Obama Agrees to Extend Bush Tax Cuts for 2 Years

[Guest broxburnboy]

In my self managed account ( I have other company and family accounts which are managed by others.. because I don't thoroughly trust my own judgement). I am almost wholly  in junior and intermediate resource stocks, mostly gold/silver explorers and junior producers with some exposure to uranium. I also hold Sprott Inc (T-SII)  which gives me balanced exposure to the Precious metal heirarchy including bullion and Sprott Resource Corp (SCP-T) which is essentially a merchant bank to other commodity based businesses.

I can understand your doubts about gold since it is a novel and somewhat strange concept to those whole investing career has been in the post US dollar/Gold decouple (since 1970ish). It may however be wise to hold some physical gold or silver as folding cash in the event of temporary paralysis of the financial system. 

Although it is conventional wisdom that debtors prosper in inflationary scenarios, the reality is that personal debt will always be called before the lenders have to take the hit... so lose your debt, pare your personal expenses and invest surplus cash flow in businesses that produce real and basic commodities or services that operate in that sphere.

[ERICOPOLY]

I can understand your doubts about gold since it is a novel and somewhat strange concept to those whole investing career has been in the post US dollar/Gold decouple (since 1970ish).

 

I grew up during "The Great Inflation" -- I put "The Great Inflation" in quotes because as we all know "The Great War" was followed up by the epic sequel WWII -- history has shown that you don't want to use terminology like "The war to end all wars".

 

I feel like (am I logical or am I getting sucked in?) the US dollar is going to devalue a lot more because the economy or political will is too fragile for austerity, but I have to hold my nose buying gold as an inflation hedge at this point.  I guess I've beaten that to death, but my ongoing fear is that the price of gold is front-running the price inflation for the reasons you mentioned -- that gold is rising due to monetary inflation (monetary inflation then precipitates price inflation).  My hunch is that the monetary inflation will peak before price inflation peaks -- so there is some point perhaps where one gets off the ride to buy TIPS.  How do you get that right?  People who got off the ride in 1980... what drove that?  We still had significant price inflation after the monetary inflation was over (as measured by gold prices).  I like your uranium exposure but I worry that if TerraPower succeeds it will lead to a decline in the value of uranium.  Humor:  this man (he is a genius) is one of the chief backers (alongside Bill Gates) of TerraPower http://en.wikipedia.org/wiki/File:Nathan_Myhrvold.jpg  In that photo he is discussing his research on penguin defecation and rectal pressure!

 

I know you like gold at the moment, but what do you think about doing with regards to exploiting the inevitable transition from monetary inflation to price inflation?  Are you going to stay put throughout and let the chips fall where they may, or might you consider TIPS once you think the monetary inflation is over?

 

 

Although it is conventional wisdom that debtors prosper in inflationary scenarios, the reality is that personal debt will always be called before the lenders have to take the hit.

 

I don't mean to be a pain, but do you have examples?  

 

I think that's generally said (or at least I generally say that debtors prosper) with regards to mortgages.  I think that (although I'm not certain), the bank can't legally foreclose on you if you are current on payments.  

 

For a corporate example, nobody can call the long-term debt that Fairfax issued.  Should interest rates go to the moon, Fairfax can buy back and retire that debt at a big discount.

 

You say a lot of interesting things so genuinely I want to know what your sources are for that info -- I haven't come across the suggestion elsewhere.

 

It may however be wise to hold some physical gold or silver as folding cash in the event of temporary paralysis of the financial system.  

 

I'm increasingly with you on this one.  In part because I read The Johnstown Flood, and in part because I read A Long Way Gone: Memoirs of a Boy Soldier.  I don't want to be like those townspeople who say "yeah, right" and then get drowned when the dam breaks, and I don't want to lose sleep if a real crisis starts (having a bit of gold buys safe passage).  A Long Way Gone really scared me... people are animals.

