Friday, September 28, 2012

Learning From The Bolsheviks

As we move into October, a look back at this month in 1917 may be in order.  The Russian revolution has for some time been one of our favorite events to study.  Most people falsely assume that their current circumstances are unique and their future condition can not possibly be predicted.  We posit that humans have behaved as designed for their entire existence as a species.

When studying revolutionary Russia, what stands out to us is that there was an impoverished mass.  This mass was mobilized for the benefit of a few.  Once power had changed hands, the mass was actually in a far worse condition than before.  Independent thinkers began trying to persuade their fellow citizens that perhaps life under the Czar's rule was not as bad as they had thought.  These thinkers were sterilized either in gulags or graves.

Take an objective look around the world and see if you can identify the source of the pressure that is bubbling up in the developed world.  Liabilities have far surpassed assets creating technical insolvency.  In the US alone, unfunded liabilities have topped $80,000,000,000,000.  We should remind readers that $80tril is 5.5x annual US GDP.  Also, the current federal debt is 115% of GDP and is being financed by the creation of new debt which the central bank purchases.    

We are not just picking on the US, the entire developed world shares this condition.  France is responding to these pressures with an outright confiscation of productive income creation.

Consider this set of conditions and compare them to what we know about human behavior in a historical context .  A mass has been created.  This mass expects to be cared for and nurtured by the state.  This mass is growing at a rapid rate.  The mass has no productive capacity outside of its ability to employ elected leaders.  These elected leaders must remain in office which requires them to continually pacify the mass.  Here is an example of the mass demanding services in the US.

Who pays for this?

We urge you to stop dreaming of a republican president and start facing reality.  France is showing you what the future holds for the shrinking productive class in the US.  When your productive capacity is 95% dedicated to caring for the mass at least you will not be able to say you were not warned.

Wednesday, September 19, 2012

Might As Well Buy A Treasury Bond

What can we say about this?  Even makes mining stocks look safe!

Sunday, September 16, 2012

General Observations

We have received several emails regarding what some of you have incorrectly perceived as an editorial sabbatical.  Simply put, there is not much to comment on at this time.  Sure, the world seems like it could be on the verge of a severe and violent eructation but we have already covered the catalysts.  Feel free to Google search our extensive archive using the box in the right column of this page.

The US Election

We suggest you limit the amount of mental capital spent discussing or reviewing this issue to a maximum of 20 hours between now and Tuesday November 6th.  It is especially important not to broach this subject with Fox News disciples or deluded, old-guard republicans.  This subset could possibly be the most unaware faction in the US today and while we wish them the best, they can only knock us off the beam of objectivity.

The cold hard truth of the choice given to US voters is that it does not matter who is elected.  Both candidates will fight to market themselves as different in their own way but the path of the US will not change materially in either case.  While you may not like reading this statement, we urge you to consider it as only one opinion.  If it disturbs you too much, maybe we are not so off base.

During the past 12 years the executive branch of the US government has been occupied 66.6% by republicans and 33.3% by democrats.  Over this period, outstanding debt has risen from $5.67tril to over $16tril, or 183%.  Over the same period, US GDP grew from $10til to just over $14tril, or roughly 45%.

What many fail to grasp is that the freedoms available to tax paying US citizens have been under constant pressure during this period.  The US government now retains the same controls over citizens that you would expect when reading Orwellian fiction.  Consider the powers granted under the 2011 NDAA which deem statements critical of the US regime to be in line with its enemies and authorize detainment of those making such statements without trial or due process.

While the origin remains disputed, we credit Goldwater with saying, "Remember that a government big enough to give you everything you want is also big enough to take away everything you have."

Turn off the TV this election season and pick up a copy of The Creature From Jekyll Island by Griffin if you want to make more sense of what is happening.

M.E.N.A. (Middle East & North Africa)

Most casual discussions surrounding the events taking place in the Middle East lack substance or an understanding of history.  The US and the UK created regional stability during the first half of the 20th century in order to secure supplies of low cost energy.  Strong men were installed in each country and were provided sufficient intelligence and weaponry to defend their position as long as they kept operating conditions stable for select, connected western corporate interests.

The abusive currency debasement carried out by the US over the past decade drove several of these leaders to attempt a break from the historic Petro Dollar tradition where by all oil trades settle in USD.  The US responded by destabilizing the countries which it had not already occupied over the past decade.  The only exception to this has been Syria where US narcissism has been resisted by Russia overtly and the balance of the world covertly.

So what is happening now?  Don't be surprised to learn in the future that the embassy attacks of last week were funded and encouraged by US and Israeli intelligence interests.  The media will now assist in creating the public perception that more military action is required to avenge these attacks.  The public will be instructed as to who they should blame and hate.

The result will be more war, more death, more banking profits and more cash to fund the war machine.  The elite have a goal of perpetual war which keeps the public distracted as they reduce freedoms and loot the treasury.


Most readers know us for our economic commentary so now that we have covered the mainstream distractions we move back to familiar subject matter.  The market and media luckily still haven't the foggiest idea what gold is or why it is important.  This is good for savvy investors as by the time the Wall Street Journal sanctions your gold investment you better be selling.

Roughly one year ago we hit an all time nominal high in the spot price of gold.  Silver had reached its nominal peak 5 months earlier.  Over the past year we have been in a very healthy and normal consolidation.  The rise from summer lows was predictable and stable although we would not be surprised to see a pullback over the next 2-3 weeks before making a year end assault on the $2,000/oz level.

The same can be said for silver although the target year end level could be in the mid $40s as it eventually surpasses last year's high on the way to $60/oz.

