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Quaintance And Brodsky On "Change We Can Belive In" Or The Coming "Monetary" Revolution
That the two heads of QBAMCO, Lee Quaintance and Paul Brodsky, have traditionally been in the non-conformist camp is no secret. They are two of the fund managers who will, when all is said and done, save and probably increase their clients' purchasing power (we won't call it money because money's days in its current version are numbered), unlike the vast preponderance of momentum chasing sheep who only find solace in their great delusion in even greater numbers (aka the ratings agency effect: "we may be wrong, but we will all be wrong"). In their latest letter, the duo does not uncover any great truths but merely keep exposing ever more dirt in the grave of the current monetary system. They also make short shrift of all the neo-Keynesian hacks who pretend to understand the fault-lines of modern monetary theory: "We would argue a system built upon unreserved bank credit expansion is inequitable, regressive, opaque, the source of asset boom/bust cycles and the root of virtually all the financial, economic and political chaos we are experiencing today. We assume this is in the process of being more widely intuited by global societies. Those that understand monetary identities are best prepared to shift wealth in advance of the necessary de-leveraging that must take place to restore equilibrium." Just as interesting is their observation that the 10 Year only trades where it does (2.6%) due to the ability of the big market players to lever up their return by 10, 20 times. Devoid of all theoretical textbook mumbo jumbo, they may well have hit the nail on the head: "the majority of bond investors driving marginal pricing such as primary dealers, hedge funds and central banks are quite a bit more leveraged. We would argue the Note is not trading at 49 because levered investors have incentive to collect 25% or more in current income (2.74% x 10 or 20) while awaiting their annual bonus or performance fee (or, in the case of the Fed, propping up the economy)." Translated: take away infinite leverage (thank you ZIRP) and the 10 year would be priced more fairly around 12.13% (dollar price of $49.20). Needless to say, their observations on gold, which this week borrow heavily from David Rosenberg are spot on. In a process first used by Dylan Grice, the QBAMCO duo defines the concept of the Shadow Gold Price, and then derives what the fair value of the metal is: roughly $9,250.
But perhaps most notable is the duo's take on the upcoming "tipping point", or, in the parlance of our times: revolution.
If the economic manner in which the US is operating is not in the sustainable best interest of its owners -- Americans increasingly becoming poorer and unproductive in real terms -- then it seems logical there will be forced change. As just proven, the political dimension in the United States and around the world has the legal authority but not the political will to act preemptively to re-balance global economic equilibria by reinstating monetary discipline. Only the power of popular dissention can force authorities to pull the ripcord on the current system.
We do not think there will be a political coup d’état or that Western democracy and capitalism will be threatened. We do believe the “revolution” that must occur, (if it is indeed a “revolution” at all), will be only monetary in nature. The most likely path is that an event will force global monetary and financial market seizure. This seizure would force a recapitalization of nominal asset prices to reflect their real values. People, businesses and nations in possession of durable assets and resources, like primary homes, cars, inventory and scarce resources, will continue to own them while a new system of quantifying their value is worked out.
We think precious metals will increase their purchasing power vis-à-vis all baseless currencies. We also think consumable natural resources with inelastic demand properties will, at a minimum, retain their purchasing power (which is to say enjoy substantial price appreciation in fiat money terms – far more than financial assets relying on existing leverage or future systemic leverage growth).
What happens next?
So when will financial markets better reflect sustainable economics than a series of dubious political constructs that have placed valuations in a constant state of disequilibrium? Well, how about this: when the milk to Dow Jones Industrial Average ratio widens to the point where only equity holders are oblivious to milk prices?
Imagine an island with ten people on it and each person has $100 and a $200 equity portfolio consisting only of shares in the island’s coconut milk farm. The people on the island consume 20 coconuts-worth of milk a day. The island’s milk output and wealth cannot be increased with the addition of money, only with the addition of consumer demand. Now imagine that 9 out of 10 people on the island do not own shares in the coconut farm. The 1 owner of the farm can sell shares in it and increase his cash position with which he can then…well, buy more milk. But how much more milk could he want to buy when he can only consume 2 coconut’s worth a day?