 

[Guest dealraker]

ERIC,

 

On the gold movement:

 

It seems everyone assumes gold will do well in a so-called financial crisis----- of any kind.  Is that a certainty? 

[ERICOPOLY]

ERIC,

 

On the gold movement:

 

It seems everyone assumes gold will do well in a so-called financial crisis----- of any kind.  Is that a certainty?  

 

As I like to point out, gold went down in late 2008 as the dollar went up.  So I suppose it won't do well in a financial crisis of any kind.  But that wasn't a crisis of confidence in the dollar itself.

 

I'm having a hard time with this kind of hedging against collapse, because the kind of people who keep guns, canned food, and gold coins around the house are wackos.  But I already have the guns -- (now for a funny story) I've even used them at home... we had a mink killing our chickens this year.  It (there were two of them but I got one on the first day) killed all but 8 of our 30 chickens (this drove my wife crazy but personally I don't really like the chickens).  The mink just chew off the head and only partially eat the chicken from the inside of the neck cavity before killing the next one... so you wind up with these otherwise perfect looking headlesss chickens lying around.  So the last mink ironically I shot with a 12 guage from 7 feet away... and of all places I hit it cleanly in the head (it evaporated) and you just had the body left from the shoulders on down.  I wasn't aiming for the had -- it was guided by karma I suppose.

[Guest broxburnboy]

You say a lot of interesting things so genuinely I want to know what your sources are for that info -- I haven't come across the suggestion elsewhere.

Rising price inflation coupled with stagnating incomes eventually forces the debtor to liquidate assets (at low prices)...if necessary all the way to bankruptcy... to delever. Ironically, the demographic who will be hurt the most will be those currently with the highest credit scores... they are closest to being maxed out to profitably service debt (and hence most vulnerable to cash flow impairment) and the ones who think they will benefit by paying off their vast debts in inflated dollars... they will never get that chance. Ironically the lucky consumers are the ones who have already been liquidated... they have delevered their personal balance sheets and now have the opportunity to move forward.

 

re: gold in a bubble? Gold price will continue to rise with the reality of monetary dillution:

 

"Frame 9: We think the greatest upside and least risk is in precious metals, specifically gold. Why? Because gold is a currency, not a capital asset, that does not rely on output growth for appreciation. Its appreciation depends on the dilution of paper money vis-à-vis goods and services with inelastic demand properties.

 

Gold is not an investment in the normal sense. It is cash in a scarcer currency. It has no more or less intrinsic value than the Dollars, Euros or Loonies in our wallets but it will maintain its relative scarcity to them. So then – the bubble we’re seeing today is not in gold but in paper money, which has grown in the US by 130% in the last two years and is about to double again. Gold’s so called “exchange rate” versus paper money will continually be re-priced higher."

 

http://www.ritholtz.com/blog/2010/11/brodsky-on-gold/

[Guest broxburnboy]

It (there were two of them but I got one on the first day) killed all but 8 of our 30 chickens (this drove my wife crazy but personally I don't really like the chickens).  The mink just chew off the head and only partially eat the chicken from the inside of the neck cavity before killing the next one... so you wind up with these otherwise perfect looking headlesss chickens lying around.  So the last mink ironically I shot with a 12 guage from 7 feet away... and of all places I hit it cleanly in the head (it evaporated) and you just had the body left from the shoulders on down.  I wasn't aiming for the had -- it was guided by karma I suppose.

 

LOL ..And you think gold bugs are wacko....

[ERICOPOLY]

You say a lot of interesting things so genuinely I want to know what your sources are for that info -- I haven't come across the suggestion elsewhere.

Rising price inflation coupled with stagnating incomes eventually forces the debtor to liquidate assets (at low prices)...if necessary all the way to bankruptcy... to delever.

 

The 1970s inflation saw rising home prices, and rent alongside it.  So the people who had bought homes as investments on fixed rates with maximum leverage did extremely well -- their interest costs were fixed (the largest expense in most rentals) while their income (rents) soared.