While charts on the metals are interesting and encouraging if you have a long bias, the mining shares are far more exciting from a risk capital perspective.

As a reminder, US federal law requires that we suggest you speak with your knowledgeable and wise financial planner regarding any decisions.  We are not deemed competent by the US feds who ironically have created the bizarre set of economic circumstances you are attempting to traverse!

Best of luck always and we will post relevant comments when necessary.

Wednesday, August 22, 2012

Why Pensions Matter

Most of what we have to say about pensions can be found in our article on the subject.  US Pension Liabilities   The market still does not seem to notice what lies ahead.  The entirety of the pension space is underfunded by a staggering margin.  What makes this more alarming is the fact that many accepted actuarial and asset return assumptions are grossly misstated.

To further break this down for new readers, consider the following simple example.  A pension fund has assumed liabilities of $100,000,000.  They are using the accepted US life expectancy of 78.2yrs as a variable input in estimating the length of benefit payments per participant.  Finally, the fund has determined current cash contribution requirements by estimating that the value of the assets owned by the pension plan will appreciate at 8% per annum.

The economy has been contracting and the company has struggled to fully fund the plan's contribution requirements over the past 4 years.  During this period, health care related costs have been rising.  This has caused upward pressure on outflows related to delivering promised care to plan participants.  The company in our example is a technology firm and its employees have lived a healthy than average lifestyle.  They are outliving the 78.2yr life expectancy of the average American which was used when making plan assumptions.  Also, the plan has modeled 8% per annum asset appreciation in their assumptions.  We are currently in a negative real rate environment which has caused the plan to return between 1-2% per annum, further widening the funding gap.

When improper assumptions are adjusted, the plan is found to have actual liabilities of $120,000,000.  The company is forced to make one of only two choices:

  1. Ask the current employees to double their contribution to the plan each pay period in order to help prevent the plan from failing
  2. Reduce benefits immediately in the form of lower monthly payouts and less healthcare related services     
Which of these two options do you think the parties involved will be in favor of?  We will tell you exactly what will happen as human nature is easily predictable.

Current employees will demand a reduction in retiree benefits noting that the under-funding occurred long before their employment.  Retirees will demand that current employees contribute more as they deserve the benefits that they were promised.

We don't necessarily care who wins this argument.  What we concern ourselves with is what sector will desperate pension fund managers seek out when 1-2% returns are no longer acceptable?

Monday, August 6, 2012

Who Can Take This System Seriously?

Over the past 15 years we have seen the most massive deregulation of financial oligarchs in civilized history.  During the same period, any non-oligarch entrant into the finance world has discovered that life in a super-max prison would be less restrictive.  Financial oligarchs do what they want when they want.  When trades go their way they win.  When trades go against them they have them reversed.

Compare this record to your own results during the volatile first quarter of 2012.
So naturally when the oligarchs install their handpicked watchdogs to squelch any entrepreneurial spirit we may mistakenly exhibit, we are skeptical.  Let's not forget the track record of these trusted public service.  While they vigorously attack anyone attempting to challenge the established financial class they have somehow missed these events which caused immense real pain to the populace they claim to protect:
  • Bernard Madoff $50bil scheme owned few actual assets as he served as NASDAQ chair
  • Alan Stanford $7bil investment scheme
  • MF Global over $1.6bil of segregated client cash stolen no charges filed
  • PFG Best $220mil of segregated client cash stolen while firm owner chaired regulator board
  • 453 US bank failures since 2008 and the list grows
We say all this to illustrate the point that today's Financial Times headline is hard to take seriously.
Consider Kwan Box comrade in arms Bill Murphy's statements before this same CFTC panel in 2010.  Your editor has known Bill for some time and this is a mere fraction of the evidence he delivered to the commission.

As long as connected parties are allowed to sell the market short without borrowing physical metal, regular investors don't stand a chance.  The mob captains running these markets have hand-picked their watchdogs and the interest of the public are secondary.

Thursday, July 26, 2012

Man Overboard

Interest rates have been falling for over 30 years.  Most investors in the market today have no understanding of what a rising rate environment feels like.  Their Pavlovian response to consistently lower rates has left many dangerously exposed to perils which they are unable to see.

Bonds are discussed in terms of yield while they trade in terms of price.  Higher prices beget lower yields.  In order for prices to rise, a buyer on the margin is needed.  For newer readers, this means there is one extra buyer at auction creating demand for the last note sold.  This keeps the price firm and causes the bonds to trade at a premium, or a lower yield.

In the late 1980's Japan experienced an impressive economic boom ending with a Nikkei high of over 40,000.  As the economy began to contract, large heavily levered banks felt increasing stress and clambered for relief in the form of central bank easing.  As the central bank purchased government debt, they softened the blow of the contraction.  Typically the effects of a hangover are in proportion to the excesses of the preceding behavior.  The Monday morning screwdriver is not a solution free of consequences.

Pension funds and traders saw this trend clearly and began to front-run the central bank's actions.  Two decades later, the Nikkei is just over 8,000 and the 10yr rate of return offered for lending Japan money is 0.75%.  As long as everyone keeps buying the debt, things are fine.  So, what is the problem?  At some point, a large buyer is going to make an economic decision that 0.75% is not adequate compensation.  

Let's take a look at the world's largest pension fund, Japan's very own GPIF.  The fund has obligations to a society in which retirees are beginning to outnumber young workers paying into the system.  Next year GPIF is slated to incur a 7.8% disbursement liability.  How can the fund manage this escalating burden of planned redemptions when nearly 65% of their assets are invested in securities yielding only a tenth of the cash need?  Also, once they have become net sellers, the price of government debt is likely to soften.  This will lower the value of their massive bond holdings and apply further pressure to their situation.

