Best Quotes of May 2007
Adrian Ash, Bullion Vault
A world run on two or three fiat currencies, issued and accepted by diktat...becomes only more likely every time that drug-lords in Moscow trade a kilo of crank. But as a store of wealth for the future, gold keeps winning out. Since the dream of a European single currency became flesh at the start of 2002, gold has averaged 10.3% year-on-year gains measured in Euros. It's risen more than 12% annually against Sterling. In terms of gold-priced devaluation, the Dollar and Yen are now neck-and-neck. Gold bullion has averaged 17.5% gains per year against both since the start of 2002.
Do business in Euros...but hold your wealth in gold? Under monetary union the trend looks pretty solid so far.
Cary Dorsch, Global Money
Were it not for its "reserve currency" status, slowly turning into a post-World War II relic, the US dollar would have already collapsed by now.
Fleckenstein, Fleckenstein Capital
I cannot shake this nagging feeling that the most important idea for folks to consider before the coming dislocation hits, whenever it hits, is that it will be necessary to have some liquidity, even if that liquidity is held in a crummy currency like the dollar. I am more convinced than ever that the amount of leverage being held at the institutional, hedge-fund, individual and corporate levels is, while not directly ascertainable, extremely high. In fact, I think the overall financial risks are far higher than I ever imagined they could be. Consequently, I no longer believe it's possible to determine in advance just what asset classes might be safe in a financial dislocation, as so many of them have become so intertwined, while at the same time we can't know how leveraged any of the underlying positions may be. Thus, when liquidation occurs one of these days, absurd developments may unfold that you might like to take advantage of. But one must have some flexibility -- liquidity -- to do that.
Duffy, Bearing Asset Management
The trouble with pyramid schemes is that they're not designed to go in reverse. Eventually, the number of willing dupes is exhausted. The same people who panicked late to get into the game are just as likely to panic when the music stops. The longer the music plays, the more leveraged and unstable the inverted credit pyramid becomes. As the late economist Hyman Minsky observed, "stability is unstable."
The US has created a 20th century living standard, the suburban lifestyle, which consumes oil with a voracious appetite. The US must put itself on a diet, and perform radical surgery on its energy consumption, its housing arrangements, and its transport infrastructure. If it fails to do so, the rest of the world will force a diet upon it.
What is important here is to keep "the big picture" in mind. We've had a long [gold] consolidation in 2003, we've had a long consolidation in 2005 and now we're facing a long consolidation in 2007 again.
Now why do you think the gold shares finally did manage to break out in 2003 and 2005? In other words, why do you think the HUI is trading now at 350 and not at 150 as in 2003?
The answer couldn't be more obvious. The HUI is trading at higher levels since 2003 due to the simple fact we're in a bull market for gold and its shares. We are witnessing a generational bull market in gold and the end is nowhere in sight. Please remember that bull markets like these tend to end in euphoria/mania and needless to say we are far away from sentiment like that yet! The last time the gold market was hit by euphoria/mania was in 1980 when people were queuing in lines for the banks in Toronto in order to buy gold. It was during that time that 5% of all invested money was in gold and gold shares (versus less than 0.5% these days). Now that was mania, and we are nowhere near such sentiment these days.
Kasriel, Northern Trust
The "core" U.S. economy is doing fine. That is, if you exclude consumer spending, business capital goods spending and housing -- almost 85% of U.S. real GDP -- the outlook is rosy inasmuch as exports will surely surge because of the strong economic growth in the rest of the world.
Other than the fact that exports are only about 11-1/2% of real GDP, a record high, there are other problems with depending on the rest of the world to be America's economic locomotive. For starters, a lot of the economic growth in the rest of the world is being generated by the rest of the world's exports. U.S. consumer spending amounts to 29% of the rest of the world's GDP. With U.S. households and businesses starting to slow their spending, the export sectors of the rest of the world will slow. In other words, U.S. domestic demand in recent years has been the economic locomotive for the rest of the world. Now that the locomotive is stalling, is the caboose going to cause the locomotive to re-accelerate?
Lamont, Lamont Trading Advisors
This is a speculative credit bubble right from the history books. As real estate investors have recently found out, when credit disappears so do price gains. Hedge funds will also find that leverage works just as well in reverse. Much like investors who bought stocks at speculative tops in 1929, 1966, and 2000; inflation-adjusted value will not be recovered for at least 20 years.
Henry C.K. Liu
Today, any one factor out of a host of interconnected factors, such as new regulation on hedge funds, or sharp changes in the yuan exchange rate against the dollar, or an imbalance between tradable assets and available credit, etc, could bring the current liquidity boom to a screeching halt and turn it into a liquidity bust.
