SW Richmond

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    • Five New Forces to Drive Gold Higher
      Yes, the irrational dollar bugs are coming for your head, watch out! Unable to break their long-held emotional attachment to their precious safe haven strong dollar conspiracy policy/theory, they will tell you there must be a world reserve currency, that fundamentals don't matter, and that since there are no other candidates the one that sucks the least will remain the leader! Some will even tell you it's OK if their enviable dollar is backed by worthless MBS!

      MUAHAHAHA!
      Jan 09 08:41 am |Rating: 0 0 |Link to Comment |View article
    • Why We Need a Recession
      Gisi,

      As I alluded to in the article, I believe that the easy money policy brought out the worst in us by enabling us to become self-indulgent. If you study history you notice that people adapt to prevalent conditions after only a few years of their existing; it seems to take those few years for paradigms to be broken and new ones accepted. Two and a half decades of easy money made us think life was easy and it was time to have fun and enjoy it. Few of us remained skeptical and didn't over-indulged, but those of us remained skeptical were the first to see the trouble brewing.

      I doubt any other nation or people would have maintained their sanity through 25 years of "easy money, anything goes".

      The "stock market magic" paradigm is still alive in spite of much evidence that it should be dead; people can't wait for an excuse to get back into the stock market and get back to easy money. The other prevalent paradigm right now is the "US Dollar and US Treasury safe haven" play. These too will die, but it will take time. My next article will probably be about paradigms.
      Jan 08 23:36 pm |Rating: 0 0 |Link to Comment |View article
    • Why We Need a Recession
      Thank you all for your comments.

      prudentinvestor,

      My belief in the Fed's course is cemented in place by the very existence of the Fed. They cannot do nothing, even though doing nothing would cause the least harm, simply because doing nothing would be an admission of their impotence. Since under "normal" times the Fed provides the inflationary funding vehicle for expansionary government and banker mischief, such an admission is a virtual impossibility. They MUST try to reinflate; no other course is possible. The issue is political and not financial.

      By the way, if you haven't seen it, this interview with Bill Poole is a must-watch.
      www.bloomberg.com/avp/...
      Jan 08 17:24 pm |Rating: 0 -1 |Link to Comment |View article
    • What Is Going On With Gold?
      paultaut,

      I think you are wrong to focus on the deflationary pressures you point out. It's not those that I fear, it is the Fed's response to them. I am not the only one who is afraid; as I pointed out just above, the Chinese and the Gulf States seem anxious to denominate their trade in something other than dollars.
      Jan 08 15:15 pm |Rating: +1 0 |Link to Comment |View article
    • What Is Going On With Gold?
      This article about the new Gulf Coast Currency is also very interesting:
      tyo.ca/islambank.commu...

      Especially this line: "Once established, the GCC leadership may decide to invoice their hydrocarbon sales in the new common currency, moving away from the current dollar pricing system."
      Jan 08 14:33 pm |Rating: +1 -1 |Link to Comment |View article
    • What Is Going On With Gold?
      One must HAVE Yuan to settle trades in Yuan. This means Yuan must begin to circulate globally. Very interesting.


      On Jan 08 01:28 PM bosun.j wrote:

      > China just began settling international trade in Yuan. As you know
      > the Chinese never do anything on a "trial basis". China's longterm
      > goal is to break American hegemony. I'm glad they are. It's well
      > past time somebody did! China will be the world superpower in my
      > lifetime.
      Jan 08 14:30 pm |Rating: 0 -1 |Link to Comment |View article
    • What Is Going On With Gold?
      What backs a fiat currency? Why is it valuable and worth holding? The US Dollar is in fact a zero coupon short term debt instrument issued by the Federal Reserve; that is why it is called a "Federal Reserve Note" (notes are debt, in case you forgot). As such it is as much an investment as it is a currency. If the things you are about to read are news to you, then you are a foolish investor who doesn't understand his investments.

      According to this article: www.todaysfinancialnew...

      Schiff puts it in plain terms: "Paper dollars are technically Federal Reserve Notes, which means they are liabilities of the Fed. When it puts newly minted notes into circulation it does so by buying assets, usually U.S. treasuries, which it then holds on its balance sheet to offset that liability. By swapping treasuries for mortgages, the Fed effectively alters the compilation of its balance sheet and the backing of its notes."

      If you then look at the chart presented here:
      www.frbatlanta.org/eco...
      you can see that the quality of the securities backing your fiat FRN's has been drastically reduced over the course of this crisis, since the Fed has loaned out (swapped) its Treasuries in exchange for mortgage-backed securities in an effort to prop up the quality of the balance sheet of member banks. It has probably engaged in these swaps at face value (otherwise they wouldn't have had the desired effect), trading a $Billion in Treasuries for a $Billion in MBS or other junk "for which there currently is no market".