Monday, July 23, 2012

Why Is Jon Corzine Not In Jail?

We have had two incidents of direct theft over the past twelve months in the futures brokerage industry.  What is astonishing is how differently they have been handled.  

Russell Wasendorf sits in jail facing severe charges.  Perhaps his mistake was not stealing enough?   It appears he only swindled $200 million.  Federal prosecutors wasted no time taking him into custody.
Jon Corzine supervised a disappearing act involving 8 times that of Wasendorf's and he walks freely down the streets of East Hampton, NY this summer enjoying a premium cup of coffee.
How can citizens in the US take this seriously?  Consider this dispatch from the CME today.  Notice that they directly acknowledge fraud in both cases!  They even name a new regulation after him!  Why is Corzine on vacation in the Hamptons?

Tuesday, July 10, 2012

US Oligarchy

The US is a great place to be an Oligarch.  You are permitted to steal with impunity from people who are too brain dead to notice they are being robbed.  Also in the US it is inexpensive to gain oligarch status.  In other societies you have to fight your way to the top and vigorously defend your power.  In the US it only takes a few hundred thousand dollars in campaign donations to buy immunity.  Let's take a look at the differences in treatment between an oligarch and a common citizen when committing crimes.  

At the end of 2011 these two men held up a gas station in Arlington, VA.  They stole some cigarettes and the register cash valuing the total haul at a few hundred dollars.  These two were swiftly apprehended and a trial date was set.  The jury was not sympathetic in this case as the sentencing shows.  They will have 24 years between the two of them to think about their actions.
In this case, the US justice system seems swift and thorough.  The real problem for these two guys is they didn't think big enough.  In the US, a small crime gets you a big punishment while a massive crime gets you a book deal.  

Let's take a look at a good example in the form of former Goldman Sachs CEO, NJ Senator and NJ Governor Jon Corzine.  Here is a man who gets the system and understands how to make it work for him.  He is not going to waste his time robbing a gas station.  In fact, he probably would not be able to locate a gas station considering he has not likely driven himself in 30 years.  When he pulls a heist he does it right.

Around the same time the previously discussed bandits were pulling their heist, Corzine was just wrapping up a $1,600,000,000 holdup of his own.  No guns were needed as he made effective use of political bribery and good politics.  Even though in the US it is illegal to speak of securities without being licensed and fulfilling an endless list of regulatory requirements, Corzine received a special waiver from security industry licensing requirements.      
So let's take a deeper look at what went on in the final days of MF Global.  When you open a trading account, cash and certain securities are to be held in a "Segregated Account."  In the event that the dealer becomes insolvent or runs into other troubles, your assets are not liable for their behavior.  

Between the CFTC, SEC, FINRA & NASD there are bureaucratic mules of mediocre intelligence by the thousands tasked with regulating this industry.  Instead of protecting you, they spend all of their time preventing people from entering the business in order to protect the oligarchs.  

MF Global placed trades in its own account separate from those handled for customers.  This is perfectly legal in a post Glass-Steagall era.  The firm was leveraged 40:1 on their actual capital meaning that a trading loss of 3% puts them in the red.  Last October the firm was sustaining serious losses driven by heavy exposure to insolvent European sovereign debt.  JP Morgan called in a large credit line extended to the firm for trading purposes.  There was no money to return so JPM simply seized the money it was holding in segregated accounts on behalf of the firm.   The lying and deception that shrouded this series of moves is typical.  
Are you surprised to learn that customers still have not received their cash which regulators had assured them was sitting in segregated accounts?  They are now hoping for a partial recovery in bankruptcy court.  Does it surprise you that Corzine has not been charged with any crime and faces no liability for the money lost by innocent and unsuspecting customers?  He has actually rented new office space on Wall Street and continues to exist as a pillar of finance in the US.  As for the $1,600,000,000 lost, he is deeply sympathetic.
This morning we woke up to news that the regulators had failed again.  This time only an estimated $200mil in segregated customer money is missing.  
Remember, the lesson here is that in the US there are two sets of laws.  If you rob a gas station you are a felon but if you rob 36,000 people you are a distinguished public servant.  It seems that Stalin is credited for a similar quote regarding his brutal behavior in office.  He would like the US system.

Wednesday, July 4, 2012

Happy Dependence Day

We would like to wish everyone a very happy Dependence Day.  Most Americans are confused as to the origin of this day but we encourage them to just continue understanding it as a day to stay home and grill out.  Historically this was a work holiday but considering nearly a quarter of the workable population has no occupation this has lost meaning.  Also, we don't want anyone to feel stress when determining what consumables they will need for their barbecue so it is a good thing they can turn to the government for sustenance.

Enjoy your day today and toast your aluminum cans to the government that can issue 10yr debt at 1.6% while blatantly redistributing the proceeds to an every growing welfare state.

"The natural progress of things is for liberty to yield, and government to gain ground." - Thomas Jefferson to Edward Carrington, Paris, 27 May 1788


Monday, June 18, 2012

What is £140,000,000,000?

Shares of British banking interests were euphorically higher Friday on news that the privately owned Bank of England would mint a fresh £140 billion in an effort to further delay their dealing with reality.  
These days, an objective take on reality seems to be a useless commodity in the investment world.  What matters most is what will happen in the next 5-10 seconds.  Long term investors will ponder what the Greeks will do over the weekend and those with a super long term focus will look to Wednesday's federal reserve meeting. 
We felt it could be useful to apply some of our out-of-date and caveman-esque logic to this situation.  This is perhaps a vain attempt to illustrate what the investment landscape could look like in the far away distant time knows as next year.