Applied to the contemporary global economy, the frenzy around nominal growth, valuations and budget deficits misses the fundamental point of finance-based economics: money and credit can grow in leaps and bounds while consumer demand can only grow linearly. The increase in money and credit supply may drive up the apparent valuations of dairy farms, but no amount of new money and credit supply can increase the global demand for milk beyond its natural growth rate. A billionaire does not buy 1,000 times more milk, computers or medical care than a millionaire, who in turn does not buy a million times more of these items than a pauper (or the government on behalf of the pauper).
We repeat: the “debt problem” is a currency problem and the currency must and will collapse. The global monetary system exists at the pleasure of the Fed, which legally exists at the pleasure of Congress, which as we have learned only has the political will to control the Fed at the pleasure of the Fed’s shareholder banks. It is the Fed and nothing else that determines the solvency of Treasury. Analogously, it is the Fed that ensures the ultimate solvency of the fractionally-reserved banking system – the system that shorts dollars via perceived “lending” today and covers those dollars once devalued as the Fed creates them tomorrow. Ultimately, Congress, the Fed and Wall Street will have to answer to the masses that buy milk and pay and staff its military.
There is a light at the end of the tunnel that is both another train and, leaving emotions aside, an investment opportunity for the willing and able. This is change we can all believe in, and it seems closer than most think.
Translated: currency collapse is coming. Whether one wishes to call it "hyperinflation" is of course, one's right.
Much more in the full letter:
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i cant wait until the comex starts quadrupling margin requirements for gold futures.
Mad Hatter... It doesn't matter because those wanting physical will post the margin and take delivery...
And who are these mystery people that will take delivery?
The very same East Asians, Indians, Mid Easterners and Europeans that are currently driving up PM prices.
58% of all PMs are now being purchased by those I named above...and, this % has probably increased significantly since last published.
For instance, China is on track to purchase more PMs in 2011 than India.
To find what is causing the surge in PM prices look outside the West.
That was a one trick pony. It will never work for Gold or Silver again. Traders are now prepared for margin changes.
I think Silver is the new gold. It's gold plus bc it has more industrial uses. But WTF do I know?
Make new friends; one is gold but the other is silver..........
Good news.
The EPA has just decided to temporarily not destroy another 7.3 million jobs by delaying enforcement of their new and improved ban on ozone.
http://hotair.com/archives/2011/08/02/super-epa-going-after-ozone-now/
Time for the American economy to create green industry jobs, and to move into green industries. China is.
Green industry is unprofitable. It requires subsidies.
We are broke.
China is because western nations are stupid. They are all about taking money from the stupid.
Why do you admire slave owners?
I have a friend who married a Chinese woman and spends a lot of time there. They live in a small city of 6 million. His descriptions of life there do not sound like the lives of slaves. Their lives seem as free as ours. Watched any you tube police abuses lately? How about police abuse in the UK? I wouldn't be surprised if we were living more the life of slaves here than they are in China. We certainly will be after the great currency adjustment, coming to a neighborhood near you.
It's time for all Coal producing and using States to secede and tell the USA to fuck off.
Babylon is the whore that sitteth upon all the waters..... Let's drown the bitch.
I'm all in. If she floats, she's guilty.
.
Anybody reading ZH for any length of time has figured out a currency collapse is coming. Whether by design, or stupidity, it's looking unavoidable. Tell friends and family to prepare, or, make sure the spare bedroom is made up for company.
TBTF are doing what we and the Chinese have been doing, trading fiat for hard assets and PMs. Fiat, don't fail me just yet.
Yes, but family and friends closed their eyes and ears long ago. I just hope I am prepared enough to help my dumb sister. Her and her boyfriend have all their $$ in a bank CD!! I have begged and pleaded with her to get that out and put into something, anything else. In one ear, out the other. At some point, ya have yer Darwin moment and just say it's Nature's method of population control.
