game anyway. But all TPTB have left is paper games and I see only one way that they need to go ahead of november, period. Paper is paper, and it is buring, no question. Like you, I don't think the manipulation can last long, certainly no longer than a year, maybe november, but why not front-run the idiocracy if you can turn it into more physical assets along the way? FYI- the "corrupt banks of the west" will be replaced by "the corrupt banks of the east" hedge acordingly.
Excellent point about the east and thanks for the clarification. :) Since we share the same outlook, I wonder if we agree that the PM price will likely collapse if (when) the Euro goes under, which will present the last great buying opportunity, before it then spikes upward again. I have a feeling this will be the case given that paper will fly to the dollar and yen.
"dollar, yuan, and yen", other than that I think we are in agreement.
Has it gone down enough for you to feel comfortable doing that?
This is actually not a terrible bet. It is very risky, as it assumes that the market will cave in on itself (as I have predicted, with the market shifting to physical settlement only, and futures exchanges no longer participating in price discovery). Going short without hedging with physical metal is likely to be disastrous, as decoupling may not happen, or may not happen before the next surge in price, which could easily wipe you out if you are unhedged short.
If you are shorting currencies, you need to say what you are short in terms of. Gold would be an excellent bet there, taken independantly of the gold short.
Patient: Doctor I have a case of Bernanke Dementure i need a hit of sivler and gold.
Doctor: Sorry looks like you dont have $10,000 per annum insurance looks like you might have to go into the street and find a suitable place to die sir.
Patient: But But.....i dont have that money becasue of Bernanke Dementure
Doctor: SIR SIR Dont make a scene now sir.. get the TSA in here now and get this guy off too a Concentr.... i mean FEMA camp now.
God Bless America...
Savings are the only real capital.
Buying gold is a vote against money printing and debt doughnuts.
On sale today I hear (physical GOLD, that is).
Savers aren't gonig to jump into equities because they took it in the ass 2001-2009; not to mention CORZINE along with all the other malfeasance of the 'bailout the banks' ponziconomy.
You are correct. A truly unexpected move would be if the TPTB sacraficed some of their own in the name of appearing to actually prosecute the fraud. Hang John Corzine and I would predict that equities would rally hard.
savings in gold or silver...
paper is for penguins..
mr. einhorn, mr. bernanke CAN'T raise rates. he is stuck. raise rates and the interest on debt eats away at a larger percentage of federal revenue. raise rates and you would take the fragile housing market and crush it in minutes.......CANT be done.....and so the balancing act continues until ben is thrown from the highwire..........
In the short run, it doesn't matter what interest rates are on Treasury debt if the Fed is doing the buying. Most of the interest paid to the Fed on the Fed owned debt is refunded to the Treasury at the end of the year. However, the larger deficit could easily by used as a bludgeon with more punitive tax policy on those actually earning an income.
It would be really funny if Ben had to print more money just to pay the higher interest rates.
The debt will never be paid off, regardless of the interest rate so this is a moot point.
The debt will never be paid off, regardless of the interest rate so this is a moot point.
Gold? Are you crazy. The euro is much stronger than gold. I don't care if the eurozone is collapsing, my euros buy more gold today than they did a few months ago. Euro is the ultimate currency.
Just kidding but the facts are true.
"the facts are true"...
No shit.
In light of the HLF shelacking the other its lucky for the Fed they don't have quarterly conference calls...
I'd like to see the real set of books they keep in the back office. Or maybe they just burn those every month.
Even Bernanke cannot look directly at the real set of books in the Fed vault or his face would melt off like like Arnold Toht’s did
MMMMMMMMMMMMMMMMMMMMMM Donuts...
What Homer would say: "Mmm, donuts!"
I beat you to it...but I'll let you have it - I know your pro "kill all humans" stance...
You guys are completely delusional. Have you seen the chart of gold? Lower highs and lower lows. How the fuck is that bullish? Can someone tell me why should I hold on to my gold?
While there is still some semblance of a free market at all, you should only "do" what you want, nobody should tell you you should or should not do anything. Do what you want and be free brother!
PS- could you tell me how I can get a paid gig posting troll commentary?
I am too lazy to dig them up.
Don't hold it, sell it then. If we're delusional, WTF are you doing here? Go spend time on Cramers site, or watch Bloomberg. Go all in on the dollar and stocks, particularly home builders, and retail.
