Best Quotes of June 2006
Great gold price spikes such as the one encountered in 1979-1980 were unusual events, but punctuated mankind's existence. Throughout history, when a country debased its money for an extended period, its citizens eventually recognized the reduction in purchasing power of their savings and wealth. When this realization spread, a panic for self-preservation erupted. The result was typically a flight from their currency, and a rush to exchange the domestic money for tangible items. The primary one was gold.
Privateer Market Letter
The global paper currency system is very young. It depends for its continued functioning on the BELIEF that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold.
Ted Butler, Investment
I am coming to the opinion that the CFTC, just like a fire department that won't respond to fire alarms, is doing more public harm than good by virtue of its very existence. It may be fostering the false security that someone is there to protect and that laws matter, when the opposite is true. By its inability or unwillingness to move against the manipulators, it is protecting them. If it were openly acknowledged that the CFTC was not there to protect the public, and was dismantled, the markets would adjust to that. At least we could save $100 million a year in taxes.
the Mogambo Guru
The latest "official" annual rate of inflation is 4.2%. Four point two percent! Even after all the rubbing and scrubbing and statistically falsifying of the raw price inflation numbers and "adjusting" the contents of the market basket they are measuring, this is the best lie they can come up with? Hahaha!
But I continue to be very impressed with the way gold and silver keep going down in price, when normally (and by that I mean in the entire rest of economic history since the first true fungi used protein strands as money), gold goes UP in price in economic situations like this. Up. Not down. Up.
This is an anomaly. And if there is one Gigantic Mogambo Truism (GMT), it is that anomalies do not last. The nice thing about anomalies is that people who bet against them continuing much longer therefore have a lock on a guaranteed profit if they can hold out long enough.
Fleckenstein, Fleckenstein Capital
The Fed knows the economy is slowing down. It's really dying to pause. But since so many have essentially laughed at it, the Fed feels as though it has to do something to make sure it's still perceived as being in charge.
As to what lies in store for the markets in stocks and metals, I believe that at some point, the tough-Fed trade will have been completely discounted by the markets, and then both stocks and metals will rally. But while stocks will just be rallying in a bear market, the metals' rally will be a continuation of the bull market they've been in -- although it's sometimes hard to keep that in perspective when the action gets as ugly as it has been.
Remember the reason to own metals in the first place: The Fed is not in charge. At some point, when the world understands that, it will cause an acceleration of the bear market in the dollar, and that will be the source of additional problems for the stock market. Metals, among other things, are an insurance against that outcome.
the Grandich Letter
For all those history buffs who wondered what it must have been like to have witnessed the fall of the Roman Empire, take heart - the fall of the American Empire is upon us.
While I believe geopolitical "safe haven" status is going to continue to benefit gold for the foreseeable future, I think the next up leg is going to be driven by the fall of the U.S. Dollar.
Hathaway, Tocqueville Asset Management
What we have is a horse race between the euro and the dollar as to which can first attain full investment dishonor.
Mauldin, Millennium Wave Advisors
New Home Inventory: What can you say about this? Builders have created huge inventory. It's no surprise that the enormous increase in Supply has impacted prices (Demand). The recent rise (since 2003) is historic!
2005 featured the last drunken push with respect to the Fed-induced, borrowing-infused, post-NASDAQ bubble money supply trade. Frankly, the 2003-2006 "recovery" was substantially a mirage -- built upon the ability of individuals to borrow money against their homes in order to stimulate the U.S. economy. U.S. central bankers did their best to give a Code Blue post-bubble patient handfuls of amphetamines to keep it on its feet until it had no choice but to collapse. But that predictable college try is over now; asset deflation has begun to take its inevitable post-bubble hold and the next several years will offer investors a sobering view of what really happens when investment manias end (in this case, I'm referring to the initial 80% crash of the NASDAQ, which took place from 2000 to 2002).
I believe the unfolding shift of finance to oil producers throws a problematic monkey wrench into the very premise of a manageable global monetary regime ("Bretton Woods II"). The proposition that our trade deficits were being driven by the purchase of under-priced discretionary consumer goods from undervalued ("mercantilist") Asian currency regimes must now be adapted. Going forward, a major part of our trade imbalance will be due to high-priced energy priced (for now) in our own depreciating dollar. Accordingly, the weaker the dollar the higher the ongoing bill for our oil dependency. The hope that a weaker dollar will rectify global imbalances can be thrown out the window, along with the dream that it will always be in the interest of our trade partners to buy dollar securities.
Whereas the normal pattern of the last five years in gold as I have described above would have expected us to see the commercial cartel covering or reducing their shorts and booking profits, the exact opposite occurred - the commercial shorts, aka known as the gold cartel, SOLD THE ENTIRE WAY DOWN - instead of REDUCING the number of their shorts and booking profits they actually PUT ON MORE OF THEM! The COT report reveals that they added a total of 5,282 BRAND NEW SHORTS as the price of gold collapsed. They have NEVER done this before during any time in this bull market in gold since it began way back in 2001.
What does this mean? - quite simple - it means that there was a concerted effort on the part of this group of short sellers to FORCE THE GOLD PRICE DOWN. They had absolutely no interest in booking profits on existing shorts as the price tumbled some $100. This is a stunning development as it clearly indicates a concerted attempt to derail what was becoming a runaway bull market in the gold price that was threatening to garner far too much public attention. Remember - gold's perennial function is to serve as the financial "canary in the coal mine" which alerts the workers to hidden, toxic dangers. Quite simply, gold's stunning rally to $730 in the matter of a few months time was sending shock waves through the corridors of the monetary elites who were "looking into the abyss" if gold continued its meteoric rise. Something had to be done and quickly or this thing was going to get out of hand.