Bank CD is FDIC insured below 250k and is obviously not debt money. There are much worse places. They will be fine.
All FRNs are 'debt money'... and I doubt 'they will be fine'.
We can only tell them our opinions of what is in store. If they don't want to confront the issues then do not make enemies of friends and relatives by harping on the subject.
and... don't say 'I told you so' when they are financially destroyed. Invite them over to share a can of tuna with crackers.
Have a life long friend who is worth $5mill or so. Got all his money in Muni's and CD's. Thinks I'm crazy and laughs at me when I try to tell him.
Nothing you can do but just watch, and then decide how much you love them.
Bank CD is exactly debt! You've got paper the bank's got your FRNs. It is FDIC backed but what will it be worth when the CD matures? How much less will it buy?
You tried. Now let them burn. Get some lake city armor piercing just in case they try to kick your door in when they become zombies.
You are right. Readers of ZH know a currency collapse is coming. Writers in ZH are pretty honest though in saying they cannot tell when. Our system has so many supports that it is hard to tell when and what the catalyst will be. That is half the problem.
This article is excellent and it is part of a growing awareness that there is a difference in the "financial" economy rigged by gov't and the Fed and central banks everywhere and the "real" economy which consists of actual products, services and fair valuations.
Still waiting for one final big PM smackdown. Must have more precious.
"...the 10 Year only trades where it does (2.6%) due to the ability of the big market players to lever up their return by 10, 20 times."
A couple of smart boys. I knew there was a good reason to sign on every afternoon and see what's on ZH
http://www.youtube.com/watch?v=zrzMhU_4m-g
Monty Python classic
"The island’s milk output and wealth cannot be increased with the addition of money, only with the addition of consumer demand."
Really? That's utter nonsence. Demand has nothing to do with it. They consume two coconuts/day because, all else being equal, it ain't worth the effort to consume more. PERIOD. Trying to stack money and stocks on such a "model" is pointless. It is evidence of a defect in the author's understanding of money and the monetary veil. Further, it leaves out of the model the stock of capital, or the actual production of said coconuts. Trying to layer stocks or money on such a silly little model leads to all manner of mischief and confusion, like:
"The increase in money and credit supply may drive up the apparent valuations of dairy farms, but no amount of new money and credit supply can increase the global demand for milk beyond its natural growth rate. A billionaire does not buy 1,000 times more milk, computers or medical care than a millionaire, who in turn does not buy a million times more of these items than a pauper (or the government on behalf of the pauper)."
It's not the consumption, stupid, it's the capital. Said millionaire can afford to feed and house people for a period of time to develop more efficient means of raising and harvesting coconuts, thus increasing wealth. This in turn, reduces the "effort" to consume coconuts, thus causing...ALL THINGS BEING EQUAL...an increase in the quantity of coconuts consumed.
So, while the author IS correct that increasing the number of paper tickets floating around does not increase weath, or production the rest of his argument is incoherent. Yes, monetary collapse is coming, but not because of the "logic" presented.
So who's the millionaire going to sell the more efficient milk to?
The price will go down, so people can afford more milk. This will only have a small affect on overall demand, so.... The milk company will then put up a advert series equating milk with pretty girls and sex. This will increase demand and lead to more production and yet lower prices. And so on.
Actually I like Peter Schiff's story about an island economy much better.
His story goes something like this. There were 7 people shipwrecked on a desert island. The people were a cross section of nationalities from all over the world, but there was one American. The American convinced all the others that if they worked together and divided up the chores things would be more efficient. So a couple guys went fishing, a couple gathered fruits, a couple hunted for wild boar, etc. At the end of every day they would gather and whatever foodstuffs had been gotten that day would be prepared by the group. Except for the American, of course, for his job was to eat the meal. If there was anything left when he was done eating, the others could eat the remains. Now, this went on for a while, until one day, a young Asian man, had an idea. He told the others, "Suppose the American was not here, then we could eat all the food ourselves. Wouldn't that be cool?" And you get to add the ending to the story yourself, however you think it might end.
