Jesse's Paradox: Gold Can Perform Well In Both Monetary Inflation and Deflation

The average punter understands the first graph to the right. Gold tends to increase in price in times of monetary inflation, because as an alternative store of wealth it provides a safe haven from central bank debasement of the currency.

By monetary inflation, we do not mean the simple, nominal growth in money supply, and of course the same can be said of a simple decrease and deflation. This is obvious when one considers that money must have a natural relationship to the demand for it relative to population growth, but most importantly to the growth of real GDP.

But notice the second chart, and this is the one which so many speculators and economists miss. Gold tends to perform well when the inflation adjusted returns on the longer end of the curve are low. In other words, when the real returns on bonds are inadequate to the risk. But the risk of what?

Inflation, pure and simple. Deflation is a prelude to inflation, and sometimes a brief hyperinflation, in a fiat currency regime.  And even while the nominal money supply may remain flat or even negative, the decay in the underlying assets that support it may be declining, and sometimes dramatically so. 

The smarter money is not chasing the latest wiggles in the Elliot waves, or the price manipulation shenanigans of the central bankers and their minions at the bullion banks. They have been buying ahead of the increasing likelihood of a monetary event.

The underlying value of the dollars are deteriorating. So even though there might be fewer dollars nominally, in fact there should be much fewer dollars because of the contraction in GDP.

And the quality of the assets underlying those fewer dollars are much lower quality than only a few years ago.

Gold seems to perform less well, underperforming other asset classes, in a healthy economy where the growth of money is related to the organic growth of real production and not to financial engineering. Gold seems to be a hold in 'normal' times.

I would suggest that the extraordinary price in gold now is because for many years the central banks artificially suppressed the price and the means of production for gold by selling their holdings in a conscious attempt to mask their monetization and the unreasonable growth of the financial sector. They wanted things to look 'normal' while they were becoming increasingly out of balance, especially with regard to debt and international trade balances, and so they opted for appearance versus reality.

As Fernando of the Fed would day, "It is better for the economy to look good than to be good, and dahling while we were printing money and selling the public's gold it looked marvelous!"

And what if the Fed starts allowing the 10 year Treasury yield to start rising naturally. Will that be the time to start selling gold? Probably not because the money supply would most likely be artificially increasing again, and that yield increase would be a remedial reaction.  Keep an eye to negative real interest rates if you can find an indicator of inflation that has not been corrupted.

Cargo Cult Economics

People who really do not understand what is happening in a complex system sometimes react in funny ways, and suggest things that would be laughable if there were not in a relative position of power. Anyone who has worked in a large corporation will understand what funny things bosses can be when struggling to deal with complexity that they do not understand. Our duty of course is to help them, for the good of all, but sometimes that is beyond our reach, especially in dealing with Type A bosses who cannot conceive that there might be something beyond their comprehension. Since 'killing the messenger' is their reflexive reaction, their learning curves tend to be quite long, generally resolved in the insolvency of the division or even the entire company.

What I find incredibly amusing are the high priests of the economic cargo cult, dressed up in the ritualistic accoutrement's of academic credentials, sporting the codpieces of monetary policy, carrying the totems of efficient market theory, arrogant and presumptuous even in their frustration and failure. They are just so incredibly and unsuspectingly funny. I am sure history will have a good laugh over it, and for us, well at times we have to grin and bear it.

Much of what Larry Summers is doing now makes me think of Dilbert's boss. If gold is the signal of a problem in the economy, well then, let's just manipulate the price of gold. If slumping stock prices are a sign of economic deterioration, well then, lets just buy the futures and prop them up whenever they slide. See how short term and easy things can be?

This is not always humorous of course. Powerful people who are frustrated and amoral can tend to do increasingly destructive things. And then the response of the people is to try to ignore them. If necessary one must basically tell them to 'stuff it,' and give them the boot. And if they persist and start acting out, well, tyrants eventually get replaced one way or the other, but it is far too early to discuss things like that now.

When Will the Gold Bull Market End

So, the frustrated investor says, when will gold finally start topping?

Gold have topped when the smart money is convinced that the real economy is becoming naturally sustainable, robustly organic in its credit creation and allocation, and healthy in the growth of the median wage to support consumption, without subsidy or interference or new unpayable debt from the Federal Reserve, or the draconian 'taxes' from an outsized financial sector that stifles real growth.

When people are no longer obsessed with what Goldman Sachs and their ilk are doing, or what Bernanke and his merry pranksters have to say that day, then will be the time to be out of gold. I do not see even a move in that direction anywhere on the horizon.  Because of the credibility trap, the impulse to reform is stifled in the corridors of power.

This is no top, and sentiment is unusually bearish. As I have said, I believe this is the base for a new leg up that is going to surprise all but a few. No one knows the future and I could be wrong.