Angelo Mozilo, CEO Countrywide
The cause of the problem that we have today is decreasing values. We didn't have delinquencies and foreclosures when values were going up.
Doug Noland, PrudentBear
An argument can be made today that market forces are finally reining in subprime excesses. Yet I view this development in anything but positive light. Unfortunately, rather than correcting or self-regulating (in response to an 'overshoot'), it is much more a case of highly-adaptable Wall Street 'structured finance' simply abandoning subprime for greener pastures. Today, the insatiable appetite for yield is more readily satisfied by ('subprime') loans to support private-equity, leveraged buyouts and the global merger and acquisition mania.
Phillips, Gold Forecaster
We have no hesitation in saying that the gold market has been subject to a decades-long campaign not only to discredit it, but to manipulate it completely. But a change is coming.
Pretti, Contrary Investor
Let's get one thing straight -- the banks as businesses are about to fall off of the proverbial cliff.
Reinhard, Growth Stocks Weekly
Since 1970, the world's money supply has grown at a rate 20 times that of industrial production. Correspondingly and not surprisingly, gold and oil have risen 20 fold over those 27 years. After Nixon's 1971 elimination of convertibility, there was no longer any constraint on the number of dollars that could be printed (other than a moral one).
The U.S. economy is now so leveraged through the banking system and the use of derivatives that the ratio of debt to Gross Domestic Product is at its highest level ever, close to 350% compared to the previous record peak of 290% in 1929. With the world's largest debtor hemorrhaging $200 billion per year in interest payments, the return to foreigners holding a currency dropping faster than the interest earned is negative. Such a situation is not sustainable. If the dollar breaks technical support it will see accelerated selling as holders seek relief -- a situation that will reverberate around the world.
Back in 1980 gold reached an historic high of $850 per ounce -- $2,200 per ounce in today's dollars adjusted for inflation. Typically these bull markets are in a 13- to 15-year cycle, and we are now only in the sixth year. And we are following a particularly long and painful bear market. These are still early days.
Roach, Morgan Stanley
On the surface, the world economy appears to be doing just fine. After four years of the strongest global growth since the early 1970s, the consensus forecast is for two more years of the same. The problems lie beneath the surface -- largely an outgrowth of profound saving imbalances stemming from the excesses of an asset-dependent US economy.
As always, the unintended consequences of these imbalances pose the greatest challenge to the global economy and world financial markets. The combination of Washington-led protectionism, a Chinese equity bubble, and Middle East dollar-concentration risk is especially worrisome in that regard.
In days of froth, it never pays to worry. But when the tide goes out, it could be a different matter altogether. That could be especially the case in the current climate. Watch out for a crack in the dollar, a related increase in real long-term US interest rates, a widening of credit spreads, and a pullback in global equities. Only then will the long-overdue rebalancing of global saving have begun in earnest.
The supplies of most of the world's fiat currencies are now growing rapidly (the supplies of US dollars, euros, Australian dollars, Canadian dollars and British Pounds have expanded by 11%-14% over the past 12 months). Trying to pick the strongest of this group of currencies is therefore like trying to pick the smartest of a bunch of village idiots.
Over the short- or intermediate-term there is probably no way to accurately quantify the real performance of an investment; at least, none that we know of. Over the long-term, however, expressing prices in terms of gold works well. Therefore, IF an investment is in a secular bull market then it should be in a long-term upward trend relative to gold. The Dow Industrials Index's October-2002 low was NOT a major bottom in real terms. Thanks largely to the effects of inflation the Dow's nominal price is now comfortably above its Q1-2000 peak, but in gold terms the Dow is still well below its October-2002 LOW. Rather than a new bull market or a resumption of the 1980s-90s bull market in equities, what we've had since the October-2002 nominal bottom in the Dow is a bear market in the currency in which US equity prices are quoted.
I asked a large broker firm to send over its smartest math person on Collateralized Debt Obligations (CDO) structuring. I wanted to know what I am missing: why is the market so sanguine in the face of deteriorating collateral values in the mortgage market? One of my firm's theses has been that, as the mortgage market deteriorates, investors holding CDO as an investment would realize losses and this would feed into other risky asset classes. Why aren't losses being seen when the market is clearly deteriorating? The team that came over was headed by a very smart gentleman. He was very good at math and very straightforward. Working for a broker I was prepared for some sugar coating. I didn't get any. The answer is simple and scary: conflict of interest.