Apologies for inaccuracies, as Peter told it much better.
Pavlov's Weimar-aners salivating...
.....believe it, my family still doesn't believe me. i've talked til i'm blue in the face, they just don't get it . i cannot save everyone & i know they will be crying @ my door expecting me to save them. it's that normalcy bias, people have been brought up in a prosperous time, good times roll, credit was a birthright. Am I the only one ? Does anyone else remember a time that if you had to ask for "credit" it was considered shameful & you did not want anyone to know that the merchant extended credit to you ?!
Yer not alone lynnybee, see my post above re my sis. And yes, I do remember when credit was shameful.
Yes. So what are you gonna say to close friends and family who show up? Suppose things look really bad, and it looks like you may have just enough to get your own family through a particularly cold winter (AGW will probably collapse, too) This is a question that I ponder quite often. What to do? Especially when you tried to tell them over and over, trying to explain it in many different ways so they could get it.
I was born in the sweet spot Lynny....1963. Nothing but blue skies and rainbows-no shame in anything. I've done nothing to stop the insanity.
God bless you lynnybee. keep speaking the truth even if no one listens ... now. i'm right there with you with my family.
<-- Gold $9500
<-- AAPL will pay for everything.
When they resume making dimes, quarters, halves, and dollars out of silver, then we will have "change you can believe in".
Glad you mentioned hyperinflation, because production shutdown this causes was left out of the milk analogy.
Quite agree with their understanding of the entirely poiitical nature of the monetary system. Thus, the world's greatest nuclear power could end the madness in a minute with Glass-Steagall.
"The Revolution will not be Televised" Gil Scott-Heron
http://www.youtube.com/watch?v=BS3QOtbW4m0
TD, a hero among men! Keep on Keepin on TD!
This is a brilliant analysis.
And, these guys put their money where their mouths are.
They are correct about everything.
this article is waaay to bullish for me. according to them, no revolution? no end to western capitalism? as per them, ive just wasted 3 grand on food supplies, medicine and defense. what am i going to do with 60 cans of tuna?
Ooooh shit. I was hoping to trade mine to you. CANNED TUNA SUCKS!!
And then, as the odd ways of the world often are, there are others who like tuna a lot.
Shoot 'em up?
From the Silver Bear Cafe:
"Cloaked in the fear surrounding the debt ceiling and a possible default is the most dangerous legislation that America has ever faced. If this passes, the Super Congress will make the PATRIOT Act look like a just and fair law. When six Republicans, six Democrats and the President have complete control over the legislature, we need to be concerned.
The most frightening aspect of this proposed "committee", inaccurate though the term may be, is the fact that lawmakers in Washington have already openly admitted the unprecedented power they will be afforded.
Referring to the Super Congress as a committee is a bit deceitful. Calling it a Supreme Council of Overlords would be a bit more accurate."
Whence our Robespierre and Saint Just? The Committee on Public Safety has been resurrected anew . . . (hey, that actually rhymed)
State of Emergency Congress more likely.
Ding, Ding, Ding, Ding!!!!
And what do you mean "if"? It passed today, Obama signed it. It's done. Now they can begin the good work of getting cap and trade passed, doing something about the 450 million guns in the country, And maybe raising taxes a little bit, to help balance the budget.
"Translated: currency collapse is coming. Whether one wishes to call it "hyperinflation" is of course, one's right.
I will call it hyperinflation followed by extreme deflation of all asset classes (some classes more than others).
The Fed/Treas will print and continue to print till inflation moves well above 50% per annum. At that point the financial system, economy and currency will collapse.
Either a new currency will be introduced in the US and/or a revamping of the world financial system will be initiated.
A long period of revaluation of all assets and labor vs the new currency (or currencies) will ensue... but price discovery will be fairly quick if the gov stays out of the 'new' economy.