But I do not think that I am, unless there is a new market panic and a general liquidation of all assets. The hedge funds, BIS, and the Fed can play their games, but they cannot hold back the tide of history without being overwhelmed.

Austerity or Stimulus Without Significant Reform Is Madness; Corporatism Is Fascism

The economy will not 'cure itself' through benign neglect and liquidationism, because it did not get this way by itself. It did not suffer an accident, or an act of God. This is an unfortunate application of the principle of human healing after an injury to the economy.

The market was warped and distorted for many, many years by the neo-liberal forces of crony capitalism. It does not have the natural forces and efficiency for self-organization, and certainly not for self-repair. It is a man-made thing, and requires intelligence and hard work.

To say that the economy can somehow heal itself now is nothing more than an extension of the efficient markets hypothesis. The market will repair itself and get back on the road to recovery if only we will leave it alone, get the government out of the way, and allow the natural goodness and efficiency of traders to flourish, while handing out some additional and unnecessary pain to the victims.

To suggest that by subjecting the economy to harsh austerity measures, but without changing the abuses that caused it to become distorted and unstable with a bloated and intrusive financial sector, and then crash in the first place, is merely to hasten the final collapse, and the tearing of the fabric of society, which some wish to see for their own dark purposes.

This is the failure of those who prescribe austerity, or stimulus, but without significant systemic reform. There are those who wish to bring the economy down, and to institute a command and control form of government.

The austerity without reform being promoted is what the Americans call 'a con.' Here is a decent description of it by my friend, Charles Hugh Smith in his essay, The Con of the Decade part II.

Are austerity and stimulus without reform equivalent? No. Austerity is designed to benefit those who have already benefited unjustly and sometimes immensely by the financial frauds. Stimulus can at least mitigate the suffering of those who are being squeezed by the economic dislocation.

However, and I wish to stress this, the core issue is and has been reform, eliminating the ongoing 'con' in the system that is merely serving to transfer wealth from the many to the few in the form of monopolies, fees, and soft taxes, starting with but not limited to the financial sector.

Corporatism is fascism. And the opportunity and impulse to reform has been co opted by the promotion of a stalking horse, a new Emmanuel Goldstein, into the presidency. Obama's tenure may be remembered as Bush' third term.

Judging from the inane and virulent emails that are circulating, most of which cannot survive a few minutes of common sense or the 'Snopes' test, the American people are being prepared for domination by a 'strong leader.'

Why do people forward such easily debunked rubbish? Why do so many older people get angry when the error, the blatant lie, is pointed out to them? Because they have set aside reason, and the burden of freedom, and taken the easier path to fear, blind hate, and serfdom. And in too many cases, it is working. I would again caution those promoting this campaign that madness has no master.

The banks must be restrained, the financial system reformed, and balance restored to the economy, before there can be any sustained recovery.

Reading for The Weekend

“We are slow to master the great truth that even now Christ is, as it were, walking among us, and by His hand, or eye, or voice, bidding us to follow Him. We do not understand that His call is a thing that takes place now. We think it took place in the Apostles' days, but we do not believe in it; we do not look for it in our own case.

God's presence is not discerned at the time when it is upon us, but afterwards, when we look back upon what is gone and over. The world seems to go on as usual. There is nothing of heaven in the face of society, in the news of the day.

And yet the ever-blessed Spirit of God is there, ten times more glorious, more powerful than when He trod the earth in our flesh.

God beholds you. He calls you by your name. He sees you and understands you as He made you. He knows what is in you, all your peculiar feelings and thoughts, your dispositions and likings, your strengths and your weaknesses. He views you in your day of rejoicing and in your day of sorrow. He sympathizes in your hopes and your temptations. He interests Himself in all your anxieties and remembrances, all the risings and fallings of your spirit.

He encompasses you round and bears you in His arms. He notes your very countenance, whether smiling or in tears. He looks tenderly upon you. He hears your voice, the beating of your heart, and your very breathing. You do not love yourself better than He loves you. You cannot shrink from pain more than He dislikes your bearing it; and if He puts it on you, it is as you would put it on yourself, if you would be wise, for a greater good afterwards.

There is an inward world, which none see but those who belong to it. There is an inward world into which they enter who come to Christ, though to men in general they seem as before. If they drank of Christ's cup it is not with them as in time past. They came for a blessing, and they have found a work.

To their surprise, as time goes on, they find that their lot is changed. They find that in one shape or another adversity happens to them. If they refuse to afflict themselves, God afflicts them.

Why did you taste of His heavenly feast, but that it might work in you—why did you kneel beneath His hand, but that He might leave on you the print of His wounds?

God has created me to do Him some definite service; He has committed some work to me which He has not committed to another. I have my mission -- I may never know it in this life but I shall be told it in the next.