As of this morning:
£140,000,000,000 = $219,408,000,000
As reported by the World Gold Council, the 5yr average annual worldwide gold mine production is:
2,377 metric tonnes
This translates to:
76,422,324.67 troy ounces
At $1,621.60 per ounce, annual mine production is worth:
So, as far as we can tell, the Bank of England just magically created from thin air a new batch of paper worth:
of the market value of the gold mined in an entire year!

Printing paper is certainly much less stressful than risking capital as a gold miner.  We can only wonder how long these privately owned central banks will be able to maintain public confidence in their worthless paper?

Sunday, June 10, 2012

Is The Market Sending Familiar Signals?

In a mere 72 hours we have seen Spain go from a statement that no funds would be needed to what looks like a €100bil in bank backstopping.  We are clearly in an environment distorted by media complacency.  The press is more than willing to release what they are fed instead of raw facts.

In the following piece we break down the facts about sovereign debt.  More importantly, we examine what the central banks are doing while ignoring what they are saying.  Several interesting conclusions can be drawn.

Is the Market Telling Us Whats Coming

Wednesday, June 6, 2012

Quick Market Update

We have received several inquiries regarding our recent silence so a quick update is in order.  Our dormant state can be attributed to the fact that there is really nothing to say.  We know where things are headed in the intermediate term but with powers at the top battling for control in an twisted version of the game Risk, we now sit waiting in purgatory.

The news has long been a medium of choice for controlling mass psychology.  While we are tortured by emotionally charged soundbites, objective reality seems to escape us.  Here are a few snips we find interesting.

Are we finally allowed to connect the dots for ourselves to see that the bailouts for Greece were only to repay certain bondholders while the European public was loaded with fresh liabilities?  What you must understand is that the playbook calls for creating a situation where the European public as a whole is in financial peril then offering a solution.  The problem is that the same people who profited from creating the problem are suggesting that they should administer the solution.  When we you see this?
What?  Are they assuming we have no memory recall for the emotionally charged LTRO solution ushered in only weeks ago?  Any bond issues with a duration under 36 months are fully guaranteed by the ECB.  So how is it news that they will issue just a microscopic amount of debt outside that guarantee window?  Spain is desperately tethered to excess bond issuance in order to maintain fiscal and, more importantly, social order.

Let's not forget that we are funding militant efforts throughout Syria in order to create chaos which will be followed by our offer to administer a solution via a brief occupation designed to "liberate the people."  This has not gone so smoothly though as Russia spent the last 10 years developing a foothold in Tartus.  This key coastal Syrian city has become a reliable resupply point for their Mediterranean naval fleet.

Also, remember that the US bullied Iran by discontinuing their access to SWIFT earlier this year.  This makes international trade virtually impossible as payments can not be settled via wire transfer.  As sanctions take hold the Persians have resorted to bartering and gold settlement in an attempt to remain in control of their economy.

Just as a geographical reminder, Iran shares a border with Turkey.  Turkey shares a border with Syria.  Turkey and Russia share the Black Sea.  Istanbul is the gateway from the Black Sea into the Mediterranean.      You might be able to connect the dots and understand the importance of the Syrian port at Tartus from the Russian perspective.  
Perhaps you are grasping the nature of our recent silence.  What is there to discuss when we are pounded with these headlines which mean nothing other than 100 Dow points either direction before reversing course overnight.  Short term markets are untradable in this era as they open higher or lower offering almost no intra-day movement.

At least there is one section of the world that seems to understand human nature or at least sees that the same playbook has been used for hundreds of years.  They also know that there is one particular trade which involves no counterparty risk and is dirt cheap at this time on a relative basis.

Thursday, May 24, 2012

The US Dollar

We currently live in a world characterized by competitive currency devaluation.  The competition is between the world's most prominent central banks.

Central bankers fear deflation more than any other economic phenomenon.  Understanding that these bankers are puppets, installed and controlled by commercial bankers, is important.  A deflationary environment makes debt repayment more challenging.  As we know, commercial banks are thinly capitalized.  In some cases as little as 5% of loans failing in a given period can render the institution insolvent.  Luckily they have installed some of their own in a position that allows for continuous life support in times of trouble without giving up profits when times are good.

As we forecast what might be next for the world's developed economies, it is important to realize that looking ahead requires a multidimensional thought process.  It is also critical to be prepared for the unintended consequences that come with manipulating the value of money.

What is next for the US dollar?  
As we see it, the dollar should resume weakening against other currencies.  The RSI indicated exhaustion at this level making a breakout to new highs unlikely.

But, it is critical to remember that as Hoover described in recounting the events of his presidency, capital can flow wildly between sovereign nations during times like these.

Considering every factor that we are able to study at this time, precious metals appear to be the most attractively priced asset class.  Specifically, we favor quality mining firms in the early phases of production with competent leadership at the helm.  The risk/reward is so drastically skewed in this sector that risk taking can be diluted to just plain taking.  When the market removes the risk premium you are taking upside only.

Wednesday, May 16, 2012

Paper Gold & Silver Ponzi Exposed

Anyone watching the gold and silver market understands that something is not right.  KSIR Capital objectively looks at the fundamentals to expose that there seems to be no one behind this current move.

Paper Gold and Silver

Monday, May 14, 2012

A Message To Charlie Munger

Dear Chuck,

Your comments on gold deserve further review.  We understand that buying a share of Berkshire in the 1960's has been a good investment.  This is not a relevant benchmark to gold as the US was held to a fixed exchange standard of $35/oz for a portion of that period.