It's anyone's guess how long the current charade will continue. It went on a long time in the Roman Empire... Empires do not collapse overnight.
So now the great and ultimate reversion of the world to the mean begins......unfortunately, soon we will know why they call it mean.
Revolution?
Did someone say revolution??
Not until they get as bent out of shape like this guy is.
Check this out and pass it on:
Part 1:
http://www.youtube.com/watch?v=Dlf4gOvzxYc
Part 2:
http://www.youtube.com/watch?v=mDlEOmcALwQ
I like the intro about power vs authority, and I agree this is a systemic crisis that will lead to a monetary revolution.
But I was very disappointed by the monetary analysis, which simply rehashes tired dogma without even making it fit the facts. The most bizzare apsect is that while they write so much about the perils of unreserved credit, and so much about the perils of rapid base money supply expansion, they never even acknowledge that the expanded base money has greatly increased the ratio of credit that is reserved.
At the end of August 2008 there was $841 billion of base money, of which $46 billion was reserves, against $7766 billion of M2.
At the end of June 2011 there was $2645 billion of base money, of which $1666 billion was reserves, against $9126 billion of M2.
If the problem is expansion of unreserved credit, then we're going in the right direction. The volume of unreserved M2 - that is, M2 minus M0 - has gone down from $6925 billion before QE to $6485 billion at the end of June.
The result would be similar using M3, with any of the estimates I've seen.
Of course I'm not saying that QE is helping. Just that these guys are mixed up in trying to figure why it doesn't. Their critique works up till August 2008. It doesn't make any sense at all when applied to what has happened since.
For the vast majority of the world that are not part of the global financial elite, there is a horrible price we are paying that is the result of confluence of two pervasive trends. One highlighted in this QBAMCO piece and the other not. The highlighted one is the "triumph of mediocrity". Everything about the financial industry is geared to reward following the crowd, mediocrity always wins.
The other is the growing practice of privatizing gains and socializing losses. This has always been true to some extent on Wall Street, have a great year, get a big bonus, hav a bad year, get a new job. Now it is proving to be true on an institutional basis with the TBTF phenomena.
The two trends together are sparks in the gunpowder keg.
Nice one, Tyler.
So there will be currency collapse, a new currency/de-valuation (?) - and then no revolution...?!?!
BWAHAHAHAHAHAHAHHAHAHAHAHAHA!!!!
this seems to imply that the collapse of the system will provide some releif or at least satisfaction but
the people who made this mess make the rules and pretty much own all the assets
we are already seeing the banks taking possession of assets, taxes are going to go up and there will be increasing taking for taxes, people cannot afford health/dental care, wages are flat or falling, benefits are deteriorating, people do not have time for their families or to vacation, media is a joke, fuel will go out of reach
This is easily the best piece I have read on the factors driving the financial crisis and the action investors need to take to preserve their assets.
Great stuff!
v-i@l*e#n+t r*e@v_o*l^u*t#i@o*n i*s t^h%e o@n*l+y a#n-s*w@e-r !!!.....?
I have close friends and relatives in China. On a day to day basis they are far freer than us. They cannot believe the actual tax rates I pay and the amount of paperwork and certifications it takes to get anything done. Any of them with any international awareness know that we ourselves are driving more businesses, particularly in manufacturing there because we make it so complicated to do business. They are eager, bright and hardworking. They are adapting to Western techniques and standards.
It takes bribes and influence to get things done, but not an act of Congress. Plus, their commie bastard government actually likes business and the corresponding prosperity and public happiness unlike our free market capitalist system which wants another 5000 pages of regs a week and new "revenue" sources. Anyone see anything wrong with this picture?
Thank you for this article! I was trying to decipher why anyone would buy T's at this low yield....but now I understand:
1. Borrow from the Fed Window at zero percent;
2. leverage it up 40:1 (or more);
3. walk away with a cool 40-80% yield ....
So when does The Bernank let the Average American in on this game?
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