I am a link in a chain, a bond of connection between persons. He has not created me for naught.

I shall do good, I shall do His work. I shall be an angel of peace, a preacher of truth in my own place while not intending it if I do but keep His commandments.

Therefore I will trust Him. Whatever I am, I can never be thrown away. If I am in sickness, my sickness may serve Him; in perplexity, my perplexity may serve Him. If I am in sorrow, my sorrow may serve Him.

He does nothing in vain. He knows what He is about.

He may take away my friends. He may throw me among strangers. He may make me feel desolate, make my spirits sink, hide my future from me -- still He knows what He is about.

Let us feel what we really are--sinners attempting great things. Let us simply obey God's will, whatever may come. He can turn all things to our eternal good. Easter day is preceded by the forty days of Lent, to show us that they only who sow in tears shall reap in joy.

Contemplate then yourself, not as yourself, but as you are in the Eternal God. Fall down in astonishment at the glories which are around you and in you, poured to and fro in such a wonderful way that you are dissolved into the Kingdom of God.

The more we do, the more shall we trust in Christ; and that surely is no morose doctrine, that leads us to soothe our selfish restlessness, and forget our fears, in the vision of the Incarnate Son of God.

May the Lord support us all the day long, till the shades lengthen, and the evening comes, and the busy world is hushed, and the fever of life is over, and our work is done.

Then in His mercy may He give us safe lodging, and a holy rest, and peace at last.”

John Henry Newman

This is a collection of quotatons woven into a whole thought by Le Proprietaire as a young man for a small circle of friends.

Why Does the Economic News Seem To Be So Different From Your Reality?

There are numerous vested interests on Wall Street, in Washington, and in the corporate conglomerates who see nothing wrong in distorting information, 'spinning the news,' and sometimes even outright lying, when it comes to reporting on the economic situation. They are promoting a story, and often an agenda.

They hide behind the safe harbor provisions of the law, and the subjective aspects of economics. They use euphemisms such as 'talking your book' to describe calculated deception.

The financial media accepts it, condones it, and does it themselves. As one financial news anchor, said shortly after the tech stock bubble collapsed in 2002, 'Of course market strategists and analysts lie. Everyone knows that. But no one made people buy those stocks.'

Straight news reporting is less seen in the mainstream media these days, since solid investigative journalism is considered too costly to the corporate management. Much cheaper to allow paid shills to take scripted shots at one another, in the manner of professional wrestling. This is how the voters are informed, and how public policy is shaped. And when it comes to economics, the establishment is firmly in control of the message. The selection of guests is carefully scripted to support a point of view.

Even on the internet, the offers come. The planted stories, the spin, the rumours, ad hominem slanders, whispering campaigns, and cliquish peer pressure to uphold the 'party line.' The rewards are connections to the powerful, invitations to important places and venues, access to names and associations, privileged access, visibility, to be part of the in crowd. This plays on a natural human tendency to 'go along to get along' and them to rationalize it all away.

As someone recently said to me, "What is truth?" Pilate asked the same question, and turned and washed his hands of it. Truth is an elusive objective, given the fallibility of our reason. Less a destination now, and more a struggle, a way of life. But we know when we stray from the path.

Most refuse the temptation, but some take the bait. And so you must be aware of this, and filter what you consume through your own common sense. You need to tread carefully, using the palate which you have, and over time you will become more adept at spotting the establishments serving honest fare and those offering artificial substitutions and false skepticism, the wink and a nod to a deception.

Wall Street Shills

"Further complicating the outlook is a more traditional issue: pronouncements by some economists on Wall Street and financial reporters in the popular media, who act as shills for the needs of Wall Street and political Washington. While there are a number of fine and honest economists and financial reporters in their respective fields, there also are those — often very heavily publicized — who spew Pollyannaish nonsense aimed at affecting public sentiment and/or the financial markets during troubled economic times.

Let me recount two personal experiences. Back in late-1989, I contended that the U.S. economy was in or headed into a deep recession. CNBC had me in to discuss my views along with a senior economist for a large New York bank, who was looking for continued economic growth. Before the show, the bank economist and I shared our views in the Green Room. I outlined my case for a major recession, and, to my shock, his response was, 'I think that pretty much is the consensus.'

We got on the air, I gave my recession pitch, and he proclaimed a booming economy for the year ahead. He was a good economist and knew what was happening, but he had to put out the story mandated by his employer, or he would not have had a job.

More recently, following an interview on a major cable news network (not CNBC), I was advised off-air by the producer that they were operating under a corporate mandate to give the economic news a positive spin, irrespective of how bad it was."

John Williams, Shadow Government Statistics

"Do not conform youself to the common pattern of this world, but be transformed by the renewing of your mind." Romans 12:2