Roach, Morgan Stanley
The "win-win" theories of globalization are in real trouble. The basic conclusion of Ricardian comparative advantage that all economists are taught to worship from birth holds that trade liberalization not only brings poor workers from the developing world into the global economic equation (win #1), but workers in the developed world then benefit by buying low-cost, high-quality goods from the developing world (win #2). The theory breaks down because of a new disruptive technology -- in this case, the Internet -- that dramatically accelerates both the speed and scope of worker displacement in the developed world. It used to be that such workers would eventually -- with considerable dislocational distress, to be sure -- seek and secure refuge in the non-tradable segment of their economies. The shocker is that the sense of security in services has effectively broken down. In recent years, IT-enabled connectivity has quickly migrated up the knowledge worker occupational hierarchy in once-nontradable services, denying displaced workers in the developed world the comfort (i.e., sustainable labor income generation) of enjoying the benefits of the second win of globalization.
Even if [Treasury Secretary-designate] Paulson tried to resurrect the mythical strong dollar policy, would anyone buy it? If a pot-smoking, class ditching, party hardy college student claimed to have a "straight A policy" would he automatically make the dean's list? Straight A's, like a strong currency, is an admirable goal, but it can not be achieved without hard work and sacrifice. In the case of a student, it means studying and not partying. For a nation, a strong currency requires savings and production, not debt and consumption. It also requires a central bank willing to limit currency and credit creation. We may have been able to con the world that such was the case in the roaring 1990's but there is little chance of us pulling that con off again today.
Shedlock, Mish's Global Economic Trend Analysis
The last US equity downturn was interrupted by the biggest liquidity experiment the world has ever seen with Japan, China, and the US all taking part.
Sprott Asset Management
It goes without saying that it has been of no small concern to the central banks that commodities have had a spectacular run in the first four and a half months of the year. Clearly, the central banks could not let this state of affairs continue while at the same time claiming that inflation was under control.
By mid-May, the housing market was clearly in decline and interest rates were rising across the yield curve. The financial markets and the economy were being threatened. Inflation had to be stopped in its tracks, come hell or high water. In many ways it was a desperate move - a gambit. They had to reign in liquidity (or at least appear to do so) and talk tough on inflation. They knew full well that such a move would bring down global equity markets as well. But the stock markets were likely doomed regardless. Better that they come down when commodities, and particularly gold, are coming down as well, than to have a broad market crash while gold continues to soar. The central banks wanted to preemptively discredit gold as the "flight to safety" investment vehicle. They wanted to ensure that gold won't be the place to hide when global liquidity takes it on the chin and forces asset prices down. That was the move envisioned, not just by the Federal Reserve, but by central banks around the world. The central banks conspired to raise rates in tandem, some unexpectedly.
Recently we've seen the European Central Bank, India, South Korea, South Africa, Turkey, Denmark, Thailand, and Switzerland all raise interest rates within days of each other. Japan proclaimed the imminent end of "quantitative easing" and the Yen carry trade. Then came the tough talk on inflation by the world's central bankers. It was a mass chorus: a newfound vigilance on inflation - it must be quelled at all cost. The primary target: gold. Gold took the brunt of the central banks' attack.
The price of gold is the outwardly public manifestation of inflation. By bringing down gold it was hoped that other commodities would be taken down as well, thus easing inflationary fears. But therein lies the Achilles Heel of the central banks, and what will ultimately prove their gambit to be unsound. Under a fiat currency system, the central banks are the undisputed masters of paper but they are rather impotent when it comes to controlling the market for "real" things. As such, there is little they can do to manipulate the markets for things like oil and copper - the markets for these commodities are just too big. So the game plan was simple: hammer gold and cause a selling panic in all commodities.
...Nothing has changed regarding our view on inflation. The economic policies of the US, in the form of twin deficits and reliance on asset bubbles for economic growth, have been fundamentally unsound and this is being reflected in the value of the dollar. In spite of recent feather pluming on inflation, we do not believe that central bankers are serious about pulling the reins on inflation at any cost. They may talk the talk, but when push comes to shove they won't be able to walk the walk. Historically, central bankers have been chronic debasers of money over time. They are addicted to money-induced asset bubbles. Although the central banks don't mind seeing gold and commodity prices crash, history shows that they have a soft spot for equity and housing markets. Nary has a crash ever occurred in these areas without the central banks turning on the spigots. We highly doubt it will be any different this time. Although the correction was a painful one (as it was intended to be), we believe the long term trend for commodities remains intact.
Safe Money Report
Yes, there's talk of fighting the inflation. But the reality is that, despite meek attempts to raise interest rates in recent months, the central banks of the world have, so far, demonstrated neither the political mandate nor the personal courage to do much to stop it.
Can This Inflation Continue Forever? Absolutely not. At some point in the not-too-distant future, this explosion -- in population, consumption, and the exhaustion of scarce resources -- will inevitably collide with limits to growth. Brazil, China, India, the United States and most of the world's economies will reach a breaking point beyond which further acceleration is virtually impossible. Prices will be so high, and incomes so low, that the demand for goods will plunge. Governments will fall. Economies will collapse. That's when you will see the other side of the parabolic growth curve. That's when you will see deflation.