 

The people who didn't buy homes saw their rents soar.  

 

Homes rose slower than inflation, but it was like 9% inflation vs 7% for home prices for some years (I'm just remembering what I read in Robert Schiller's book).  Schiller argued that it was evidence that homes didn't even match pace with inflation, but I looked at that and said that because most "investors" buy the home with at least 2:1 leverage then the inflation actually earned them a real return.

 

Anyhow, as I pointed out earlier the 1970s inflation was coupled with rising wages.  That's what allowed for a lot of the measured inflation to happen in the first place (things like rents and home prices wouldn't be rising without wage pressure).  What's not clear to me though is whether our next big inflation will happen independently of wages -- if wages don't go up, then you have the social unrest.  We didn't get the social unrest in the 1970s because it didn't put everyone out on the street (saved by rising incomes).

 

 

[Guest broxburnboy]

You say a lot of interesting things so genuinely I want to know what your sources are for that info -- I haven't come across the suggestion elsewhere.

Rising price inflation coupled with stagnating incomes eventually forces the debtor to liquidate assets (at low prices)...if necessary all the way to bankruptcy... to delever.

 

The 1970s inflation saw rising home prices, and rent alongside it.  So the people who had bought homes as investments on fixed rates with maximum leverage did extremely well -- their interest costs were fixed (the largest expense in most rentals) while their income (rents) soared.

 

The people who didn't buy homes saw their rents soar.  

 

Homes rose slower than inflation, but it was like 9% inflation vs 7% for home prices for some years (I'm just remembering what I read in Robert Schiller's book).  Schiller argued that it was evidence that homes didn't even match pace with inflation, but I looked at that and said that because most "investors" buy the home with at least 2:1 leverage then the inflation actually earned them a real return.

 

Anyhow, as I pointed out earlier the 1970s inflation was coupled with rising wages.  That's what allowed for a lot of the measured inflation to happen in the first place (things like rents and home prices wouldn't be rising without wage pressure).  What's not clear to me though is whether our next big inflation will happen independently of wages -- if wages don't go up, then you have the social unrest.  We didn't get the social unrest in the 1970s because it didn't put everyone out on the street (saved by rising incomes).

 

The comparisons between the 2 eras are not exact. In the earlier period Paul Volcker saw his duty to tame inflation and hence save the dollar through higher interest rates  (monetary deflation)... today the Fed sees its duty to stave off assett price deflation by QE, lowering interest rates and throwing the dollar under the bus.

[ERICOPOLY]

The comparisons between the 2 eras are not exact. In the earlier period Paul Volcker saw his duty to tame inflation and hence save the dollar through higher interest rates  (monetary deflation)... today the Fed sees its duty to stave off assett price deflation by QE, lowering interest rates and throwing the dollar under the bus.

 

The current Fed does still have a price inflation mandate.  They have said (and I think they intend to) they will undo QE once price inflation starts to move.  So here the gold market believes them when they say QE3 may be necessary (to support asset prices), but the gold market does not believe them when the Fed claims that it is only a temporary thing.  So gold prices adjust as if this is a permanent increase to the monetary base.  It may or may not be.

 

Some people say that by the time price inflation starts to move it will be too late -- but Volcker did it.

 

If gold (and commodities) are merely reaction to the increase in the monetary base, then it stands to reason that they will fall immediately in reaction to a decrease in the monetary base.  Should the day come where we have rising prices all over the place and people are out on the street, won't there be political will to unwind QE and thus crush gold and commodities?  Wouldn't that be the politically easy approach?  I'm running a devil's advocate argument here -- when the place is in tatters why won't people DEMAND the Fed just go to their keyboard and sell the Treasuries, thus reversing QE2 (and QE3 and QE4 etc).  One could say that it would just put us right back into the deflationary spiral, but the longer we wait then the less leverage (the ongoing delevering).