We feel that a fair comparison would be the last 5 years.  This period is more relevant as the average citizen does not have $30 billion in cash to cut deals like Berkshire.  In fact, we are facing negative real interest rates which forces us to shelter capital in a currency other than the one your bosses have high-jacked.  

Here is a 5 year chart comparing Berkshire to a paper gold ETF product.  Due to your deteriorating condition we should point out that the red line represents gold and the blue line is your stock price.

You also cleverly likened gold buyers to Holocaust era Jews.  This is not entirely off base.  Do you know what these Jews were facing at the time?  Survival was their foremost goal.  In markets today Chuck, we too are striving for survival.  Financial repression is not an easy investing environment.  We are attempting to preserve hard earned capital as we are not connected enough to participate in the bailout programs that you and Warren are privy to.

Finally, if memory serves us correctly your occupation is in the legal field?  Since you impossibly suggest that we should have purchased Berkshire in the 1960's maybe we should suggest you seek work as a lawyer today?  Due to your self-proclaimed "humble roots" upon exiting law school you would begin servicing a mountain of student loan debt.  Also, you better be sharp as there are 2 lawyers graduating for each job in the field today.

Remember Chuck, if you were not with Warren you would be supplementing an $800 per month Social Security check and facing Medicare cuts this November.   We suggest the following would be a suitable way for you to participate in the workforce today.


Thursday, May 10, 2012

Market Update

The following market update might help make some sense of how disconnected we are from the mean.
Market Update May

Wednesday, May 9, 2012

Land Of The Free?

It seems the citizens of the United States have no clue how restricted their choices have become.  When the "freedom" we have been taught we have comes into question, heretics are quickly labeled negative and shooed away.  As patently ridiculous stories of foiled underwear bombers dominate headlines, the congress continues an unabated sprint towards serfdom.

If you beat the odds and somehow navigate regulatory and legal hurdles successfully, you may quietly make something of yourself.  Next you will face the difficult task of investing the 40% your profits that were not consumed by lawyers, accountants, lobbyists, city, state and federal taxes.  Investing at home will be a challenge though as the Federal Reserve has set capital return controls on asset prices limiting your returns to nearly zero.

Also, we had a housing crisis which somehow caused lawmakers to respond with the most punitive set of laws free markets have ever seen.  It is now a virtual felony to even speak about markets outside the offices of Merrill Lynch, JP Morgan or Goldman Sachs or a major sanctioned bank.  We are still unclear as to how this will prevent another housing crisis?

You can forget about investing abroad as only someone running a scam will take your US derived wealth now.

Thursday, April 26, 2012

Centrally Planned Economics

Investors in the US need to realize they do not live in a free market.  Centrally planned policy has distorted economics in such a way that nostalgic investors face tremendous peril.  Reading books about Warren Buffett, maintaining loyalty to a Wall Street Journal print subscription and putting a Romney '12 bumper sticker on your car is not an action plan.

The central bank of the US is privately owned.  Anyone under the assumption that this private institution has the public's best interest at heart deserves what is coming to them.  The bank, like any well-run monopolistic corporation, has arbitrarily set the price for capital in an attempt to protect its own shareholders from suffering losses.  Romney supporters will frown at this notion but we question if they would allow a private company to set the price of all homes at $10,000 per bedroom?  Of course not, this is only something Chavez would do.  So why is a private company allowed to dictate the return on capital earned, saved or inherited by private citizens?

The weapon of US central planners is the treasury market.  This is the funding mechanism for the US government.  The US is currently spending over $300 billion per month yet it receives only $200 billion in revenue.  The balance is purchased by the private bank that possesses the right to create official US currency.  The are willing to finance this largess in exchange for carte blanche access to capital markets for the primary dealer banks.  They are allowed to run wild and steal from anyone they chose with impunity.

Is this far fetched?  Why has not one executive from MF Global been indicted in the wake of the company stealing $1.6 billion from customer accounts the day before filing for bankruptcy?  This money is gone and former account holders have no answers as to where it went.

As always, our mission here is to do what $250,000 in economics education failed to do.  We hope to help you cultivate your own ability to think.  How can we get out of the day-to-day emotionally charged news cycle and get into objective reality?

The first place to begin is with the fact that the US must issue $1.3 trillion more in debt than it receives in revenue.  So we know that someone must buy this paper.  Here is a chart of the three largest foreign buyers of US debt.  We urge you to notice that they are not expanding their purchases as a group.
What this means to us is Federal Reserve meeting minutes are utterly useless.  We know that the current Operation Twist expires in late June.  This round of counterfeiting has been effective but what will happen between June and the presidential election in November as $500 billion in excess treasury issuance must be absorbed.

As we consider these facts and lay them over a deep understanding of human behavior, it becomes clear that the society might feel pain for the next 6-8 weeks leading up to the expiration of Operation Twist.  We know that the central planners like the public to approve of, or at least not notice, each new counterfeiting program.

Notice the useless nature of this press release and consider that it is designed to make you think you are smart if you don't quite understand everything the great central planner is saying.  As a side note, you don't understand because it must be translated into plain English, "We are going to debase your currency and use your money to acquire wealth for ourselves for as long as you allow it then we will leave you stranded like a dead carcass....Thank you for listening."  

Tuesday, April 24, 2012

What Does Fascism Look Like?

"There's no way to rule innocent men. The only power government has is the power to crack down on criminals. Well, when there aren't enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws."   
                                                                                                                                                 Ayn Rand, Atlas Shrugged

Today the SEC announced action against what we see as the only competent ratings agency, Egan-Jones.  They are also personally gunning for Sean Egan.