      If you wish to place your life savings in a debt instrument currency that is ultimately backed by the ability of a landscaping employee in California to pay off his $600,000 mortgage, be my guest. The fact that our fiat doesn't suck as bad as anyone else's fiat should provide you sufficient comfort to be able to sleep at night.

      All other things being equal, cash is a good hold in a depression. But we now have an activist Fed who has taken the bit in its teeth and run out of the ring. Dollar bulls should watch this recent Bloomberg interview with Bill Poole:
      www.bloomberg.com/avp/...

      Pay special attention to the part where he says:"The Fed has been encouraging the bond market to think the Fed is going to be in there supporting Treasury Bond yields. That can't be because the implications of that commitment are too simply horrendous to think about."
      Jan 08 11:21 am |Rating: +12 -1 |Link to Comment |View article
    • Is the Long Bond Cracking?
      Forgive me "piling on" here, but this article also illustrates the end game of capital destruction. The capital pool is completely depleted, and lowering interest rates further won't work. The bubble will not reinflate; printing money dilutes capital, adding to its destruction. Low rates make new capital formation impossible.

      www.telegraph.co.uk/fi...

      'Millions of savers are braced for zero per cent accounts within days as the Bank of England is poised to cut interest rates to the lowest level in its 315-year history.'
      Jan 05 13:29 pm |Rating: 0 0 |Link to Comment |View article
    • Is the Long Bond Cracking?
      Sage / Mr. Shaw,

      I'd like to stand back and look at the long wave.

      I think it's fairly well understood that a regime of steadily falling interest rates is bullish for stocks. This chart:
      research.stlouisfed.or...
      shows that long rates have been falling more or less steadily since the mid-1980's. Rates are now at or near historic lows.

      A long term DOW chart shows it's response to this steady lowering of rates: steadily rising stock prices since the mid-1980's. The DOW reached historic highs, stumbled, and has thus far failed to respond to further lowering of interest rates. This article
      www.plexus.co.za/files...
      includes a chart titled "The Marginal Utility of Debt in Real Terms" which shows that new dollars of debt have much less of a stimulative impact on the economy, as specified in this quote from the paper: 'In the 1960s, real total debt outstanding in the U.S. "bought" $0.64 in additional real GDP. In the current decade, a dollar of real additional debt now "buys" $0.15 in additional real GDP.'

      I wonder, as I am sure do others, whether we are essentially at the end of a credit super-cycle. I also follow the writings of Antal Fekete, and one of his main theses is the idea that a regime of falling interest rates destroys capital. It seems that this makes some sense if you consider what also started to happen in 1980: raising interest rates drastically. Higher interest rates encourage savings over consumption and hence are supportive of capital and thence capital formation. The high rates encouraged capital formation and launched a new productive economy. Over time we have continually lowered interest rates to try to avoid adjustments (recessions), but have had to do so more and more due to the gradually reducing marginal utility of debt. We have now reached the end of the cycle. We will inflate away the old debt, endure a bout of inflation, everyone's lifestyles will be reduced to pay for all the consumption we brought forward with the debt, real resources such as gold and oil will go to the moon, and then we'll raise interest rates and have another recession to restart the process.

      The conclusion I draw is that we essentially need to "reset" the capital process. Ultimately it will look like we raised interest rates to suppress inflation (still to come), but what we really will have done is to re-enable savings and make capital formation possible again.

      I'd really appreciate your thoughts.
      Jan 05 12:43 pm |Rating: 0 0 |Link to Comment |View article
    • Profiting From Bernanke's Super-Fed and Obama's Newer Deal
      Very thorough review of our current situation and the Fed's balance sheet. Bernanke clearly wants to achieve inflation; I agree also that the money that is currently sequestered will be pushed into the system once Treasury has done much of its funding. I expect this to happen once the Obama stimulus plan is in place and stimulus money has begun to flow. They will not shove the money into the system until the coordinated monetary/fiscal plans are ready to go.

      Ultimately, of course, this recovery plan is about 'belief'. The starting gun will be fired by a massive PR campaign on national news programs, especially on weekends when worker bees can absorb it, talking heads all talking it up incessantly, smiles all around, lots of use of the words 'hope' and 'future'. Naysayers will not be invited.