 

Actually so far QE2 has sent interest rates up -- not accomplishing what Bernanke said it was intended for.  But it is making banking more profitable again, as this improves the net interest margin.  The more profitable it is for banking, the faster the delevering can continue (a debt default or a foreclosure is a delevering event).  Banks with a wide NIM can process the chargeoffs faster than a bank with a deteriorating NIM.

 

I don't sleep well at night with all this experimentation going on, but there is the possibility of a black swan for gold (these guys are all wholly convinced that there is no risk of QE being unwound).

 

 

 

[Guest broxburnboy]

"Some people say that by the time price inflation starts to move it will be too late -- but Volcker did it

 

Volcker`s solution almost killed the economy at the time.. today the imposition of higher interest rates would hasten a hyperinflationary collapse. In other words the Volcker solution ship has sailed..it should have been imposed at the time of the 2008 global margin call. The IMF had the only corrective solution... nationalize the insolvent banks, move all the bad debt into one holding company and liquidate it at distressed prices, raise interest rates and move forward with a `real`  fed balance sheet. But the banksters would have been wiped out and their gold spread around... QE and deficit spending gives them the opportunity to repurchase gold with increasingly worthless paper money and pass the inflationary hit on to the sellers.

The general (US) public continues to buy into the deception to the extent of selling their only real asset - scrap gold - to media hucksters for 3 magic beans (USD). If and when the banksters start trading their gold for increasingly smaller denominations of fiat money instead of the other way around, we can be assured that the price of gold has topped.

[ERICOPOLY]

"Some people say that by the time price inflation starts to move it will be too late -- but Volcker did it

 

Volcker`s solution almost killed the economy at the time.. today the imposition of higher interest rates would hasten a hyperinflationary collapse. In other words the Volcker solution ship has sailed..it should have been imposed at the time of the 2008 global margin call. The IMF had the only corrective solution... nationalize the insolvent banks, move all the bad debt into one holding company and liquidate it at distressed prices, raise interest rates and move forward with a `real`  fed balance sheet. But the banksters would have been wiped out and their gold spread around... QE and deficit spending gives them the opportunity to repurchase gold with increasingly worthless paper money and pass the inflationary hit on to the sellers.

The general (US) public continues to buy into the deception to the extent of selling their only real asset - scrap gold - to media hucksters for 3 magic beans (USD). If and when the banksters start trading their gold for increasingly smaller denominations of fiat money instead of the other way around, we can be assured that the price of gold has topped.

 

Okay, you've convinced me.  I have been watching the price this year and it has basically confirmed what other solid currencies are saying (like the AUD).  My dithering hasn't cost me anything yet -- my gains of 25% (roughly) this year basically track these other currencies.  I need something to keep that door open to Australia (I need to be able to afford to live there).

 

[Guest broxburnboy]

You may find Eric Sprott's case for silver more compelling than the gold story:

Just released via Zerohedge:

 

http://www.zerohedge.com/article/eric-sprotts-double-barreled-silver-issue

 

[ERICOPOLY]

You may find Eric Sprott's case for silver more compelling than the gold story:

Just released via Zerohedge:

 

http://www.zerohedge.com/article/eric-sprotts-double-barreled-silver-issue

 

 

Yes that is easier to warm up to.

 

There is an interesting set of data here:

 

http://www.taxfreegold.co.uk/goldsilverratioshistoric1970onward.html

 

I'm not sure how high the squeeze would go though -- I would expect some "mean reversion" arbitrage to take hold if silver gets too high (they'd sell it and buy gold).

 

Since 1985 gold has never traded for less than 50x silver.  At 50x today's price of silver, you get the present price of gold.

 

(although this is a data set of 25 years, it's hardly a candidate for a "since the beginning of time" statement on silver/gold ratios.  But I like it due to the fact that it mirrors the period of time when it's industrial demand has exploded -- we didn't need silver for many of it's current industrial uses back in 1500).

 

I don't know whether or not Sprott did this basic comparison because he doesn't mention it.