The charges levied are hardly relevant.  The SEC has so many regulations that even the nations top securities lawyers concede they are not fully aware of them all.  The reason that an agency behaves this way is they must maintain the ability to apply laws when necessary so as to control market participants who challenge the agenda of their superiors.

We suggest you consider the fact that Sean Egan's firm downgraded their rating of the US Treasury's fiscal condition twice.  The firm, and its namesake, made the critical mistake of challenging a fascist regime by stating the truth.

The US government is technically insolvent as it borrows nearly 50% of its annual budget.  The nations power elite seem determined to maintain a dependent welfare state and unquenchable thirst for senseless war.  Anyone who uses logic, reason and facts to asset that this behavior is unsustainable will be burned at the stake and demonized by the strong arm of the state controlled press.

Tuesday, April 17, 2012

Silver Supply At Historic Low

A clear understanding of the silver market seems to elude even the most seasoned market participants.  We have made every effort to properly characterize the fundamental makeup of this market.  Our efforts are rooted in the singular mission of helping you develop an ability to think objectively.  Through an objective lens, dislocated markets become visible opening a profit window.

Silver currently exhibits a very intriguing set of market conditions.  From a technical perspective, few charts are able to develop the pressurized conditions now visible in silver.  Exactly one year ago, silver began a violent three phase consolidation.  We now suspect that this consolidation is nearing completion.  What we would like readers to see is the disciplined behavior of the metal throughout this period.  As frequently discussed here, pennant formations of this size typically create explosive directional breakouts once completed.
Also note that an MACD reading of nearly 0.00 for almost a month now further confirms our suspicion that we have reached the tip of the pennant.  Simply put, there is no more runway available and the pilots must pull back and lift off or ditch the plane in the river.

We have focused on technical indicators to this point, but what about the underlying metal?  Referenced in our February piece on silver fundamentals, annual mine production is reported at roughly 700mil ounces.  In order to meet annual demand of 1bil ounces, scrap supply and government sales have been required.

This is far from a pure supply and demand equation though.  The silver market is heavily influenced by futures contract pricing at the COMEX.  During the most violent sell-offs of this consolidation, we saw days where more than one year of mine production changed hands in a single trading session.  The controlling entities at the COMEX have maintained a firm grip on the price discovery process up to this point.

We would like to direct reader's attention to the registered inventory held for deliver in COMEX vaults.  Currently, there is less than 4% of annual mine supply available for delivery.  In our view this is further evidence that we have reached the technical end of the runway.  Simply put, prices must rise in order to attract more physical silver into the delivery pool.
The pennant formation in our first chart allows for another 6 weeks of consolidation.  The breakout will confirm the direction of the move which will remain in place as a trend during the next cycle.  Time sensitive investments are discouraged as the market will dictate the rules and being tied to a desired result in your time is not a smart strategy.

Monday, April 16, 2012

Land Of The Free?

What is freedom?  A fair definition might be found in the following statement:

"I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for mine."  Ayn Rand, Atlas Shrugged

The average US citizen disregards this statement as irrelevant.  Further questioning might reveal that life in the US is increasingly burdened by an obligation to the state.

The cornerstone of true freedom is an unencumbered mind.  Man separates himself from animals when he uses his ability to organize efforts in conjunction with properly perceived metaphysical realities to pursue a uniquely individual vision of success.  

When metaphysical realities are hidden from man he is unable to effectively organize his efforts.  His hard earned experiences are of little benefit as the conditions surrounding his life are subject to change at the whim of a controlling entity.

The internet has provided more than a decade of open access to information.  Just as the printing press threatened controlling entities of the past, the internet challenges today's power interests.  Don't expect gossip websites and entertainment outlets to be censored though as these are useful distractions.  Think of them like an entertaining street performer who distracts you as his accomplice steals valuables from your parked vehicle.  The censorship only applies to concepts and metaphysical truths that would alert a thinking man to conditions requiring action.

Brin has an interesting perspective on life as his family escaped the same mental tyranny that Rand passionately warns readers of.  How will these interests that Brin mentions go about protecting their power?  In typical fashion, they will use the taxes of the people they plan to censor.


Wednesday, April 4, 2012

Dear Argentine People,

Dear Argentine People,

Long ago in the year 2001, your ancestors took to the streets in riotous protest of your leaders' blatant economic mismanagement.  Having studied these events in great detail we can confidently tell you that excessive leverage and a stalled economy, corrupted from the top, caused these conditions.  In short, your nation became unable to finance its out of balance fiscal condition through continued debt monetization.

What concerns us now can be summed up in the following two images.  First, your central bank is controlled by an agent of private institutions who will not be available to help you once they have finished devouring your nations assets.
Second, and perhaps most troubling, the leader of your central bank is openly telling you that she plans to follow the exact same path that led you to the previous collapse.

Finally, our firm has recently liquidated holdings of mining shares doing business in your beautiful country.  We can no longer be exposed to your government which has begun imposing nebulous taxation policies on productive enterprises; it creates too much uncertainty for us.  We are moving our capital to safer jurisdictions.

Maybe you have dismissed our comments as unwarranted or ill-informed.  We are merely observing your choices from another hemisphere but our firm grasp of economic law gives us this prescient opinion.  How can we be so certain?  Only a leader intent on protecting her own power even if it destroys the society that elected her would respond this way to outraged former shareholders of YPF, the private oil company that she barbarically seized.
This is not the end of our relationship.  Once you have successfully driven out private industry and debased your currency we will return to purchase land and resources which we will sell back to you after you recover.