He explained that due to the many layers of today's complicated credit products, the assumptions used to dictate the pricing and outcome of CDO are extremely subjective. The process is so subjective in fact that in order to make the market work an "impartial" pricing mechanism must exist that the entire market relies upon. Enter the credit agencies. They use their models, which are not sensitive to current or expected economic activity, but are based almost entirely on past and current default rates and cash flow to price the risk. This of course raises two issues.
First, it is questionable whether "recent" experienced losses over the last few years really represent the worst of the credit market (conservative). But even more importantly, it raises a huge conflict of interest: the credit agency's customers are the very issuers of the tranches they rate. The credit agencies, therefore, need to compete for business based at least in part on the ratings they are willing to give these tranches. As a result, they will only downgrade when forced to by experienced losses; not rising default rates, not a worsening economy, but only actual, experienced losses. Even more disturbing, they will be most reluctant to downgrade the riskiest tranches (the equity tranches) since those continue to be owned by the issuers even after the deal is sold.
So even though the mortgage market has deteriorated substantially, mark-to-market losses by those holding the CDO paper have generally not been realized simply because the rating agencies have not changed their ratings for all the above reasons. Accounting rules only require holders of the paper to mark prices according to the accepted model, not actual prices. Actual prices where traders can really buy and sell is substantially lower than where investors are marking their positions. The levels at which investors are carrying the paper is not reflecting underlying reality as the holders simply hold their collective breath and the rating agencies ignore a worsening environment.
I asked them what would force the rating agencies to change their ratings and the response was "it's just a matter of time if the market continues to deteriorate, for the agencies at some point will be forced by the cumulative losses to acquiesce." Because these losses have been compressed, any re-adjusting of ratings by these agencies are likely to result in a massive repricing of risk.
Because central banks can through their monetary policy control the buying power of their domestic currency, it is easy to accept the notion that they can control the value of all money, including gold. This notion, however, is incorrect because gold and national currencies are fundamentally different.
Central bank balance sheets show that national currencies are their liability, while gold they own is an asset. One does not have to be a chartered accountant to appreciate this difference. Central banks can control the value of their liabilities (i.e., their national currency) in various ways. But they cannot determine the value of gold, anymore than they can determine the value of a Picasso painting or any other tangible asset. Only the market can determine the usefulness of a tangible asset, and therefore its value.
Weiss, Safe Money Report
Our dollar is now falling almost everywhere, even against currencies that, until recently, were among the weakest in the world. I have very mixed emotions about this decline. As an American who loves his country, I have dreaded this outcome since the first day I began helping Dad to prevent it four decades ago. And on this Memorial Day, I wish I could remember more battles for the dollar that were won than the battles that were lost.
But at the same time, as an investor, I have dreamed of an opportunity like this since the first day I opened a savings account. Most investors fantasize about the day when they can see great megatrends like these... make the right moves with the right investments... and come away with a king's ransom in profits.
Williams, Summit Analytic Partners
Another issue with housing is the number of vacant homes hidden among middle class neighborhoods and even into the high-end homes. Brown lawns have become the calling card for empty homes where families handed the keys back to their banker or were evicted for non-payment. What is perhaps most sobering is the number of vacant homes, which is reported to be over 2.5m (or almost 3.25%) homes according to a recent story in Barrons. That number taken with the approximately 7m resetting ARMs holders makes for a formidable pool of selling pressure likely to hit the market at exactly the wrong time. Once a family realizes that it cannot stay in its home, the occupants often engage in a spree of destructive behavior, neglecting the upkeep and even damaging the property out of spite. The costs of maintaining a moderate subdivision worth of empty houses for things like taxes, landscaping and repairs falls to the city. Neighbors may even step in and mow the lawn so that their own homes are not taken down in value by the vacancies. Once a neighborhood is tainted by vacancies, the risks multiply that it will experience a downward spiral of the kind not seen since the mid-to-late 70s. Housing prices will likely take another hit as distressed families are forced to move, driving bids down and depressing comps that in turn exacerbate the vacancy problem in a growing number of cities across the nation.
Willie CB, Golden Jackass
Increasingly feisty, if not hostile, sheiks in the hotbed of the Middle East have become the last remaining pillar of USDollar support. If any prominent economist thirty years ago had taken the podium at a professional conference or political assembly and put forth a plan for the USEconomy to rest upon two pillars of credit supply, one being a printing press, that person would be condemned as a charlatan, a quack, a lunatic, a bird brain, an incompetent counselor hellbent on destroying the financial structure of the land where the beacon of freedom used to shine. Well, that is exactly what has happened, except this time, the process of flooding the system with phony fiat false money is hailed as a boon to investors, a solution to home foreclosures, and a source of tremendous profit for US corporations.