QE 3: Gold Bugs, Stockholders Celebrate While American Workers Starve

Joe, a retired, Kingston, NY commodities trader and Brooklyn College alum, is a drinking buddy. He predicted $1750 gold on Labor Day while he, Mike and Mark Marnell, a left wing attorney, and I were imbibing a 1.75 liter bottle of four-year-old single malt scotch called McClelland's.  I picked it up at JK's Wine and Liquor in the Kingston Plaza mall. For only $43 for a jumbo bottle, McClelland's is a good buy.

On that fateful Labor Day Joe predicted $1750 gold this month.  It just about hit $1750 the other day, but today it soared to a bid of $1769 (at 2:26 P.M.).  The reason is the Fed's announcement of quantitative easing.  My brokerage accounts, because of the recent moves in the general stock market coupled with the recovery in metals prices and real estate,  are at or near all-time highs.  According to Kitco: " Spot gold was last quoted up $37.50 an ounce at $1,769.50.  December Comex silver last traded up $1.298 at $34.60 an ounce."  The stock market is also buoyant: The Dow is up 224 points, or 1.68 percent, and the S&P 500 is up 1.76% at 1461.

Quantitative easing or QE3 is one more round of money printing. Monetary expansion boosts the stock market because increasing the quantity of money reduces the price of money, the interest rate. A lower interest rate increases the discounted future value of profits. That increases the stock market because stock prices discount future earnings. It is a mechanical relationship.  As a result, the Fed has played the Nixon card with Obama: in 1972 Nixon encouraged then-Fed Chairman Arthur Burns to ease so that the stock market would go up; now, Ben Bernanke's Fed is easing and Obama will win the election. Likewise, the Europeans are accommodating Obama.  A recent German court decision held that Germany can participate in a bailout of profligate Greece and other southern rim nations. Hardworking Germans can now sacrifice their savings to fund pensions of Greek public sector retirees who have produced little and demand much.

Joe does not have much faith in the stock market.  He is right in a fundamental sense: there is no reason to have faith in the structural reality of the underlying economy. The excesses of the Clinton and Bush years are still around, and Obama has done nothing to correct them.  Americans, for an unfathomable reason, tend to reelect presidents when the stock market is high. The monetary expansion that increases the stock market harms most of them; in other words, most Americans vote for politicians who directly harm them.

The reason is that the monetary expansion that boosts the stock market devalues wages.  As the money supply has expanded since the Reagan and Clinton years, the link between real wages and productivity has been eliminated for the first 40-year period in American history.  American workers are no better off today than they were in the early 1970s, but stockholders are much better off. In other words, the income inequality that liberals grieve over is directly due to the policies of Paul Krugman, Woodrow Wilson, Franklin Roosevelt, Richard Nixon, Ronald Reagan, Bill Clinton, George Bush, and Barack Obama. Obama has done nothing to clean up this mess.  Historically, he has contributed more to it than anyone else.

The stock market may continue up through the fall and possibly into 2013.  Eventually monetary bubbles implode as bondholders realize that their bonds are going to become worthless.  As real interest rates start to rise, Fed policy becomes irrelevant.  If the Fed continues to print money thereafter, there will be a monetary collapse.  Otherwise, there will be rising interest rates and stagflation as the expansion of the monetary base is transformed into cash money.

If real interest rates start to rise, the stock market will not do well, but commodities will because of the inflation.  If the dollar remains stable, the increasing money supply will continue to boost the stock market. 

I am easing out of the stock market.  I had sold the stocks in my pension fund (I still have real estate), which were about five percent of my total stock holdings.  I have low-beta (low-risk, high dividend) stocks like Philip Morris, Kimberly Clark, and Heniz in one brokerage account, and higher risk stocks in the other. I will sell the higher-risk stocks over the coming months, except for the gold mine stocks.  I hold both the gold index and the Van Eck juniors index.  I would like to be able to pick gold mining stocks, but I lack the expertise.

The stock market is likely to continue up into the coming year; thereafter, all bets are off.  If you look at a picture of the S&P 500 since 1950 there are two massive peaks in 2000 and 2007; we are approaching the height of those two peaks now.  Because of the massive monetary stimulus, the peak could get higher in nominal terms.  As the monetary expansion translates into a depreciating dollar the reverse can and will occur.

   

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Thoughts on Coming Economic Dislocation

Money is not just a matter of perception.  As the amount of money is increased, the supply forces higher prices or misallocation of resources.  Faith in the currency is reduced; people stop working hard because they realize that asset prices (stocks) are increasing, but wages aren’t increasing.  Foreign dollar holders realize that the dollar is getting cheaper.  Those are not merely perception. They are caused in large part by increasing the amount of dollars.

The chief differences between  Ron Paul and Gary Johnson versus Mitt Romney and Barack Obama  are (a) a commitment to limiting the money supply and (b) a commitment to reducing the scope of government, which is a corollary of (a).   I’m not sure that a monetary collapse can be avoided by anyone at this point, but the public needs to be made aware that the reason for the coming instability is government, not freedom. The response in many places to economic dislocation has been authoritarian.