Farewell but not goodbye.

Tuesday, March 27, 2012

"I'll Just Hold Until Maturity....."

As we suggest that municipal bond owners check their premise against the backdrop of reality, no one seems to comprehend what we are saying.  We must resort to a pictorial sketch of the severe principal reduction they are about to experience.  Look at the bright side, they will have 10 more years of 3% coupon payments to help them survive 10% per annum price inflation.  Those coupon payments will make them feel smarter than the ignorant gold bugs who receive no dividends.  The gold bugs will be jealous of the bondholder's unrealized 40% losses.  Goldies will actually have to pay taxes if they sell their appreciating bullion and mining shares.

Maybe those blindly pouring money into the "safest" investment, bonds, are the smart ones?  

Sunday, March 25, 2012

Understanding Bubbles

We have written at length about the physics of bubbles.   Hot money flows into a sector and humans instinctively respond in accordance with their herd nature.  They almost can't help themselves.  Once other herd members boast of their genius they are subconsciously determined to get in on the action so as not to be perceived as slow or stupid.

What we are trying to show you is that most sheep get sheered over and over again because they spend their entire existence worried about what the sheep next to them is doing and how they are being perceived.

If your main concern is generating capital gains and protecting said capital, you tend not to care what others think of you.  You will also begin to expect your opinions to be unpopular and keep them to yourself.  As our mentor famously says, "When you are first, you look wrong."

In order to accurately spot a bubble waiting to burst, you must look for one key indicator.  The pool of possible buyers must be exhausted or nearing exhaustion.  Then, you can seek confirmation by watching for a rapid double in price taking place in a 6 month period.  This will be followed by a waterfall event.

Let's take the technology bubble of the late '90s as an example.  The Nasdaq QQQ experienced strong yet normal capital inflows during the latter half of the '90s.  Then the index doubled between Q3 '99 and Q1 '00.  Notice the highlighted area in this chart:
That was a really big move as the index rose from 2,500 to over 5,000.  Most alarming is the nature of the move.  The horsepower was entirely retail oriented.  We remain shocked at how many average people owned shares of firms that they knew nothing about.

In more recent memory we had the housing bubble.  February of 2007 remains our peak date for the sector.  At that time even your editor's local Starbucks Barista was boasting of expected future profits in a condo deal.  He had no ability to compute the comparitive cost of renting or view housing as a consumption item.  With no money down, no sector knowledge and poor capitalization, he fit the profile of the last available buyer.

We know that the current bubble is of a sovereign debt nature.  This will be the most painful burst as the counter-party faith is blind and unquestioned.  Another hallmark of bubble formation is unquestioned loyalty.

So, we are charged with spotting sectors that no one notices.  They are economically dislocated and characterized by extreme value gaps.  We are unable to ignore the precious metals mining sector.  For over 30 years the sector has been hated.  As we comb the surface for values, the sector looks like a poorly advertised Neiman Marcus after Christmas sale.  Debt free firms producing gold profitably are run by committed managers with large personal share holdings.  Combine this with the sheer hatred of the sector and our instincts seem to be confirmed.  As the sovereign debt bubble wipes out the sheep's percieved safety vehicle, we expect precious metals prices to soar as they form the next bubble.  We can already hear the Starbucks Barista, "I'm taking what's left and buying one gold coin I found on ebay.....I don't want to get burned again."

Could this be an indicator that we are nearing the realization that social media share offerings and iPad introductions are not the foundations of a real bull market?  Remember, we need to see total disdain in order for valuable shares to be abandoned at rock bottom prices.  This is the ideal entry point which the sheep are unable to understand:

Consider that the average market participant gives no consideration to mining shares while the companies are experiencing record margin growth:
Average Gold Producer Profit Margins
When we see a sector this fundamentally strong being ignored on a wholesale basis, our attention is peaked.  The continuing and impressive growth in earnings is going to make this space increasingly difficult to ignore.

Thursday, March 22, 2012

Here It Comes.....

We have consistently lobbied for you to awaken your self preservation instinct.  Some readers perceive our comments as negative or pessimistic but we are trying to help you see that the productive class is the only possible payment source for the country's kudzu like debt.  The welfare state certainly will not be capable of footing the bill for its excesses.  The Afghans will not be repaying the $3,000,000,000,000 spent "Liberating" them from the mystical threat they allergically faced.

Here is how Turkey suggests its citizens help close the deficit gap.  A suggestion to the Turks; consider not complying with this mandate.

Monday, March 19, 2012

Wake Up America

The citizens of the US remain the most unaware population on the planet.  "Freedom" in the society has been reduced to the ability to chose between Coke or Pepsi, Doritos or Pringles.  In late 2010 we wrote about the groundbreaking ceremony for the world's most state of the art spy facility.  This will be used to spy on the citizens of the US not a foreign enemy.  This week Wired magazine published an interesting piece detailing the project.
Longtime readers will recall that our first comments focused in on the mysterious death of John Wheeler.  Wheeler had publicly questioned the project and spoken out against it on several occasions.

Here is what happened to Wheeler.
What is the lesson here?  If you speak out against the regime you will end up drugged, walking around with your shoe in your hand then dumped into a landfill.  The police will still be looking for the crime scene two years later.

Friday, March 9, 2012

Rare Earth Sector Consolidates

For some time now it seems that we are the only set of eyes watching the rare earth sector.  Our favored picks are largely debt free and sitting on significant, high demand deposits.  Today's announcement is only a reminder of what the future holds for this misunderstood sector.
If your broker has difficulty accessing accurate research on this sector please consider our rare earth research report.  A link is available at the top of our homepage.