 

[Myth465]

A Long Way Gone: Memoirs of a Boy Soldier. - That book has been on the reading list for quite a while. I may have to move it up.

[benhacker]

My biggest problem over the last several years with "Gold Bugs" have been that they weren't silver bugs... because it was a pretty obvious 'relative' trade to me to go with Silver.  And it still is totally obvious today.  It was so wacky back a few years that I almost put a short GLD / long SLV pair trade on last year.

 

If Gold doesn't come down fast, silver will go up like a rocket... I don't own any mind you (outside of small personal stake in a safety deposit box) because I don't understand the absolute valuation, but relatively it's a no brainer.

 

Ben

[ERICOPOLY]

but relatively it's a no brainer.

 

Ben

 

Silver right now (gold is 48x silver) is the most expensive it's been since 1984 (measured relative to gold).

 

What is the appropriate relative valuation?  What ratio of gold vs silver?  20x? 30x?  40x? 50x?  60x?  70x? 80x?  I think all those ratios have held at one point or another since 1970.  I would argue that since 20x only lasted for a year (until gold was free to trade as dollar got unpegged) that it is an outlier caused by artificial forces.

 

[Guest broxburnboy]

but relatively it's a no brainer.

 

Ben

 

Silver right now (gold is 48x silver) is the most expensive it's been since 1984 (measured relative to gold).

 

What is the appropriate relative valuation?  What ratio of gold vs silver?  20x? 30x?  40x? 50x?  60x?  70x? 80x?  I think all those ratios have held at one point or another since 1970.  I would argue that since 20x only lasted for a year (until gold was free to trade as dollar got unpegged) that it is an outlier caused by artificial forces.

 

 

I would be careful trying to bet on mean reversion to a historical ratio via a vis silver/gold for the same reason that the historical mean between gold/oil is not necessarily indicative of future movements. Both silver and oil have supply/demand/consumption fundamentals which change over time... gold alone has static supply and non consumption.. that's why it is money.

I actually believe that oil may be the next commodity bull story (over silver which has had a pretty good run) which will ignite visible inflation as energy prices are the mother of all cost-inflation drivers.

[oec2000]

Some people say that by the time price inflation starts to move it will be too late -- but Volcker did it.

 

If gold (and commodities) are merely reaction to the increase in the monetary base, then it stands to reason that they will fall immediately in reaction to a decrease in the monetary base.  Should the day come where we have rising prices all over the place and people are out on the street, won't there be political will to unwind QE and thus crush gold and commodities?  Wouldn't that be the politically easy approach?  I'm running a devil's advocate argument here -- when the place is in tatters why won't people DEMAND the Fed just go to their keyboard and sell the Treasuries, thus reversing QE2 (and QE3 and QE4 etc).  One could say that it would just put us right back into the deflationary spiral, but the longer we wait then the less leverage (the ongoing delevering).

 

Actually so far QE2 has sent interest rates up -- not accomplishing what Bernanke said it was intended for.  But it is making banking more profitable again, as this improves the net interest margin.  The more profitable it is for banking, the faster the delevering can continue (a debt default or a foreclosure is a delevering event).  Banks with a wide NIM can process the chargeoffs faster than a bank with a deteriorating NIM.

 

 

Volcker did it by taking a single-minded approach to taming inflation. The question is whether Bernanke will continue to try and balance the Fed`s dual mandates when the time comes to tighten. Bear in mind also that Volcker did it only after many years of stagflation. Should we have confidence that Bernanke, who neither saw the bubble forming or the crisis developing, will have the prescience and courage to head off inflation before it becomes a problem? It is not realistic to think that there will be political will to tighten until things get ugly, by which time it might be too late.

 

Bernanke will also face a major problem that Volcker did not - the record indebtedness of the economy. You mention deleveraging - but this is happening very slowly at the aggregate level because of the replacement of private sector debt with public sector debt. If you think the economy was bad when Volcker raised interest rates to double digits, imagine how bad it will be if Bernanke has to do the same when total debt to GDP is 300%.