In two to three thousand years of human history this has happened numerous times, and no one has found a way around it. It happened in Rome, in China (recall the Chinese invented paper money), and it will happen again.  

Keynesian economics says that you can stimulate the economy with government spending and monetary expansion, and monetarist (Republican) economics says that you can stimulate the economy with monetary expansion alone.  Neither has a plan of action for what to do when the indebtedness and cheap money cause economic dislocations, reallocate wealth to the wealthy, and reduce the standards of living of those whose livelihood is concentrated in cheapened dollars rather than stocks, real estate, commodities, and leveraged assets. 

Anyone who works has already been harmed—with a standard of living likely half of what it would have been with a gold standard. Literally half. The productivity gains since 1970 have not been translated into higher wages for the first time in American history.  Our standard of living is already much lower than it would have been had Nixon retained the gold standard, raised interested rates, and caused a recession that would have forced up the dollar.  There would have been short run unemployment, but real wages would have continued to rise with productivity. 

The people who are being hurt are (a) retirees, (b)  those who have their wealth in dollars (CDs, savings), and (c) wage earners.  The pain will get worse.  The way out is to redefine yourself as an asset owner through leveraged purchases of real estate, commodities, and stocks, especially if there is a cyclical correction in the stock market soon. 

As a society, the stabilization of the money supply and reduction in government spending has to be done through public choice; the public is not so choosing, so I don’t think there will be a way out as a society until the pain of inflation or other economic dislocation becomes great, when it will be too late. 

The belief in something for nothing (for the Republicans, to hedge fund owners, Wall street, real estate owners, stockholders, cronies like Halliburton; and for the Democrats, the same as for the Republicans plus welfare recipients, public employees, and cronies like Soros) is simply too strong in both parties. Both parties (despite the Republicans’ recent platform position in favor of the gold standard) are committed to paper money whose quantity they consistently expand. This started with Nixon and Reagan.  

Eliminating it would require sharp reductions in spending and stabilization of the money supply. The problem is that we have already printed $10 trillion dollars and sent them overseas (compared to a massively increased US money supply of $2.6 trillion).  If the US stabilizes, perhaps the dollar will continue as the world’s currency, and pain will be avoided in our lifetime.  As Giustra points out in the video, this is unlikely because neither party is interested in restraining government, and the public, convinced by the television set, favors the government spending, both domestic and military.  

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Thoughts on Gary Johnson

http://www.rlc.org/2010/01/19/interview-with-governor-gary-earl-johnson/

Above link is to a 2010 interview with Governor Johnson I did for the Republican Liberty Caucus.  He has strong small government credentials; he vetoed more bills than all other governors combined; he got good ratings from CATO despite having to negotiate a Democratic-dominated state; he has more executive experience than Obama or McCain had when they were nominated and as much as Romney; also, his executive experience evidences a strong commitment to putting the principles of reduced government and freedom ahead of politics.  In contrast, Romney introduced the same kind of health care plan that Obama introduced; Romney has never been consistent in any of his principles; Romney has been a major beneficiary of the Fed-funded financial industry that is the underlying force behind big government (of which the bailout is the most visible but not the only symptom). There is a comparison between Romney and Johnson: Romney has spent his life benefiting from and implementing big government; Johnson started a real business from scratch and has fought big government.

Mr. Johnson is more honest, as capable, as moderate, and more committed philosophically to the ideas of freedom than any candidate other than Ron Paul.  He succeeded at a real business, unlike Romney’s; Romney succeeded at a crony-capitalist one funded with and dependent on printed government money.  Johnson is a real businessman. Romney is a crony capitalist.

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Carl Paladino on Sheldon Silver

-----Original Message-----
From: Carl Paladino
To: Carl Paladino
Sent: Wed, Sep 5, 2012 7:36 pm
Subject: Sheldon Silver and the New York State Press a/k/a Wimps

Obviously you are not disposed to call for Sheldon 

Silver's resignation or even a Federal investigation 

of his corruption.  After all, he only embezzled 

$103,000 from the State treasury and in the context 

of his other high crimes and misdemeanors, what's the 

big deal?   Silver was only doing what he has always 

done.  He was bailing out his buddy Vito Lopez.  After 

all he is Sheldon Silver, the guy who wrote the book on 

intimidating the press with the denial of access.  Just 

ask Liz Benjamin and Jim Vielkind.  Is there no one in 

the spineless press who has the cohunes to stand up to 

this diabolic scoundrel?

Considering Silver's past, the press should be asking 

if it was quiet money to keep Vito's mouth shut about 

other topics?  We'll probably never know the answer to 

that because the press will let the good old Albany 

establishment boys bury the issue with a Special 

Prosecutor investigation that will go on forever 

and result in nothing.  Whenever politicians want 

to bury an issue they appoint a Special  Committee or 

Prosecutor.  

Silver acknowledged  "a mistake was made."  Was it an 

intentional mistake?  The confidentiality clause, his 

long history of making such "mistakes" and the BS that 

other elected officials knew lead one to believe that 

it was an intentional and unforgivable mistake.   

What more do you need to demand his resignation?   