Thursday, March 8, 2012

While You Were Watching The Debate.......

We suggest you detach from the obsessive nature of politics as a spectator sport.  For years now we have tried to demonstrate that these pseudo-actors on the television are nothing more than modern gladiators.  They fight for their bosses and accomplish the mission of distracting you from reality.  There is absolutely nothing of significance emanating from your television set or propaganda source of choice.

While you were under media induced induced hypnosis, we have been paying attention for you.  There are some things that you might want to consider.  Your country meets the accepted definition of insolvent.  42% of federal dollars spent this fiscal year have been borrowed.
This will not continue.  There is no possible way that any entity can carry on behaving this way indefinitely.  At some point in the future, economic law will reassert itself.  Once reality is no longer avoidable, US citizens who chose today to behave as zombies will look for someone to blame for their condition.

Friday, March 2, 2012

What Happens Next?

We are constantly getting the question, "What happens next?" Unfortunately, most market participants are unable to objectively understand what is happening now. We have consistently tried to help our readers see that we do not possess a crystal ball. A persistent, rigorous, and ego-free quest for objectivity drives our work in markets. This is the key to profiting from what the masses are unable or unwilling to notice.

As we have detailed in previous posts, the privately owned US central bank has fully implemented a policy of privatizing profits and socializing losses. The privatization of profits exclusively benefits the Fed's owning shareholders, the primary dealers. The socialization of losses affects anyone using dollars as a means of saving or transacting business, i.e., you.

The following image depicts a battle which is currently raging in the public's mind. Ironically, only objectivists can see that a winner has already been declared. It will take the public some time to notice the outcome and this is often the case when you seek to drink upstream from the herd.
Market participation in bond funds is at record high levels. Savings accounts and certificates of deposits are stuffed with excess cash as investors fear deflating asset values. A basic understanding of economics would suggest that near 0% yields would curb interest in debt instruments and deposit products. People have chosen return of their capital over return on their capital.

So What's The Problem?

The problem is that we are not in a traditional market-driven deflation. A select few market participants, primary dealer banks, have been allowed excess liquidity via treasury churning as a means to repair their damaged balance sheets. Remember that the damage was caused by their manipulation of traditional market activity. While you are dealing with the hangover from the past excesses, they are having a Monday morning Bloody Mary party and you are not invited.

This is not a problem until excess liquidity begins to seep into the economy. As long as the public perceives liquidity to be scarce, there is no problem.

What to Watch

We are beginning to see the effects of this central bank behavior in markets. While the government uses Soviet-era tactics to assure the public there is no problem, astute market participants see otherwise. Remember that government inflation numbers do not include food, energy or anything that has risen in price.

With the average savings account returning less than 1% per annum, before taxes, savers are losing more than 7% on their money. We continue to wonder how they can be unaware of this reality but, so far, the Fed's mission has been accomplished. Once the herd is awakened to this, we urge you to pay attention in order to avoid being trampled as they rush towards speculative investments in a cloudy, panic-filled haze.

When bonds are sold at the margin, we expect sheer panic to ripple through the ranks of owners. Today's bond buyer is effectively last to the party and, as we know, most likely to get slaughtered. He likely has no idea that bonds trade on price not yield and can go down in value creating a loss for the owner. We have heard them say they don't care because holding to maturity is an option. Let's see if they are calmly holding that 2% treasury coupon 9 years from now.

The consequences related to a reduction in savings account balances is more dire. Banks have used excess deposits to repair their capital ratios and boost lending in what has been the best yield curve imaginable. Paying depositors 0.50% and being selective about loaning to only the best borrowers at 5-8% has been a business that only a gangster could dream of. Throughout this era, holders of bank stocks have been hanging on hoping for valuations to rebound while being totally unaware of increasing costs associated with banking. The Dodd Frank Consumer Protection act has increased the cost of a free checking account to over $400 per annum. Combine this with the worlds most tedious anti-terror documentation and operating a retail bank becomes expensive.

As soon as depositors begin to connect the dots discussed above, we expect severe tremors to be felt in the banking sector. At the start of this downturn, there were more than 8,000 banks in the US. We expect that number to shrink by at least 1,500. That leaves another roughly 1,100 as only 421 have failed since the beginning of 2008. Holders of bank stocks are totally unaware that the central bank is privately owned and will always act in the best interest of its shareholders, the primary dealers. Only a fool would expect otherwise.

Once banks have to compete for depositors the game changes. Being forced to pay competitive rates on savings products will end the yield curve advantage which they have only as a result of the massive levels of fear present in markets today. The costs associated with banking today will act as a death knell for smaller banks forcing them to merge or fold under the pressure of a weight they refuse to notice. Bankers are notorious for using the rear view mirror to predict the future. They do not see what is coming which would require looking through the windshield.

What To Do

We suggest you spend some time thinking about the concepts that we have discussed above. Notice the behavior of the public. Remove yourself from any attachment to a specific outcome you might desire. Try to objectively see the circumstances and catalysts present in the market today.

We suspect there will be a rush to speculative assets once the public wakes up. Volatile shares with promising upside are a likely home for "hurry up" capital being deployed by unskilled savers. Gold remains a core holding in our management strategy. Rarely do you see a product that rises 20% per annum in price while demand remains pegged at 100%. In this case, we suspect speculative mining shares will attract significant quantities of hot money.

You must make up your own mind as to the likely course this issue will follow. Read, study, learn, and question everything in your efforts to protect and grow your own balance sheet.