      I think your targets for gold and silver are achievable.
      Jan 05 09:00 am |Rating: +6 -1 |Link to Comment |View article
    • 2009: The War on Capital(ism) Must Be Stopped
      Your paradox will forgive me, then, if I endeavor to plant a few seeds.

      On Jan 04 11:44 AM carey_jim wrote:

      > Paradox: Even the powerful don't want to live in a world where justice
      > is simply defined as "the advantage of the strong" and so we get
      > philosophy, politics and economics.
      >
      > But the actors of history don't listen to the philosophers, as Plato
      > found out 2500 years ago when he tried to advise a king in Sicily
      > and barely escaped with his life, and as Winston Churchill found
      > out 75 years ago when he warned the world about Adolph Hitler but
      > got war and genocide instead of peace.
      Jan 04 23:22 pm |Rating: 0 0 |Link to Comment |View article
    • 2009: The War on Capital(ism) Must Be Stopped
      John L,

      Thank you for this comment. While it is true I am deeply concerned about the things you mention, the thrust of the article has been correctly seen by Smarty_Pants. I felt a need to revisit certain elements of the basic philosophy of a capitalist system; I felt that need because the core concepts are under direct assault and it is not being discussed enough here at SA. I don't want to speculate on whether the assault is deliberate or not. Capital is, first and foremost, private property. The nationalization of businesses and trampling of property rights must stop. I have no illusions either about the "temporary" nature of any of these measures.

      How can anyone assess risk when legal protections are meaningless and the financial system is run by diktat?

      On Jan 04 03:05 PM John Lounsbury wrote:

      > SW Richmond - - -
      >
      >
      > The risks you point out that current policies may lead to serious
      > degardation of the value of the U.S. dollar, high or hyper inflation,
      > and serious damage to the ability to fund our national deficitrs
      > are recognized by many who do not share all of your economic and
      > political philosophy. What others consider, and you do not, is how
      > much destruction of commercial structure should be tolerated in trying
      > to get the excesses shaken out.
      Jan 04 23:16 pm |Rating: +3 0 |Link to Comment |View article
    • Citigroup's Derivatives Reduce Bailout to a Non-Event
      Aryamehr said:
      'we have the power to print as much money as we choose and we have the most powerful military in the world.'

      I used to think that the dollar was backed by the military. It's not about the military, it's about tax collections. The dollar is only as good as the government's ability to collect taxes to pay the debt. And since it is being demonstrated that the US military cannot subdue a country the size of Texas containing a small but determined resistance, what chance have they if a popular but non-violent tax resistance movement springs up in the USA? This government needs the goodwill of its subjects, whether it likes it or not, as it endeavors to heap more debt on our shoulders.


      Lockstep is correct that the US Treasury uses an estimate of 15% of nominal exposure as net exposure. Certainly there are individual differences from party to party. The numbers are still monstrous. One of the major problems I see with CDS going forward is that the due diligence selection of counterparties might have looked good when the contracts were written, but who is there now who looks like a good counterparty (absent hundreds of billions in Fed funny money)? Lockstep also points out the situation with AIG, which if I understand it correctly is this: AIG must be kept out of BK court in order to avoid triggering default events and payout requirements in CDS contracts. This seems to be the reason for the ongoing theft from taxpayers to pump up AIG.
      Jan 04 22:49 pm |Rating: +5 -1 |Link to Comment |View article
    • Is the Long Bond Cracking?
      Mr. Shaw,

      I've just read three of your earlier pieces, they've given me a lot more info including your thoughts on QE, thanks a lot!

      It's a remarkably dangerous game that Treasury and Fed are playing, and it is one that all of us are watching closely.

      I started buying small lots of TBT some time ago and have taken a beating; I still agree that Treasuries are 'bubbly'. Treasury 'supply' is overwhelming.
      Jan 04 14:26 pm |Rating: 0 0 |Link to Comment |View article
    • Manufacturing Activity Hits a 28 Year Low
      counterparty risk

      Definition
      The risk that the other party in an agreement will default. In an option contract, the risk to the option buyer that the writer will not buy or sell the underlying as agreed. In general, counterparty risk can be reduced by having an organization with extremely good credit act as an intermediary between the two parties.

      This content can be found on the following page:
      www.investorwords.com/...

      Gold held in your hands has no counterparty risk. The risk John L describes above is liquidity risk.

      When you hold gold there is no need to trust a counterparty. I never said there was no liquidity risk, market risk, etc. Gold's current popularity (and the current popularity of US Treasuries) is almost entirely due to the current prevalence of counterparty risk.
      Jan 04 09:48 am |Rating: +2 0 |Link to Comment |View article

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