Silver is a poster child for term limits.  18 years 

of intimidation, arrogance, illusion and theatrics 

that the establishment boys call "skill."  He rules 

the entire State government with an iron fist.  We'll 

never see Tort, Malpractice or Workers Comp reform 

while he's there.  He gets a load of 

money from his personal injury law firm, and under 

the rules he has written, he is not required to 

disclose it.  We'll never see reform of the Wick's law, 

Taylor Law or Tri-borough Amendment which punish the 

taxpayers with mind boggling costs.  We'll also 

never see initiative and referendum which would 

give the taxpayers a real voice in their government.   

Silver thinks that three men in a room with one 

alpha dog works good for him. 

Mike Gormley's expert from someplace else tells us that 

Silver is out of the weeds because all his actions were 

known to the Comptroller and Attorney General.  What 

Mike didn't say is that both of them owe their jobs to 

Sheldon Silver and have been his puppets for years.  That 

doesn't work for the people Mike.   The "Joint Commission 

on Public Ethics" was personally picked by Silver.  That 

also doesn't work for the people Mike.

We know the press is just peachy with things as they are.  

The status quo suits you so well because it keeps the 

taxpayers dumbed down and cheap brainless staff keep your 

profit margins up.  You can sell the people of New York just 

about any garbage.  They eat it up.  They accept mediocrity 

and failure because the press has told them that they can't 

do anything about it.  Those who can get out.  Meanwhile 

guys like Silver keep the entitlements rich to bring more 

dregs to New York to enhance the effort for a permanent 

democratic majority.  Silver recently showed just how 

far he has gone off the reservation by proposing that New 

York State taxpayers give financial aid to educate any 

illegal in America.  Who wants to stick around to pay 

for that burden?

Corruption is rampant in Albany because Shelly Silver is 

not only involved and complicit but he also protects the 

criminality of his followers when one of his bottom fish 

gets caught with dirty hands.  

Silver's attitude has now evolved to the absurd.  He 

alone can violate the rules of the Assembly and disburse 

taxpayer money with impunity and without prior consultation 

or approval.  He uses taxpayer money to ensure loyalty.  What 

possible theory could justify the use of taxpayer money to 

resolve a sexual harassment allegation?  What other actions 

of this man will raise the red flag?  Why is a downstate 

District Attorney, who associates with the good old boy 

establishment RINO's, selected as the Special Prosecutor 

instead of a more objective upstate DA who would be less 

inclined to belabor the proper dissection of an 18 year 

career of arrogant larceny and intimidation.  If anyone 

else embezzled $103,000 the press would be calling for 

the construction of a gallows prior to giving him or her 

a fair trial.

The question is why is this particular government 

official above the law.  For anyone else in government 

it would be embezzlement.  For Shelly it's just another 

day of taking care of his friends and family club.   

The press could get by its cowardly image if it followed 

its role model,NY Times, and jumped at this opportunity 

to take down the man that even his friends refer to as the 

demon. 

Silver is vengeful and his retaliation is unmerciful.  For 

me, as the greater fool, it's a call to arms. For spineless 

cowards like the editors and reporters (and publishers) of 

the New York State press it would be an earth-shattering 

bold change of policy.  It would require actual research and 

a major effort to connect the dots and we all know the 

reluctance of the Albany press corps [Tom Precious of the 

Buffalo News included.]   They don't like controversy and 

are only capable of tweaking up feel good press releases.   

Here in Buffalo there would probably be a big problem for 

Stan Lipsey who's friends and family club members Jordan 

Levy and Howard Zemsky may be found on Silver's dance 

card when the Feds start following the money.  Do they do 

each other big favors?  Are investment tips the quid pro 

quo for handsome multi-million dollar subsidies from the 

taxpayers for their projects?  The money comes from one 

of Shelly's "off the books" vehicles like his private 

stash of taxpayer cash which some refer to as the 

Dormitory Authority.  

He who lives by the sword will die by the sword.

If you agree with the above, forward it to your 

friends and family.

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In the above-linked interview (h/t Kitco),  Frank Giustra, founder of both Lion's Gate Entertainment and Goldcorp (two multi-billion dollar corporations) discusses his prognosis for the American economy's coming decades.  He concludes that there will be inflation and dollar collapse.

These would lead to a collapse in American power.  He compares the United States to 16th century Spain.  He is non-partisan.  He attributes the coming American collapse to the political system.   He suggests that it is a waste of time to try to change the political system because the incentives are too large; the politicians have zero incentive to do anything other than to inflate and cause the monetary system to collapse. 

Although he does not mention Mitt Romney, the process he describes by which inflation transfers wealth to the wealthy and destroys those who hold cash or CDs,  or earn wages,  is exemplified by Mitt Romney's career.  Making money through inflation is largely what hedge funds do. 

The best way out, according to Giustra, is to make money off the coming currency collapse.  This can be done by buying farmland, gold, or junior mining stocks (junior mining stocks are a leveraged way to invest in gold and other precious metals). 

Giustra is saying that the system is too  corrupt, and the public too misled, for political activism to make a difference at this point.

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Lucy van Pelt on Mitt Romney

The lesser of two evils has become increasingly evil. There is no reason to believe that the trend will change.

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Gary Johnson at Paul Fest

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