The hell with the charts, the only "sell" signal for gold is the government suddenly ceasing the printing of money and chopping close to 50% off it's current expenditures. If you think that's happening anytime soon, I have a large red bridge you might be interested in out here in the SF Bay area...
YOU ARE CORRECT, SIR. There is no reason to hang on to all of that stinky old metal. Please send it to me for disposal in a boating accident, free of charge. Get yourself some of those new Bernanke two ply inflation rolls of Benjamins. Easier to peel off enough of them for a loaf of bread, and you can also wipe your ass with them ! Case lots or pallet loads are on sale now at Walmart and Costco.
Excellent article. I'm not terribbly savvy when it comes to economics/finance, but something just seems so dangerous about our situation.
"But others who, like Marge, have seen the market get cut in half twice in the last dozen years, will resist. They don't believe it is prudent to gamble their nest egg in the market."
This is precisely how I feel.
They have destroyed the saver class....my father was a depression era saver...never had a loan...always bonds..CD´s...very few stocks and if he had them he had them for 40 years....had the paper certificates too....this would have killed him..but luckly he died a long time ago...
Now you can´t save...it is stupid to so so they way they have set it up...its a bad way to educate a population....spend today...don´t worry about tomorrow...very bad..there are going to be alot of scared..hungry..depressed...and angry people in the future...
Maybe there is no future.
Einhorn, Hendry and Gundlach all crushed it this week. S&P up.
"everyone who has been reading Zero Hedge for the past 3 years knows too well"
You can eat gold...be warned though - you shit bricks.
Obvious you have never had Goldschläger.
Mmmmmm. Gold donuts.
I will keep a substantial long exposure to gold.
David Einhorn, Wealthy Market Player, shorting everything BUT gold
I don't buy gold. Who cares about the price of gold?
(this was said when AU was 600?)
Chattering CNBS Mouthpiece Mark Haines heckling Peter Schiff
Well you should (care about the price of gold)
Peter Schiff
---------
Paid Trolls: What have you got to say?
The only thing that stops Bernanke and the Fed from devaluing is a complete run on the US dollar. Already countries are preparing for such an event.
Ben Bernanke and teh Fed are unprepared for a loss in faith in the US dollar. A Zimbabwe/Argintina moment.
Even here big changes are afoot as the use of gold for payment becomes more pervasive and signed into law in Utah.
http://bit.ly/I4PoI4
Jelly donuts are a bad comparison,... I could wolf down a dozen easy... the only problem would be my movement the next day... What? Too much information? Agreed.
Question - Can QE3 be done at this point? What is more psychologically powerful to help ramp up markets? QE3 or the idea that we still could do QE3? The illusion that QE3 can be done has ramped the market a dozen times, the actual stimulus will have an impact that HFT's can churn through in an hour. Then what, QE4?
There is a general rule in comedy that you don't milk the 3rd joke out of a bit, diminishing returns and all that.... I guess it applies to tragedies as well. My view is if they proceed with QE3 it is the FED admitting defeat.
In the old days, people were self sufficient and had few distracting possessions: no cars, electronics, HVACs, trips to the grocery store, jet set vacations, etc. They had their muskets, plows, cabins, axes, cattle, and some land. Gold was the only show in town. Also, if you had some gold as well, you could hold on to it for a long time. Money was stable-it didn't matter. There was no reason to speculate, unless of course you packed off to California in 1849 to join those "speculators" in search of physical.
Now days, you need quick cash to buy gas, pay your electric bill, and money to buy the latest ipod on line. Who has time to buy physical gold as a store of value only to have to convert right back to fiat? You need fiat to play the stock market because it can be exchanged electronically in nanoseconds. So physical gold doesn't work as well. It's a cliunker. Government loves this dilemma as well, since even profits from the stock market have to first be converted to fiat from which the govt can tax it's cut Move over taxation by inflation, you've got company.
That's why I am wrestling with the thought of gradually liquidating my retirement funds, especially after I turn 59 1/2, and buying PMs and other tangibles that might allow me to live a longer, healthier, and happier life...if you get my drift.
So yes, I think accumulating gold/silver gradually over time makes sense, until after world finance/banks have gone through their jelly "dough"nut induced convulsions, at which time I can quietly step back on board to the dinner table where real food, not donuts, is being served.
What the 1% are really good at:
http://afscatlanta.blogspot.com/2012/05/shocking-illegal-eviction-in-dek...