 

This is what Eric Sprott worries about. Meanwhile, there is no indication that Washington is doing anything to address the fundamental problem of excessive consumption and a shortage of savings. The options are getting more limited over time. When the crisis broke in 2008, the government finances were in much better shape. If another shock happens, the government will be in a considerably weakened fiscal position to act.

 

It seems like we are heading towards the point beyond which every option left will be a bad one.

[benhacker]

Silver right now (gold is 48x silver) is the most expensive it's been since 1984 (measured relative to gold).

 

What is the appropriate relative valuation?  What ratio of gold vs silver?  20x? 30x?  40x? 50x?  60x?  70x? 80x?  I think all those ratios have held at one point or another since 1970.  I would argue that since 20x only lasted for a year (until gold was free to trade as dollar got unpegged) that it is an outlier caused by artificial forces.

 

Eric, I think the "since 19xx" numbers are mostly irrelevant generally unless they have some grounding economic reality (such as the '15x' pe multiple for stocks), and the post-84 type numbers to be worth less than nothing.  If anything, the relative rarity ratio (let's call it 20x) UNDERstates the value of silver wrt to Gold.  All numbers for supply/demand that I can think of support a ratio much lower than 48x.  I think we see 20x in the next 5-10 years.

 

Sprott makes part of his case this way.  The demand for silver is greater (as a %) than Gold, the relatively supply and product (again, relatively) clearly shows that the price of silver is being set in either a manipulated (again, relatively) or completely brain dead way.

 

I'm no metal fiend, but the numbers are so in favor of silver (especially a year ago) that I just scratch my head of why anyone owns gold.  The argument that I think holds the most weight is that specifically Gold is valuable because it has less "real" demand thus making it a more pure monetary metal (the extra silver industrial demand takes away from it's monetary value is the argument because Gold is a pure monetary signal).

 

My personal belief is that this argument doesn't quite work because the monetary value of Platinum / Silver / Gold has to do with 1) density 2) durability 3) recognizability and 4) inability to artifically create new supply and 5) of course rarity.  The stability of supply of metalic currency is not valuable within a reasonable band... it's the rarity.  So if these metals have value for monetary reasons, if there is OTHER real demand for the metal that only makes the metal MORE valuable.

 

I guess you could take my argument further and say that if the ratio of rarity is 20x, Silver should actually be worth an even lower (more valuable) ratio to gold.  I won't push it that far as there are many factors that will start to play at the margin (cost of extraction, recycling, etc) that I don't have great handles on.

 

As for why the ratio has been out of whack so long?  Markets aren't efficient or logical for stocks over short / medium periods, and there is no natural short term catalyst to bring metal prices back to proper alignment (whereas stocks have supply / demand, buybacks, secondaries, PE firms, etc, Gold and Silver just have human nature and raw extraction costs to provide a floor, and recycling at the extreme to bring prices back down...).

 

My 2 cents, I'm not expert, but I think that is probably helpful in this case.

 

Ben

[Guest Bronco]

The debate on taxes is always interesting.  However, most billionaires say they should pay more...still don't know why both parties can't agree on taxing income over 10 million at a rate higher than that of $250,000.  Big difference in lifestyles...somewhat of a joke.  I think the Republicans argument of job creation loses steam after $10m.

 

Would also need to alt min the MF'er and tax ordinary, CG and dividends at the same rate.  Then get rid of current alt-min.

 

You raise billions doing this, don't impact more than a small group of the population, and it is necessary.  As a purist, it even pains me to say it, but we have now hit the point where more dramatic steps are necessary.

 

Democrats and Republicans have let the US down big time.  I understand the Bush bashers even though I am a Republican but Obama is a disgrace and a fake.

 

And to others on this board in prior posts ... we don't need to defend the world, provide the world with health care innovation, and act as the world bank.  It is not taking a toll anymore, it is destroying us.