'Now I'm wild about my jelly
'Bout my sweet jelly roll
When you taste my jelly
You wanna take me right home'
MMMMMMMMMMM Jelly Doughnuts. ahhhhh
US ECONOMY WILL OFFCIALLY ENTER A RECESSION ON THE 15TH OF JUNE. FORGET ABOUT DATA THAT YOU READ - IT IS ALL MANIPULATED BY GOV AND CENTRAL BANKS....THE ONLY SAFE PLACE IS TO OWN PHYSICAL REAL ASSETS LIKE GOLD, SILVER, COPPER AND LAND - EMPTY LAND...................THE REST IS BS!!!
Nice article the only thing I can think is negative is the definition of deflation. "Lower prices caused by scientific progress and higher efficiency" is not deflation, it called an efficient market or as it was famously said 'I can't eat an iPAD"
Eihorn is a excellent corporate fraud analyst. But he sucks as an investor. He invested in GDX and RIMM a few months ago and look what happened.
I disagree with Mr. Einhorn's premise that a little bit of governmental/Federal Reserve intervention in the free market is a good thing:
"My point is that you can have too much of a good thing"
and
"Everyone agrees that low interest rates are a good way to stimulate a stalled economy."
As Auburn economics professor Robert W. Garrison shows in his Power Point presentation on Capital Based Macroeconomics shown on YouTube, any artifical intervention in the market distorts that market and makes us all poorer for it in the long run.
Interestingly enough, his analogy about the jelly donuts suffers from the same flaw. Our jelly donut isn't "too much of a good thing". They may be cheap and taste good, and give us a short term energy boost, but are detrimental to our health and overall energy levels in the long run. Low doses are far less apparent, perhaps even negligible, but they aren't really "a good thing".
See highly lauded science writer, Gary Taubes', article in the NY Times, "Is Sugar Toxic?"
and the University of California, San Francisco Professor, Robert H. Lustig, MD talk on YouTube:
Sugar: The Bitter Truth
Good article as usual, take care super Nintendo chaulmers
The folks from Springfield as savvy savers compared to Uncle Ben. "Exxxcelent" My favorite part isn't highlighted enough; Just how Operation Twist works when trying to get the jelly properly dispersed in the twisted donut. Ask the donut maker Uncle Benz how they do that. They will have to deep fry you if they tell.
Excellently written.
I often argue that central planners, macroeconomists, and liberals (but I repeat myself) don't understand incentives.
If Zimbabwe Ben went back and took a Microeconomics 101 course, it would do a world of good.
In the '50s TV series, Peter Gunn, the hero frequented a coffee house where the beat generation performed. On one occasion a beatnik delivered the following memorable poem, the meaning of which escaped me.
Now I understand it:
Ragged little child,
standing on the outside,
nose pressed up against the window,
crying 'cause she ain't got no jelly donut.
Why cry ragged little child?
Why want a jelly donut?
When you grow up, you can drive a red car
and go to a country club dance.
Ragged little child,
there ain't no jelly donut
on the other side of that window
-- only death.
Yes, a jelly donut.
in re: bernake's "bad luck" answer- I have always liked this quote
"Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded- here and there, now and then- are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty. This is known as bad luck." - Robert A.Heinlein
Gold sucks today. The US$ is doing great today. The euro is doing better than gold. Gold may be nice but ...
The only paper I own is the stuff I wipe my ass with. Market paper is worthless, because I cannot do a good job of wiping my ass with it. Gold was worth $28.00 an ounce when I was a kid. Silver was worth whatever was printed on the coin you spent. Any one think those days are coming back? All of the lying bum fucking aristocracy of the Age Of Paper Power can burn in their paper suits soonest. I won't even bother pissing on them to put out the flames. I collect gold, silver, lead, copper, real dry powder, food, tools, diesel fuel, and other useful commodities. There is a community of folks all doing the same, so skill sets and extra eyes and hands can guard each others sixes. Time to pull a Jim Morrison and "break on through to the other side, break on through to the other side, YEAH
"Paper sucks, you Wall Street fucks! I'll see you vampires in the sun, with my loaded silver gun. Yer goin' down in flames, from Lower Manhattan to the Thames. Your paper is I know not where, I'd rather shit my underwear! For, be there bull, or be there bear, silver is the suit I wear! (With gratitude, and apologies to Dr. Seuss.)